‘The Future of Money’: book review

Monday, September 26, 2022 1:03 p.m.


CFA Institute Contributor

These are articles written by professionals for investment professionals. These are contributions from outside subject matter experts who do not work for the CFA Institute, but who may be CFA charterholders as well as members of a CFA Society. All are experts in their field and strive to provide useful information that helps investment professionals make better decisions.

Are cryptocurrencies the next big investment, fad or currency that will transform the economic and financial landscape? What are some of the pros and cons of digital currencies? Who will benefit?

Eswar S. Prasad attempts to answer these questions in The future of money: how the digital revolution is transforming currencies and finance. Prasad, Tolani Senior Professor of Trade Policy at Cornell University in New York State and author of several books on currencies, provides an insightful exposition on the changing landscape from traditional paper notes to digital currencies.

Prasad begins with a quote from Cecilia Skingsley, the former deputy governor of Sweden’s central bank: “If you extrapolate current trends, the last note will have been returned to the Riksbank by 2030.” Skingsley, who recently took over as head of the innovation hub at the Bank for International Settlements, isn’t the only government official who sees a big future for digital currencies. China is another country moving away from paper money. In the United States, President Biden signed an executive order to ensure the responsible development of digital assets in March 2022.

Mobile banking and blockchain

The “Innovations” section begins with a chapter titled “Will Fintech make the world a better place?” “. The author takes us through the history of fintech, which he says is a catch-all term for new financial technologies. However, some innovations, such as the ATM, have become so ubiquitous that we forget they were once new technologies. The story includes an interesting look at innovations, such as M-Pesa, which enabled individuals in Kenya to bank via mobile phone, as well as peer-to-peer lending, crowdfunding and insurance at Requirement. Many of these new services will pose challenges for traditional financial services companies.

Today, fintech is more closely associated with cryptocurrencies, such as Bitcoin and Ethereum. However, a discussion of cryptocurrencies cannot begin without understanding blockchain. This technology has been touted as the future of finance and many other business areas, including securing medical records, non-fungible token (NFT) markets, and supply chain and logistics monitoring. .

Most investment professionals are familiar with blockchain and the concept of a decentralized ledger on a peer-to-peer network, but many may not fully understand the technology. Prasad provides a detailed yet accessible explanation of how blockchain works, from its origins to the technology behind it. The term “blockchain” is associated with a variety of cryptocurrencies. However, the protocols used to validate transactions differ for different blockchains. In addition, each protocol has advantages and weaknesses. Will many alternative protocols continue, or will one emerge as the industry standard?

Prasad debunks some of the myths of crypto and other digital currencies. For example, many view the use of cryptocurrencies, such as Bitcoin, as a way to maintain anonymity. The reality is that, unlike cash, digital currencies require credentials for consumers to receive goods purchased with digital currencies, which removes anonymity. Blockchain has also been considered a secure technology. Although this technology offers greater security than other methods, Prasad outlines how individuals can hack the various protocols.

Like all new technologies, the fintech revolution has brought with it a whole new language to define new offerings, including hashing, security token offerings (STOs), smart contracts, initial coin offerings (ICOs) , hash time-locked (HTLC) contracts, and stablecoins. The future of money allows investors to learn the new vernacular of this field and examine which innovations may offer the greatest investment opportunities.

Investor outlook

The book is unlikely to provide information on how to value cryptocurrencies or how digital currencies, such as Bitcoin, are likely to replace government-issued money as a reserve of value, medium of exchange or unit of account. However, Prasad offers insight into the potential of digital currencies in the chapter “The case of central bank digital currencies”. He argues that CBDCs can improve efficiency on the wholesale side by improving how central banks distribute reserves to commercial banks. On the retail side, CBDCs can offer several benefits, including providing a backup payment system, promoting financial inclusion, and improving monetary and fiscal policy.

Although these chapters may seem more interesting to monetary economists and central bankers than to investors, Prasad provides some insights that investors can benefit from. It summarizes a study that analyzed how policies in some European countries aimed at reducing the use of cash reduced the underground economy and increased tax revenues. The savvy investor might wonder which investments will benefit from these increased tax revenues. Will the additional revenue be used to fund infrastructure spending? Will countries use the windfall to fund alternative energy projects? Perhaps countries led by conservative lawmakers will choose to return the money to citizens and businesses through tax cuts. If so, which industries are likely to benefit?

Innovations produce winners and losers by creating new opportunities and challenges for incumbents. Financial sector innovations are no different. Understanding some of the current and potential future changes will allow analysts to better determine which companies and industries are likely to prosper and which are likely to suffer. The future of money offers readers a window into some of the opportunities and challenges that lie ahead.