There was a period in the early days of the email when people treated inbox messages like you would messages you get on a fax machine. If you don’t remember this period, then you might not even know what a fax machine is.
No matter. The basic point I’m driving at is that people use to get an email and then print it out to read it. Or they might even print the email and file it in a filing cabinet.
Pre-mobile, the printing of digital artifacts, things like map directions, for example, were also regularly put to paper because how else would you know where you are going once you left your computer?
That’s how it used to be.
And, it’s funny thinking back to that period, that all of the printing of digital communications and search results, and online research felt completely normal. But really, that activity was a time of transition. It was a time of behavior change from the world of analog communications to the world of digital communications.
And, as in the case of the map example, in the early days of the internet there was a disconnect between the vision (like downloadable map directions) and the reality (how do you use them without printing once you leave your internet-hardwired machine?)
We find ourselves in a similar situation with the movement toward digital money. On one hand, there is tremendous innovation happening (like completely decentralized non-custodial digital assets and payment networks). On the other hand, there is still a lot to figure out — we still need the mobile equivalent of tech or the behavioral equivalent of not need to compile paper files of emails — in order to fully realize the vision of open money.
In that spirit, here are a handful of frameworks of how money and financial systems might evolve as all of the pieces come together for true step function change. These frameworks are based on a paper by OliverWyman Forum called Four Visions For the Future of Digital Money.
Frameworks for how money will work in the future
There are any number of ways that the future can unfold money-wise.
What’s for sure is that the way we understand money now is changing. The biggest driver of change is that everything is moving digital.
Our money system, which is essentially built on ledgers or analog networks controlled by governments and banks is still very much based on very old architecture.
Not that there’s anything wrong with old architecture. It’s just that we might not want old architecture handling critical transactions when better, more efficient alternatives exist.
If you’ve ever had to wait 5-6 business days to get an ACH transfer, which is essentially sending money from one bank to another bank, then you know what I’m talking about. It can be equally as frustrating and even costly to send money across borders.
The two main reasons why sending money between institutions or jurisdictions is cumbersome and costly is because the backends are not compatible (meaning the ledgers run by banks and payment companies take time to settle) and because of legal/regulatory reasons.
Here are a few ideas of how the backend of money can/is changing:
One potential outcome is that banks and other financial institutions see the capability and the utility of moving money to a blockchain-based, smart-contract-enforced, programmatic, and interoperable system that runs at the speed and scale of the internet.
But for a lot of reasons ranging from overall security and controllable access, banks aren’t going to move to full non-custodial mode or at least not fully.
Instead, maybe they build private banking networks that try to have the best of both worlds in terms of the network effects of a global distributed ledger while also maintaining control by creating networks that require permission and controlled access.
Digital central bank
Central bank digital currencies (CBDC) are a becoming a very real thing. The basic idea of a CBDC is that instead of a central bank issuing money through a treasury or some other branch of government and then using banks as a distribution model, central banks would be able to issue digital currencies directly to supported wallets and services.
On one hand, this has the potential to increase the overall efficiency of central banking. It could also make money more accessible and monetary policy decisions based on actual money movement data because the system could be easily monitored and analyzed in real time.
The growing concerns about CBDCs is that moving money to a digital system that is controlled by a centralized government agency leads to privacy and security issues and has the potential to be used as a means of command and control.
An app eat app world
Another potential for the future of finance is that apps and services are designed and built to provide the ease and speed of access of digital products, but can also interface with the traditional monetary and banking system on the backend.
Inertia is already taking us in this direction. It makes sense for a lot of reasons, but the biggest is that the reliance on digital intermediaries doesn’t require a complete overhaul of infrastructure or revamping the central banks.
We can probably most intuitively understand this model because we all already have experience navigating payment apps and other kinds of intermediary financial tools.
The biggest issue or drawback to this system is that building a financial system on top of intermediaries that are themselves designed to create solutions to pain points or roadblocks just leads to more complexity, which most often results in increased costs and fees.
Fully decentralized financial networks
Instead of closed loops, intermediaries, or controlled access, fully decentralized money networks are built as public ledgers. The backend is supported by a system of distributed nodes that handle network operations and maintenance.
And on the frontend, users join the network and then are free to interact with one another without a layer in between (but also without amenities like customer support for account insurance).
This system most aligns with the open money approach where layer one networks are built on permissionless distributed ledgers and then other kinds of monetary or financial apps can be built on top, using a system of interoperable wallets, programs, and protocols.
If 2023 taught us anything it’s that financial regulations exist for a reason. One big drawback to the fully decentralized model is that it is a regulatory headache.
Likely as on-chain analytics and reporting become more accessible and useable for regulators and watchdog groups, then some of the regulatory concerns become alleviated, opening a more investment and innovation.
The everything approach
What we are seeing now in terms of new money innovation is the everything bagel approach. Maybe this works and the diversification of different kinds of apps, services, and financial products all find their product market fit.
This would mean that consumers would have options, but it might also create a system of fees and complexity.
If we’ve learned anything from the internet, it’s that networks prefer consolidation over fragmentation.
But then again, maybe that’s just an aging architecture too.