How much will digital currency revolution alter our means of trade and our perceptions of money? These issues are increasingly occupying the attention of the World Economic Forum and other international organizations, as innovation in digital payments accelerates.
Whatever happens with Facebook’s own digital-currency revolution moon shot, Libra, it has already served as a wake-up call for businesses and regulators all across the globe. If there is to be revolution, let us attempt it rather than endure it, Otto von Bismarck famously observed. For policymakers, the issue is not whether or not to attempt to steer the digital-money revolution, but how.
Technology businesses, payment processing companies, and banks are all fighting to become the doorway into the emerging platform-based economy, and digital money is already a crucial battlefield in finance. The reward pool for the victors might be enormous. Alipay and We Chat Pay currently handle more than 90% of all mobile payments in China.
The possibilities are obvious
The advantages of digital currency revolution are undeniable. Moving money in Western nations is excessively expensive and inefficient, and those who pay the most are frequently those who can least afford it. Improving these systems might offer large profits and societal advantages, as I suggested in a paper for the Bank of England (BOE) earlier this year.
Furthermore, in many developing economies, the demands – and potential rewards – are considerably larger, especially when it comes to cross-border payments. The World Bank estimates that the average cost of transmitting international peer-to-peer remittances is roughly 7% of the total amount.
Efforts are still being made to improve the primary payment methods. For example, Transfer Wise claims to have cut the average cost of cross-border transfers to 0.74 percent for its customers. However, less-traveled paths remain difficult to navigate due to anti-money-laundering regulations and low data quality.
Others are researching the difficult legal and regulatory issues raised by digital money in order to protect monetary and financial stability. Leal Brainerd, a member of the Federal Reserve Board of Governors in the United States, has said that the hazards of crypto currencies exceed the advantages.
The People’s Bank of China, on the other hand, is moving forward — but not toward the decentralized or “permission less” block chain architecture that crypto enthusiasts imagine. The PBOC intends to utilize encryption to issue tokens to mainstream banks, which will subsequently be distributed to users via the current two-tiered banking system.
Suggestions for using digital money
As a result, if the European Central Bank wished to be the first central bank to create digital money, they may do it now. I would provide five suggestions from my BOE report to policymakers contemplating the alternatives offered by digital money.
To begin, monetary authorities should provide the infrastructure that will allow alternative payment systems to communicate with one another. As BOE Governor Mark Carney demonstrated by providing non-bank payment businesses access to the BOE payments system, the private sector can thrive when central banks function as a platform for innovation.
However, the success of new providers will be determined by how quickly they can connect to the central bank infrastructure, which will need well-designed application programming interfaces for receiving and sharing data.
The advantages outweigh the disadvantages
Payments innovation is advancing at a breakneck speed. Some concepts may not take off, while others may need a pivot to become financially viable. Other challenges, including as market domination and cyber-security vulnerabilities, will definitely gain prominence in policy discussions. However, the economic and social advantages of a frictionless, fraud-free, and trustworthy global payment system will almost certainly exceed the threats.
Fifth, and most importantly, governments must devise a strategy for the demise of cash. Cash payments in Sweden have decreased by 80% in the last decade, and many other developed economies are just 5-10 years behind.
Although digital payments have numerous advantages, the Swedish example demonstrates that without a well-coordinated strategy, the rate of change risks alienating certain social groups. As payment patterns change, each nation will require a plan to strengthen its payment infrastructure – including internet and mobile-telephone networks – to ensure that no one falls behind.
