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Why do we care about the future of money?

Money is in a state of fast flux, driven by the ongoing impact of mass digitalisation, the ubiquity of the internet and social media platforms, the rapid disruptions of big tech, fintech and opensource innovators, and the mass proliferation of smartphones and other connected devices.

By 2035, it’s likely that Central Bank Digital Currencies, and probable that some other digital currencies will represent established stores of value, credible units of account and dependable mechanisms of exchange. It is also highly likely that business practices, consumer behaviours, investment assets, legal contracts, data, payments, regulation and macroeconomics – basically everything we associate with money, including who, or what can use it – will change too. And, even in the event that digital money struggles to be accepted – credibility issues are frequently exposed – its influence over the strategies, practices and policies relating to money will only intensify.

The changes we are describing are both dramatic and far reaching, demanding urgent attention, analysis, and consideration from all the stakeholders they touch. Businesses and governments need a strategy. And consumers need to understand what is happening to the money they, ultimately, both earn and use.

The current debate around digital assets has uncertain foundations. It is fast-moving, polarised and diffuse. The terminology is used inconsistently in some areas, risking confusion among would-be users.

In response to the size and complexity of the issue, our research is designed to support the informed discussion the industry needs, helping everyone touched by digital assets and their implications to think about the best path to plot towards to the future of money.

Triple trajectory

In the early 2000s, the internet revolutionised connections between people. In the 2010s, it established real-time links between appliances, plant and equipment in what is often called the internet of things (IoT). In the 2020s, with digital money, we are seeing the creation of the internet of value, breaking down barriers of financial connectivity between creators and consumers. In the 2030s, it is likely that these three functions of connectivity will converge, delivering an epoch-defining socioeconomic revolution.

The basic nature of money is, was, and always will be defined by three fundamental characteristics. Whatever form it takes money is money because it is a medium of exchange, a store of value and a unit of account. The quality of money reflects the degree to which it fulfils these characteristics. Currencies issued by central banks score highly as a medium of exchange and a unit of account. This is because fiat currency represents a claim on the central bank (and, therefore, by implication, the government as tax-raising authority). This gives fiat currency universal acceptability, and associated trust.

Recent high inflation has called into question the role of fiat currency as a store of value for some people. Exponents of crypto-currencies claim that the supply of crypto will be more tightly controlled than that of fiat currency, thereby making them better stores of value. This has not been proven, and there are many who would disagree.

The format of physical money has evolved through the ages – from clay tablets and cowrie shells to gold coins, paper notes, loans and other promises. In this context, digital money is the latest in a succession of historical transitions.

The implications and repercussions of this digital transition are substantial, at least as large as when paper money first appeared in Europe in the late 1600s and early 1700s, Like these early iterations, the digital money of today has been accompanied by controversy and some measure of distress. For example, it could be argued that some of today’s crypto-innovators are not unlike characters such as John Law. The Scottish economist famously brought the first form of widely used fiat money to France. Regrettably, his novel innovation was associated with a similar tale of boom and bust – the Mississippi Bubble perhaps being the most notable example – to that associated with certain of today’s crypto-assets.

(R)evolutionary theory

In our era, the adoption of digital money will have far-reaching ramifications, with some of the transitions being easier to grasp than others. Among a large and diverse range of considerations, we believe that principal drivers of change include:

  1. The demands and expectations of the users of money
  2. The regulations and international standards governing money
  3. Competition in the financial services industry, including the competitive impact of emerging decentralised financial services (aka DeFi)
  4. The technologies that facilitate the creation, exchange and management of money.

Inevitably, given the enormous scope of these drivers, the outlook here is shrouded in uncertainty. We don’t profess to have special powers of prediction. However, we do have the benefit of research, and our analysis aims to bring light and clarity to this debate, combining artificial intelligence (AI) techniques and human expertise to illuminate the forces shaping the future of money.

Multi-faceted money

In the future, money will likely look, feel and behave rather differently than many of us are used to. Though its essential characteristics will remain unchanged, the formats and usability of money are being transformed as it becomes increasingly digital. For example, many transactions will be cheaper and quicker to execute. It will also be possible to attach data to money in ways that enhance its meaning and utility.

So-called ‘smart contracts’ where payments are executed conditionally, will be loaded with contractual details relating to the transaction they exist to settle and, with the right infrastructure in place, will even be able to self-execute when a specific set of rules are met. This could be particularly interesting when considering the time-consuming and fragmented experience of buying a house.

Using the same ‘smart contract’ technology, it’s also conceivable that foreign exchange marketplaces could be fully automated. All order book and trade execution logic contained within a smart contract. Imagine, for example, how much easier buying a house would be without the need for the fee having to be handled manually. Rather, at a pre-programmed time, and assuming all relevant conditions were satisfied, the money would simply ‘pay itself’ into the seller’s account.

Types of digital money

The future of digital money is developing now. This will continue, gathering pace as the technology, and the tokenisation it powers, both become more common. We believe that the nature of the digital money that will evolve over the next decade will conform to one of four scenarios, which we will explore in detail later in this series of blogs. The next phase of evolution is fraught with a degree of risk. As we outline in more detail in future articles, the outcomes that prevail will depend on the degree of trust that users have in different types of coin, as summarised below, and in the degree to which regulatory authorities manage and impose controls on the eco-system.

  • GOVERNMENT COINS – currency issued by government authorities, typically as Central Bank Digital Currency (CBDC). These are similar to the fiat currencies traditionally issued by central banks.
  • STABLECOINS – currency issued by private entities that attempt to link their value to reference assets, for example the US dollar. Stablecoins may gain traction before CBDCs. If stablecoins are perceived as proxy fiat currencies, this could have a material impact on how digital money evolves more broadly.
  • CRYPTOCURRENCIES – the tokens of decentralised finance (DeFi), owned and controlled largely beyond the reach of central authorities. They are generally unregulated and lack the imprimatur of government oversight.
  • REWARD/PRODUCT/SERVICE/APPLICATION TOKENS – tokens akin to loyalty cards or reward points that are now widely used in the retail, hospitality and gaming industries. These are usually discrete, self-contained systems operated with the specific permission of participants. Reward coins, like most loyalty cards, are often non-transferable between recipients and entities, limiting their value as a medium of exchange.

Facing the future of money – our approach

  • Faced with a complex backdrop of interconnected trends, technologies, formats and modes, we realised early on that trying to predict the future of money with certainty would be a fool’s errand. Rather, we engaged with the factors and forces shaping the future of money, considering how these drivers of change would interact over the period leading up to 2035.
  • Based on our research, we developed four distinct and credible scenarios, each describing a possible outcome for the future of money. They are intended to illustrate how this important debate might play out and will, we hope, be of value to anyone seeking to better understand and plan for their own individual future of money.
  • We processed and simplified more than 2.9 million data points using advanced AI tools, giving us a holistic view of the broad money and payments landscape. Topics connected with value storage, transfer and exchange were given particular emphasis.
  • This extensive dataset has been visualised using network diagrams illustrating the major themes and their relationships to one another, as shown below.

We then supplemented our findings by conducting interviews with a panel of experts across ten countries on four continents. This allowed us to draw on a wide and representative pool of subject-matter expertise, both from our Deloitte global network as well as external experts. This brought crucial context to our analytical findings, helping us to identify the discrete economic, social, political, technological and environmental factors influencing the money landscape.

Finally, these factors were used to assess how strongly specific drivers and trends are likely to impact the answers to our key question: what would value storage, transfer and exchange look like by 2035? The answers to that, together with the direction in which our experts believed each driver would evolve, ultimately gave us the axes on which our scenarios were plotted, ensuring each benefitted from a strong analytical underpinning.

As well as considering the long-term, and more uncertain future of money, as illustrated by our four scenarios, this research has enabled us to identify nearer term trends with a high degree of confidence. Participants in the payments ecosystem should be addressing these near-term trends now.

We explore this further in our series of articles about the future of money – what it is, why it matters and how it’s changing. We then unpack where we are now, and the drivers of change, explaining how we derived the two main factors that determine four distinct and plausible scenarios for the future of money in 2035. We do a deep dive on each scenario, and also explain what the implications of each are for key stakeholders, and how they can use this analytical framework to derive a course of action.

The next in our series sets out who’s who in the digital money universe.

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