Konstantin Frumkin talks about a new world currency that could replace the dollar, the evolution of traditional financial institutions and the transformation of personal ratings into payment systems
About the expert: Konstantin Frumkin is the chief editor of Invest-Foresight magazine. Journalist, philosopher, coordinator of the Association of Futurologists, author of the books “After Capitalism. The Future of Western Civilization” and “Philosophy and Psychology of Science Fiction”.
What will be the money of the future?
– It is necessary to speak about the evolution of money taking into account two aspects: technical and economic.
First, we see the gradual facilitation of cashless electronic transactions, which are used by an increasing number of people around the world using mobile devices. Which – and this is the second – creates the prerequisites for the exclusion of private banks from the settlement system. At the same time, the foundations of their existence are undermined by two more technical ideas.
The first is cryptocurrencies. The second is a digital currency that emerged on the wave of huge interest in the blockchain, but which does not have to be based on it. It is being launched by the Central Bank, which means that there will still be a single controlling center. Therefore, a digital ruble or yuan is not necessarily a blockchain-based cryptocurrency.
It is already easy to imagine a situation in which people will pay digital cash from their electronic wallets without resorting to the services of commercial banks. In this case, settlements can be provided by the Central Bank and an autonomous settlement system. Perhaps there will be some digital currency operators, but they will perform a purely technical function, and all the money will be on the balance sheet of the Central Bank. If such a system is implemented, it will mean a huge revolution, as commercial banks (the most important economic institution of our time) may fade into the background or even disappear.
In addition to the Central Bank, the idea of introducing digital money in our country is being promoted by Sberbank and social networks to simplify financial transactions within their systems. For social networks, the successful introduction of their own digital currency is also an opportunity to enter the field of banking, to dramatically increase their influence in the national (VKontakte) and global (Facebook) economies.
The transition from cash to electronic money looks like a logical continuation of the trend towards digitalization of all areas of government activity. But it will be gradual so that people can get used to the new currency, and banks can easily introduce a system for transactions with it. This transition also does not mean a complete rejection of cash.
Digital money, however, brings with it not only advantages for users in the form of simplification of settlements and transfers of funds around the world, but also the risk of losing savings, for example, due to the fact that fraudsters take possession of a person’s digital profile, his login-password. In addition to hacker attacks on users’ electronic devices, there is a threat of hacking into the data center, where citizens’ electronic wallets will be located.
— What is a digital ruble?
– This is cryptographically encoded information that has the status of cash. That is, this is money issued by the Central Bank of the Russian Federation in order for people to use it, but in the form of coded information. They will be stored on electronic wallets, which will be installed, as the report of the Central Bank says, on some electronic devices. Most likely, we are talking about mobile phones, tablets and so on.
– When can a digital ruble appear in our country?
— The idea of digital money in our country can technically be realized in three or four years. The current 2021 will be needed for discussions, another year or two for legislative preparation, and then it will take a year or two to resolve technical issues.
Why is the digital ruble put into circulation?
— The Central Bank sees competition from the cryptocurrency sector, which is not very strong now, but could potentially start to crowd out national currencies, and is trying to keep up with the trend and enter the future. In addition, the report of the Central Bank says that the digital ruble can be used even where there is no Internet and mobile communications, which is very important for our country.
Also, the Central Bank may hope that digital “cash” will gradually replace the usual one, and thus the circulation of money will become more controllable: the path of any monetary unit can be tracked.
– How will commercial banks be restructured if our money is in the electronic wallets of the Central Bank or the non-banking system?
– Here you can look at Sberbank: using the fact that it already has 96 million individuals as customers, it is turning from a bank into a business ecosystem. Others will follow this path, transforming into multifunctional ecosystems.
— And who will lend instead of commercial banks?
We already see the answer to this question. So, two financial institutions of an updated type have already appeared: peer-to-peer networks (p2p platforms) and microfinance organizations.
The first led to the uberization of finance — the replacement of intermediaries by digital platforms. Previously, the bank took money from depositors and gave it back to borrowers, but now, with the help of virtual platforms, the intermediary performs minimal technical support functions. Currently, there are crowdfunding, crowdlending and crowdinvesting platforms. Peer-to-peer networks are now acquiring all the tools of expertise and scoring that previously only commercial banks had.
And the essence of microfinance credit organizations is not in the prefix “micro”, but in the fact that these are structures that draw resources not from depositors and current account holders, as banks do, but borrow, for example, from their investors. By the way, this may mean that the role of lending to commercial banks by the Central Bank may increase due to a decrease in the role of depositors.
– And if we try to look into the distant future of money, what awaits us?
– Money in world history has developed through the emergence of obligations for payments. The gold coin was a unification of weight gold, which could be melted down at any time into a precious metal ingot. But the coins circulated so well that they were melted down less and less. As a result, even lost weight and worn out gold coins were considered valuable, that is, they replaced the weight of gold. Then came banknotes – the obligations of banks to pay a certain amount of gold on demand. But they also went well, so that in the middle of the XNUMXth century, banks realized that if they stopped issuing gold in exchange for banknotes, then they would still be used. Non-cash money (cheques, bank accounts, and plastic cards) followed a similar path, beginning as obligations to pay cash or coins. But today the most important trend in the world is a decrease in the share of cash.
Now it is worth thinking about what financial phenomena today perform the function of obligations of non-cash money – this will be the money of the future, which will gradually replace them in the same way that paper money has replaced gold, and non-cash is replacing paper money. It seems to me that these are credit limits: they are very similar to what is now called credit ratings. A credit rating is an assessment of your creditworthiness: you are assigned in advance the amount that you can borrow, as well as the interest on it. The higher your rating, the lower the interest on the loan.
The further, the more people and companies will be assigned a comprehensive assessment – let’s call it conditionally “rating”. And the possibility of obtaining borrowed funds will depend on its size. Here I am reminded of the Nosedive episode from the third season of Black Mirror, in which a person’s economic well-being depends on likes and his rating. Everyone fake smiles at each other and beg for the highest rating, because it depends, for example, how much the rent of your house will cost. This story is such a caricature of our future.
– In 2019, the presentation of the Libra association took place – now it is known as Diem, which was initiated by Facebook. The Association announced the creation of a new cryptocurrency. Can one social network create a global currency that can be easily transferred around the planet and that will eclipse the dollar along with existing payment systems?
— So far, the states are the main players in the market, so all the most important decisions on monetary circulation will still be made by the states and the Central Banks of various countries. And although I agree that the currencies of social networks are the prototype of the single currency of the future, I still believe that the states here will not die out in the coming decades. It is possible that a general agreement will be reached on the introduction of an international electronic cryptocurrency.
As for Libra/Diem from Facebook, this system is not unique, there are other currencies. Rather, the issue of exchange and seamless settlements for this money is more important here. We already have more than 150 national currencies and about 3 thousand more cryptocurrencies.
Why else do we need a new international currency?
“Only to reduce the cost and hassle of converting one currency into another. In this sense, any private currency – be it Bitcoin, Libra or the dollar – does not solve the problem of conversion costs.
“It’s not uncommon these days to see articles with headlines like “Why Bitcoin is a Bubble.” What is the future of bitcoin?
– I do not undertake to predict his future, because he behaves contrary to all forecasts. Bitcoin is really a bubble. It has no intrinsic value. There is no serious issuer behind it, but it has already drawn millions of people into its orbit who are ready to work with it. Bitcoin has become a model of a new type of technological currency, and sooner or later more legal cryptocurrencies will appear under the auspices of the states. I cautiously predict that bitcoin is likely to deflate in the shadow of interstate association cryptocurrencies and national government cryptocurrencies.
— How does the attitude of people towards money that cannot be touched change?
“As the world’s middle class grows, money is no longer the unconditional lure it presents to the poorest segments of the population. Now, the more prosperous people become, the more often they realize the need to refuse additional income for the sake of peace of mind, comfort, relationships. That is, there are other values. We come to understand that there are situations when more income means less happiness. Making money happens with less dedication.
In general, the fact that the opportunity to touch money disappears is not very significant. The reliability of the financial system is important. For example, after the revolution of 1917 in our country, both paper and even gold money lost their value, because the new government introduced its own finances and banned the free market. As long as people trust the financial system, electronic money is quite good. But they have one drawback – they are visible to both fraudsters and tax authorities, financial monitoring of banks and other authorities who want to see how much is in your pockets. People are beginning to understand that money is no longer a space for freedom. Rich people 40 or 50 years ago might have thought, “I have a million. I will hide it so that no one will find it. And I’ll buy what I want with it.” Now it’s not like that. There are almost no places left in the world where you can safely store money. And different authorities will ask ten more times: “Where did you get a million? What will you do with it?” This also reduces the value of money as an asset.
– How will the transitional stage take place in the world, when people will begin to abandon the dollar and switch to digital or cryptocurrency? Can this situation break out into a new world war or a new series of revolutions?
“We know from history that serious changes in the financial system of the world did not cause wars and revolutions. On the contrary, wars and revolutions themselves caused global changes in the sphere of finance. Therefore, it is not necessary to see money as the cause of all our troubles.
Why can we abandon the dollar? Because, in my opinion, the role of the United States in the world economy and trade will decrease. It will change following various global processes with varying degrees of probability, including completely apocalyptic scenarios such as a world war, a revolution in the United States, or simply a gradual decrease in America’s influence on the global financial system, which is happening now.