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We have Bitcoin, Dogecoin, and Litecoin. Every day a new coin. These are known as cryptocurrencies, which are unregulated digital currencies that live outside the banking system in blockchain technology.
Recently, the US Federal Reserve said it was exploring the possibility of a central bank digital currency, or CBDC. They will be issued, regulated and supported by the government, just like paper dollars. Some countries, such as the Bahamas, Nigeria, Sweden and China, are already experimenting with this.
I spoke with Eswar Prasad, a professor at Cornell University. He is the author of a recent article in the MIT Technology Review, “Money Is About to Enter a New Era of Competition,” and he told me what it would look like to live with all of these coins. What follows is an edited version of our conversation.
Eswar Prasad: It would be like having Google Play, Apple Pay, Venmo, and a couple of other apps on your phone. So in fact, it can be very easy to use these multiple apps on your smartphone. The great advantage of a central bank digital currency, unlike these other payment systems, is that it will have the advantage of interoperability - you can, in principle, use a central bank digital currency anywhere to pay.
Megan McCarty Carino: Could a shift to digital currencies like this pose risks to smaller countries and developing countries?
Prasad: In many countries, the local currency is not trusted, even by local citizens. If digital versions of the dollar or, for that matter, the Chinese renminbi, are easily available around the world, or even if we move to a situation where big companies like Amazon or PayPal start issuing their own cryptocurrencies, they could easily replace them. Currencies of some small economies or economies that have unreliable central banks or currencies. We have already seen this phenomenon in some Latin American countries, even before the availability of digital currencies. But the easy availability of cryptocurrencies would definitely speed up the process.
McCarty Carino: And what would that look like if you were someone who lives in one of those countries, both in terms of how they do transactions and what they do with the economy?
Prasad: It is entirely possible that the use of local currency will disappear mainly because people, in terms of dealing and also in terms of maintaining their bank deposits and other savings, decide to keep them in their own currency or alternative currencies. This basically means that the country no longer has the ability to use the issuance of its money as a tool to implement macroeconomic policies. If the economy is overheating and inflation is rising, as it is now, the central bank can raise interest rates and reduce money printing. But if you don't have your own currency, you are missing out on this policy tool - a very important political tool, especially in desperate economic times.
McCarty Carino: Digital transactions are often considered a potential problem in terms of inequality. There are many states that require companies to continue to accept cash. I mean, what could this shift mean to address inequality within societies?
Prasad: There is certainly a concern that the disappearance of cash could disenfranchise the poor, the elderly, and those technically inexperienced. But we've seen examples, even from very low-income economies, that with a very basic mobile phone, and even among people in rural or illiterate areas, it's very easy to access basic banking systems. Moreover, there is a promise that through these new technologies we will be able to make essential banking products and services available on a much larger scale at very low costs. So I think, in general, technology has many potential benefits in terms of reducing inequality. But, of course, we need to make sure that financial literacy and consumer protection are taken care of amid all of this because the reality, as in most cases, is that technology by itself will not solve all problems. It could create a few more, but on the whole I'm sure it would be of net benefit to society.
McCarty Carino: What do you envision as the future of money and how do we interact with it? I know you wrote an entire book on this, but in one answer.
Prasad: Money will be digital, and I think we are ready for an exciting new era of currency competition. Within countries, we can have digital currencies issued by a central bank that compete with other payment methods. And on the international platform, we will have a lot of competition between digital versions of coins, and competition, in the end, may be beneficial to consumers and societies.
Related links: More ideas from Megan McCarty Carino
Here is the piece that Eswar Prasad wrote for MIT Technology Review. In it, he delves into the history of currencies and how the new landscape has echoes of the formative period of financial markets centuries ago, when the issuance of money was fairly free for all.
When it comes to central bank digital currencies, China is now way ahead of the United States. We spoke with our China correspondent, Jennifer Buck, about this about a year ago. She said that China is looking to compete with the dollar in global markets. But the digital currency would also make it easier for the government to track financial transactions and allow China to reclaim some power from tech giants like Alipay, which dominate digital payments.
Speaking of the tech giants, Prasad talked about the possibility that they could create their own cryptocurrency, and it looks like Meta is back at it again. No, it is not a cryptocurrency - this idea was rejected by the regulators. Meta is said to be looking at a system of in-app tokens, similar to those used in gaming apps, according to the Financial Times. The staff started calling them Zuck Bucks — you know, Mark Zuckerberg. This just opens the door to a lot of possibilities for rhyming mockery, if you ask me.
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