The future of money: new report predicts commercial bank dominance despite digitalization

According to a recent report by credit rating agency Moody’s, digitalization will not soon replace commercial bank money.

While digitalization is undoubtedly changing how we handle money, traditional central bank money housed in commercial banks will remain dominant, thanks to the trust they have earned over the years.

The market capitalization of all crypto assets has increased by over 60% year-to-date to US$1,330 billion as of 20 April 2023.

Digitization is transforming how we handle money, and many experts predict that money housed in commercial banks may soon face stiff competition from cryptocurrencies and other digital assets.

However, this recent report may calm any fears of this happening in the near future.

Moody’s surveyed a wide range of emerging or potential forms of money and found that trust beats efficiency, even in the digital age.

The report highlights the fact that the monetary landscape is becoming increasingly fragmented despite many new payment solutions still supporting the use of commercial bank money.

Digital wallets, for example, will continue to support the dominance of commercial bank money and ways to borrow money as long as bank accounts remain their primary source of digital currencies.

While digital wallets could threaten banks’ revenue by excluding them from the transaction process, tokenized deposits maintain a similar tie to commercial banks.

Even if other forms of tokenized assets, which remain largely untested, do not.

The report also predicts that central bank digital currencies (CBDCs) will be perceived as the safest form of digital money.

CBDCs do not require deposit insurance and promise gains in inclusivity and ease of payment, especially cross-border.

However, technical and policy complexities hinder their adoption. Nonetheless, most CBDCs would be intermediated, preserving the place of the commercial bank.

Cryptocurrencies received a middling review in the report.

Despite being around for more than a decade, they still do not meet the basic functions of money, insurance or loans.

While they offer wide availability, round-the-clock transferability, and programmability, factors such as volatility, high transaction fees, low throughput, user experience issues, and often limited liquidity outweigh those advantages.

Stablecoins were treated with similar dismissiveness, with the report stating that they suffer from an intrinsic conflict of interest because their operators are incentivized to invest in riskier assets to increase revenue.

However, the report did acknowledge that stablecoin usage may increase modestly.

The report concludes by stating that the monetary landscape is still developing.

Digital money issued by a private company could significantly impact the payment landscape.

However, there has been no successful project to date, and many countries will likely not allow them to operate at scale.

Other innovations mentioned in the report include mobile money issued by telecommunications companies and tokenized money market funds.

Although digitalization is undoubtedly changing the way we handle money, the report by Moody’s shows that we may not be seeing any radical shifts in the near future.

While CBDCs and stablecoins may offer some competition, their adoption is hindered by technical and policy complexities.

As the monetary landscape continues to develop, new innovations may emerge that could significantly impact the payment landscape.

Nonetheless, trust in commercial banks and their money will remain strong for the foreseeable future.

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