Five trends that will shape the future of digital currencies

In times of crisis, topics and people that lurked previously undetected suddenly become the focus of attention and discussion. In the financial crisis of 2008, it was central bankers who blinked into the limelight of unfamiliar publicity. In addition to the indispensable members of the health professions and epidemiologists, the focus in the pandemic was on specialists in digital payments and digital currencies from central banks.

The OMFIF Digital Monetary Institute’s symposium last month gathered over 1,700 participants from 120 countries, including senior central bankers and officials on the one hand, CEOs of pioneering digital companies on the other, and pretty much every other professional with an interest in financial services. Two years ago we could just about have held the colloquium in a phone booth. In two days full of discussions, debates and often heated arguments, we identified five major trends that will shape the future of digital money.

Global transformation

Given the tragedy of the pandemic, we have seen a rapid acceleration in the transition from a physical to a digital economy. Nowhere is this more evident than in financial services and payment methods, with the use of cash declining significantly. Both financial markets and the real economy will continue to digitize, driven by a combination of new technologies, public policy and entrepreneurial zeal. Not all incumbents will survive. Not all innovators will be successful. It will be difficult to strike the balance between stability and innovation.

CBDC not if but when

A digital economy requires digital payment instruments. Entrepreneurs are ready and able to provide them. We are already seeing the birth of digital central bank currencies for private customers in the Bahamas and China, and more will follow. Experiments with stablecoins and tokens are taking place in the capital markets and are becoming more widespread. There are many valid political reasons for central banks and governments to adopt a CBDC, but none are more compelling than the risk of losing financial and political sovereignty to either the private sector or other state actors. Large economies will be suspicious of the potential threats to financial stability and fractional reserve banking posed by some types of CBDC, but sooner rather than later they will be convinced that they are juggling competing interests.

Plenty of private currencies

A tapestry of currencies will soon cover the world. These will be both quasi-fiat (like stablecoins) and private, with many taking up the middle. Money will be stupid, smart, local, international, private, public, and everything in between. It will mainly be digital, but there will also be physical representations, especially of national currencies. Cryptocurrencies will continue to flourish and decline at the same rate. Some will become institutionalized assets, though likely not widely accepted payment instruments. Physical cash will continue to exist for the foreseeable future, even as usage declines.

Cross-border currency competition

Just as competition within national borders between public and private payment instruments will intensify, so will competition between nation states and currency areas. Whether this will be done by representatives of the private sector or by central banks as an extension of national policy remains to be seen. This competitive arena will span regulation, governance and technology, with general agreement on the benefits of collaboration and interoperability and heated disagreement about who should hold the stick.

Public-private partnerships on market terms

The private sector realizes that whatever utopian dreams some may have, it will not be allowed to adopt unopposed fiat financial infrastructure that sovereign states have built for centuries. Central banks know that despite their diverse abilities, they have neither the appetite nor the capacity to open and maintain accounts for millions of citizens. A degree of partnership and collaboration between the private and public sectors is required in the design, piloting, deployment and implementation of CBDCs. The balance of power, activities, and functions between the two will vary widely from country to country. Partnerships range from enthusiastic to skeptical, but going it alone is unlikely to be seen as a viable option in the long term, except in certain circumstances.

“I never make predictions, especially about the future” has been attributed to a number of seers. I am confident that not all of these five predictions will be correct. I’m just not sure which one. I am sure that we will be discussing this hotly at the next annual DMI symposium.

Philip Middleton is the chairman of the OMFIF Digital Monetary Institute.

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