Author : Aniket Pathak
Date : 2 May 2023
We are living in a very exciting times in the Financial world. All the things happening around us were a long time in the making and is about to appear on the main stage.
While no system is perfect, the age-old financial system is currently experiencing a decade-long deterioration, which calls for drastic solutions.
Based on historical data and trends, it appears that the current banking collapse in the US and the way some governments are planning for the future, change is becoming unavoidable.
This article aims to touch upon some fascinating areas of study that provide a glimpse into what's coming in the next few years. The key points we'll be discussing are.
Before you read further, would be great if you can share your views on below poll
What you think of existing financial system ?
Foundation is broken and Need revolutionary change
Central banks are not doing good and but need few changes
Foundation is very strong and banks are doing best they can
Downfall of USD ??
In the period following the Bretton Woods Conference of 1944, exchange rates around the world were pegged to the United States dollar, which could be exchanged for a fixed amount of gold. This reinforced the dominance of the US dollar as a global currency. If we look at a rough history of which power has a dominant currency it was Portugal (1450–1530), Spain (1530–1640), Netherlands (1640–1720), France (1720–1815), and then went to Great Britain (1815–1920) who lost it to the United States of America. There is a saying that not one currency can sustain its dominance more than 100 years and USD is about to complete the time, if not already.
Beyond theories and historical charts, there are significant developments in the current global economy that challenge the dominance of the USD. China, in particular, is aggressively promoting the use of its yuan or renminbi as an alternative to the USD, as demonstrated by Saudi Arabia's decision to use the yuan to trade oil. Even Russia, which has faced US sanctions, has started using the renminbi as a de facto currency. While some may argue that there is still a long way to go, the rise of BRIC and other Asian countries will likely contribute to the ongoing currency chase.
While there is much speculation about achieving reserve currency status, it is not a formal process but rather more like winning a popularity contest, which China is not yet good at. The traditional divide between the East and West is growing rapidly, with the East emerging as a contender for new leadership while the EU and US remain obligated partners. Most experts believe it is highly unlikely that a new reserve currency will emerge, ensuring that the USD will retain its status quo. With many current and future trades locked in using USD, any change would be complex and difficult to achieve. However, this does not mean that it is impossible. While previous changes of dominant currency have been triggered by the collapse of a country or large-scale war, in today's world, a change would likely require a more tactical approach rather than a catastrophic event.
The geopolitical landscape is changing rapidly, impacting a relationship between countries. With decline of Oil and other commodities many countries are looking for different partners to diversify their economy. This means new trade with new currency. There is a very interesting time ahead and it's not that far. We might see a new world currency emerging or a rare possibility, a multi-currency world poking its head in the world stage. The next topic will add to this as it will revolutionize the modern banking.
If you want to read more -
CBDC
You must have already heard about what CBDC (Central Bank Digital Currency) is and what it bring to the table as next digital revolution in financial world, but if you don't know you should start looking right now. This is the future of banking and everything financial as we know it.
A formal definition of CBDC is -
"Central bank digital currencies (CBDCs) are the digital form of a government-issued currency / a digital liability of a central bank that is widely available to the general public".
Most central banks and governments dislike physical cash because they are unable to track or control its usage. Once physical currency is printed and circulated, it can be used by anyone, anywhere, for anything. That's why the ultimate goal for each central bank is to go fully digital, with no more physical cash printing. This presents a huge advantage when considering all the regulations and laws that governments and banks need to put in place to ensure that physical money is not used for unsolicited purposes.
When I heard about this and try to discuss it with my mates the question came, Isn't it already digital so what's different with CBDC? If I don't carry cash, which I don't need anyway nowadays, I am already using digital money. Most of the metro cities across the globe are already digital in terms of transactions, so what's different? The answer is "a Lot", a very very very big Lot.
Even if we have wallets and apps to pay digitally central bank still need to physically print money to create it or lend it. So while you are using it digitally the physical asset is stored somewhere. A simple example is even if you done need it you can anytime go to ATM and withdraw all the money you have in actual physical form. Many places some vendor offer discount if you pay cash, so even if we are digital, Cash is still the king/queen. CBDC aimed to replace that, no more coins or printed bills/notes, fully digital money.
CBDC is capable of a lot more than the current system can provide, which is why all central banks love it and can't wait to implement it. There is kind of a race who is going to launch theirs. As usual, China is way ahead of everyone, but others are catching up. It needs an separate article of its own on what is CBDC and there are a bunch of them out there. The whole essence behind CBDC is to change the current financial system completely. 24/7 payments, faster currency exchange, easy money transfer, easier and cheaper banking facilities, and a lot more. CBDC might even change the whole purpose of commercial bank as technically you can directly hold account with central banks.
This is exciting, but that's not why central banks and governments what it. CBDC enables one biggest advantage which all central authorities crave - "Control". CBDC being s a digital asset can be easily tracked, monitored, and controlled. I personally not a big fan of centrally control digital currency and there are many reasons for it. In theory once you bet a CBDC central bank and Government can control where you can spend it and for what. If you try to purchase something that they don't want CBDC will not work because it is programmed to do so.
This article is not about if CBDC is bad or not but just to educate on what's coming. you can be your own judge for that. good or bad CBDC is going to revolutionize the way the financial market operates. There is a lot to be done in this area, and anyone who is looking for a next career move or like to study something new in this area should start getting involved very soon.
One of the good article to read all about CBDC : https://www.mckinsey.com/featured-insights/mckinsey-explainers/what-is-central-bank-digital-currency-cbdc
Stable Coin
The utopia of the global currency system is one stable instrument that can be exchanged with any currency without the worry of volatility or the burden of interest rates. The concept of a Stable coin was actualized in the Crypto world when the industry wanted to tackle the volatility of Cryptocurrencies and wanted something stable that which market can use for trade. So many companies started creating stable coins using various techniques.
In simple terms, a Stablecoin is a digital currency that is pegged to a “stable” reserve asset like the U.S. dollar or gold. In the current world, most of the long-running Stable coins are pegged with USD i.e. 1 stable coin = 1 USD. Such asset-backing currency assures the market that the value of such coin remains constant and can be used to trade with other coins or currencies.
Currently, the concept of stablecoin is only restricted to the crypto industry but there are a lot of use cases to accelerate the potential of Stablecoin in the real world economy. iFinex and Circle are currently the top two companies issuing stable coins in the crypto world and lobbying very hard to extend the stablecoin benefit to the central banks.
To economists, the benefits of Stablecoins include lower-cost, safe, real-time, and more competitive payments compared to what consumers and businesses experience today. They could rapidly make it cheaper for businesses to accept payments and easier for governments to run conditional cash transfer programs (including sending stimulus money). Say you were a Chinese business owner who wanted to pay an invoice to a client in Japan who also had subcontractors in Europe. “You’d need to have a Chinese bank account, a Japanese bank account, and a European bank account,” explains William Quigley, co-founder of the WAX blockchain and one of the founders of USDT issuer Tether. “If somebody wants to send you euros or yen or RMB, the intermediaries who can hold those accounts swap out those currencies for the currency you can hold and send it to your bank. And along the way, they've skimmed a lot of money off the top for that.”
Stablecoins are gaining recognition among central banks, and efforts are underway to create them in the real world. With the advent of CBDCs, the possibility of creating stablecoins seems even more promising, especially if non-volatile assets can be used to secure their value. These developments reflect a broader shift towards a digital future for money, which is likely to have far-reaching implications for the financial world
If you want to know about more about stable coins -
Conclusion :
As the article stated, we are in a very interesting time and definitely on the verge of the next financial revulsion. We are still yet to experience a few preliminary ideas tested in the markets and might even fail but it will lead to a completely new system.
Even if you are not from the financial industry and these are some of the very fascinating topics and there is a lot of material available on the internet to get all kinds of perspectives.
So as they say "at the end all economists are wrong".
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