UPI hit a record 1.62B transactions in August 2020 in India as compared to 918 million transactions a year back. That implies more than a 100% annual growth rate which is phenomenal. The transaction costs are zero which has aided the growth story of UPI. Similarly, Venmo in the US has grown from 10 million to 40 million users after it has removed all transaction costs which allows anyone to send money online for free.
What was the key promise of Cryptocurrencies? Privacy, no. It was zero transaction costs for sending money. You can send an email to anyone in the world for free, in the same way, you should be able to send money to anyone in the world for free.
On 20th October 2020, IMF released a policy paper titled Digital Money across Borders: Macro-Financial Implications which is the most important policy for cryptocurrencies or the future of currency as a whole. Why?
The Bank for International Settlements estimates based on a sample of 112 countries the average total cost of sending $200 across borders is 10%. That means if the total $550B annual remittances to developed countries, $50B are only bank fees. Just take a look at the below figure
CBDC (Central Bank Digital Currency) is a digital form of fiat money issued by the central bank while GSC is issued by Big Tech (Think Libra from Facebook). Seeing the current trajectory of antitrust action against Big Tech, GSC won’t be flying off the shelves soon. Out of the major 21 advanced and 45 emerging market economies, 80% have already started work on CBDC while 40% have moved to a proof of concept. When (Not If) a CBDC is launched backed by the US Fed, European Central Bank and People’s Bank of China, the network effects will be extremely strong. In terms of powering payments for consumers and businesses, there will only be one clear winner. Similar to Google for Search, Facebook/Instagram for Social, Amazon for E-Commerce, can we have PayPal for payments ?
Look at what PayPal CEO Dan Schulman said in his interview – “We are working with central banks and thinking of all forms of digital currencies and how PayPal can play a role,”.
As far as Legal Provisions, Monetary Policy, Regulatory frameworks, Political Ambitions, they don’t progress as fast as technology. But if 186 countries can agree to the Paris Climate Agreement, it should be feasible for central banks of multiple countries to back a digital currency
If the below concerns are addressed, it won’t be long before we are on the path for such a currency, which I don’t expect till 2025
- Monetary Policy: The lever on interest rates can control inflation and economic growth should remain as powerful. Central Banks should be able to lend money and buy bonds as before
- Criminal Activities/Legal Implications: Similar to how bank accounts can be frozen, digital currencies should be allowed to be frozen as well. As digital currency can be tracked easily, this can work in the favor. Cryptocurrencies do not have a good track record on safety keeping as well as compared to banks
- Political Motivation: The key Achilles heel, if it becomes a dominant economic force, multiple countries will need to have a say in the direction of it, which can be extremely difficult and tricky.
- Technology: Who will be developing, maintaining and addressing bugs in the digital currency. In case of any hack or bug, it can result in complete economic wreckage
- Basket: The digital currency needs to be linked to a stable currency or a basket of currency at the start. If you require the support of multiple central banks, then what would be the ratio of the basket of currencies
This next stage of Cryptocurrency is bound to impact every segment of our economy. Only time will tell whether the above predictions will come true.
Link to IMF Policy Paper – https://www.imf.org/~/media/Files/Publications/PP/2020/English/PPEA2020050.ashx