In a world united in prudence, the third of four scenarios generated from our future of money research, strict regulatory frameworks allow some monetary evolution to take place, but they also act to preserve the underlying status quo, keeping systemic risks to a minimum.
While authorities let the market explore digital asset opportunities, adoption remains limited. Decentralised digital assets are niche. Value is stored in traditional bank accounts and wallets, and as loyalty points and tokens from preferred service providers.
In this scenario, strong regulation curbs the use of digital currencies. Monetary policy and practices are defined by caution. Inertia rules. Confidence in the financial system is maintained.
Attention is focused on the imperatives of financial stability, consumer protection and market integrity. Digital currencies are tolerated, but nonetheless regarded as threats to monetary sovereignty, raising concerns about economic and financial stability. Policymakers are cautious, while public and private authorities – primarily central and commercial banks – are united in prudence.
Consumers, corporates and other institutions value stability over innovation, with commercial banks holding the bulk of existing deposits. In doing so, they retain customers’ trust, and sustain healthy market positions.
And so, as regulators shape the future of the payments industry, global money systems become increasingly predisposed to the preservation of the 2023 status quo. That said, powers are extended to encompass digital currencies where they emerge. As a result, digital money is largely prevented from delivering on the promise of lower costs, faster speeds and money with ‘memory’ at scale.
Robust enforcement of stringent compliance is the norm. Digital currencies evolve, but only within the confines of low-tolerance risk thresholds. Digital assets, such as non-fungible tokens (NFTs), are recognised as an alternative investment class but are rarely used as stores of value or accepted for payments.
Sparse usage thwarts otherwise viable business models. Actual and perceived conflicts of interest dampen innovations. Some suspect established incumbent participants of anti-competitive behaviour. There is debate about whether this prudent stance is the result of conscious or unconscious decision-making, or whether the aim is rather to stifle innovation to protect legacy profit pools.
Where innovation happens, it is also largely bounded by existing banking business models. Its focus is on enhancing cost efficiency, reducing cash handling costs, and developing protocols and application programming interfaces (APIs) that grant secure third-party access to commercial banking services.
That said, digitally enabled reward coins will largely displace loyalty cards and incentivised consumer membership schemes. As reward coins develop as non-systemic versions of money, they are typically non-transferrable and widely seen as tokens with soft value characteristics, giving rise to little in the way of regulatory concern.
Monetary systems also maintain their strong appetite for data privacy. As data sharing is tightly restricted, new digital payment services are limited in scale and scope of services. Elsewhere, enduring worries over the sustainability of some blockchain-based currencies bolster the instincts of the cautious, further impeding the development of digital money.
Long-established national and regional fiat currencies continue to dominate domestic and international monetary exchanges. Where consumers, corporates and other institutions use digital money, they prefer government coins. Where cryptocurrencies are used legitimately, they seldom step outside niches such as online gaming or for use as traded assets rather than methods of payment.
If prudence prevails, economic, financial and monetary architecture will be easily recognised by those familiar with the landscape of the mid-2020s. Change will come, but at a pace that may, in real time at least, be imperceptible. Innovators will have to work harder to justify the utility and strength of digital money systems, while established banks and asset managers will have plenty of time to understand and prepare for change (though they may be criticised by investors for wallowing in their comfort zones). By 2035, frustration at this inertia could precipitate a rapid flip from prudent to more liberal digital scenarios, driving instability and lasting repercussions.
This is one possible scenario. It is important to remember that this is not the only one and is not a prediction. We have other alternative scenarios to consider. All are intended as a basis for discussion, debate and an input in shaping plans that we hope will ultimately lead to a positive future of money for all.
Coming next: ‘Government coin’ – digital assets will flourish, but the regulator will ensure the monetary sovereignty of the economy and regulate accordingly.