Digitization is shaping the future of money, but traditional central bank money housed in commercial banks will remain dominant, Moody’s predicts in a new report. Essentially, trust trumps efficiency, he said, after studying a wide range of emerging or potential forms of money.
According to Moody’s, the monetary landscape is becoming fragmented, but many of the new payment solutions support the use of commercial bank money. For example, “We believe that digital wallets […] They will support commercial banks’ dominance of money as long as bank accounts remain their primary source of digital currencies.”
However, digital wallets could threaten banks’ revenues by excluding them from the transaction process. Tokenized deposits will have a similar link to commercial banks, even if other forms of tokenized assets, which remain largely unproven, will not.
“CBDCs will be perceived as the most secure form of digital money,” Moody’s said, referring to central bank digital currencies. They do not require deposit insurance and promise gains in inclusiveness and ease of payment – especially cross-border – but technical and political complexities hinder their adoption. The report added that most CBDCs would be brokered, preserving the place of the commercial bank.
For their part, cryptocurrencies obtained a mediocre valuation. “Although they have been around for more than a decade, they still do not perform the basic functions of money,” Moody’s wrote. Although cryptocurrencies offer wide availability, 24/7 transferability, and programmability, factors such as volatility, high transaction fees, poor performance, user experience issues, and often limited liquidity offset these advantages, according to the report.
Stablecoins were treated with similar disdain. “Stablecoins suffer from an intrinsic conflict of interest, because their operators are incentivized to invest in riskier assets to increase their income,” the report said. Nonetheless, “stablecoin usage may increase modestly.” Besides:
“That being said, the market capitalization of all crypto assets has increased by more than 60% year to date to reach $1.33 billion as of April 20, 2023.”
The monetary landscape continues to develop. The report said, for example:
“Digital money issued by a private company could have a significant impact on the payments landscape. However, […] there have not been any successful projects to date, and it is likely that many countries will not allow them to operate at scale.”
Other innovations mentioned in the report are mobile money issued by telecommunications companies and tokenized money market funds.
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