3 - 5 minute read
The world of finance is rapidly changing, with digitalization at the forefront of this evolution. In a recent report, Moody’s predicts that traditional central bank money housed in commercial banks will remain dominant despite the emergence of numerous other forms of money.
Moody’s conducted a survey of emerging or potential forms of money and concluded that trust trumps efficiency. The monetary landscape is becoming fragmented, but many new payment solutions still support the use of commercial bank money. Moody’s believes that digital wallets will support the dominance of commercial bank money as long as bank accounts remain the primary source of digital currencies.
Digital wallets, however, could threaten banks’ revenue by excluding them from the transaction process. Tokenized deposits will maintain a similar tie to commercial banks, even if other forms of tokenized assets, which remain largely untested, do not.
Central bank digital currencies (CBDCs) will be perceived as the safest form of digital money, according to Moody’s. CBDCs promise gains in inclusivity and ease of payment, especially cross-border, and do not require deposit insurance. However, technical and policy complexities hinder their adoption, and most CBDCs would still be intermediated, preserving the place of the commercial bank.
“Digital money issued by a private company could significantly impact the payment landscape. Nevertheless, […] there has been no successful project to date, and many countries will likely not allow them to operate at scale.”
Cryptocurrencies got a middling review from Moody’s. Despite being around for more than a decade, they still do not meet the basic functions of money, according to the report. While crypto offers wide availability, round-the-clock transferability, and programmability, factors such as volatility, high transaction fees, low throughput, user experience issues, and often limited liquidity outweighed those advantages.
Stablecoins were treated with similar dismissiveness. Stablecoins suffer from an intrinsic conflict of interest because their operators are incentivized to invest in riskier assets to increase revenue, according to the report. Nonetheless, stablecoin usage may increase modestly. The market capitalization of all crypto assets has increased by more than 60% year-to-date to $1,330 billion as of 20 April 2023.
The monetary landscape is still developing, and new innovations are constantly emerging. The report mentioned mobile money issued by telecommunications companies and tokenized money market funds as potential disruptors. However, the report also notes that many countries will likely not allow private companies to operate digital currencies at scale.
The Bottom Line
Moody’s report confirms that traditional central bank money housed in commercial banks will remain dominant despite the emergence of numerous other forms of money. While CBDCs offer gains in inclusivity and ease of payment, their adoption is hindered by technical and policy complexities. Cryptocurrencies and stablecoins still do not meet the basic functions of money, according to the report, and their volatility, high transaction fees, low throughput, user experience issues, and often limited liquidity outweigh their advantages. Traders should remain cautious and keep a close eye on the constantly evolving monetary landscape.
