The Money of the Future

What will we use as money in the future? Central Bank Digital Currencies (CBDCs), stable coins or cryptocurrencies? How centralized will they be? The answer is likely all of the above and they may be in our hands (digitally, of course) sooner than we think.

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The Bank of International Settlements (BIS) published in August its latest report on CBDCs highlighting that most progress on the topic has been achieved by digitized economies with capacity for innovation, and that most central banks are considering retail CBDCs architectures with cash-like claims on the central bank leaving the private sector to handle all consumer-facing activity. As of late 2019, central banks representing one fifth of the world population were very likely to launch a CBCD soon. This number has only increased during 2020.

CBDCs should be issued having in mind monetary, fiscal, and financial inclusion policies

CBDCs, however, should be issued having in mind monetary, fiscal, and financial inclusion policies. Research such as the article by University College London researchers and industry experts Dr. Geoffrey Goodell, Dr. Paolo Tasca, and Hazem Danny Al-Nakib, explore the possibilities introducing a CBDC and a Fiscal Digital Currency (FDC), fiat-based and asset-based respectively. While privacy is paramount in the currency issued by the Central Bank, more direct control is needed for performing fiscal policy and making sure subsidies and other government aids have the intended impact. In addition, some countries are seeing CBDCs as a way to diversify the concentration risk on their payment systems currently dominated by tech companies.

Stablecoins have been the perfect solution for traders to maintain the value of their investments once they sell volatile crypto currencies. Now they are seen as an avenue for faster payments, especially for cross-border transactions. BitPay in December 2019 rolled out stablecoin payments for merchants and consumers around the globe and Coinbase allowed payments with DAI through its card. In addition, Libra, the famous Facebook project aims to reduce the cost of international remittances.

Stablecoins pose stability problems and currency policies and capital controls will determine countries' different approaches to regulation

Stablecoins pose stability problems as highlighted by a report from the G7, International Monetary Fund (IMF) and BIS, particularly in those countries with less stable currencies. These risks include currency substitution, deposit withdrawal, reduced ability to transmit monetary policy and anti-trust concerns. This is why developments on stablecoins will be dictated not only by private sector innovations, but also by existing currency policies and capital controls, which will determine countries' different approaches to regulation. For example, EU countries called in September 2020 for restrictions on the issuance of these coins.

Lastly, cryptocurrencies or tokens could have a payment, utility, or security function. Given that their value can rise or fall due to demand and supply forces, up until now, cryptocurrencies have been used primarily for trading and arbitrage by consumers or as a bridge currency to decrease cross-border and FX costs for companies. While it is not likely that these cryptocurrencies will become the main payment method within one country, they could be used in peer to peer transactions. The announcement of Metamask and other non-custodial wallets finally launching on iOS and Android will bring us closer to knowing the preferable use of these tokens by a larger part of the population.

According to the IMF, the BIS, national central banks and other international organizations, money should fulfill three characteristics: be a store of value, be a unit of account and serve as a medium of exchange[1]. This definition in the past required a centralized approach but now technology is allowing more decentralized versions to be created. Decentralization could reduce systemic risk but this benefit should be weighted against the strength or weakness of governance protocols.

Money is changing, and with it, our monetary and financial systems

In conclusion, money is changing, and with it, we will see changes in our monetary and financial systems. These changes could address the current shortcomings and allow for a more accessible and efficient future.

[1] https://www.imf.org/external/pubs/ft/fandd/2012/09/basics.htm