Future of Money Scenario 2 – ‘Village economies’: fragmented silos of digital and physical money

Cryptocurrencies may be adopted as an alternative asset class but are not commonly used as stores of value, and nor are they widely accepted for payments. Where digital assets are used, they are confined to niche use cases in areas such as online gaming. Likewise, authorities consider digital assets to be equivalent to other asset classes, requiring users to declare their use of digital assets and to comply with a host of regulations and taxation requirements.

Markets are left to determine the future of digital money. All four types of digital currencies – government coin, stablecoins, cryptocurrencies and reward coins – continue to emerge, but there is a high degree of friction. There is limited interoperability, and fragmentation threatens the monetary stability of new digital currencies. It also hinders progress towards an efficient, low-cost, financially-inclusive system.

Digital money exists awkwardly alongside traditional analogue and electronic mechanisms. Enclaves of digital finance are scattered over a disjointed landscape of so-called village economies, in which there is no or limited interoperability, and confidence in the new digital financial system weakens.

Here, private digital currencies become scattered around the economy. Some successful business models and ecosystems are built where trust and credibility can be generated, with tech-enabled digital payments bringing together limited ecosystems of merchants, suppliers and customers.

Doubts about cryptocurrencies overshadow the nascent reputations of government coins and stablecoins, even though these varieties of digital money have starkly different characteristics. Shadowy crypto-exchanges, sloppy KYC (know-you-customer) processes and anonymous ‘digital wallet’ technologies amplify the reputational and financial crime challenges facing digital money.

Against this backdrop, acceptance and adoption of digital money is functionally low. Business and retail borrowers find it harder, and more expensive, to borrow money. Digital currencies backed by central authorities gain little traction, suffering from perception and interoperability shortcomings.

Observable structural and operational weaknesses chip away at public confidence in regulators. There are persistent concerns around liability, fraud and high volatility of digital assets. Few tangible net benefits accrue to the financial systems where digital money operates, and it is little used in legitimate cross-border trade.

There is also widespread ignorance of the technology itself, with a blurring of the distinctions between different forms of digital, fiat and electronic money. The technical, administrative, and regulatory burdens associated with digital money mean that it is largely shunned by small and medium-sized enterprises (SMEs).

Banks retain legacy roles as guardians of savings and issuers of loans. But they face many new potential competitors, therefore they have to decide whether to compete or cooperate.

Consumers, corporates and institutions continue to use fiat money. Electronic payments – as opposed to new digital money leveraging distributed ledger technology (DLT ) and other emerging technology – utilise 2020s-style credit and debit payment processes. Contactless payment volumes rise. Older people prefer plastic cards; younger people are happier using smartphone wallets. Physical cash continues to be used, to greater and lesser extents, across generations, demographics and income groups.

Largely in common with the status quo, value is primarily stored in traditional bank accounts, analogue assets including equities, bonds, property and alternative assets, smart wallets, and token-based schemes (such as customer loyalty points) operated by trusted financial services practitioners, retailers and in hospitality.

With weak central authority control and protection over digital currencies, users’ trust in digital money is established through evidence, such as personal experience of demonstrable high-quality service standards, brand positions and word-of-mouth advocacy. Geographical, cultural, and other shared-interest clusters form and facilitate peer-to-peer, cooperative payment systems connecting PSPs, banks, other service providers and businesses, but volumes remain low, and a position of systemic importance is not reached.

In our village economies scenario, central bank digital currencies (CBDCs) exist in principle rather than practice. Similarly, reward coin systems are deployed but only taken seriously by a relatively small cohort of bargain-conscious consumers.

The greatest threats, and fewest opportunities, accompany the village economies scenario, burdening the future of money with the worst of all worlds: innovation will demonstrate potential gains in cost, speed and financial inclusion but a mixture of inertia and cautious regulation reduces the opportunity for system-wide benefits. Those innovations and reforms that do materialise result in uneven, and perhaps even unfair, competition.

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: ‘United in prudence’ - With strict regulatory frameworks focused on evolution, preserving the status quo, and keeping system risks to a minimum, the adoption of decentralised digital assets remains niche.