Predictions for the Future of Money

Excerpt: The article discusses digital currencies since the novel is as much about the past and present of banking and money as it is about their projected future.

Introduction

Conspiracy Suisse is as much about the past of Swiss banking as it is about its future, and as much about money as it is about the future of money. In different parts of the story, the fictional Grand Master of the Knights Templar refers to this topic when he speaks about upcoming struggles concerning digital currencies. I, therefore, thought that it may be of interest for some to read more about how the future of money may turn out to materialize. First I’ll recite the part of the novel where this issue is discussed most overtly and then try to explain what the arguments refer to.

The Dialogue in the Book

The banking expert Elena Lehning says in a part of the story: “I understand the trepidation around cryptocurrencies… I assume that’s what you have in mind. We talked about this already last time. But I still don’t understand why BRB would fear them. We use cryptos, especially stable coins, all the time at the bank. It helps reduce the cost of moving and exchanging money. Buy in Swiss francs in Zürich and have pounds in London in milliseconds, at no cost. Direct transfer, full security, immediate settlement, greater liquidity… What’s not to like? As long as they can charge their customers a commission, I don’t see why banks wouldn’t like cryptos. Besides, it has created a great new source of investment income. Banks love volatility. Admittedly, governments don’t like cryptos, because of the anonymity. But not banks.”

Grand Master Grimavi replies to this as follows: “I’m actually talking about digital currencies that will replace money as we know it. 300 million Chinese are already using digital yuan issued by the Chinese State. Very convenient. You can buy and sell without a terminal, at no cost, and the tax is deducted automatically, without an intermediary. Now where is the fun in that for banks? It works great until you decide to, God forbid, criticize the government. You suddenly find all of your money gone and, what’s more, you’ll never be able to buy so much as a loaf of bread after that. Any despot’s dream. 1984 on steroids. The key to a single state, unified world dictatorship. Now imagine, on the other hand, as the only true democracy on the planet, we with our stable Swiss franc issued a digital currency that guarantees 100% anonymity, just like our numbered accounts did once upon a time, in a fixed amount, with full inflation protection, come what may. Easily programmable on a smartphone by anyone for any current or future need. Backed by the Swiss State and useable by anyone, without regard for their nation or currency. Imagine that… I mean the technology is there for sure. The others also have it, but they don’t really want to go for it until they’ll have to.”

The Three Types of Digital Currency

Any currency that is only available electronically is considered digital currency. The majority of nations have already made the transition to electronic currency. The fact that digital currency never takes on a physical form sets it apart from the electronic money present in bank accounts today. You can quickly convert the electronic record of your currency holdings into actual money by going to an ATM right now. However, digital currency is only exchanged digitally and never leaves a computer network.

There are three main types of digital currency: cryptocurrency, stablecoins, and central bank digital currency (CBDC). Many people are already quite familiar with cryptocurrencies, of which there are over 9000 varieties by now, including Bitcoin and Ethereum, which are all based on maintaining some form of a distributed ledger with blockchain technology. A ‘stablecoin’ is a type of cryptocurrency whose value is pegged to another asset class, such as a fiat currency (US dollar, Euro, etc.), gold, or some other commodity, to stabilize its price. Examples are Tether, USD Coin, Dai, or the new PayPal USD. In the most common type of this class, the organization behind the coin will typically set up a ‘reserve’ of the backup asset. For instance, $1 million might be stored in a traditional bank in order to back up one million units of a stablecoin. In the dialogue above the banking expert refers to this type of cryptocurrency.

Bitcoins imagined as physical coins generated by Midjourney AI

The Grand Master on the other hand refers to CDBCs. A central bank digital currency is a digital currency that is issued and overseen by a country’s central bank, similar to fiat currencies today. Many scenarios are being discussed, but one way to implement CBDCs would be for citizens to have accounts directly with the central bank. This would provide governments with strong new tools for controlling the economy, such as making direct stimulus payments or automatically withholding taxes. However, by concentrating a great deal of power, information, and risk within the hands of a select few, its implementation will undoubtedly lead to the creation of new issues and jeopardize cybersecurity and privacy.

In total, about 100 nations are investigating CBDCs in some capacity. A few are testing, and doing research, and some are providing CBDC to the general population already. In the Bahamas, the Sand Dollar has been in circulation for more than three years. Sweden’s Riksbank has completed phase 2 of the e-krona project in 2022. In China, the digital ‘renminbi’ continues to progress with more than three hundred million individual users and billions of yuan in transactions. The implementation in most of the Western World is stifled by worries about the future of the financial industry, as we shall shortly see.

Pros and Cons of Digital Currencies

Digital currencies enable instantaneous payments without intermediaries, cost-free international transfers and currency exchange settled immediately, 24/7 access without closing hours, support for the unbanked and underbanked of the third world, fully secured continuous liquidity, and more efficient government payments such as tax refunds, child benefits, and food stamps.

On the other hand, depending on the digital currency used, there always is some drawback: Cryptocurrencies guarantee anonymity but require an enormous amount of energy for verification of transactions and are very volatile. Stablecoins are – as the name suggests – stable but require some intermediary and are therefore not fully reliable. And CDBCs can be maintained at a very low cost, are stable, but encompass inherent privacy risks.

The head of the International Monetary Fund Kristalina Georgieva said not long ago: “In many countries, privacy concerns are a potential deal breaker when it comes to CBDC legislation and adoption.” This is another way of saying that the people will not go for this level of control. But this reason differs from why a report issued by the Federal Reserve recently noted that “a CBDC could fundamentally change the structure of the U.S. financial system.” This statement must be explained by the fact that CBDCs would cut out commercial banks as intermediaries.

Problems for Commercial Banks

In the same speech I recited above, Georgieva also said: “Central banks are committed to minimizing the impact of CBDCs on financial intermediation and credit provision. This is very important for the wheels of the economy to run smoothly. The countries we studied offer CBDCs that are not interest-bearing — which makes a CBDC useful, but not as attractive as a vehicle for savings as traditional bank deposits.” What she means is that commercial banks would no longer be able to create money ‘out of thin air’ and loan it with interest. “If people chose to bank directly with the Fed, that would require the central bank to either facilitate consumer borrowing, which it might not be equipped to do or find new ways of injecting credit. For these reasons, private, regulated digital currencies are preferable to CBDCs. We also saw in active CBDC projects that they placed limits on holdings of CBDCs to prevent sudden outflows of bank deposits into CBDC.”

Digital currency wars as imagined by Midjourney AI

You can clearly see where the priorities lie. We may therefore assume that to protect commercial banks and their shareholders, governments will opt for public-private partnerships. One possible retail CBDC framework, for example, would allow the central bank to issue money to a regulated bank, that subsequently distributes it to the general population. A multitude of models that incorporate the private sector to differing degrees are presently being investigated. It is obvious that banks, fintechs, technology businesses, and third-party providers will all be involved in the CBDC architecture – clearly to a much greater extent than the public itself.

In a recent report published by the PwC, they stated that: “If a retail CBDC with a digital wallet is introduced which is capable of being hosted with a non-bank financial institution, banking deposit accounts will face new competition. The potential lower deposit balances pose an asset liability management risk should reserves fall below the requirements needed for lending activities. In addition, some users may choose to store CBDCs in digital wallets offered by competitors if they could save on fees or if it is more convenient to do so. In this case, banks may face pressure to consider offering higher interest rates on deposits and adjusting their fees when competing for CBDC deposits… The ability to conduct payments instantly and electronically via digital wallets could pose a threat to financial institutions’ ability to collect fees from wire transfers, check issuances, and other payment services. If the CBDC is designed to allow for central bank-issued digital wallets, financial institutions may face competition from potentially lower fees. In situations where users store their CBDC on third-party digital wallets, traditional financial institutions will likely face competition from technology companies.”

Possible Future Money Scenarios

In one scenario, traditional finance may effectively evolve in the future. Tokenizing assets and money together, banks and other conventional financial institutions might create their own digital currency systems. In the event that regulators favor these over digital natives due to the losses of FTX and other cryptocurrency firms, banks would not only survive but thrive.

In another scenario, governments and central banks may use the new distributed technologies to produce digital copies of their fiat currencies that account for a sizable portion of payment flows. They might have to decide if CBDCs would be made broadly available to individuals or reserved for wholesale usage, like interbank transfers, which might threaten banks that currently control the majority of consumers’ access to cash and credit, as previously mentioned,

In a third scenario, agile digital native companies may expand their reach through platforms that power lending services, the issuing and trading of various digital assets, and fiat-backed stablecoins or tokenized deposits. Without restrictions from antiquated cultural norms or legacy technology, these businesses may expand faster than more established organizations and steal their clientele. However, in order for digital natives to achieve significant scale — something that the financial establishment might prevent — they must secure regulatory acceptance for their business models.

In the most radical fourth paradigm, new open networks that allow issuers and investors, borrowers and lenders, and other participants to transact with each other directly and without middlemen would emerge. Smart contracts and decentralized financial protocols would facilitate transactions, and algorithms would assign credit, upending the economic models of both digital natives and banks. However, to bring about such a significant shift, there would probably need to be strong government backing and the creation of new policy instruments to replace the regulated intermediaries that regulators currently use to monitor the financial markets.