Digital Money: A Distant Future or a Soon-to-Be Reality?

By Amir K

In this article, we aim to analyze how close we are to the inevitability of physical cash (nearly) phasing out, what the likely financial impacts of the transition are, and whether there are potential investment opportunities to look out for while we observe this (arguably) inevitable change.

Source: World Bank Global Findex

The Beginning of the End

A steadily growing proportion of the global population is now using the alternative to physical cash when conducting their transactions thanks to the mobility, security, ease of use, and implicit auditing that comes along with electronic money. In the modern day, for instance, it is estimated that only 8% of the global cash distribution is in physical form, with this percentage likely to fall further as the developing world obtains better access to technology. Entities of the most developed nations such as Sweden, for instance, are now conducting more than 99% of their transactions digitally, as compared to 92% in the US and 22% in India (New York Times, 2017). The advantages of the adoption of digital cash are evident and proven to be effective; however, with the unanticipated COVID-19 pandemic stymieing the use of physical cash due to health concerns, social distancing, and isolation requirements, progress of global adoption is likely to accelerate.

Some of the most impactful recent global developments came in March from the US with a “shock” announcement of a digital dollar (Forbes, 2020), the chair of the US Federal Reserve announcing FED’s likely collaboration with the private sector to make CBDC (Central Bank Digital Currency) a reality as soon as possible in the months following (Reuters, 2020), and China waging what is effectively a digital currency “Cold War” by poising to make the digital Yuan the insurgent de-facto trading standard as opposed to the USD or the EUR (The Japan Times).

The Impacts of Digitization on Finance

The merging of finance and technology has innumerable potentialities – its effects are so vast, in fact, that the term “fintech” has long been adopted and in use globally to describe the amalgamation of the two. In simple terms, fintech refers to providing conventional financial applications through technology. By utilizing the existing and future digital currencies in the developing regions of the world along with applications such as Artificial Intelligence, people have greater access to investing, peer-to-peer lending, establishing better credit scores, information to build reliability, boosting their local economies and businesses faster. In addition, through blockchain-based “smart contracts”, faster and more secure settlements of financial market transactions are facilitated, both of which have long been greater points of concern in developing nations (IMF, 2018). When it comes to institutional lending, easier access for small and medium-sized enterprises (SMEs) to funding has already shown lower barriers of entry for investing and finance, thereby boosting local and regional economies (IMF, 2018).

On the flip side, as with all things digital, there are of course innate concerns and disadvantages that come with the territory. One of the potentially negative effects is that financial stability could be heavily affected since more rapid electronic cash transactions are likely to disrupt traditional economic and business model forecasts (IMF, 2018). Another problem is, of course, cyber-crime and the lack of regulation. For instance, in 2016, the hack of Bangladesh’s Central Bank allowed computer hackers to transfer millions of dollars from the Federal Reserve Bank of New York into their own accounts (IMF, The Dark Side of Technology, 2016).

It is also clear, that, in addition to computer hacking, the lack of sufficient regulation yields itself to greater opportunities for risks akin to money laundering or situations such as the infamous Facebook and Cambridge Analytica scandal of 2018.

Potential Investment Opportunities

The risks of computer hacking and money laundering are implicit, and leading nations are clearly leading turbulent efforts towards the adoption and digitization of money and all things financial as they consider these risks which can be alleviated with sufficient auditing, particularly through the blockchain, and through strong cryptography that combines the collective power of all computers utilizing the applied blockchain that would make stealing assets a practical impossibility. Given the arguments for the positives along with sufficient trust, interest, and research in the supporting technologies, there are sound investments that can be considered at this relatively early stage of adoption. Albeit surprisingly, the first option to consider is in direct competition to the Digital Dollar – cryptocurrencies.

Consider the title of this Forbes article alone: “Bitcoin Will ‘Moon’ If The U.S. Creates A New Digital Dollar ” (2020) – this trend in fact has been observed earlier in 2020 when Bitcoin saw a meteoric recovery following its crash in the early months of the COVID-19 epidemic, and arguments as to why this is likely to happen again for Bitcoin also apply to the entire market of cryptocurrencies as Bitcoin generally signals the trend of the space. [ bitcoin/]

Another interesting avenue to consider is investing in companies that plan to provide their own digital currencies and “stablecoins” (in this context stable implies a lock in value to the value of another currency similar to 1 USD = 1 USDC, under all circumstances) with ambitious plans such as providing an automatically-stabilizing deflationary currency for use in developing nations (Peter Thiel, Coinbase, and several other founders of PayPal are the seed investors of one such project together called Reserve Rights, for instance).

Lastly, of course, one could turn to the technologies (which are sometimes patented) and third parties that aid the government to make such digitizations a reality and invest in them.

The authors of this publication are not qualified to provide financial or investment advice and as such the content provided should not be construed in this manner. All information is intended purely for educational purposes and is provided for the personal interest of UNIT members. The opinions expressed within the article do not reflect those of UNIT as an organisation, its partners or its sponsors.