Article
Future of Money Scenario 1 – ‘Highest freedom’: high tech…low reg
In the world of Highest freedom, the first of four scenarios generated from our future of money research, a lack of trust in authorities, their inability to control the market and a broad recognition of the benefits of digital assets result in an increasingly significant role being played by technology companies. Flourishing innovation allows for the rapid expansion of digital assets as digital currencies become mainstream. However, regulators struggle to keep up and their influence is increasingly limited.
At the same time, unease begins to grow about a new breed of ‘digital oligarchs’ – powerful and unaccountable individuals, corporates and non-governmental institutions that come to dominate the monetary landscape.
All four types of digital currency – government coins, stablecoins, cryptocurrencies and reward coins – prosper in an atmosphere of opportunity, with private digital currencies gaining the most ground. Regulators endure, but struggle to keep pace with a constant stream of payments innovation. Confidence in the ability of governmental institutions to manage the financial system becomes stretched.
Highest freedom implies the rapid expansion of private digital currencies, apparently seamless payments and exchange mechanics, innovative technologies, and a deepening understanding and adoption of blockchain-based monetary mechanisms. Decentralised finance (DeFi) becomes the rule rather than the exception.
However, stoked by distrust of traditional authorities and their perceived inability to control the market, many consumers, companies and other institutions are willing to use financial systems where the value storage and transfer mechanisms operate largely outside the regulatory perimeter.
The widespread adoption of private digital currencies reduces the ability of central banks to influence domestic monetary conditions and undermines national monetary sovereignty. Digital means of value storage and transfer, as well as exchange, also then develop beyond the reach of regulators, monetary authorities and incumbents. Against this backdrop, technology brands hold greater influence, albeit indirectly.
In this scenario we see a proliferation of branded and unbranded digital currencies and derivatives. Distinctions and definitions between different varieties of digital money are blurred. Government coins, that is Central Bank Digital Currencies (CBDCs), are issued but gain limited traction. Legacy commercial banks, asset managers and insurers begin to struggle as wholesale and retail distribution channels multiply.
As digital currencies become more accessible and widely adopted, the impact on the depth and breadth of financial inclusion is in the balance. On the one hand, digital currencies allow for everyone to possess a wallet without the need for a bank account and related checks such as mandatory credit investigations. Improved access to a new network of investors and funds for small and medium-sized businesses are also enabled, through easy connectivity across a diverse, international competitive landscape. Consequently, individuals or small businesses could engage in economic activity that was previously not an option, regardless of their location or socioeconomic status. However, rapid propagation of digital currencies overshadowing ‘traditional money’ such as cash, creates the risk of a wider chasm opening up between those who are tech savvy and those who are not, leading to exclusion from the decentralised finance system. In the absence of empowered public or private bodies explicitly charged with ensuring fairness and access, the propagation of digital currencies doesn’t guarantee improved financial inclusion.
As customer trust in public institutions, such as central banks, regulators and legislative bodies is strained, confidence in alternative digital currencies is driven by the provision of outstanding customer experience and, an often tech-led, perception of robust security of new digital currency systems. Users appreciate the added levels of convenience, lower transaction costs, and the expansion of products designed for specific market demands and shared-interest user groups.
However, as the majority of transactions move to the digital sphere, technology unfortunately enables not only the development of new and better services and systems, but also the emergence of new and more sophisticated threats on a wider scale as the cyber arms race continues.
As the value of data and the potential gains multiply, very often customer data is the centre of the battle. With increasing organisation and technical sophistication within the payments landscape, cybercriminals are exploiting the vulnerabilities of new systems and technologies, while the providers of systems and services are continually forced to up their game.
Threats to established structures will emerge if the Highest freedom scenario comes about. At the same time, significant opportunities will arise for agents of decentralised finance and related technology providers. The creation of a new financial ecosystem will come about as central financial and monetary authorities have their position eroded. System-wide loops will form which, depending on one’s perspective, may be a positive or a negative. In either event, central banks and regulators move slowly, leaving openings for a new generation of disruptors which, as is always the case, will include both good and bad actors.
This is one possible scenario. It is important to remember that this is not the only one and is not a prediction. We have other alternative scenarios to consider. All are intended as a basis for discussion, debate and an input in shaping plans that we hope will ultimately lead to a positive future of money for all.
Coming next: Village economies - the fragmentation into both digital and physical silos undermines effective regulation, while both society and businesses largely eschew digital assets.
