Analysis & Opinions - Belfer Center for Science and International Affairs, Harvard Kennedy School

What Will Determine the Future of Money?

| May 25, 2022

The international economy is beginning to fracture around the development of novel digital currencies and the human values that their systems represent. Since currencies represent a commonly accepted medium of exchange and can act as an enabler or disabler of economic relationships, they have the power to shape how the global economy functions. 

The economic landscape today is evolving rapidly with the emergence of various fiat currencies, central bank digital currencies (CBDCs), and cryptocurrencies that each represent a set of goals or priorities set forth by the issuing body. For example, the US Dollar symbolizes globalization. Bitcoin represents hyper-globalization, with a focus on decentralization and a sprinkle of revolution. The Digital Yuan represents an attempt to track purchases, collect data on consumers, and disconnect a sizable portion of the global economy from the US Dollar.

COVID-19, further discomfort with a US-centric global economy, and the implementation of economic sanctions have ignited isolationist sentiment across the world, leading to the fracturing of interests, values, and leadership. If unchecked, this trend could create an economy that is based on a basket of currencies rather than one that hinges primarily on the performance of the US Dollar/US economy. The growing pains of crypto have not deterred the decentralized finance and creator economy from pursuing a privacy-based system that operates outside of the purview of governments, which helps explain the rise of Monero, Horizen, Railgun, Dash, ZCash, and other so called privacy coins.” 

China’s continued push to implement a CBDC that logged over $8 billion in transactions in the second half of 2021 has still not been met with serious pushback from the international community. Israel’s reduction in US Dollar foreign reserve holdings also symbolizes a move away from a US-centric system. These trends denote a larger shift to a diversified world economy, where many types of currency (decentralized and state-issued) live alongside one another.

Stablecoins
A stablecoin is meant to maintain a fixed value over time and it is pegged to a specific real currency – often the US Dollar. Stablecoins are used to keep assets invested in digital financial systems without converting into fiat currency, benefitting from some aspects of the market while reducing volatility. They are also a way for crypto companies to complete transactions with one another without having to wait for wire or ACH payments.

The crash of stablecoin Terra/Luna earlier this month sent shockwaves across the industry, eroding credibility in an icon that was at one point worth ~$18 billion. What made Terra’s case unique was its algorithmic-calibrated peg. In theory, Terra’s value was supposed to be maintained via programmed smart contracts that would automatically sell or buy a “sister” coin called Luna. While Terra’s approach proved vulnerable to a death spiral, it’s important to note that other stablecoins, such as USDC and Paxos, are in fact, backed by hard assets on a 1:1 basis. 

As noted by MoonPay, a crypto money service business, “USDC is often described as a safer stablecoin since Centre makes a greater effort to comply with audits and governmental regulation, and has more transparent, fully-backed reserves.” Although the Terra crash will bring about further regulatory scrutiny, stablecoins will continue to play a significant role in the world of currency.

Bitcoin, Ethereum, Solana, Avalanche
These highly popular ‘Layer 1’ networks will continue to be used to create dynamic ecosystems of projects that reduce latency and fees, while increasing security, transactions per second, or interoperability. ETH, SOL, and AVAX are the currencies that underpin each of the respective networks, providing value to those that build on (or use) the infrastructure. These projects are primarily targeted for use by the creator economy, which is constantly looking for ways to increase benefits to creators, decrease barriers to entry, and maximize their audience. Bitcoin has a separate use case from these other cryptocurrencies, as it primarily gathers its utility from being considered a ‘store of value.’ To be sure, its high volatility and life span of just 13 years means Bitcoin is nowhere near the store of value that gold is. Even so, many people have committed to this original cryptocurrency, building up billions of dollars’ worth of Bitcoin in reserves.

Governments Leveraging Foundations for Infrastructure
Another element shaping the future of money are networks that are collaborating with governments to build national infrastructure related to healthcare, finance, and other state services. Though these collaborations are still in their early stages, networks like Tezos (XTZ) and Fantom (FTM) have already come out with public statements related to their work together with Central Asian governments. Layer 1 networks that have been built over the past several years will continue to partner with governments to advise/consult on how to best build e-Government infrastructure for the years to come. This will enable governments to build trustless systems with high fidelity and reduced friction for innovation.

How Will They All Work Together…And What About China?
The network infrastructure being built in the world of cryptocurrency is more than just “magic internet money” (not to be confused with ticker MIM). Instead, many of these projects have durable value and their native tokens will find a permanent place among other currencies of the world. The “basket of currencies” that will result from fiat currency, stablecoins, CBDCs, popular Layer 1 networks, and some Layer 2 networks, will bring diversification to a currently US-Dollar centric world economy. While G7 economies (and other trade partners) will need to figure out how to innovate the SWIFT payments system and increase interoperability of blockchains for cross-border transactions, they clearly see benefits to using this new financial technology.

As this diversification occurs, we should expect to see the US Dollar challenged on the global scale, especially in the face of some of the recent developments in China’s CBDC, the reduction of dollar reserves in partner nations, and the wavering trust in a US-centric financial system. 

Authoritarian countries like China, Russia, and Iran will continue to seek ways to evade an international trade system that transacts in USD, leading to a fracturing of the current global system among ethical and value-based lines. In this new world, we may see a decreased desire for like-minded, Western countries to conduct heavy trading with China, and instead move to a more limited collaboration with East Asia. At the same time, following Russian sanctions, countries like India and ECB/euro countries are doing dollar stress tests to make sure the US can’t ever put them in the crosshairs like Russia has been. US policymakers are learning that the use of financial war has consequences and in a world with financial alternatives, even centuries-old partners may be incentivized to make a shift.

Statements and views expressed in this commentary are solely those of the author and do not imply attribution or endorsement by Amazon Web Services.

Michael B. Greenwald serves as the Global Lead for Digital Assets at Amazon Web Services. Previously, he was the director of digital asset education for Tiedemann Advisors. He was the first U.S. Treasury attaché to Qatar and Kuwait, acting as the principal liaison to the banking sector in those nations for two presidential administrations from 2010-2017. Michael is a fellow at Harvard Kennedy School’s Belfer Center for Science and International Affairs, a senior fellow at the Atlantic Council Geoeconomics Center, and an adjunct senior fellow at the Center for New American Security.

For more information on this publication: Belfer Communications Office
For Academic Citation: Greenwald, Michael.“What Will Determine the Future of Money?.” Belfer Center for Science and International Affairs, Harvard Kennedy School, May 25, 2022.

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