Life after cash: what is the future of money?

Geopolitics, energy markets and pandemic ripple effects are just some of the factors contributing to a major global conversation on the future of money. AP

These days there is great asymmetry with money: the more it’s in the news the less it’s in our pockets. Inflation, the price of oil, shortages of fundamental stuff like wheat and microchips, all contribute to this period of uncertainty and volatility.

What to do? How do you make your hard-earned cash go further and ensure that what you have does not lose value? I am no financial advisor and will not dish out any wisdom here. But you will have noticed pundits and commentators talking about gold, real estate, the Swiss franc. Add to that the growing allure of cryptocurrencies and NFTs. The landscape we’re seeing feels like a frantic race to understand what’s happening to money in a volatile and uncertain world, peppered with hard-hitting global news with a sprinkling of never-ending Covid-19, climate change impacts and so much more.

Whether it’s gold or money, a central goal of a currency is providing the bearer with the confidence that value is maintained for longer than it takes for bananas to turn brown.

So, before going any further: breathe. And let's start with the basics. What is money and what future might we see for it? Money has three attributes. First, it is a medium of exchange, making bartering easier and painless. Second, money is a unit of account, a sharable good that is quantifiable to everyone. Third, it is a store of value: one dirham, dollar, rupee or euro is the same today (valued in its own terms) as it will be in a week. This is different to, say, bananas: if bananas were your store of value, you’d notice that, after a week or two, your ability to purchase anything with them will have reduced dramatically because nobody wants limp bananas.

Of the three attributes of money, the store of value is perhaps the most central to the future of money. Looking back, money was made of gold, silver or other valuable material, conferring it intrinsic value. Eventually, paper money was issued and backed by a precious metal reserve deposited in a secure facility. Money owners could exchange money for the equivalent in gold or silver. This direct linkage limits a government’s ability to steer the economy, so a de-linking from silver or gold reserves was completed by the 20th century. Now currencies are backed by government, or rather the faith and trust in a government being able to maintain the value of the currency. This is fiat money.

Then there is digital money. Two years ago, the Dubai Future Foundation published a report on the future of money – The Impact of Crypto-assets on State Currencies. Like others before us and since then, we examined the rise of technologies that underpin digital currencies. Bitcoin is but one of the many cryptocurrencies that have emerged on the back of blockchain, the technology that secures and digitises currency or other assets. While the term “currency” is closely tied to crypto assets, economists like Nouriel Roubini argue that they don’t meet the three criteria of a currency – most places don’t take Bitcoin to purchase coffee, for example. Also, given Bitcoin’s volatility over the years, it’s hard to see how it is a stable store of value. Unless, of course, the currency used to purchase these crypto assets are even less of a store of value and more volatile. There are increasingly such cases.

It is also the crux of the matter: whether it’s gold or money, a central goal of a currency is providing the bearer with the confidence that value is maintained for longer than it takes for bananas to turn brown. If that period of time is not days or weeks but years or even decades, we might need to think of a new concept that constitutes currency. That concept, in the future, is likely to incorporate both old and new concepts of money. Roubini and his colleagues at Atlas are working on devising a tradable blockchain-secured digital token that is backed by real stuff – a "stablecoin" of sorts. In their case the token’s value is conferred and backed by gold, government bonds and other real-world assets. They are not the first to hatch this kind of idea and such an approach draws an arc from the past to the future: security of a digital currency without the hype-factor of a potentially baseless cryptocurrency issuance, where anyone can be a central banker and issue their currency, supported by the stability of a basket of real-world assets.

Whether we like it or not we live in a globalised world, so the assets backing this token will likely benefit from a global mix, which may strengthen the outlook for store of value. Just imagine: could a basket of global assets, turned into a digital token become an actual currency, which can be transferred between people and used directly in shops? This could mean that in the future money still has the three key attributes of being a unit of exchange, a unit of account and a store of value, but it could reflect a balanced-out confidence that is not tied to any single country nor to any single asset. And importantly for everyone on this volatile planet: will this digital money retain value when exposed to the long-wave impacts of climate change and all that follows? Whatever the future of stores of value, and the need for it grows relentlessly, I for one am not bulk-buying bananas.