The Race to Mass-Market Digital Money
It’s inevitable that truly mass-market digital money, used by billions, will emerge. It’s creator will wield great political and economic power. Who will get there first?
In my last article I argued that whilst millions of people may become attracted to cryptocurrencies as an alternative to trusting centralized forms of money, the driver for billions of people to use digital money will not be ideological or political. It will be because digital money will be fundamentally more useful than any form of money that came before it.
But who will be the first to create truly mass-market digital money? The opportunity is enormous — we’re talking trillions of dollars and serious political power. It’s one of largest opportunities in the world, across all countries and industries. The impact could not be larger and stakes could not be higher. So who are the contenders in the upcoming race and how might the story unfold?
Contender #1: Bitcoin
Bitcoin is the most well known cryptocurrency today, but it’s certainly not famous for price stability. For digital money to be useful as a currency its value needs to be stable. People don’t want to spend a currency they expect to significantly increase in value over time — they want to Hodl! Merchants don’t want to accept payments in a currency that swings wildly in price.
For bitcoin to obtain mass adoption, its market size would need to be trillions of dollars and this means a significant increase in its price. As we witnessed last fall, large price increases are accompanied by a large amount of price volatility which limit bitcoin’s usefulness as a global currency. At the moment, bitcoin is in its ‘adoption phase’ and additional ‘bootstrapping’ (speculation driving increased investment and development) will be required for the digital currency to cross the chasm into ubiquity.
In the meantime while we watch the bitcoin story play-out, we’re lacking a digital currency that is free of volatility to function as ‘internet money’.
Contender #2: ‘Stablecoin’ Projects
Given the size of opportunity it’s not surprising that there are now many crypto projects looking to create ‘stablecoins’. These are cryptocurrencies which are designed to eliminate volatility and maintain a stable price or pegg. They could be pegged to anything, but the majority are pegged to fiat currencies like the dollar. They achieve this price stability by using a reserve to back-up the price, or by using algorithms — programmable rules that attempt to match supply with demand to maintain a stable peg (note this is still very unproven technology).
At Blockchain, our research team recently published a comprehensive review of these stablecoins. The report shows a dramatic increase in the number of stablecoin projects — from a small handful a year ago to over 57 stablecoins at present. These projects are also receiving a significant influx of private funding, with $350m committed to date from venture capitalists. But so far, the wider impact has been limited. The total market value of all stablecoins is around $3 billion — that’s around 1.5% of the total market value of all cryptoassets and a tiny fraction the world’s money supply. The work being done in the crypto community is part of a far larger story which will develop on a global scale in the years ahead.
Contender #3: Central Banks
Central Banks have long been the gatekeepers of what constitutes money and they are starting to recognize the potential impact digital money will have across our economies. Central Bank Digital Currency (CBDC) represents a new medium for an existing currency, whereby a central bank issues currency in directly digital form. Much like cryptocurrencies, the benefits of a sovereign digital asset will be significant and offer central banks increased monetary control, transparency, economic growth and overall financial resilience. Christine Lagarde, head of the International Monetary Fund (IMF) detailed the global benefits of cryptocurrency earlier this year:
“Just as a few technologies that emerged from the dot-com era have transformed our lives, the crypto assets that survive could have a significant impact on how we save, invest and pay our bills,”
However, while such a development holds enormous potential it also involves fundamentally changing the way existing financial systems are structured. Major central banks around the world are currently grappling with these issues. In the long-run, the creation of CDBC appears to be the next likely step but it may be some time until a central bank takes the plunge.
Which major economy will make the move first? I’d be inclined to place a side-bet on China — a digital, mobile-first country with the required resources and political incentives to digitize the yuan. Such a development could have huge ramifications- from micro issues around individual privacy (a government could potentially track every single transaction you make) to macro changes to global trade that could threaten the position of the US dollar as the world’s reserve currency.
Contender #4: Commercial Banks and Companies
In the interim before central banks enter the scene we could see some interesting developments from commercial entities.
In fact, we’re starting to see some commercial banks trying to figure this out. A project I helped set-up called the Utility Settlement Coin is one example of large banks (including UBS, Barclays and HSBC) coming together create digital money. While the interest in the project is a good signal, the reality is that consortium projects like these are slow to move by nature and could be overtaken by a new fast-moving entrant.
Where could such competitor emerge from? A curve-ball new entrant into the digital money game could be an existing company, that like a country, can reach millions or billions of people at once. Is there a ‘Facebook Coin’ or ‘Amazon Coin’ on the horizon? Such companies already have immense resources and data at their disposal. Facebook recently established a blockchain research unit to explore how to leverage the technology across their platforms. Perhaps their own digital token is not that far off. Furthermore, these companies have already achieved the so-called network effects, so introducing a digital currency in lieu of existing payment options could create an affordable, globally accepted form of digital money across their platforms — what’s more useful than that?
If one of these companies choose to create an open and free-to-use currency outside of their closed wall systems then this could be an immensely valuable gift to the world. By making it easier to transact and do business, it would help connect people and bring communities closer together. On the flip side, such a currency could be used to fortify their control, capture more valuable personal data and hold us captive to monopolised transaction fees. This would give a company like Facebook or Amazon enormous control and it’s unclear that they are equipped to handle the responsibility.
The Race Ahead
The race to shape the future of digital money is underway. At the moment things are looking quiet on the surface, but inevitably the competition will intensify as the stakes become higher.
Today, most of the innovation is coming out of the the crypto community. This is good news as most stablecoin projects are generally based around open and decentralised networks that aim to empower people with financial tools without forcing them to sacrifice control of their personal data and privacy. If such decentralised projects fail to gain traction then the creation of mass-market digital money will be left to centralised institutions. This could also be an incredible force for good, but will completely depend on the values and objectives of the entity that controls the money — be that a country or a company. In such a scenario whoever gains major traction first will wield great political and economic power.
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