We are in the midst of is financial revolution, it is impacting every layer of the financial ecosystem and by the virtue of how embedded it is in our lives, for good or bad, every layer of of the social fabric is also at a risk of disruption, and what we see as “Money” is at the core of it.
All aspects of the financial stack; instruments, infrastructure and intermediaries are being challenged, this article though focuses on the “instrument” aspect of the evolution.
Why is money changing ?
Well the fact is that what we define as “currency/money” has always been evolving. Chinese were the first to use paper currency around 700 BC, before that it was somewhere in Europe that coins were being used at an industrial level and before that the world used something called as “bartering” which is a system of exchange in which participants in a transaction directly exchange goods or services for other goods or services without using a medium of exchange, such as money.
The reason of evolution of “money” are diverse and complicated, but the fact remains “money is only as valuable as the importance the people place on it“. Depending on who you ask, a diverse set of entities exist that can be defined as “Money”; cryptocurrencies, private bank coins, stablecoins, CDBCs and good old fiat, you name it are you will find believers and non-believers.
The evolution of money is a result of many things, I believe you will definitely find the below reasons in that list,
1.The equation of money is NOT BALANCED ! (The need for intermediation < gross mistrust)
Central authorities control money, and the need for their intermediation somehow is perceived as less relevant than the impact on the world because of their “monopoly” on the financial infrastructure.
2. Apparently money is now an ASSET CLASS with higher returns than any equity share or stock ?
Money is more than a medium of exchange today, it is “perceived” as an asset class, and perception can impact anything and everything, traditional fiat money just does not live up to this perception.
3. Money now comes with OWNERSHIP in the infrastructure that builds, stores and transfers it.
The concept of distributed trust that comes with blockchain based money is revolutionary, but the fact that you help in building the infrastructure and get incentives (tokens/digital assets) for your work is an alien concept to centralized intermediaries.
How is the money changing ?
At a high level, I believe three directions describe majority of the change;
- Digital money instead of physical cash.
- Distributed trust instead of centralized control.
- Programmable infrastructure (blockchain) to build definitive actions using smart contracts, leading to smarter autonomous transactions.
What is money changing into ?
At this stage of the evolution, “money” has really diversified into many threads,
- Crypto currencies are the most popular, the name is derived from it being secure because of complicated encryptions and transfer mechanisms. Bitcoin blockchain started it all and brought it to the notice of an average joe (hence perception in play), even though the likes of Paypal have been trying to modernize money since a long time, bitcoin really did it. There are hundreds of cryptocurrencies today, but not all of them will survive. This type of money is either on public blockchains or private blockchains, but the perceived value of these coins/tokens/assets is deciding their future. These are highly volatile and pose huge risks of uncountable types, but they have their place in the economy and some are even seriously challenging the central bank money.
- Stablecoins, these are assets pegged to a fiat currency and hence leverages their stability, they are perceived as an interim solution till the world agrees on a viable approach or is pushed into it.
- Central bank digital currency, these in so many ways exist to counter the effects that cryptocurrencies had (no central banker will agree to this though :-)). The concept of fiat money was challenged and now cryptocurrencies and stable coins have a substantial amount of value locked into them (bitcoin’s market cap is currently estimated to be around $650 billion). Central banks across the world are considering CDBCs and China is leading the way. Today it is the only major economy with a live CDBC with more than 250 million users.
In conclusion, what ever we decide the evolution of money should be, it should be formidable enough to play its part in the economy. In the words of Mark Carney (former governor of Bank of England and Bank of Canada), “money should be anchored on values of trust, resilience, dynamism, solidarity and sustainability”.