There is a narrative among the crypto crowd that only cryptocurrencies will be used for payments in the future. While this may be wishful thinking, the future of money will undoubtedly be turned upside down.
But this disruption is more about removing the friction that technology allows than the technology itself.
As a background, Piyush Gupta, CEO of DBS Bank, commented on blockchain and Web 3.0 at this month’s Singapore Fintech Festival. He said that currently DBS uses the basic functionality of blockchains, which results in considerable efficiency. But he also described a âlevel threeâ future that âidealist libertariansâ envision.
In this vision, âYou don’t need middlemen. You don’t need institutions. You don’t need hubs. Contracts, tokens, smart contracts will make it all work. The problem with (web) 3.0 when you go to level three, if you pass that argument to the next phase, it’s not just that you don’t need middlemen. You start to wonder: you don’t need a central bank. You don’t need regulators. And by the way, guess what, you don’t need nation states, you don’t need governments, âGupta said.
He continued, âIt’s not a question of technology. It is now a question of social policy and a question of philosophy. This level three is not what he envisions. Instead, he sees an intermediate level.
This is the big picture. However, without completely eliminating middlemen or regulators, some degree of socio-political issues in this level three scenario are likely to arise.
This is best demonstrated by moving from the big picture to the practical aspect.
Where are we today
Today, if you hold cryptocurrency in a major exchange, you can get a Visa or Mastercard that allows you to spend the crypto to buy a cup of coffee. It’s not really magic. When you make a purchase, the cryptocurrency exchange converts the crypto to dollars at the time of payment.
But this simple example is a road map for the future. Because what happens is that the crypto exchange eliminates friction, which means you don’t have to use conventional money to pay for goods.
Think back to the history of barter. The problem was, if you had apples and the other person had oranges, but you didn’t want oranges, there was no trade. It was one of the main reasons you needed change. In this case, you have cryptocurrency rather than cash, and the retailer wants cash. But that’s not a problem. In a digital world, someone is there to take the oranges and give you what you want instead.
Fast forward to a future where stocks, bonds, your in-game assets, and your home equity are all digital tokens. You will keep all of your assets in one interoperable wallet. If a tiny fraction of the Apple shares in your portfolio can be converted in real time, why not use it to pay for your coffee? The trader doesn’t care because he gets dollars if he wants to.
When the frictions of converting prices and selling assets go away, how much money should you keep in a bank account? By the way, how much should you keep in a central bank digital currency (CBDC) or stablecoin? Wouldn’t you rather keep your money in income generating assets?
Asset prices are not stable
In this digital future, you would still want to keep cash to pay rent and the like as asset prices fluctuate. Law? Maybe, but not necessarily. It is a question of risk management.
Institutions are in a similar boat because they like to ensure that interest rates and foreign exchange costs are predictable. So they buy futures and options to provide stability. These derivatives markets are massive. The total global market value of stocks at the end of June 2021 was $ 116 trillion. But the notional value of unlisted options and futures was $ 610 trillion.
In the crypto world, you can instantly buy futures and options for a variety of assets. Many offers circumvent regulations and are risky. However, it does demonstrate that hedging and derivatives could shift from being a tool for sophisticated institutions and investors to being accessible to the average person if allowed.
When you buy French fries, you are offered a packet or two of ketchup. Likewise, when you buy a stock or other asset, you may be asked if you want to handle price stability in a meaningful or medium way. Artificial intelligence can guide the less savvy and also determine whether you are hedging or playing. This is because the use of derivative products may not be permitted for consumers in some countries.
So, with the combination of portfolios, instant trading, and hedging, consumers’ appetite for âmoneyâ may decrease over time. But what about businesses?
Companies are not the same
It is true that companies may need more cash just because they have to pay for staff and goods and services. But one of the promises of blockchain and digital currency is that their need will decrease as well.
Today, businesses maintain cash balances around the world to meet local needs, in part because of the friction associated with moving money around the world. As these frictions are removed and intraday cash management becomes more automated, there will be fewer pockets of cash and overall their cash requirements will also be considerably lower.
Frictions being removed
So from a practical point of view, digitization makes it possible to remove several frictions. Currently, assets are siled in different markets and institutions. As assets become digital tokens, they all start to be integrated into unique portfolios, meaning silos are broken or become interoperable.
In the future, instant price and trade may be available for most, if not all, assets. Similar to the cryptocurrency card payment example, you can already instantly convert some in-game assets and reward points to cash. And in the future, you can do the same for stocks, bonds and other public assets. But probably not all. A buyer instantly willing for an obscure private stock or a share of an esoteric art object may arrive more often than before, but could be tricky.
And finally, coverage can be made available instantly, automatically, and at the point of sale reversed in the same way.
This combination of wallets, standardized tokenized assets, liquid markets and hedging could drastically reduce the extent to which consumers and businesses want to hold money, whether that money is held in banks, in stablecoins, or in cash. central bank digital currencies.
In other words, it doesn’t just affect commercial banks. It also has an impact on central banks and national economies. And that raises some of the socio-political issues mentioned by the CEO of DBS, albeit on a smaller scale. These impacts will be explored in the next article.