The Future of Money by Sandy Oh

The Future of Money by Sandy Oh

What is ‘money’?

At its most basic, money is a technology that stores and transfers value over time and space. To do this effectively, an ideal money should be durable, portable, fungible, divisible and scarce. The type of money societies choose to use over time is an evolutionary process judged along these desirable traits – from shells, beads to metals and coins.

Today, the mention of money would conjure images of cash bills and numbers on bank accounts. By themselves, the cash bills and bank account numbers are worthless. They derive value from a combination of our belief systems and being legally enforceable promises in a vast, complex and coercive network of political, legal and economic systems.

Case in point is what happened in 1971 when US President Nixon surprised his allies by unilaterally abandoning the US dollar gold peg after a secret meeting at Camp David. His move ended the Bretton Woods era since WW2 where currencies were pegged to the US dollar, which itself is pegged at $35/ounce.

His move opened the floodgates and ushered in a new monetary system. Central banks expanded money supply without constraints. Covid has only turbo-charged what has been a parabolic growth in money supply. When priced in gold today, the USD has lost 98%, the GBP 99%, and the JPY 93% since 1971.

Money has clearly lost its scarcity trait, and as such, is losing its ability to store value over time. It is no wonder that investors are rushing out of cash into other assets with a higher expectation of return over time, be it stocks, real estate, commodities, art or even NFTs.

As we search for a better form of money, the market has delivered some interesting options. For scarcity, bitcoiners point to bitcoin’s hard-coded 21million supply cap as the hardest form of money, arguably even harder than gold. Rather than being state-issued and controlled, bitcoin was created by an anonymous person Satoshi Nakamoto, who has ‘disappeared’ after creation but still in possession of 1million btc (worth 45bio at today’s price).  Bitcoin’s protocol is now maintained by a decentralised network of miners and nodes.

Although bitcoin has proven its store of value feature, its volatility (even though decreasing) makes it challenging to use as a regular, practical means of exchange.

Enter stablecoins, which are designed to have the low volatility of sovereign currencies but with settlement done on blockchains, rather than via traditional banking systems. Essentially, stablecoins are digital representations of fiat currencies that reside on blockchains. The two biggest stablecoins by market cap- US$65bio Tether (USDT) and US$28bio USD Coin (USDC) –  are issued by private institutions.

In many ways, the fast growth and adoption of such digital currencies have spurred central banks to speed up their own process in developing and launching their own CDBC (Central Bank Digital Currency).

Digital currencies, whether in the form of stablecoins or new CDBCs clearly have a role in the future of money. At their best, they are cheaper and faster in terms of payment. They also allow the unbanked to join the financial system with just a mobile phone. Cash transfers from the government could be made seamlessly to the people (something that could facilitate Universal Basic Income should it ever materialize).

On the flip side, there needs to be robust legal, regulatory and technological frameworks to ensure stability and customer protection. What are the trade-offs with privacy and surveillance societies are willing to make? What if central banks use CDBCs to facilitate a deeply negative interest rate policy?

The future of money is being created now. As the US dollar is being fought off its pedestal as the dominant reserve currency, I see a future where the money we use depends on what we use it for. Our digital wallets could very well contain a mix of CDBCs, stablecoins and crypto tokens that reflect our beliefs and assessment of value.

It’s a subject that can do with much more open consideration.

“The Future of Money” will be discussed with Mark Sobel at our forthcoming Drink & Think webinar.

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