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Competition in digital money - who will win?

The first U.S. dollar, as it is known today, was printed in 1914 upon the creation of the Federal Reserve Bank. Since Bretton Wood conference in 1944 U.S. dollar has been the unchallenged global reserve currency with a dominating role in global trade. Before the hegemony of dollar, during previous centuries, the status of leading currency was much more competitive. At times the pole position was held by Florentine florin, French franc, Dutch quilder and UK pound sterling[1].

 It seems likely that we are entering an era of competition in money again. “We may now be in Blackberry (author adds Nokia) world about to see the introduction of iPhone”[2] – fully transforming what and how we use as money in daily life. Digital money that “promises to make finance work better but also shift power, alter geopolitics and change how capital is allocated”[3].


 Dollar and euro will face competition

 The two main drivers of competition in digital money are geopolitical and technological – and they are intertwined. China is fast becoming the largest economy in the world and is already almost cashless as commerce is done on mobile platforms like Alipay and WeChat pay. China aims to further boost economic growth, whilst increasing state control, as it imminently plans to scale the use of digital yuan. As digital yuan transactions can be monitored and controlled by Chinese government, it could well allow more freedom in its use outside the country. How much boost the digital yuan will give remains to be seen but enough to add urgency on ECB and FED to progress on their competing digital currency projects.

 The bigger shift is happening on the technical front. Relentless digitalization of economies is building pressure for money to change accordingly, become digital. Cash is fast becoming obsolete in advanced countries. Technology for digital money exists and has been proven in markets during the last decade. Cryptocurrency market value has reached $1.7 T with several thousand different coins launched. The benefits of digital money are well understood and starting to become visible in commerce.

 Central Bank Digital Currencies (CBDC’s) have received a lot of attention recently. Majority of central banks, including the FED and ECB, are researching or piloting their digital currencies to complement existing money. Some private sector solutions have been introduced, like Facebook driven Libra consortium, but scaling has been delayed in USA and Europe due to regulatory pushback.


Unbundling the roles of money

 Digital era changes the use and competitive factors of money. “One of the most salient features of digital currency competition: an unbundling the roles of money. When switching costs are low, there is no longer a strong incentive to use one currency as both a store of value, medium of exchange, and unit of account.”[4] These are the three key functions of money to become widely used and accepted. But if they are unbundled, which one is the most important and how will it shape the upcoming competition?

 Unit of account is largely a regulatory decision within countries and likely to be the last one to change from current national (or regional in the case of EUR) fiat currencies. Store of value is a hot topic in the current economic environment and economist debate. On one side, many argue that the freewheeling public spending and printing of money is the “least responsible economic policy in 40 years”[5] as rising and persistent inflation would lead major currencies to lose the store of value credibility and trust.

 The other side of the argument is armed with New Monetary Theory (NMT) positing that central bank can print money and governments can spend freely without problems until economy is operating at full capacity and inflation shoots higher. A third, currently small but growing, group of ardent believers put their faith on Bitcoin and other alternative cryptocurrencies as the new form of digital gold. They see the distributed blockchain and resulting independence from central banks, governments and banking systems as the ultimate safeguard of value, even if the daily price volatility of Bitcoin is extreme.


 Payments are the center of any economic platform

 Of the three roles of money, the most important one determining the future winner will be the use as a medium of exchange. This is where the weaknesses of the current fiat money and its associated banking and payments systems are most obvious today.

 Global data transfer and communication are instant, but money moves slow. It takes hours or days to clear simple payments or account transfers within countries and especially cross-borders. Payments are expensive. Card-schemes like Visa and Mastercard charge merchants around 2,5% for receiving money from consumer’s credit card account, cutting away a considerable slice of their sales margin. Global financial system is expensive. Industry operating expenses amount to over $350 a year for every person on earth.[6] And it is not inclusive, as over 20% of world’s population still lack access to it.

 What will be the most competitive form of money in future payment networks? There are three necessary requirements that a credible challenger must fulfill. First, it needs to have millions of users, achieving critical mass in some large markets. Second, winning money concept needs to be widely accepted by merchants, i.e., have many use-cases and -places. Third, it needs to gain depth in the business ecosystem. By depth I mean usability in both consumer markets as well as in the B2B payments market. Merchants accepting new digital currency from consumers would find it much more useful if part of their proceeds could be used for payments within the depth of their B2B supply-chain.

 Value-chains in modern economy are inherently global, so this emphasizes the need for a global network of real-time money transfers at low to zero cost. This can turbo-charge the network effects of the winner, as companies use a portion of the incoming digital money-tokens further to pay their suppliers. The remaining balance could be kept on account (assuming the digital money is a good store of value) or exchanged into some other currency, like digital dollar or euro, that has a better credentials as a store of value.


 User experience, cost and security drive payment network and transaction growth

 Within these three constituents - consumers, B2C businesses and B2B value-chains – some of the competitive drivers are same but there is an abundance of differences. In consumer markets, the most important driver is convenience, user experience (UX). UX usually determines the winner in consumer digital services and platforms. Apple proved this in mobile phones. Existing large mobile payment ecosystems like Alipay and WeChat Pay in China, Apple Pay and Google Pay globally and a multitude of mobile wallet-based instant payment solutions locally have proven this in payments and banking.

 On the B2C merchant acquiring side, most important features are cost and security. To achieve low payment acceptance cost, the payment network needs to be “integrated”, i.e., have a very limited number of parties involved in the transaction authorization and clearing taking a cut from the merchants’ money. Streamlined digital money transfer also solves many of the existing security problems in payments networks. Both merchants’ and users’ value real-time payments, as is proven by the success of new payment networks. Winning digital currencies have good security and streamlined processes defined in their protocol.


 Identity is the new money

 Payment and identity have always been tightly coupled. Existing payment systems integrate user identity, transaction authorization and payment processing into one service bundle. This bundle will be dis-integrated in future digital payment networks. Payment processing is just data transfer - moving cryptographic tokens from payers wallet/account to payees. Instant, almost free and secure. The value in payment transaction is the “receipt information” – who buys what from whom at what price?

 The value and competition in future payments happens in the identity and authorization part. Payment regulation, like PSD2 in Europe and Anti Money Laundering (AML) and Know-Your-Customer (KYC) requirements globally are major cost drivers and UX impediments in payment user identification. The amount of friction and cost they introduce depends on how the enrolling user’s identity is verified and authenticated and how transactions are authorized.

 Digital currency payment systems will compete on their identity solutions. The digital currency that has the best identity and authentication UX and security in their user wallet / mobile phone app generates more transactions on the network. Authentication UX impact on number of transactions per user is already now highly visible in digital identity and payment systems.

 More transactions generate more and better information, which can be processed and used to expand the network, reduce transaction cost further and improve security. Additionally, more transactions in the digital money network mean better liquidity and tighter spreads in currency market when switching to other currencies for value-storage or other needs. The benefit of “reserve currency” status.

 If identity is the new money, it probably will be exclusive rather than inclusive. Efficient algorithmic risk management would exclude low payment value and high

high-risk persons from getting access to the payment network. Identity theft is about to become an even bigger problem than it already is. “But if money is to be identity-based rather than token-based and fungible, this introduces a whole new set of ethical dilemmas and social questions, which aren’t really being asked at the moment on a wide enough social level.”[7].


 Platform economics will drive winning digital currencies

Digital currencies associated with platforms will be far more differentiated than ordinary currencies are today.[8] “Payments are at the center of any economic platform, and all other activities would organize themselves around the central payment functionality. Consumers’ point of contact would be the entity that owns the platform rather than a bank.”[9] They will effectively combine the functionalities of the traditional money with the platform’s functionalities and data, leading to a re-bundling of money.[10]

 Winning digital currencies can offer superior functionalities at low or no cost to users due to networks effects and their ability to use and monetize the information content of payments. The largest advertising market globally is based on Google search at its core, as this generates “behavioral surplus”[11] insights of consumers that can be sold to advertisers. Digital payment platforms can offer even better insights into to consumers’ and businesses’ economic behavior – the ability to follow and influence the flow of money in real time.

 Consumers will sacrifice most of their privacy for convenient, immediate and free payment services within these walled-garden payment platforms. The platforms are interoperable through currency exchange, but not on the information level. They are fragmented ecosystems, as they have different functionalities, integrations and rules.[12]

 The economic prize available for issuer of winning digital money is so big, that there is bound to be a tough competition between private digital currencies, distributed network (blockchain) cryptocurrencies and CBDC’s. Facebook Libra was just the opening salvo, ahead of its time, in the war for digital money domination.  


 CBDC’s have conflicting goals hindering their chances of success

 In this competition for digital money issuance and management, it is not at all clear which CBDC’s, if any, will be the winners. The big advantage of CBDC’s is that they can combine some of the benefits of digital currency to complement existing fiat-money whilst also having the support of existing financial system and the ability to shape regulation. But big challenges remain that probably tilt the table towards other competitors than central bank issued digital dollar or euro.

 First is timing and first mover advantage. Digital dollar and euro CBDC’s will be long in the making. During this time the use of digital yuan or even digital SEK could spread outside of their home markets into much wider use. And the existing cryptocurrency market is maturing fast. From the weeds of thousands of existing coins, a winner can well emerge.

 Second major challenge for CBDC’s are the conflicting policy goals. The relationship between central banks and banking sector is symbiotic as has been proven in the cost of bailouts. The efficiency of CBDC’s will be compromised by the need to avoid disruption of today’s banking system. So digital dollar and euro will be designed as complements to existing currency on top of established market structures. Current complexity and cost will remain, even grow.

 Third challenge for CBDC’s is the immaturity of national strong digital identity solutions in most countries. Central banks coordinate and shape financial regulation, like PSD2 requirement of strong customer authentication (SCA) in financial transactions with EU citizens. But outside of payments (and Nordics), identity regulation is uncoordinated and national implementation progress is slow.

 Private banking and payments mobile apps / wallets with verified strong identity and biometric authentication are growing fast. When global companies manage their customers’ digital identities they aim for cross-border solutions creating global reach and critical user mass. If/when companies join into an emerging information and payment ecosystem, it will tilt the competitive field towards private digital money offerings.


 Who will win?

 It is too early to say, who will be the winner in future digital currency. CBDC’s complementing existing money will have a role in the future as units of account and possibly as a store of value. But even that is being questioned due to the ultra-loose monetary policy, possible rise in inflation and high debt levels of governments. Some believe Bitcoin is well positioned to become the primary store of value, the digital gold-standard, but that remains to be seen. It takes considerably longer than the current 12 years of history to achieve this position.

 Most likely CBDC’s like digital euro or dollar will not succeed as future currencies for payments networks. They suffer from opposing goals leading to trade-offs, user friction and delays leaving an opening for private sector issued digital money that is more convenient, more efficient in information usage and a cheaper alternative in payment networks.

 The likely winner is an existing or soon-to-be introduced private sector digital money that grows big “below the radar”, adhering to current regulations with strong digital identity solutions, great UX, low to zero cost services based on the information economics and rapidly growing acceptance and depth in B2B payment markets.

 The information benefit and resulting financial return of becoming an owner and issuer of global digital money is big - so big that there will be no lack of aspiring competitors from all backgrounds. With the roles of money decomposing, there will be room for several winners.

 We will most likely have different money for different purposes and competing against each other. This complexity will be hard to manage for the users and companies, though they can benefit from automation and programmability of money. For the payments and financial industry, surely, it will be a complete overhaul.


Janne Jutila

 Espoo, Finland 31.5.2021

 Twitter: @jannejutila



[1] Wikipedia on reserve currency history

[2] Sir Jon Cunliffe, Deputy Governor, Financial stability, BofE, speech at 13. May 2021

[3] The Economist, leader on 8. May 2021

[4] BIS Working papers No 941, May 2021, page 11

[5] Larry Summers on multiple interviews since February 2021

[6] The Economist leader on May 8th, 2021

[7] Financial Times, Izabella Kaminska, May 5:th, 2021 “Why CBDC’s will likely be ID-based”

[8] BIS Working papers No 941, May 2021, page 14

[9] BIS Working papers No 941, May 2021, page 15

[10] BIS Working papers No 941, May 2021, page 12

[11] Shoshana Zuboff, The Age of Surveillance Capitalism, 2019

[12] Modified from Bank Policy Institute publication on CBDC, Greg Baer, 7. April 2021


Digital dollar. Picture from SciTech Connect magazine 2016

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Janne Jutila

Janne Jutila

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Internos Partners

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Espoo, Finland

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