Abstracting Money Wisely

Wise's positioning as the last in a history of successful abstractions of money

Those pieces of paper, which should have been gold, are a token of honor—your claim upon the energy of the men who produce. Your wallet is your statement of hope that somewhere in the world around you there are men who will not default on that moral principle which is the root of money. Is this what you consider evil?

— Ayn Rand. Atlas Shrugged

There are at least two major forces that have shaped modern economies in the last two decades. One is globalization, the other technology. Globalization has made individuals more connected across the globe; technology has created the seeds to make them more impactful.

Their combined effect is clearest in money, specially cross-border payments. And while the globalization has made more obvious to deal with customers and suppliers that were further from us, the people responsible for making those deals easier haven’t lived up to the challenge. This, throughout history, has been the norm.

Checks as an abstraction of gold

Before the US Civil War, people dealt with each other not in dollars, but in shinplasters, shingles, stump tails, and red dog: thousands of different types of paper money. Their role was to relieve the burden of carrying gold. It was assumed that paper, like gift cards, was valuable to the extent that the institutions behind it were good on their promises; your wallet was truly a statement of hope.

Credit risk was handled by a specialized market of paper money where they traded at discounts to their face values. With the introduction of an interlinked system of institutions called national chartered banks in 1863, a new era of money movement began, with a new means to do it: the check.

The check was the stepping stone of a formula that has been used ever since to improve the ease of use of money: abstraction. Not by widening the scope and acceptance with a competing version of paper, but by encapsulating the concept of gold into an effectively impossible-to-break, state-sponsored promise, checks render local paper money pointless.

National chartered banks could now deal in terms of checks, while shifting the responsibility of backing those checks onto larger banks that stored the actual gold. As a result, customers could now move money, albeit regionally, without the hassle of navigating the complexity and corrupt paper-money markets.

Ledgers as an abstraction of checks

Cross-state, though, was a whole different story. When checks moved across hubs with no direct link, they needed a third party, or in many cases multiple parties, to bridge the gap, racking up fees and delays.

Further standardization by splitting the US into sections eased up the problem, but only a bit. Along with making money easy to move with checks, standards couldn’t cope with the explosion of check use. After World War II, banks drowned under the pressure of combing through the endless stream of checks, and branches had to shut doors at 2pm to shift it.

Most staff were quitting this grueling task within a year, which set the stage for the advent of technology. Funded by Bank of America, a room-sized computer called Electronic Recording Machine Accounting, or ERMA, spurred the standardization wave by enforcing a common check format.

Moving money was easier and, once again, we did more of it. Only once we abstracted money one more layer above, this time from paper to electronic records stored in databases, this became manageable.

Checks were now records on a gigantic ledger, and abstraction was one more time saving the industry. In less than a hundred years, money had transformed from nuggets of gold into bits of electrical pulses, this time under the aegis of machines and the control of the financial system.

Trust as an abstraction of ledgers

Because banks have evolved to satisfy a mostly domestic customer base, partly due to the impact of regulation, moving money today is seamless within a country, but impossibly slow and expensive cross-border. Countries have independently enforced parallel banking regulations that, after many iterations, strongly resist change. Their success had sown the seeds of eventual immobility.

We find ourselves back in the early twentieth century: dealing with money markets and intermediaries. And much like then, standardization efforts haven’t been able to make a dent in this. It is only when money has been abstracted, rather than standardized, that money movement has advanced significantly.

Technology and globalization are in fact opposing forces, and because the ambitions of a truly globalized society can only be fulfilled by technological jumps, rather than playing catch-up.

In the case of cross-border payments, SWIFT was designed to be the standard to send money abroad. Two banks enter into a contractual agreement by which they have accounts under the other bank’s control. This allows cross-border payments to become moving money from and to those accounts in parallel, with SWIFT being the handshake between the two hands of the operation.

The issue, of course, is that SWIFT payments depend heavily on how interlinked the two banks are, which is in and of itself a form of cold start problem. In the end, it is not unlike how national chartered banks tried to move money nationally, with many intermediaries making the process slow and very expensive.

Against the failed promises of SWIFT, there’s one company that is playing the abstraction card, and is winning. Wise is going full circle on the history of money by doing away with foreign exchange markets. Its key abstraction consists of doing away with the unnecessary idea of national currency, by intermediating their customers’ cross-border money transfers.

Where SWIFT is just a handshaking protocol for banks to communicate, Wise has taken the role of the left and the right hand, making money move at the speed of computers, and doing away with correspondent banks much in the same way that checks put an end to paper money, not by creating a One Coherent Thing, but by making foreign exchange invisible.

In the end, Wise’s intermediation across border is a bet on the creditworthiness of the company as a whole. What keeps the operation sound and simple is that Wise’s customers trust it. Thus, it is there where the last layer of abstraction resides: from money as shiny physical objects, through tokens of honor, to centralized ledgers, Wise is paving the way for trust to become the ultimate currency.

Everything else is just implementation details.