The future of money: how the digital revolution is transforming currencies and finance Eswar S. Prasad Belknap (2021)
Want to understand why citizens have taken to the streets about the adoption of Bitcoin as legal tender in El Salvador? Enter economist Eswar Prasad, with his very well researched book The future of money. Innovations in payment systems and currencies, he explains, reflect both significant changes in the global economy as it integrates large developing countries, such as China, and digital transformation overall. As money has become free to flow around the world, Prasad examines how digital innovation is reshaping it both as a tool and as a concept.
Two things embody the transformation. The first concerns money as a physical entity. The digitization of payments challenges the idea of cash as the most definitive form of money. However, cashless transactions result in a loss of confidentiality as they leave electronic traces. This does not appear to be a problem for the majority of people and businesses that conduct such transactions legally. And requiring digital payments for transactions over a certain amount would help shrink the off-ledger economy. In Italy, for example, where this underground economy accounts for around 15% of gross domestic product, payments of € 2,000 (US $ 2,350) or more can no longer be settled in cash.
The governance of data collected through digital transactions remains an open question, which cannot be dismissed as the product of libertarian paranoia over “harmful or misguided government intrusions,” as one commentator puts it. Safeguarding individual freedoms and privacy is a legitimate issue in an open and democratic society in which concerns about the use of personal data are handled in a transparent and accountable manner.
Prasad scratches the surface of this complex subject. He seems satisfied with the prospect of expanding existing financial regulation. For example, he discusses regulating how and when FinTech companies should transmit personal data, rather than rethinking the entire regulatory framework.
The second aspect of the digital money challenge is what counts as legal tender, and who is the issuer and the guarantor. Traditionally, currencies issued and guaranteed by central banks are legal tender – for example, they must be accepted to settle any debt to a private party. But cryptocurrencies issued by private entities, notably Bitcoin, are now part of a growing number of transactions. Bitcoin was even briefly accepted by electric car maker Tesla, until the company’s chief executive, Elon Musk, revisited the idea about the currency’s gargantuan carbon footprint.
So who or what is at risk here? Private cryptocurrencies are fiat money, which means that their value is not backed by a tangible asset such as gold. They share features with central bank currencies, such as the ability to settle payments. But cryptocurrencies lack transparency, accountability and governance. They are less secure (if you hold Bitcoin, for example, and lose your unique password, you lose access to your account forever), more volatile, and cannot provide the same level of anonymity as money. liquid.
Prasad convincingly concludes that private cryptocurrencies – such as the Diem offered by Facebook (formerly known as Libra) – are more of a fad than a serious threat. They are likely to become niche assets held by speculators, or just plain trinkets, as central banks prepare to launch their own digital currencies.
Despite its subtitle, The future of money is not just about the evolution of banking and financial services. Prasad is deeply interested in the social impact of the digitization of money, for example in making finance more inclusive. About 1.7 billion adults worldwide do not have a bank account, according to the World Bank. Among other things, this means that immigrants who wish to send money home often depend on expensive remittance services or personal connections.
Fintechs can provide inexpensive financial services to all parts of society, including rural and low-income households. In Kenya, for example, the M-Pesa mobile banking service, introduced in 2007, enables small businesses in remote areas to store and transfer money securely and easily via mobile phones.
As with all attempts to define an uncertain future, The future of money leaves many questions open. On one point, however, Prasad seems confident – that although the money becomes more marginal, it will never be eliminated. This comes as a bit of a surprise after reading his review of the possibilities offered by digital currency, as well as its flexibility and convenience. Prasad seems to accept that people want to protect their privacy. He concludes that as long as people appreciate convenience and anonymity, a cashless society is not the order of the day. It’s hard to disagree.
The complete elimination of cash would require fully digital societies, with extensive and reliable infrastructure, universal access to devices, and people who are comfortable leaving electronic traces. Even though the pandemic has sped up digital payments, we may still have some cash on us, just in case.