Whether the digitalisation of finance does more good than harm, says EswarSPrasad, depends on the world’s dowdiest institutions—central banks—embracing change without losing control
That cash is declining may not surprise readers. Many will bank from laptops and make payments on their phones. Financial innovation is old news, too. One of the first “fintech” breakthroughs happened centuries ago, when China helped engineer a boom in Asian commerce by introducing paper currency to replace metal coins, which were heavy and scarce. Yet this time is different, Mr Prasad insists. Previous overhauls mainly improved existing systems, he notes.
Three types of disruptive agents are involved, he says. The first are fintech firms, a varied group that all have a big online presence and a knack for crunching data. Their onslaught differs from previous, isolated breakthroughs—such as the debit card or the—because it targets every facet of financial markets and institutions, from lending and payments to investment. By expanding the market for financial services, they help to democratise them. All the same, they are not imposing regime change.
Bitcoin, and the many other digital monies it has inspired, could bring about a more fundamental shift. By enlisting a network of users to validate transactions, they make payments possible without the need for a trusted, central authority. Mr Prasad doubts decentralised money—less safe, stable and efficient—will ever trump its official cousin.
Fearing this could do them out of a job, many central banks are beginning to disrupt themselves by developing their own digital currencies—the third and most important shock. Done well, these “s” will upgrade the financial system. More efficient than cash for settling transactions, they could also provide a backstop to digital-payment systems managed by private firms, should those fail. They could offer “unbanked” communities access to digital payments and other financial products.
He also manages to make the financial system intelligible and interesting without resorting to shortcuts and exaggeration. His patient description of how it works, peppered with well-researched examples and personal anecdotes, imposes a cosmic order on the constellation of institutions that determine how money flows. As it loses physical form, money’s meaning will become ever harder to grasp.
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