Apr 25

Apr 25 Financial Currencies for an Early Interplanetary Age

The Florida “Gateway to Discovery” Quarter used for the New Horizons Mission (Courtesy of NASA)

“History does not repeat itself, but it rhymes”

— Mark Twain

Stories about the monetary supply have been dominating the headlines this year. With the Federal Reserve printing trillions of dollars, some are weary of runaway inflation. Others are drawn to tales of how cryptocurrencies, such as bitcoin, have suddenly become mainstream and institutionalized. And the rest are captivated by news of China becoming the first nation in the world to release a central bank digital currency better known as the “digital yuan.”

With a renewed focus on this medium of exchange, I started to think about the types of currencies that might develop as the means for transactions in an interplanetary age. For this post, I will share my view on how the medium of exchange might develop as humanity begins to establish its presence on other worlds. Because of issues related to trust and distance, I believe that neither Earth-based currency nor modern cryptocurrency will be able to serve as a practical currency in the early days of Outer Space settlement. Hence, as we adapt ourselves into an interplanetary species, we will likely start over and experience a repeat of how modern-day currencies came about. In this frontier settlement era, I believe barter systems will be reintroduced and, as each colony or space station becomes more self-sustaining, new asset-backed currencies will develop and flourish.

Trust Issues with National Currencies

In the early days of Outer Space exploration, it will be hard for any government to fully impose its will on its distant settlements. Because of this difficulty, any Earth-based national currency will likely fail as a medium of exchange in this frontier era. Currencies can only function as an effective financial instrument if everyone believes in its value. When it comes to a state-backed currency that is not pegged to any asset, such currency has no intrinsic value and relies solely on faith for its worth—the currency only has value because people believe it has value. This trust in a state-backed currency is fostered through the competence and ability of its issuing government to create a stable environment for its citizens. If a state can sufficiently provide for its citizens’ needs and protect its citizens’ welfare, it is less likely to encounter upheaval and chaos which could lead to regime change. With this stability, a government can focus on creating a productive economy that will lead to a flourishing society. In this environment, the government can create a currency to better facilitate the movements of goods and services; people could just use the currency in exchange for other goods and services, thereby creating efficiencies in the economy. With their safety and prosperity secured, people would be willing to exchange their valuables for such a state’s currency—even if it is not backed by any assets—because they believe in this government’s intrinsic value: a powerful steward that can ensure stability and improve societal welfare.

But, this value in a government could deteriorate in its distant settlements. In a frontier environment, it is hard for a state to properly govern. A central government’s ability to redress wrongs and provide protection will be hindered by the distance. In such circumstances, a state will almost absolutely need to rely on the competency of its local administrators. The harsh conditions of these Outer Space settlements mean problems need quick solutions before they spiral out of control. Hence, the government’s representatives will need to think fast and act on their feet with the freedom to implement solutions without approval or guidance from the capitol. But given what we have seen throughout the course of human history, these administrators’ responses are often hamstrung by out-of-place and out-of-date policies dictated from afar. As goals of the central government diverges from what is good for these distant settlers, faith in the government will start to crumble. With this erosion of trust, such a state’s currency, which has no intrinsic value, will likewise fall. Even if the currency is backed by assets, with these settlers likely never to return to Earth again, the currency can also become useless in its colonies.

A Network too far for Cryptocurrencies

Because of transmission delays, Earth-based cryptocurrencies will also likely fail as a successful medium of exchange for frontier territories. Based on blockchain technology, cryptocurrencies, at their core, rely on a multitude of users validating and updating the ledgers of each of these currencies. These ledgers are a form of accounting that keeps track of every single transaction for every single coin that the cryptocurrency has ever produced. Because anyone could theatrically run a node to keep each cryptocurrency’s transaction history up-to-date, this technology can democratize and decentralize the financial system through mass public participation.

However, in order to use a cryptocurrency, you must be able to connect with the network for such coin. This is generally not an issue anywhere in the world because if you have unfettered internet access—and if your government does not otherwise ban cryptocurrency transactions—you can typically find a way to interact with a cryptocurrency’s blockchain. However, once you are an extraterrestrial settler, this becomes a literal out-of-this-world problem. Because a cryptocurrency’s ledger is constantly being updated with new information via additional blocks (hence the word “blockchain”), syncing up with the network in real-time is critical.

As you move farther and farther away from Earth, transmission becomes more and more delayed. For instance, while transmission lag is only about 1.3 second between Earth and Moon, this moves up to a delay of between 3 to 21 minutes, depending on orbital locations, between Earth and Mars. With the most popular cryptocurrency, bitcoin, generally creating a new block every 10 minutes, this could make it impractical to run a node for an Earth-based cryptocurrency off-planet. Even if a cryptocurrency ledger is being constantly transmitted to a distant settlement, settlers will always get the information on a delay. Malicious actors can exploit this lag by quickly “double-spending” a specific set of coins on several different transactions before the ledger is updated. Their counterparties will not be able to accurately validate whether the coins remain unspent in real-time. Until lightspeed-defying transmission technology develops, the only practical solution for using an Earth-based cryptocurrency far off-planet would be asking everyone to wait through the transmission delay between each transaction. But for obvious reasons, this is just not practical. Without being able to fully harness the innovation of the blockchain—creating public immutable records leading to complete trust—distant settlements will likely find Earth-based cryptocurrencies useless as a meaningful medium of exchange.

How Currencies might Develop in Frontier Space Settlements

If neither state-backed currency nor cryptocurrency will work for a frontier space age, then what kind of medium of exchange will emerge? Here, I believe we can look to the American colonies as a guide.

During its humble beginning as an English settlement, America’s first type of medium of exchange was the coins brought over from the “Old World.” While English coins were the primary form of exchange for the settlers, over time, this supply shrank. Because the colonies were not allowed to mint their own coins and existing supply was used to purchase goods from Europe, there was a net outflux of English coins back across the pond. The lack of English currency led many settlers to resort to a bartering system in which goods were simply exchanged according to supply and demand. Currencies eventually made a comeback in the colonies as trade with the rest of the New World picked up. Specifically, the Spanish Dollar became the de-facto currency of choice for the colonies prior to the war for independence. During the American Revolution, paper currencies also developed with colonies issuing IOUs for valuables to help fund the war. But, since these paper currencies were not asset-backed, the bills greatly depreciated as the colonies printed money like there is no tomorrow—leading to the expression, “not worth a continental.” However, after the United States won its independence and ratified its Constitution, the federal government established a national bank that eventually paved the way—albeit with many twists and turns—to the national currency we have in place today.

I believe early Outer Space settlements will experience a similar trajectory in the development of their medium of exchange. With many of these settlers likely never to set foot on Earth again, existing Earth-based currencies will slowly become worthless over time. As these monies slowly get “flushed out” of the settlements through the exchange of goods and services with Earth, a barter system among the settlers will likely develop. In the beginning, essential goods from Earth will be extremely valuable to all when the colonies are fully reliant on these supply runs. However, the tyrannical grasp of the rocket equation means that the supply of essential goods will always be constrained. Hence, exchanging supplies among the settlers will come naturally as the scarcity caused by high transportation costs means that no one party will be able to have a sufficient supply of everything it needs. Relying on free market principles, the barter economy should ensure that the settlers will optimally distribute services and goods among themselves. In fact, this type of barter system already exists today in Outer Space. International Space Station personnel are already informally exchanging goods and services according to their own perceived value. Furthermore, governments on Earth have also encouraged the development of this form of exchange as demonstrated through various formal barter agreements that European Space Agency has executed.

As these frontier settlements “come of age” and become more self-sustaining, currencies will likely be introduced to facilitate the growth of their economies. Unlike the development of currency in the American colonies, given the lack of resources in Outer Space and the advancement of technology in the centuries since, this type of currency will likely be digital from day one. And unlike most of today’s Earth-based cryptocurrencies, it will likely be an asset-backed digital currency. The type of assets underlying these digital ledgers might be a critical resource such as water—which is known as the “oil of space”—or other precious metals and rare earth materials that a colony might have control over. These digital currencies will essentially serve as an equity claim on these assets. Whether a specific settlement currency becomes popular will depend on the issuing settlement’s trustworthiness in fulfilling its obligations and its ability to protect and control the underlying assets.

Until technology advances to such a stage that travel time is greatly reduced and communication becomes more instantaneous across the vast distance of space, I believe that this hodgepodge network of settlement currencies will dominate the Outer Space monetary system. This will create a trading environment in which many different forms of currencies will be in circulation as merchants ferry goods across the colonies, space stations, and Earth. This monetary system will likely be the norm for many years, and potentially several generations, as these microsocieties continue to mature.

But then what will be the final end result? Well, as history has shown us, if these far away colonies and Earth start walking down two diverging paths, the settlements just might declare their own independence. In this scenario, if these settlements win their independence, they just might form a new form of government—a type of system that could look similar to that of the American federal government or the European Union. The formation of these federations of extraterrestrial nation-states will mark the end of the frontier Outer Space age. When this new Outer Space era begins to dawn and these federations continue to gain power and influence, it will also likely herald the arrival of a more “universal” currency. These new centralized governments might establish a “galactic bank” much like the first national bank of United States. From there, they might continue a path similar to how the U.S. Dollar eventually came about. Thus, even if history for the medium of exchange in Outer Space might not repeat, it will certainly rhyme with its forefathers.