Digitalisation of Money
The spread of digital technology and the emergence of digital platforms offering their services to tens and hundreds of millions of users. It is radically changing the structure of financial systems and even the nature of money itself. The digitalization of money itself isn’t something new, as bank accounts and settlements with it already exist in electronic form. BullionVault is also contributing to the expansion of digital money. By combining the reliability of gold with modern digitalization trends, the company is opening up new horizons for investors and citizens that use cryptocurrency to make payments.
New digital currencies can be the backbone of large technological platforms that extend beyond national borders. The emergence of such money could change the nature of monetary competition, the structure of the international monetary system and the role of money issued by states.
Changing of money’s functions
Digitalization, which has substantially reduced the cost of currency exchange, may lead to a separation of the three main functions of money — as a unit of account, as a means of payment and as a means of saving. Any national currency today fulfils all three functions. But if the costs of switching from one digital currency to another become low, there is no need to use the same currency as a medium of payment and as a unit of account. A user may well use one digital currency to make savings and another to make payments. As a result, each digital currency can perform a specific function and compete with other currencies solely as a means of payment, for example, or only as a means of savings.
The development of digital platforms will facilitate the “specialization” of digital currencies. Digital payment instruments linked to platforms will effectively combine the functions of traditional money with the functions of the platforms. As a result, a particular currency will be difficult to separate from the platform where it is used. The attractiveness of currencies is likely to be determined by the features of the platforms. For example, it could be their privacy policies or choice of counterparties.
Changes in the structure of financial activity
Digitalization leads to the shift away from the traditional model. In other words, there won’t be a bank at the centre. Platforms have stronger control over digital payments than the central bank, as platforms know more about their users and are better equipped to track, stimulate or restrict user activity.
Because the platforms accumulate so much data about customers, they have an information advantage. For example, an insurance company may know more about you than you do.
It should be remembered that platforms have stronger control over digital payments than the central bank does. The platforms know more about their users and are better equipped to track, stimulate or restrict user activity. As a rule, the cost of entry to the platform is extremely low. This helps to attract users, while leaving the platform can be too costly and become a kind of “wall” for users.
Digital “dollarization”
Usually, when we talk about currency areas, we talk about specific geographical areas. In the digital world, this will be different. Digital currency zones are emerging where the currency in use is not tied to a specific country, but to a specific digital platform. As digital currencies are inherently international, this entails the risk of digital dollarization. In this case, the national currency may not be supplanted by the dollar, but by some other digital currency.
Cash payments are now getting increasingly displaced by digital payments, and techno giants are gaining more influence and power. In such conditions, the financial system may shift towards digital platforms. The most important consequence of this could be that the agents start contracting in a platform-specific unit of account, instead of the central bank’s unit of account. A digital “dollarization” could lead to the national currency no longer fulfilling the function of money. In such a case, the regulator would lose the ability to conduct monetary policy and the monetary sovereignty of countries would be weakened or lost.
Small economies are the most sensitive to digital “dollarization”. These are economies with a large informal sector, countries with insufficient regulation and countries without an effective national electronic payment system.
Protecting
Future monetary systems will have to consider not only the role of government and banks, but also the role of large technology companies. Digital platforms’ big data is a huge advantage, but it can also be used by banks to become technology companies themselves.
Governments need to preserve monetary sovereignty, which is critical for managing economies. Effective regulation of technology companies is required, but at the same time central bank issuance of national digital currencies (CBDC) could be the solution.
In today’s economy, there is almost no direct monetary interaction between monetary authorities and individuals. Cash represents only a small part of the money supply and the majority of consumers keep their money in the form of bank deposits.
Central banks can exert some influence on the public by influencing the rates at which banks can borrow and lend. However, if the advent of platform-based digital currencies changes the financial hierarchy from bank-centric to platform-centric, the role of banks could diminish. CBDC can be a natural way to counteract the negative effects of digitalization. It will also allow the central bank’s unit of account to remain relevant in the rapidly changing digital economy.
