Finance is changing radically. A new book explains how
The future of money. By Eswar Prasad. Belknap Press; 496 pages; $ 35 and £ 28.95
FOR MORE folks, money still means physical money printed by a single public authority. Yet this is a surprisingly modern incarnation: only a century ago, private currencies competed with government-issued banknotes. It can also be short-lived, as cash succumbs to the digitalization of finance and new means of payment take over. This big bang will have enormous implications for states, individuals and businesses. Whether it does more good than harm, says Eswar Prasad, depends on the world’s weakest institutions, central banks, embracing change without losing control.
This falling money may not surprise readers. Many will do their banking from laptops and make payments on their phones. Financial innovation is also old news. One of the first breakthroughs in “fintech” occurred centuries ago, when China helped boom Asian trade by introducing paper money to replace metal coins, which were heavy and heavy. rare. However, this time, it is different, insists Mr. Prasad. Previous revisions have mainly improved existing systems, he notes. The end of cash, probably within a decade or two, is revolutionary.
Three types of disruptors are involved, he says. The first are the FinTech companies, a diverse group that all have a strong online presence and a knack for data analytics. Their attack differs from previous isolated breakthroughs, such as the debit card or the AT M– because it targets all facets of the markets and financial institutions, from loans and payments to investment. By expanding the market for financial services, they help democratize them. However, they do not impose a change of regime. Banks remain dominant.
Bitcoin, and the many other digital currencies it has inspired, could lead to a more fundamental change. By using a network of users to validate transactions, they make payments possible without the need for a trusted central authority. Mr. Prasad doubts that decentralized money – less secure, stable and efficient – will ever win out over its official cousin. But he cautions that the technology involved is being co-opted by big companies, such as Facebook; with their billions of users and their financial weight, they could make private currencies an attractive medium of exchange and a store of value.
Fearing that this could cause them to lose their jobs, many central banks are starting to disrupt themselves by developing their own digital currencies, the third and biggest shock. Well done, these “CBDCwill upgrade the financial system. More efficient than cash at settling transactions, they could also provide a backstop to digital payment systems run by private companies, should these fail. They could offer “unbanked” communities access to digital payments and other financial products. And they can let central bankers experiment with new monetary policy tools and more easily track illicit transactions.
Formerly at IMF, one would have expected Mr. Prasad to favor public solutions. Even if the pendulum turns to the private sector, he believes that central banks should and will remain at the heart of finance. But one of the strengths of his analysis lies in his mastery of both technical details and global compromises. He is afraid CBDCs may be vulnerable to hacking and bugs; they could crush private innovation and cause the instability they are meant to prevent. At the same time, the new responsibilities of central banks could erode their independence. Confidentiality of transactions will be lost. Practicing the balance he advocates, Mr. Prasad is enthusiastic but nuanced.
It also manages to make the financial system intelligible and interesting without resorting to shortcuts and exaggeration. His patient description of how it works, interspersed with well-documented examples and personal anecdotes, imposes cosmic order on the constellation of institutions that determine how money flows. As he loses his physical form, the meaning of money will become more and more difficult to grasp. This book explores the economic and social effects of this upheaval, giving shape to this most abstract concept. ■
This article appeared in the Books and Arts section of the Print Publishing under the title “Kill bills”