Book Review: The Future of Money

The future of money: how the digital revolution is transforming currencies and finance. 2021. Eswar S. Prasad. The Belknap Press of Harvard University Press.

Nowadays, you can’t turn on the TV or the radio without hearing an advertisement for cryptocurrencies or crypto exchanges. Numerous celebrities are promoting crypto trading platforms, including professional athletes LeBron James and Tom Brady and actors Matt Damon and Larry David. Are cryptocurrencies the next big investment, a fad or a currency that will transform the economic and financial landscape? What are some of the advantages and disadvantages of digital currencies? Who will benefit from these new currencies?

Eswar S. Prasad attempts to address these questions a The future of money: how the digital revolution is transforming currencies and finance. Prasad, the Tolani Senior Professor of Trade Policy at Cornell University and the author of several books on currencies, provides an interesting and insightful exposition on the changing landscape from traditional paper notes to digital currencies.

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Prasad begins his discussion of the future of money with a quote from Cecilia Skingsley, the deputy governor of Sweden’s central bank: “If you extrapolate from current trends, the last note will have returned to the Riksbank by 2030.” Skingsley isn’t the only government official who sees a bright future for digital currencies. China is another country that has moved away from paper money. In the United States, President Biden, recognizing the importance of new digital assets, signed an executive order to ensure the responsible development of digital assets in March 2022.

The book is divided into four parts. Part I, “Laying the Bedrock,” looks at the future and promise of digital currencies and provides an introduction to finance for those with little background. The second part, “Innovations”, focuses on the history of fintech and the crypto revolution. Part III, “Central Bank Money,” discusses central bank digital currencies (CBDCs). Part IV, “Ranifications,” considers the possible consequences for the international monetary system.

The “Innovations” section of the book begins with a chapter titled “Will Fintech Make the World a Better Place?” Here, the author takes us through the history of fintech, which he notes is a catchy term for new financial technologies. It was first coined in 1993 with Citicorp’s creation of the Financial Services Technology Consortium. However, some innovations, such as ATM, have become so ubiquitous that we forget they were once new technologies. The story includes an interesting look at the latest innovations, such as M-PESA, which allowed people in Kenya to bank using a mobile phone, as well as peer-to-peer lending, crowdfunding and on-demand insurance. Many of these new services will pose challenges to traditional financial services firms.

Today, fintech is most closely associated with cryptocurrencies, such as bitcoin and Ethereum. However, a discussion of cryptocurrencies cannot begin without understanding blockchain and how this technology is transforming business and finance. Blockchain technology has been touted as the future of finance and numerous other areas of business, including medical record security, non-fungible token (NFT) markets, and supply chain and logistics tracking.

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Most investment professionals will be aware of blockchain and the concept of a decentralized ledger through a peer-to-peer network, but many may not fully understand the technology. Prasad provides a detailed yet accessible explanation of how blockchain works, from its historical origins to the technology underlying the system. The term “blockchain” is associated with a variety of cryptocurrencies. However, the protocols used to validate transactions differ for various blockchains. Also, each protocol has advantages and weaknesses. Will many alternative protocols continue, or will one emerge as the industry standard?

Bitcoin uses a “proof-of-work” protocol to validate transactions, which requires block creators, known as miners, to solve a randomly generated cryptographic problem. The approach allows transactions to be validated without a trusted third party. However, this method requires significant computing resources, requiring large amounts of electricity to power the computers. Another drawback of this approach is that it only allows a relatively small number of transactions to be validated simultaneously.

Ethereum uses a “proof of stake” protocol. Proof of stake was created to address some of the inefficiencies of the proof-of-work approach. Here, the privilege of validating a block is based on how much it has been “staked” by competing nodes. However, as Prasad points out, this less resource-intensive approach is not without its shortcomings.

Prasad debunks some of the myths surrounding cryptocurrencies and other digital currencies. For example, many see the use of cryptocurrencies, such as bitcoin, as a way to maintain anonymity. The reality is that, unlike cash, digital currencies require identifiers for consumers to receive goods purchased with digital currencies, which removes anonymity. Blockchain has also been seen as a secure technology. While this technology offers greater security than other methods, Prasad points out ways people can hack the various protocols.

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Like all new technologies, the fintech revolution has brought with it a whole new language to define the new offerings, including hashing, security token offerings (STOs), smart contracts, initial coin offerings (ICOs), blockchain contracts in hash time (HTLC), and stablecoins. The future of money it allows investors to learn the new language of this field and consider which innovations may offer the best investment opportunities.

Reading the book is unlikely to provide insight into how to value cryptocurrencies or how digital currencies, such as bitcoin, are likely to replace government-issued money as a store of value, medium of exchange, or unit of account. However, Prasad provides insight into the potential of digital currencies in the chapter “The Case for Central Bank Digital Currencies.” He argues that CBDCs can improve wholesale efficiency by improving the way central banks distribute reserves to commercial banks for payment, clearing and settlement. For retail, CBDCs can offer several benefits, including providing a secure payment system, promoting financial inclusion, and improving monetary and fiscal policy.

While these chapters may seem of more interest to monetary economists and central bankers than to investors, Prasad offers some insights that investors can benefit from. It summarizes a study that looks at how policies in some European countries to reduce the use of cash reduced the underground economy and increased tax revenues. The thoughtful investor might ask which investments will benefit from this increased tax revenue. Will the additional revenue be used to fund infrastructure spending? Will countries use the windfall to finance alternative energy projects? Perhaps countries governed by conservative lawmakers will choose to return the money to citizens and businesses through tax cuts. If so, which industries stand to benefit?

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Innovations produce winners and losers creating new opportunities and challenges for incumbents. Innovations in the financial sector are no different. Understanding some of the current and potential future changes will allow analysts to better determine which companies and industries may thrive and which may suffer. The future of money gives readers a window into some of the opportunities and challenges facing the financial sector.

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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.

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Ronald L. Moy, CFA

Ronald L. Moy, CFA, is an associate professor of finance at the University of St. John’s, Staten Island, New York.

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