The continuing process of digitalisation of the world’s financial system as well as the move away from cash during the pandemic are raising existential questions about the future of money.
Newsletter from 14 January 2022
I write this newsletter from Belfast, where the DeLorean sports car – most famous for having been used as Marty McFly’s time machine in the Back to the Future movies – was manufactured. I invite you to join me in a DeLorean time machine as we travel back and forth across decades to see what money was like in the recent past and what it may be like in the near future.
Let’s go back to 2000. I taught my very first lecture at Queen’s University Belfast that year. The topic was money and the debate in class focused on the possibility and merits of a futuristic cashless society. That year more than three-quarters of total payments were made in cash. Other payments were made using cheques, direct debits and credit cards.
The arrival of the ATM (automated teller machine) in 1967 had revolutionised banking and payments by making cash much easier to access. According to LINK, there were about 31,500 ATMs scattered across the UK in 2000, which was a 75% increase from one decade earlier.
When we fast-forward to 2010, two major things had changed in the realm of money as highlighted in my Economics Observatory article on the lessons from history for digital currency.
First, chip-and-pin and contactless payment cards had been introduced in 2003 and 2007 respectively. Despite these innovations, cash was still being used in 65% of payments in 2010 and the number of ATMs had doubled since 2000 to just over 63,000.
Second, Bitcoin – the world’s first cryptocurrency – had been introduced to the world several months after (and partly as a response to) the global financial crisis of 2007-09.
In his Observatory article on Bitcoin and other digital currencies, William Quinn (Queen’s University Belfast) provides a good introduction to the cryptocurrency and explains its advantages and disadvantages compared with traditional currencies. He suggests that the advantages of Bitcoin are few (if any), while the disadvantages include its costliness as a medium of exchange and its poor store-of-value property, which arises from its very high volatility, as Figure 1 shows.
Figure 1: Price of Bitcoin (US dollars), December 2016 to January 2022
The next stop in our time machine takes us back to 2020. In this world, we see how the innovations of the previous decade have transformed money. To begin with, cash use has shrivelled to a mere 17% of all payments and the number of ATMs in the UK has fallen sharply from a high of 70,588 in 2015 to 54,574.
This trend was well under way before Covid-19, but as the Observatory article by Bernardo Bátiz-Lazo (Northumbria University) and Manual Bautista-González (Columbia University) illustrates, the pandemic has accelerated the move towards a cashless society.
The pandemic has also seen increased interest in Bitcoin and other cryptocurrencies, with over 4,000 different cryptocurrencies now in circulation. Meme cryptocurrencies, such as Shiba Inu or Dogecoin, became very popular with the general public during 2020 and into 2021.
In his Observatory article on Dogecoin, Andrew Urquhart (University of Reading) describes how this meme cryptocurrency works and explains how it became one of the world’s largest. In terms of market value, Dogecoin and Shiba Inu are the 12th and 14th largest cryptocurrencies, with market values of $21.7 billion and $16.5 billion respectively.
The pandemic has also witnessed increased speculation in cryptocurrencies as retail investors have poured their savings into all things crypto. This has resulted in very steep rises in the prices of cryptocurrencies. Figure 2 shows the appreciation in price between the start of 2020 and the end of 2021 of the three largest cryptocurrencies, as well as the two largest meme cryptocurrencies.
Figure 2: Appreciation in the prices of leading cryptocurrencies between the start of 2020 and the end of 2021
Note: The appreciation in Shiba Inu is from 2 August 2020; the scale is logarithmic.
As well as rising dramatically over the past two years, cryptocurrency prices have also been very volatile, as illustrated by the price of Bitcoin in Figure 1. In his Observatory article, William Quinn explores the main drivers of changes in the price of Bitcoin, suggesting that the price is largely determined by three things:
- First, large holders, known as ‘whales’, who have the ability to manipulate the market and move the price of Bitcoin.
- Second, news coverage and discussion of cryptocurrencies on social media brings in new naïve investors who buy Bitcoin and other cryptocurrencies, which in turn drives up prices.
- Third, the number of Tether stablecoins that have been issued. Although the price of Bitcoin is usually reported in dollars, Tether is the main currency for buying Bitcoin. It is an on- and off-ramp for Bitcoin investors, in other words, a vehicle for helping investors convert fiat currencies into Bitcoin and vice versa.
Stablecoins, such as Tether or USD Coin, have grown in popularity from the beginning of 2020. The market capitalisation of Tether, for example, has grown from $4.11 billion at the start of 2020 to $78.43 billion at the end of 2021.
The volatility of cryptocurrencies such as Bitcoin has undermined any claim that they are money or have money-like properties. Stablecoins, on the other hand, have a stable value because they are convertible one-for-one into US dollars or a basket of currencies. As I point out in my Observatory article, this makes most stablecoins akin to bank money. But the difference is that banks are regulated, and their deposits are underwritten by insurance and government guarantees.
If the flux capacitor in our DeLorean has enough power to get us to 2030, what might we see when we go to the shops and cafes and walk down the high street?
ATMs are much less common. Cash is used for a small number of purchases and mainly by the poor and old. Government policy has attempted to slow down the march towards the cashless society and to ensure that citizens are not excluded from the digital payments system.
Cash is still the back-up means of payment for many because global pressures and geopolitical forces mean more frequent electricity, telecoms networks and internet outages, as well as cyber-attacks.
We would be unsurprised to see in 2030 that the cryptocurrency bubble and craze is long over and forms a new chapter in the second edition of our book Boom and Bust: A Global History of Financial Bubbles. Nevertheless, some of the underlying crypto technology is being used for decentralised finance applications and smart contracts.
Stablecoins, where they still exist, are regulated by the authorities and have been subsumed into the traditional banking system. The main digital currency is one provided by central banks, like the Bank of England, in the form of a central bank digital currency (CBDC). The report on 13 January 2022 by the House of Lord’s Economic Affairs Committee, which argued that CBDC was a solution in search of a problem, has been long forgotten.
Andrew Urquhart, in his Observatory article on CDBCs, argues that their development is inevitable, and in my article, I argue that the chief lesson from history is that currency issue is eventually concentrated in the hands of government or their central banks.
The economic debate around the globe in 2030 is focused on the issues of privacy and exclusion because CBDCs are being used in some countries to control the citizenry and exclude minorities and dissidents from the formal economy. Maybe we should have listened to the House of Lords back in 2022 when they raised concerns about privacy.
Before we leave 2030, I will buy a souvenir with some Britcoins (the colloquial name for the Bank of England’s CBDC) to take back to 2022 – a celebratory book telling the story of how Northern Ireland beat England on penalties in the final of the 2030 FIFA World Cup.