The origin of money dates back centuries and we have come a long way from the use of metals like gold to fiat money, which includes currency. The historical figure of Kublai Khan had started this concept of money supported by him, the king. The evolution of payment systems also means that we have moved beyond physical currency to the bank where transfers are enabled by various systems and as a result the use of cash has decreased. So what is the future of money?
In his book, The Future of Money, Eswar S Prasad takes us through the plethora of changes taking place in the world where money will no longer be defined by the notes we hold or even the deposits we have in banks . Picking up a 485-page book on the future of money can be a bit daunting for the reader, but the way Prasad writes makes it an easy read.
The author takes us step by step through the multitude of changes taking place. Fintech companies are here to stay, and a lot of lending happens through these modes. Also, the various payments we make in digital mode that go beyond plastic cards are manifestations of this revolution that accelerated after demonetization. You don’t have to go to a bank to get a loan either, and peer-to-peer lending is catching up. These companies surely pose a threat to the banks and we have seen them working on their digital platforms to compete with them. So, while fintech companies are providing loans online, banks have started to do the same for certain levels of loans, especially at the retail or SME level. Can they replace investment banks? This cannot be ruled out as the algorithms being built may also do what these institutions end up doing. It is possible to say that although we need banking services, banks may not be necessary.
Prasad talks a lot about the emergence of bitcoins and other cryptocurrencies. These are probably the biggest change underway and while everyone is cautious in their opinions, their proliferation has brought central banks and governments closer to their awareness. It explains the basics of these currencies and how blockchain technology works. Appearing just after the financial crisis, bitcoin was a novelty in the financial world. Central banks and governments do not quite protect the sanctity of their currencies with their capricious policies. This is why cryptos have emerged as alternatives. Today, with trillions of dollars in these currencies, we have to accept them.
Here, the author extends the concept to central bank digital currency (CBDC), which is the next big thing. Several central banks are working on it and they could become reality. How soon will this be? We can not say. A central bank digital currency has the advantage of tracking every crypto-contrary transaction, which thrives on anonymity. Therefore, we can consider central bank digital currency as an improvement over crypto, although the author points out that even crypto is not entirely anonymous and some transactions have been traced by authorities in charge of investigation.
Moreover, the CBDC, while being a different way of holding money and making payments, does not make any currency stronger or weaker in the global financial system and monetary policy and other economic factors. will play a role in determining the value of the currency. Therefore, if all the rupees in the system are in digital form and there is no paper money, it will not make the rupee stronger in the global system. It must be supported by a credible monetary and fiscal policy.
There is also the serious issue of hacking or a situation where systems fail when people need to make transactions. Often we find that ATMs are not working or that RTGS/NEFT cannot process transactions on public holidays. How will the CBDC address these concerns? Technology is not foolproof and any disruption can create chaos in the global payment system. Therefore, one cannot be sure that these new technologies are better than the existing ones.
Prasad takes us through the full range of changes taking place and puts them into perspective, giving readers a detailed view of how these new systems work, what the pitfalls are and where they might come from. The concept of money that we read about in textbooks as being a means of payment, a store of value, etc., will reach a new dimension with these new systems in place. The promise is more transparency and convenience. There is, of course, a question mark over how long will they sweep the nation, especially emerging countries that still have varying degrees of sophistication.
The important thing is that it is only a matter of time before the cash disappears from the system. But it will not be replaced by cards and phones but by cryptos and even central bank digital currency. Even companies like Amazon and Facebook will join the game that goes beyond their wallets that exist today.
Interestingly, Prasad argues that the dollar will always retain its hegemony in the world of finance. While other currencies might try to become a mode of acceptance for cross-border trade, this will only be temporary. Moreover, even today, most cryptos are mostly quoted against the dollar and therefore, although these currencies came into existence because there were too many dollars in the system due to QE, ironically, most transactions are still accounted for with the dollar value.
But all of these technological innovations come at the cost of privacy and we may not like it, but we have to be prepared for it.
The future of money
Eswar S Prasad
Harvard University Press
Pp 485, Rs 799
(Madan Sabnavis is Chief Economist, Bank of Baroda)