5 minute read 12 Oct 2020
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Why the future of money will shift the balance of power

By James Lloyd

EY Asia-Pacific FinTech Leader

Dubliner in Asia. Passionate about early-stage, growth-stage and non-traditional financial services. Husband. Father.

5 minute read 12 Oct 2020

Sibos 2020 panelists discuss how a diverse future will have implications on how we pay and save.

In brief
  • Digital currencies will change how we spend and save but who will hold the power in this new future of money is unclear. 
  • Understanding the history of money and how the world is changing can give us clues to how it may develop.
  • Introducing new systems of currency introduces questions around financial inclusion – platform access and identity verification.

 

The future of money is likely to be diverse but what is less clear is how a move towards digital currencies will shift the balance of power within the financial system, with implications for how all of us live our lives.

The future of money – and who gets to decide – was the center of an Innotribe panel discussion during Sibos 2020. The panelists – James Lloyd, David Birch, Lana Swartz, and Tom Zschach – convened to preview the topic, explore issues around control, financial inclusion, and the importance of looking beyond the hype of digital innovation.

What does the future of money look like?

David Birch is a FinTech expert and author of several books, including his latest, The currency cold war: Cash and cryptography, hash rates and hegemony. He anticipates a very different kind of future with multiple types of money where even the concept of “currency” starts to fade.

“We’ll move into having digital assets that are exchanged via money-like exchanges without clearing and settlements. With technology giving decentralization a kick and open banking expanding the use of flexible platforms, we can expect a future that doesn’t look much like what we have now.”

He expects this future to evolve through a variation of the “punctuated equilibrium” model – a theory that most social systems sit static for an extended period, broken up by short, rapid bursts of innovation that lead to radical change.

We’ll move into having digital assets that are exchanged via money-like exchanges without clearing and settlements.
David Burch
FinTech expert and published author

But Lana Swartz points out that innovation to date hasn’t always fulfilled its promise. Swartz, an assistant professor at the University of Virginia in the US, is also a published author on money, with her latest book, New Money: How payment became social media, arguing that money is essentially a form of communication. She says that while much of the discussion around the future of money centers on comparing one type of currency with another, more focus should be on payment rails – the platforms and networks that allow us to move money around.

“Most people think of money in terms of who has it and who doesn’t but not how it moves. But if you can’t access money, you may as well have no money at all.”

Swartz says that payment innovation, while exciting, hasn’t always been dependable, and better payment rails that serve the most people most of the time could build a better future of money.

Most people think of money in terms of who has it and who doesn’t but not how it moves.
Lana Swartz
Assistant professor at the University of Virginia and published author

Tom Zschach, Chief Innovation Officer at SWIFT, agrees that focus should be less on new technologies and more on the underlying infrastructure. He also reminds us that innovation should always be purpose-driven.

“We need to start by being clear on what the problem is before we look for a solution. Banks are experiencing the rapid digitization of our economy and central bank digital currencies (CBDC) are gaining attention but what are the problems they are solving? We’ve seen in the past that innovation that doesn’t make the system work better - for both consumers and the financial system - is unlikely to catch on.”

James Lloyd, EY Asia-Pacific FinTech and Payments Leader, emphasized that Tom’s point about new digital currencies needing to first solve problems is a very important one. “From central bank-issued digital currencies to Big Tech-backed stablecoins, from long-established payment networks to growth-stage FinTechs, I find it striking that radically different players are often seeking to solve similar pain-points. The direction of travel is the same, even if the starting points and rates of acceleration are different. This raises interesting questions about design principles, governance, and execution.”

I find it striking that radically different players are often seeking to solve similar pain-points.
James Lloyd
EY Asia-Pacific FinTech Leader

Who will hold the power?

If money is power, we should expect that power to shift as we use less state-backed currencies and more digital currencies issued or moderated by corporations.

Zschach added that “Developments in money are driven by convenience and the public sector has always been influential in driving innovation and change.”

Birch believes that while Big Tech wants to manage money, they don’t want to provide it and suggests that banks are best placed to run the changing system since they already have the infrastructure largely in place.

All panelists agree regulators will need to catch up to this changing environment but say that we shouldn’t leave it to the government to decide how the future of money unfolds.

“We all need to look beyond the headlines and the hype of digital currencies and pay attention to the details of how they will work because this is what’s really important,” says Swartz.

“I try to attune people to think about the boring things – I call it the politics of the boring – because this is how we engage them in the important stuff.”

What does the history of the money tell us about its potential future?

Birch and Swartz point out that, for most of history, money was not in the form of physical currency in circulation but in different types of credit enabled by social contracts. Rich and poor people did not use the same money, making it difficult to trade across groups and exacerbating inequalities.

“State-issued currency created a common economic language for all citizens. If we lose that we need to consider what else we lose in the process,” says Swartz.

Swartz warns a return to various competing, and complementary currencies may herald a return to transactions divided along socio-political lines. She compares the evolution of money to that of media and communication.

“Before the rise of mass media, we had a cacophony of information – not all of it good. The mass media age where everyone watched the same thing on the same big networks was the exception, but it did bring unity. Now we are shifting back to a model where people get their news from many sources and a blurring of what’s credible and what’s not – and we’re struggling to adapt.”

Will “more and different types of money” increase or decrease financial inclusion?

In the US, more people have a social media profile (79%) than have a bank account (75%). If Facebook becomes a currency player, could this boost rates of financial inclusion? Perhaps, but, as Swartz warns, at what cost?

“Privacy is an obvious concern but we also need to think about ensuring access. Social media platforms generally don’t have a great track record of moderating content. They have one-size-fits-all terms of service. And their approach to dispute resolution is notoriously poor.

“So when we consider financial inclusion, the terms of inclusion are important. What are the mechanisms of redress if access to platforms is restricted?”

These basic questions around fairness will need to be at the center of new systems of currency, agrees Tom Zschach, who says this is one of several building blocks that will pave the way to the future of money.

“Identity is another key issue – it’s the basis for everything within the financial system. All countries are concerned with tackling money laundering, fraud and just ensuring money doesn’t fall into the wrong people’s hands, whether it is exchanged via a social media platform or SWIFT. Understanding how we can verify identity will be critical in a financial system that’s built on a combination of trust and authority.”

Birch also urges a closer focus on identity. “Financial inclusion is not about money, it’s about identity but the rise of digital currencies is seeing the two converge.”

What’s next for the future of money?

Exactly how the future of money unfolds is difficult to predict but Zschach says understanding how the world is changing can give us clues to how it may develop.

“We’re now living in a hyperconnected world where consumer expectations, including around payments and access to money, are changing fast.

“Financial innovation is likely to respond but we’ll need to look beyond the hype and headlines which reminds me of a quote from Bill Gates. ‘We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.’”

Central bank digital currencies are gaining attention but what are the problems they are solving?
Tom Zschach
Chief Innovation Officer at SWIFT

Birch expects the rise of “money with apps” designed to create a fairer, more ethical financial system. An example he gives in his book is that anonymous transactions would attract an automatic 20% withholding tax to guard against money laundering or criminal activity.

“This is where there is an opportunity for real innovation.”

Swartz agrees with the potential to create a more inclusive system of money but warns we’ll need to be careful that the right levers are in place to guide its development. She says the evolution of the web may be a cautionary tale.

“In the early days of the internet, we had almost utopian visions of its possibilities but, in the absence of regulation to ensure limits to corporate power, Big Tech platforms came in and claimed almost every corner of the internet. We now use the web totally differently to how we envisioned.

“So we can get excited about the big ideas around the future of money as long as we don’t let the details get away from us. Don’t lose sight of the vectors of access.”

Summary

As digital currencies transform the world, we know the future of money will be very different, but just how the financial systems’ balance of power will shift is yet to be determined. At Sibos 2020, panelists led by EY Asia-Pacific FinTech Leader James Lloyd, discussed the topic, debating key issues including financial inclusion, lessons from history and how to ensure technological innovation realizes its potential. 

About this article

By James Lloyd

EY Asia-Pacific FinTech Leader

Dubliner in Asia. Passionate about early-stage, growth-stage and non-traditional financial services. Husband. Father.