The origins of money go back centuries and we have come a long way from using metals like gold to fund money, including currencies. The historical figure of Kublai Khan had started this concept of money, supported by him, the king. Evolution of payment systems also means that we have moved beyond physical currencies to banking where transfers are enabled by different systems and hence the use of cash has decreased. What then 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 determined by the notes we hold or even the deposits we hold in banks. Picking up a 485-page book on the future of money can be a little daunting for the reader, but the way Prasad writes makes it easy to read.
The author takes us step by step through the multitude of changes that are taking place. Fintech companies are here to stay, and much of the lending takes place through these modalities. Also, the various payments we make using the digital mode that go beyond plastic cards are manifestations of this revolution that has picked up steam after demonetization. You also don’t have to go to a bank for a loan and peer-to-peer lending is catching up. These companies certainly pose a threat to banks and we have seen the latter operate on their digital platforms to compete with them. So while fintech companies are providing loans online, banks have started doing the same for certain credit levels, especially at the retail or SME level. Can they replace investment banks? You can’t rule this out because algorithms that are built can also do what these settings eventually do. It is possible to say that although we need banking, banks may not be necessary.
Prasad talks a lot about the rise of bitcoins and other cryptocurrencies. This is probably the biggest change happening and while everyone is cautious in their views, their spread has led central banks and governments to pay more attention to it. He explains the basics of this currency and explains how blockchain technology works. Coming to the fore just after the financial crisis, bitcoin was a new piece in the financial world. Central banks and governments don’t quite protect the sanctity of their currencies with their wayward policies. Therefore, cryptos came up as an alternative. Today, with trillions of dollars in this currency, 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 be a reality. How soon will this be? One cannot say it. A central bank digital currency has the advantage of tracking any transaction that contradicts crypto, which thrives on anonymity. Therefore, we can consider the central bank digital currency as an improvement over crypto, although the author points out that even crypto is not completely anonymous and some transactions have been traced by the investigative authorities.
Also, while CBDC is another way of holding money and making payments, it will 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. currencies. So if all the rupees in the system are in digital form and there is no paper money, that will not make the rupee stronger in the global system. It must be supported by credible monetary and fiscal policies.
There is also the serious issue of hacking or a situation where systems fail when people have to transact. We often see ATMs not working or the RTGS/NEFT not being able to process transactions on public holidays. How will CBDC address these concerns? Technology is not foolproof and any disruption can cause chaos in the global payment system. Therefore, one cannot be sure whether these new technologies are better than the existing ones.
Prasad takes us through the whole range of changes that are taking place and puts them into perspective, giving readers a detailed picture of how these new systems work, what the pitfalls are and what their eventualities are. The concept of money that we read about in textbooks as means of payment, store of value, etc. will take on a new dimension with these new systems. The promise is more transparency and convenience. There is, of course, a question mark about how quickly they will conquer the nation, especially emerging countries that still have varying degrees of sophistication.
Most importantly, it is only a matter of time before the money disappears from the system. But it will not be replaced by cards and phones, but by cryptos and even the central bank’s digital currencies. Even companies like Amazon and Facebook will join the game beyond their current wallets.
Interestingly, Prasad states that the dollar will still maintain its hegemony in the financial world. While other currencies could try to become an acceptance vehicle for cross-border trade, this will only be temporary. Also today, most cryptos are primarily quoted against the dollar and therefore, while these currencies came into existence because there were too many dollars in the system due to QE, ironically most transactions are still calculated with the dollar value.
But all these innovations in technology come at the cost of privacy and we may not like that, 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)
