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BIS digital currency paper predicts money will be unbundled

Ledger Insights | May 20, 2021

digitalization of money - BIS digital currency paper predicts money will be unbundled

Today the BIS published a working paper entitled “The digitalization of money,” in which the unbundling of money is predicted. Fiat money is expected to have three sets of functions. It should act as a store of value, a medium of exchange, and a unit of account. However, as cryptocurrencies are already showing, some digital currencies or money might provide the store of value function. Others may be used as a medium of exchange for payments—hence the conclusion re unbundling.

And digital money is associated with a platform not a country. Alipay owner Ant is used as an example on multiple occasions.

The three University academics that wrote the paper see a re-bundling happening with different functionality, such as for data gathering or social network sites. It’s no coincidence that the two major digital wallets in China are owned by Ant, which aggressively uses data, and social network WeChat. The authors argue that a payment platform is the best possible way to gather data.

See:  Canadian researchers develop CBDC digital currency proposal for Bank of Canada

A payment platform that collects data about all your economic activity could provide a lender with detailed information about the borrower’s income and all their payments. “Analysis of such rich data would enable the bank to estimate the probability of repayment with great precision, far exceeding the predictive accuracy of the applicant’s credit score,” conclude the authors.

The hypothesis of re-bundling of money assumes that the competitive differentiators for a currency are about data bundles and networking services. Put another way, a digital money’s appeal is based on its algorithms, its privacy policies and the counterparties on the platform. Unsurprisingly, different currencies will attract users with similar characteristics. Some will prefer privacy, while others may be willing to trade that privacy for the outcome of that data, such as better recommendations. Not mentioned in the paper, but there is a parallel with how insurers will offer better rates if they can track your driving habits.

If currencies are associated with platforms, then the role of banks comes into question not just for payments but for other functions because they lose the primary touchpoint. An example provided is Ant’s Yu’e Bao, the world’s largest money-market fund and Ant is also a dominant provider of credit scoring. Ant owns Alipay, the world’s largest payments platform.

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NCFA Jan 2018 resize - BIS digital currency paper predicts money will be unbundled The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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