BIS Digital Currency Paper Predicts Money Will Be Unbundled – Ledger Insights

The BIS today published a working paper entitled “The Digitization of Money” which forecasts the unbundling of money. Fiat money is expected to have three sets of functions. It was intended to function as a store of value, a medium of exchange, and a unit of account. However, as cryptocurrencies are already showing, some digital currencies or money could offer a store of value function. Others can be used as a means of exchange for payments – hence the conclusion on unbundling.

And digital money is linked to a platform, not a country. The Alipay owner Ant is mentioned several times as an example.

The three university scientists who wrote the paper see a repackaging with different functions, such as for data collection or social networking sites. It’s no coincidence that the two major digital wallets in China are owned by Ant, which uses data aggressively, and social network WeChat. The authors argue that a payment platform is the best way to collect data.

A payment platform that collects data about all of your economic activities could provide a lender with detailed information about the borrower’s income and all of their payments. “The analysis of such rich data would allow the bank to estimate the probability of repayment with great accuracy, far exceeding the accuracy of predicting the applicant’s creditworthiness,” the authors conclude.

The money rebundling hypothesis posits that the competitive differentiators for a currency lie in data bundles and network services. In other words, the attractiveness of a digital money is based on its algorithms, its privacy policy and the counterparties on the platform. Not surprisingly, different currencies attract users with similar characteristics. Some will prefer privacy, while others may be willing to trade that privacy for the outcome of that data, e.g. B. Better recommendations. Not mentioned in the paper, but there’s a parallel to how insurers offer better rates when they can track your driving habits.

If currencies are associated with platforms, then the role of banks is not only relevant for payments, but for other functions because they lose the primary touchpoint. A cited example is Yu’e Bao of Ant, the world’s largest money market fund, and Ant is also a leading provider of credit ratings. Ant owns Alipay, the world’s largest payment platform.

With dominant platforms, a national currency could become secondary, increasing the risk of “digital dollarization.”

Digital money is changing the dynamics between private and public money, with cash potentially disappearing, as it has done to a significant extent in Chinese cities. Hence the drive by governments to issue central bank digital currencies (CBDC) to maintain independence.


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