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With the rise of bitcoin, stablecoins and decentralized finance, the last 10 years have been an incredibly crazy time for those of us who write about money. Many of the innovations we’ve seen since Bitcoin debuted in 2008 are going to endure for the rest of our lives. Some of them will be unwound as embarrassing mistakes. Here are my five predictions about the future of money.
J.P. Koning, a CoinDesk columnist, worked as an equity researcher at a Canadian brokerage firm and a financial writer at a large Canadian bank. He runs the popular Moneyness blog. This article is part of Future of Money Week, a series exploring the varied (and sometimes weird) ways value will move in the future.
1. Decentralized finance won’t eclipse centralized finance. Eventually, they’ll just blur together.
Many of the features that decentralized finance, or DeFi, brings to the table will be copied by regular finance in the future. For instance, there’s no reason that regular finance can’t copy the automaticity and programmability that DeFi offers, without bothering with the blockchain part.
Even as regular finance copies the useful bits from DeFi, DeFi will emulate regular finance by pulling itself into the same regulatory framework. That is, DeFi tools will become compliant with anti-money laundering/know your customer (AML/KYC) rules, Securities and Exchange Commission-registered or licensed with the Office of the Comptroller of the Currency (OCC).
And not necessarily because they are forced to do so. (It’s hard to force a truly decentralized protocol to do anything.) Tools will comply voluntarily. Most of the world’s capital is licit capital. Licit capital wants to be on regulated venues, not illegal ones. To capture this capital, DeFi has no choice but to get compliant.
The upshot is that over time DeFi and traditional finance (TradFi) will blur together. People won’t know or care whether the financial products that they are consuming are, under the hood, decentralized or regular finance.
But there’ll always be a small wild edge, true DeFi, which avoids regulations and does what it wants. That’s where the outsiders, hobbyists, activists and criminals will all congregate.
2. El Salvador won’t be known as a watershed moment. It’ll be known as a reality check.
For many bitcoin fans, El Salvdor’s adoption of bitcoin in 2020 was a watershed moment. First El Salvador, then the rest of Central America, next South America and then the United States. By 2030, the entire world will have been “hyperbitcoinized.”
In the future, El Salvador’s bitcoin moment will be seen as a reality check.
Regular people don’t like to use volatile things like bitcoin to make payments. Folks who already own bitcoin prefer to keep holding it in hopes that it makes them rich. Folks who don’t own bitcoin probably don’t want to accept it as payment because they see it as dangerous.
In short, bitcoins stall out as generally accepted payments media.
Which means that all of the resources El Salvador has spent building a bitcoin-based payments infrastructure will have been wasted. Other countries on the verge of adopting bitcoin are watching El Salvador’s monetary experiment. When they see that it isn’t working out, they will put their own plans on ice.
That being said, it will remain stylish for nations to “adopt” bitcoin. But only ceremoniously, as a marketing trick. All-out bitcoinization attempts like El Salvador’s won’t spread.
3. Cash will fade away. So will CBDCs.
In the Bitcoin Age, central bankers have gotten jealous. “We can do cool money stuff, too!” And so they’ve trotted out the idea of central bank digital currency, or CBDC.
A few major Western central banks will try CBDC, but they’ll find citizens don’t have an appetite for a KYC’ed electronic version of the dollar or euro – their existing bank or fintech fill most of their needs, thank you very much. Seeing how tepid the demand is for CBDC, other central banks watching from the sidelines will retire their CBDC aspirations.
With their dreams of CBDC dashed, central banks’ lone connection to regular people will be old-fashioned banknotes. But usage of physical banknotes in commerce will continue to decline, too, with ATMs getting as rare as phone booths. By the late 2020s, what was once a standard service offered by all bank branches – cashing out a bank balance into paper money – will be a fairly exotic transaction. If millennials don’t know how to write a check in 2011, Generation X won’t know how to use cash in 2031.
Central banks fear this moment. They’ve always liked being at the front and center of the payments system.
But they have nothing to worry about. We rarely think about the sewer system. We don’t interact directly with water mains or care how treatment plants work. But ultimately our entire lives depend on these unsexy bits of infrastructure.
The same will happen with central banks. With cash and CBDC dead, we’ll never directly interact with central banks. But unbeknownst to us, every single financial tool relies on core central bank settlement. And that’s fine.
4. If governments don’t force KYC across the entire internet, MasterCard and Visa will.
In the future, most bits of online content will be vetted and linked back to a verified creator. The card networks will be a big driver of this.
Many failed to notice that in October 2021, Mastercard brought in a new rule. It required all sites that host user-generated porn to adopt identity verification rules. They must also vet all content for illegal material. The penalty for noncompliance is to be dropped from the Mastercard network. Since losing card access means commercial death, most sites have fallen into line.
In the future, card networks will migrate their porn rules over to all sites that host user-generated material. YouTube, Rumble, Twitter, Facebook, not to mention countless smaller sites will be required to verify the identities of their users and set up real-time content moderation, or be cut off from the card networks.
Card networks don’t necessarily want to be the internet’s censors. The problem is that processing payments for illegal online goods constitutes money laundering. To avoid a potential conviction, Visa and Mastercard have no choice but to keep their networks clean.
5. Along comes a universal stablecoin standard.
But the card networks’ domination of online commerce will eventually run into a solid competitor.
Over the next few years the stablecoin industry will experience multiple rounds of failure, growth and mergers, eventually leaving just a few big stablecoins.
Because it will be confusing for the public to deal with several different stablecoins, issuers will ally together to build an interoperable stablecoin standard. Each of them will accept the other’s stablecoin at a 1:1 ratio, effectively fusing them into a single universal stablecoin.
This alliance having been formed, stablecoins will leave the closed-loop speculative universe of DeFi and crypto exchanges and enter the real world to attack the card networks.
To break the Visa/Mastercard stranglehold, the stablecoin alliance will have to find ways to encourage consumer adoption. Their first big win will be to negotiate with Amazon to add a “stablecoins accepted here” payments option. Because stablecoins will be cheaper for Amazon to process than cards, the stablecoin alliance will be able to convince Amazon to offer a 1% on all stablecoin purchases.
Will a 1% stablecoin discount be enough to unseat the card networks? Who knows?, But at least it’ll offer some competition.