The Money Revolution: A New Era

●     Money Revolution" Era New ....!

●      Gita Bhatt, Editor-in-Chief of Finance & Development magazine, published by the International Monetary Fund (IMF), wrote in its September 2022 issue, in her editor’s note titled "Reimagining Money," referring to Professor Eswar Prasad's article in the magazine entitled "Money Revolution," that digital money is undoubtedly the future..! ..She added that the evolution of digital money has in fact been underway for some time, with new technologies hoping to make finance accessible to everyone..and to expand access to financial products and services..!

●      Bhatt added that not all forms of digital money are fit to persist: cryptocurrencies like Bitcoin..failed as money.!.These tokens have lost two-thirds of their value..despite active trading..and intense speculation on them..where their prices do not reflect their fundamental economic value...While others say that decentralized finance and cryptocurrencies will not only persist..but will be able to tackle the world’s real problems, such as the energy crisis .!.However, regulation remains a necessary factor to organize markets and provide a safe space for innovation...At the same time..central banks are currently considering issuing their own digital currencies..as these banks must benefit from technological innovations...!

●      Summary of Professor Eswar Prasad's article "A New Era for Money"

-        Professor Eswar Prasad says, under the title of his article "A New Era for Money", that with the replacement of dollars, euros and yuan by electronic byte units, some changes—and only some—will be welcome..!

●      Money and its role in society

-        The professor adds that money has brought about new transformations in human society...it opened the field to trade and all commercial activities, even between geographically distant locations; it enables the transfer of wealth and resources across different regions and times, yet for most of human history it has been a source of “greed and plunder”.!

-        Money today stands on the verge of a transformation that can reshape banking and financial activities, and perhaps the structure of society; more importantly, the era of physical currency or cash is approaching its end..! Even in low- and middle-income countries..! The era of digital currencies is beginning..and on the horizon also looms a new round of competition between official and private currencies in both domestic and international arenas...! The spread of digital technology that powers this transformation can encourage the creation of beneficial innovations and expand access to financial services.., but technological developments may also intensify the concentration of economic power and enable large companies and governments to intervene more in our financial and private lives..!

-        The traditional financial institution, especially commercial banks, faces challenges to their business models in light of technological developments that have given rise to electronic banks that can reach a larger number of customers, and the emergence of online platforms via the Internet...such as Prosper, which can connect savers and borrowers directly...These electronic platforms and new institutions increase competition, encourage innovation, and reduce costs..Savers will have the opportunity to access a larger set of savings, credit, and insurance products..! Small entrepreneurs will be able to secure their financing needs from sources other than banks, which often impose strict conditions to secure loans and require additional collateral..! Local and international payments will become cheaper and faster..! which benefits consumers...and business projects..!

●      Digital and crypto currencies

-        The emergence of cryptocurrencies like Bitcoin initially held the prospect of revolutionizing payments, since cryptocurrencies do not rely on central bank money or trusted intermediaries such as commercial banks and credit card companies for transactions, which limits the inefficiencies and added costs embedded in those intermediaries..!

-        However, volatile cryptocurrency prices..limits on transaction sizes, and the time transactions take have made them ineffective as media of exchange..! New forms of digital currencies known as stablecoins have become more effective as a means of payment...It is an ironic paradox that most of them derive their stable value from being backed by large amounts of central bank money and government bonds..The blockchain technology that underpins these currencies spurs far-reaching changes in money and transfers that will strongly affect households, companies, investors, central banks, and governments..Through enabling a second ownership of purely digital things, this technology can encourage the emergence of new digital assets such as non-fungible tokens..!

●      Central bank digital currency: advantages and disadvantages

-        At the same time, central banks are concerned about implications for financial and economic stability if decentralized payment systems (Bitcoin offshoots), or private stablecoins, etc., were to replace traditional cash and payment systems run by regulated financial institutions....A payment infrastructure entirely in private hands may be efficient and low-cost, but parts of it may cease to function if confidence is lost during a period of global turmoil, and without a functioning payment system any advanced economy could come to an abrupt halt..In response to such concerns, central banks are currently considering issuing digital forms of central bank money for retail payments, i.e., central bank digital currencies (CBDCs). Central banks’ motives range from expanding financial inclusion (by giving even those without bank accounts access to a free digital payment system), to improving the efficiency of payment systems and enhancing their resilience by creating a public payment option to back them up—the role that cash currently plays..!

-        But a central bank digital currency has other potential advantages: it curbs illicit activities such as drug deals, money laundering, and terrorism financing that rely on anonymous cash transactions..It will encourage more economic activity to move out of the shadow economy and into the formal economy..!making tax evasion more difficult..Small businesses will benefit from lower transaction costs...and avoid the hassles and risks of dealing in cash..!

-        But a central bank digital currency also has its disadvantages, including: it poses risks to the banking system, since commercial banks play a vital role in creating and distributing the credit that keeps economies operating smoothly..!

-        But what would happen if households moved their funds from ordinary bank accounts into digital wallets at central banks, believing them to be safer even if they pay no interest..! If commercial banks were deprived of deposits...! The central bank would find itself in an undesirable position, compelled to undertake credit allocation activities, deciding which sectors and firms deserve loans. In addition, a central bank running the retail payment system could destroy private-sector innovations aimed at making digital payments cheaper and faster..!

-        Another concern of equal importance is the potential loss of privacy..Even with safeguards in place to ensure confidentiality, any central bank would want to retain a record of transactions that can be verified to ensure its digital currency is used for legitimate purposes only..Thus a central bank digital currency ultimately poses risks to the remnants of anonymity and privacy in commercial transactions..! However, a carefully designed central bank digital currency that leverages rapidly evolving technical innovations could mitigate many of those risks..But despite its advantages, one should not be complacent about expectations that a central bank digital currency will ultimately replace cash..!

-       New technologies are likely to make it more difficult for the central bank to carry out its main tasks, namely keeping unemployment and inflation low by controlling interest rates... When a central bank, such as the U.S. Federal Reserve, changes the policy interest rate, it affects interest rates on deposits and loans of commercial banks, in a reasonably clear way; but if the spread of digital lending platforms reduces the role of commercial banks in intermediating between savers and borrowers, we do not know whether this mechanism for transmitting monetary policy can continue to work or how that would occur..!

●     Currency competition:

-       The basic functions of money issued by central banks have become imminent candidates for change...! Until quite recently, no more than a century ago..! Private currencies have entered into competition with one another and with the currencies issued by governments, also known as trust money...!, The emergence of central banks had decisively shifted the balance in favor of legal tender currency or trust money, which function as a unit of account, a medium of exchange, or a store of value.. And with the emergence of various forms of digital currencies and the technologies that underpin them, it has become possible to separate the functions of money, and direct competition has arisen with legal tender currencies in some respects..!

-       Central bank currencies are likely to retain their importance as stores of value for the countries that issue them, in digital form, and also as media of exchange; nevertheless, payment systems mediated by private parties are likely to become more important, intensifying competition among different forms of private money and central bank money with respect to their role as media of exchange. If we leave market forces to operate on their own, some issuers of money and providers of payment technologies could come to dominate the field, and some of these changes could affect the nature of money itself — how it is composed, its forms, and its role in the economy.!

●     International money flows

-       Innovative forms of money and new channels for moving funds between economies and within them will help reshape international capital flows, exchange rates, the structure of the international monetary system, and some of these changes will bring many benefits while others will pose new challenges.!

-       International financial transactions will become faster and cheaper and will feature a higher degree of transparency; these changes will be a boon for investors seeking to diversify their portfolios, for firms seeking to raise funds in global capital markets, and for economic migrants who send money to their countries of origin.. Faster, cheaper cross-border payments will also help boost trade, which will particularly benefit the economies of emerging and developing countries that depend to a large extent on export revenues as a share of their GDP.!

-       However, the emergence of new entities handling cross-border money flows will not only facilitate international trade but will also ease illicit cash flows, creating new challenges for regulators and governments, and will increase the difficulties governments face in controlling flows of legitimate investment capital across borders; this poses particular challenges for emerging economies that have suffered periodic crises as a result of sudden outflows of foreign capital..!

-       The emergence of central bank digital currencies, nor the lowering of barriers to international financial flows, will on their own be able to make great headway in rearranging the international monetary system or the balance of power among major currencies. The cost of direct transactions between any two emerging-market currencies is declining, which reduces the need for intermediate currencies such as the dollar and the euro, but major reserve currencies, especially the dollar, will most likely retain their dominance as stores of value, because that dominance rests not only on the issuing country’s economic size and the depth of its financial market but also on the strength of the institutional foundations necessary to preserve investor confidence; technology cannot replace an independent central bank and the rule of law. Likewise, central bank digital currencies will not be able to solve the fundamental weaknesses in a central bank’s credibility or other problems such as undisciplined fiscal policies pursued by a government that affect the value of the national currency; when a government runs a large budget deficit, the presumption that it will instruct the central bank to issue more money to finance that deficit often leads to higher inflation and a weakening of the purchasing power of central bank money, whether physical or digital. In other words, the strength and credibility of central bank digital money are only as great as the strength and credibility of the institution that issues it..!

●     The role of government...

-       In the years ahead central banks and governments around the world will face the challenge of making important decisions about whether to resist beneficial financial technology, to passively accept private-sector-led innovations, or to embrace the potential efficiency gains the new technologies offer. With the rise of cryptocurrencies and expectations about central bank digital currencies, important questions have arisen about the role government should play in financial markets — whether it should intrude into areas better left to the private sector, and whether it can compensate for market failures, notably the large number of households that are insufficiently served by the banking system or not served at all in developing economies and even in advanced economies such as the United States..!

●     Democratization of finance

-       As recent cycles of boom and bust in cryptocurrencies show, regulating this sector will be necessary to preserve the safety of payment systems and financial markets, ensure adequate investor protection, and encourage financial stability... However, given the great demand for highly efficient payment services at retail, wholesale, and cross-border levels, privately led financial innovations may deliver substantial benefits to households and firms. In this regard, the main challenge facing central banks and financial regulators is to strike a balance between financial innovation and the need to mitigate risks to uninformed investors and to macrofinancial stability..!

-       New financial technologies promise to broaden access to a variety of financial products and services even for poor households.. thereby achieving the democratization of finance..

●     The digital society

-       But financial technological innovations, even those that may enhance the efficiency of current financial intermediation, can have conflicting effects on income and wealth inequality. The wealthy may benefit substantially from the advantages of fintech innovations, as they will be able to use them to increase financial returns and diversify risk, and incumbent financial institutions may adopt these changes for their own interests. In addition, because the economically marginalized have limited capacity to participate in the digital society and lack financial literacy, some changes may attract them into investment opportunities whose risks they do not fully understand and cannot bear, and therefore the implications for income and wealth inequality — which have risen sharply in many countries — are hard to foresee and may fuel political and social tensions..!

●     Class division and unfair competition

-       Another major change is increasing class division at both national and international levels: smaller economies and economies with weak institutions may witness the demise of their central banks and local currencies, increasing the concentration of economic and financial power in the hands of major economies. At the same time, large companies such as Amazon, for example, may acquire greater power by dominating both trade and finance..!

-       Even in a world dominated by decentralized finance activities based on the innovative blockchain technology used in Bitcoin, governments have important roles to play in enforcing contractual rights and property rights, protecting investors, and ensuring financial stability), !

In the end, it appears that cryptocurrencies and other innovative financial products also operate more efficiently when they are based on trust derived from government supervision and oversight. Governments have a responsibility to ensure that their laws and procedures work to encourage fair competition, not to favor established institutions with strong positions, nor to allow large parties to strangle their smaller competitors..!

On the other hand, while fragmented systems can operate efficiently in times of ease, confidence in them can become fragile in times of distress. If the financial system is dominated by decentralized mechanisms not directly supported (as banks are) by a central bank or another government authority, trust can easily evaporate; thus decentralization may achieve efficiency in times of ease and quickly lead to instability in times when economies suffer..!

It is also likely that there will be imminent changes in the societal community; replacing cash with a digital payment system would eliminate any remnants of privacy in commercial transactions. The purpose of Bitcoin and other cryptocurrencies was to secure anonymity features, privacy,   and the removal of reliance on governments and large financial institutions in commercial transactions, but they stimulate changes that could end up weakening privacy. Societies will struggle to curb the power of governments at a time when individual freedoms face greater risks..!