The future of money is undeniably being shaped by digitalization, with various new forms and types of currency emerging. However, according to a recent report by Moody’s, traditional central bank money contained in commercial banks will continue to dominate due to the trust factor often outweighing efficiency. As the monetary landscape becomes more fragmented, many new payment solutions work alongside commercial banks’ money – further supporting the assertion that trust continues to hold significant value.
One key example mentioned in the report is the widespread use of digital wallets. Moody’s believes that digital wallets will maintain the dominance of commercial bank money as long as their primary source of digital currencies remains within bank accounts. The potential downside of digital wallets is that they could threaten banks’ revenue by excluding them from the transaction process. However, tokenized deposits are expected to maintain a close relationship with commercial banks, even if other forms of tokenized assets may not share this same connection.
Moody’s contends that Central Bank Digital Currencies (CBDCs) will be seen as the safest form of digital money. CBDCs do not require deposit insurance and can potentially provide gains in inclusivity and ease of payment, particularly with regards to cross-border transactions. Despite these benefits, technical and policy complexities pose challenges to the adoption of CBDCs. In most cases, CBDCs are expected to be intermediated, reinforcing the importance of commercial banks’ role in the financial landscape.
Cryptocurrencies, despite being around for over a decade, received a mixed review from Moody’s. The report highlighted the limitations of cryptocurrencies in fulfilling the basic functions of money due to issues such as volatility, high transaction fees, low throughput, user experience problems, and often limited liquidity. These factors seemingly outweigh the advantages of wide availability, 24/7 transferability, and programmability.
Stablecoins were also treated with caution by Moody’s. The report argued that stablecoins operators could be incentivized to invest in riskier assets to increase revenue, creating an inherent conflict of interest. Even though stablecoin usage might see a modest increase in the future, significant challenges remain. Meanwhile, the market capitalization of all crypto assets has risen by more than 60% year-to-date, reaching $1,330 billion as of 20 April 2023.
Finally, the report explores the potential impact of digital money issued by private companies; however, no successful projects have emerged so far, and many countries may not allow them to operate at scale. Other possible innovations include mobile money issued by telecommunications firms and tokenized money market funds.
In summary, the monetary landscape is rapidly evolving with digitalization steering the future direction of money. While new forms of currency appear, traditional central bank money housed in commercial banks is expected to remain dominant due to the overarching importance of trust. The adoption and impact of alternative currencies, such as CBDCs, cryptocurrencies, and stablecoins, continue to face hurdles that may hinder their widespread use.
Source: Cointelegraph
