Some battles are fought in the open. And some are conducted in the shadows, such as tussles for economic power in vital but hidden areas of the world economy. The fight for the future of money is one such conflict.
It will – in time – have big implications for consumers, but now it is all about the vital infrastructure that controls how money moves around the world. And about the fight for control of this involving the US, Europe, central banks, commercial banks and private players.
It is partly a story of the new world of finance versus the old world, but the new geopolitical tensions between the European Union and US are also now central.
For a long time the rules were relatively clear in a system that had developed over many years for controlling the issuance of money and how it moves around the world, much of it based – to the advantage of the US – on the dollar. If you are doing a digital transaction, after all, chances are you are using US-based technology from either Visa or Mastercard – or, online, PayPal.
The advent of crypto was the first sign that this had changed. But now the story has got a lot bigger.
Digital money
We are all used to digital transactions in our daily lives, both in retail locations and online. But these transactions are underpinned by “real” money – in Ireland this is euro issued and guaranteed by the European Central Bank (ECB).
However, there is a new band of digital currencies that do not exist in paper form and are not issued by central banks.
We are familiar with crypto currencies such as Bitcoin, which are now significant players but have largely stood apart from the traditional world of finance, used as higher risk investments and in some cases to underpin transactions.
Unlike traditional, or so-called “fiat”, currencies, they are not underpinned by a central bank guarantee and not regulated in the same way. Nonetheless, they have grown into significant players for speculative investors. Now the technology underpinning crypto is starting to go mainstream. And this is behind the battle for control on the future of money.
Cryptocurrencies work on the so-called blockchain, which is separate from the traditional bank to bank transmission system for money transfers. Photograph: Getty Images/iStockphoto
Blockchain
Cryptocurrencies work on the so-called blockchain, which is separate from the traditional bank-to-bank transmission system for money transfers.
Advances in cryptography have been vital to the development of this technology. The Central Bank of Ireland explains blockchain as “like one big public file – or ledger – that is shared and stored across a huge network of computers.
“This file contains all the transactions made using the cryptocurrency. Because it is publicly shared and its contents validated by so many different people, it makes it virtually impossible for anyone to include a fraudulent transaction on it.”
In this way control is taken away from central banks and the banking system, with private players issuing cryptocurrencies and overseeing their transmission.
A key feature of blockchain is so-called tokenisation – the way ownership is registered on a blockchain is via a token. In turn this allows 24/7 settlement and programmability – mandating funds to be transferred when something happens, such as a product delivery or – in the case of investments – an asset registering a particular price.
The advent of crypto has led to fears among central banks and financial regulators, but at least it has been largely separate from the mainstream.
But now blockchain technology is threatening to go mainstream, due to the speed of transactions, cost advantages and the ability to avoid traditional systems such as Swift, where the money has to be sent through correspondent banks involving charges and delays. This has big implications for who controls our “money”.
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Stablecoin
A key bridge between the old world of money and the new is so-called stablecoin, a newer player issued by private interests – Circle and Tether are the two biggest. As a cryptocurrency it operates on the blockchain but, unlike traditional crypto, it offers those who hold it convertibility back into traditional currencies, almost always the US dollar, on a one-for-one basis.
The Trump administration has sought to regulate this sector via the Genius Act, which obliges issuers to hold assets to back the stablecoin they issue, normally US government bonds. The US sees stablecoin as a way to underpin dollar dominance in international transactions, even though a consortium of big EU banks is planning to issue a euro-based version.
Stablecoin, as its name suggests, is designed to offer an alternative to volatile traditional cryptocurrencies and thus gain acceptance in key roles of functional money – as a medium of exchange and a store of value.
There are, however, fears about how it would fare if a crisis hit the markets and whether the huge holdings that stablecoin companies are building up in US treasuries would be unloaded in a way that would cause instability in this vital market if stablecoin investors lost confidence and a lot wanted their money back in US dollars at the same time.
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The digital euro
For years the digital euro programme pioneered by the ECB has failed to generate much public enthusiasm. After all, the pubic is used to swiping their cards or sending money electronically online or via banking apps or services such as Revolut. What extra would the digital euro bring? The Financial Times famously dubbed it “an answer in search of a problem”.
In the new world, however, a digital euro has some clearer advantages. First of all, at a wholesale level, it offers the opportunity of European businesses and investment managers using blockchain technology and tokenisation on a euro platform. This would limit even greater reliance on the US dollar – a goal of the Trump administration in its support of stablecoin.
Second, at a retail level, it removes exclusive reliance on US-controlled payment systems, even if in their daily lives this is something that the public rarely considers.
And third, it goes some way to underpinning ECB control in a world where the supply of money is fracturing. Despite this, European Parliament support for the digital euro project in a key vote this year is not guaranteed.
Some big EU banks are also pioneering a new EU payments system, Wero. Photograph: Nicolas Tucat/Getty Images The money war
The war for control of this new world is raging. The promoters of stablecoin want to be allowed to pay interest on deposits – a measure ruled out by the Genius Act.
The US commercial banks object, warning that this could attract money away from them, limiting lending. In Europe, the commercial banks worry about the digital euro attracting funds, leading to limits on the amount individuals can hold.
Some big EU banks are also pioneering a new EU payments system, Wero, now live in a number of countries including France and the Benelux countries and being introduced in others – and feel they are better placed than the ECB to drive this train.
And behind it all, EU leaders worry privately about the power of the US to “weaponise” parts of the payments network or the supply of vital US dollars, central to international transactions, if economic tensions were to boil over.
Those who talk of the EU unveiling its so-called anti-coercion instrument and hitting US companies in Europe need to pay attention to this threat, with the US historically using the dollar hegemony to underpin sanctions implemented against various countries.
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And the punter?
New payment technologies already provide advanced services to Irish consumers and businesses – and recently much more rapid transfers of cash at home or internationally.
There is no question that our phones will be central to future use. The unanswered question is what services will “win” in the war to come both in terms of payments and, in time, investments, where tokenisation has the potential to offer consumers greater options and control of their money and is already offered in the US in areas such as money market funds.
In time we may all be on the blockchain.