The move to digital money

A woman paying a bill in a cafe using her phone and a contactless POS machine

Cash is fast becoming redundant. Over the past decade, the growth of the digital economy and the rise of electronic commerce has accelerated a shift to virtual payments. Now with the spread of COVID-19 and fears regarding the risk of contaminated physical cash, what we are seeing is a potential permanent shift to digital currencies. 

This is not the first time an unknown virus has transformed entire industries. The Spanish Flu introduced socialized medicine and strengthened healthcare ministries, inspiring an international health bureau (the precursor to today’s World Health Organization). This is also not the first time a major global event has caused tectonic shifts in innovation. During World War II, countries around the world poured money into transforming communications, transportation, and weapons technology.

In fact, the current shift to digital money has been accelerating for some time. Today, the vast majority of transactions are already executed digitally. Of the sum total of money in the world—around $80 trillion— only 10 percent  is held as coins or bank notes. The remaining 90% is held as virtual money on digital ledgers. In fact, all of this digital commerce is evidence of a larger trend: money is becoming inseparable from data-driven technologies.

FinTech comes of age

Over the past decade, tech companies have capitalized on mobile payment applications in an effort to displace traditional financial institutions. Companies like Apple, Google, Samsung, Sweden’s Swish, China’s Ant Financial, and Kenya’s M-pesa have begun rapidly transforming the nature of mobile payments. What we are seeing today is the rise of financial technologies (FinTech) in the mass disruption of physical currencies.

Spurred on by the need for new digital services and new forms of e-commerce, the growth of the Internet and smartphone penetration has been driving an explosion in nontraditional financial services. In Europe, for example, Sweden has become a global exemplar of the shift to digital money. The Nordic country is now a benchmark for cashless economies with more than 59% of transactions completed without the use of cash. 

Near-field communication payments (NFC)— a form of contactless payments— is already the basis for major mobile wallet providers and has begun transforming the nature of commerce itself. As the internet of things (IoT) enables new infrastructural layers of machine-to-machine (M2M) transactions, payment virtualization is beginning to intensify with the potential to escape the cost, complexity, and regulatory rigidity of traditional money. 

In fact, the future of digital transactions is increasingly biometrics. Biometric authentication represents the cutting edge of identification and access control in shaping and transforming global commerce. This includes facial recognition, fingerprint scanning, voice recognition, and even DNA analysis. In China, biometrics already enables consumers to make virtual payments at the point-of-sale (POS), as cameras seamlessly identify shoppers and manage routine transactions.

China’s digital footprint

Even as the world mobilizes against COVID-19, digital commerce is expanding dramatically. In fact, Chinese consumers are now the world’s leading market for digital payments. Leveraging Alipay or WeChat Pay via smartphone apps, Chinese consumers transacted an astounding $37tn in mobile payments last year. Payments using mobile apps represent 16 percent of gross domestic product (GDP) in China, compared with less than one percent in the United States and Britain. 

China is of course a global leader in the transition to digital money. Last year, the People’s Bank of China announced that it would replace its cash in circulation with a digital currency. Instead of competing with the US dollar (which now dominates the global trading system), China is looking to sidestep the international financial system altogether by creating a national digital currency. 

China’s proposed central-bank digital currency could help reshape the global financial system. In fact, China’s government is looking to create a transnational peer-to-peer payment structure by moving into the digital payment sphere— a shift that could potentially transform the way the world trades.

The future is emerging markets

a young woman in a car using a mobile phone

Beyond industrialized economies, the future of digital money is clearly emerging markets. In fact, Africa is already a global leader in mobile money. In Sub-Saharan Africa, over a fifth of the adult population has a mobile money account. Building on the success of Kenya’s mobile payments system (M-Pesa), some 30 million users in 10 countries can now virtually transact across a range of mobile services including international transfers, loans, and healthcare. 

The success of M-Pesa represents the growing capacity of emerging markets to develop an economically viable alternative to traditional banking. M-Pesa, for example, was designed to give farmers and smallholders from remote regions of Kenya an easy way to manage and receive funds for their produce. Mobile operators Airtel Money (available in 16 countries in Africa) and MTN Mobile Money (available in 15 countries), reflect a digital wave of financial services spreading across the African continent.

There are over 850 million registered mobile money accounts across 90 countries today with $1.3 billion transacted through these accounts every day. This includes large e-commerce platforms and telecom operators that have managed to leverage digital financial services to facilitate payments, lending, insurance, and even pay-as-you-go solar energy.

Time for cryptocurrencies?

As many of the world’s central banks contemplate moving to digital money, questions regarding the US dollar’s global dominance are now growing. The advent of digital-asset technologies has combined with the coronavirus-induced economic crisis to raise nagging questions about the dollar’s undisputed reign as the de facto global reserve currency. Dollar dominance is not just about the currency itself but about the banking infrastructure and systems that clear transactions— and this is where a lot of innovation is taking place.

Today, the unit of exchange is established by the state, but the store of value and payments systems are mostly provided by banks. Indeed, the US dollar accounts for some 62% of global central banks’ foreign-exchange reserves. But all of this may be changing. In the wake of the COVID-19 epidemic and the ongoing shift to digital money, the underlying interest in cryptocurrencies has grown substantially. 

Discussions regarding digital currencies like bitcoin have been prominent for some time. Blockchain-powered cryptocurrencies represent a rising alternative to traditional fiat money systems. Advocates maintain that cryptocurrencies are a democratizing force, moving money away from institutions and back to the people. At the same time, the rise and fall of initial coin offerings (ICOs) has been a red flag to many governments.

As the need for digital money expands globally, the move to cryptocurrencies now seems inevitable.

Notwithstanding the risks, governments around the world today have begun exploring the potential of blockchain-based financial services. Innovative pilot programs led by China, Sweden, Estonia, and the United Arab Emirates demonstrate the potential for governments to experiment with blockchain technologies. In the UAE, the Dubai Government is exploring the potential of system-wide blockchain-based e-commerce. Meanwhile, China’s state-backed Blockchain-based Service Network (BSN) seeks to become the global standard for blockchain firms around the world.

As the need for digital money expands globally, the move to cryptocurrencies now seems inevitable. Indeed, the Bank for International Settlements— the so-called bank for central bankers— has set up an Innovation Hub to look into cryptocurrencies and other forms of digital money. Even the US Federal Reserve has signaled interest in the possibility of issuing its own digital coin. The move to digitize government currencies could impact a host of public institutions and programs, including unemployment insurance, social security, and government benefits. All of which could be highly automated.

What is clear is that the future of digital money and especially cryptocurrencies has now become fundamental to discussions on the post-COVID recovery. Much as the pandemic has accelerated the trend toward digital commerce, digital currencies like bitcoin are now spurring conversations about the future of digital money. As many analysts suggest, digital currencies could soon become a “core enabler” of a digitally connected world. More than even transforming money itself, digital currencies could drive a seismic shift in the nature of global commerce.

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