Money-Replacing Innovations are on the Horizon, Says 'Future of Money'

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Economist Eswar Prasad

Cash will not always be king, according to economists. Eswar Prasad, an economist with CNBC's Make It, says the Covid-19 pandemic accelerated the shift toward digital and contactless payments and led to a wider acceptance of physical cash alternatives, such as cryptocurrency.

Prasad, author of "The Future of Money," writes, “If concerns about the tactile nature of cash receded, most consumers and businesses who switched to digital payments would be unable to return.” Professor Prasad, a professor of trade policy at Cornell University, a fellow at the Brookings Institution, and the former chief of the IMF's China desk says, "The era of cash is ending, and the era of central bank digital currencies is starting." According to Prasad, “Cryptocurrency, stablecoins, central bank digital currencies (CBDCs), and other digital payment systems will decrease the use of physical cash. However, one technology alone will not replace it. Cryptocurrencies by themselves will not replace it. Stablecoins may have more chance, but their reach may be limited," he says. Ideally, a CBDC would be "widely available."

Below are a few details about each.

(CBDCs) Digital Currencies Issued by Central Banks As Prasad points out, several central banks are experimenting with CBDCs, but most are at an early stage. CBDCs are digital versions of banknotes that a central bank backs. Chinese, Japanese, Swedish, and Nigerian CBDC trials are underway, and the Bank of England and European Central Bank are planning their own trials. The Bahamas launched its first CBDC, the sand dollar. Despite the uncertainty, U.S. Federal Reserve chair Jerome Powell has said the central bank is thoroughly studying the possibility of developing a CBDC.

Each CBDC uses a different technology, depending on the country and its central bank. In some cases, CBDCs use distributed ledger technology, which is a type of database that can store multiple copies of financial records, such as transaction histories, across multiple entities. Central banks can manage these entities overall. Since CBDCs are controlled by one entity, a central bank, they

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can't be considered cryptocurrencies, unlike popular decentralized cryptocurrencies such as Bitcoin.

Prasad says there would be several potential upsides if the U.S. Federal Reserve issued a CBDC. As a result, "even the poor and unbanked would have easy access to a digital payment system and basic banking services." Prasad also predicts that it would hinder illegal activities such as drug deals and money laundering.

CBDCs are concerned about privacy issues. "Even with safeguards in place to ensure confidentiality, no central bank would give up auditability and traceability of transactions, which are necessary for limiting digital currency use to legitimate ones," he says.

Stablecoins

As Prasad explains, stablecoins are digital currencies pegged to a reserve asset such as gold or the dollar but not issued by a central bank. "The advantage of stablecoins is that they can be easily transacted across borders at low costs," he says. Regulation of stablecoins could allow for "faster, more efficient, and more inclusive payment options." One such critic has questioned whether Tether, a stablecoin supposedly pegged to the dollar, has enough dollar reserves to support its currency. Additionally, to being the largest stablecoin by market value, stablecoins have caught the attention of U.S. lawmakers as potential threats to financial stability, with many at the center of controversy.

Prasad says that the limited use of stablecoins as a medium of exchange could benefit "the poor and unbanked, and small businesses, such as street vendors," in making transactions. Biden's advisers advised Congress to pass legislation that limits stablecoin issuance to insured banks because the move would enable federal regulators to further control the industry.

Cryptocurrency

According to Prasad, cryptocurrencies will improve payment systems. Cryptocurrencies like Bitcoin don't have central control.

These other cryptocurrencies, unlike stablecoins, are not backed by any reserve asset. Supply and demand determine their value. A peer-to-peer finance system, such as Bitcoin, launched in 2009, intending to provide a cost-effective way to transfer funds. There is a well-thought-out ecosystem behind its blockchain. Due to its limited supply and built-in scarcity, Bitcoins are seen by their holders as a store of value.

“Cryptocurrencies could improve the efficiency of payments by facilitating quick and transparent cross-border financial transactions,” says Prasad. People who need to send money overseas could find that useful in a number of situations. Prasad says most cryptocurrencies are very volatile, which could hamper their long-term success as a medium of exchange. Cryptocurrencies are not likely to be used for everyday transactions due to their instability.

The Downsides of Cashless Payments

In addition to the fact that Prasad is confident cashless payments will be the future, he admits that relying primarily on digital payments may not necessarily lead to perfection. In spite of his view that digital payments can democratize finance, they may also contribute to income and wealth inequality, he says. "The rich may be better able than others to take advantage of new investment opportunities and reap the benefits," Prasad says. "With limited access to digital technology and limited financial literacy, some changes could harm, as well as benefit, economically marginalized segments."

As a result, smaller economies may see their central banks and currencies fade away or become less relevant. "This could concentrate economic and financial power in the hands of the large economies." Cash has a number of other benefits, including confidentiality and privacy in financial transactions.

Therefore, he believes that the future of money should be carefully considered. “Eventually, cash will disappear, and we need an extensive public debate on what will replace it,” Prasad says. "After all, it will affect the economy, finance, and society as well." 

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What is a Bitcoin ETF?

Cryptocurrency exchange-traded funds (ETFs) are pools of Bitcoin-related assets traded on traditional exchanges by brokerages. With these ETFs, retail investors and investors who are uncomfortable investing in cryptocurrencies, can have access to them without actually owning them.

An exchange-traded fund consisting of Bitcoins or assets tied to Bitcoin price is a Bitcoin ETF. Unlike cryptocurrencies, Bitcoin ETFs are traded on traditional exchanges. An exchange sells or trades Bitcoin after the company securitizes it. Although the SEC continues to reject these proposals, there are no cryptocurrency ETFs that directly represent underlying coins.

The underlying assets of Bitcoin ETFs are currently Bitcoin futures contracts traded on the Chicago Mercantile Exchange. Shortly after Bitcoin prices began rising and the cryptocurrency became more popular, the idea for a Bitcoin exchangetraded fund emerged. Bitcoins can also be traded to generate returns. With Bitcoin's price rising above several thousand dollars, retail investors and average investors lost the chance to invest directly in Bitcoin. In response to investor demand, brokers began designing Bitcoin exchange-traded funds. The Winklevoss brothers applied for approval with the Securities and Exchange Commission (SEC) in 2013.

Understanding a Bitcoin ETF

A mutual fund that tracks stocks buys those stocks on its behalf. The company that

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Benefits of a Bitcoin ETF

Investors dont need to own bitcoin directly No hassle associated with keeping crypto secure

ETF investors can short BTC if they think prices will fall Institutions can invest without going through crypto exchanges

purchased these shares offers fractionalized shares on exchanges, which trade nearly 24 hours a day, seven days a week. According to this structure, a Bitcoin ETF would buy and hold Bitcoin. It could then offer fractionalized shares of its holdings on an exchange, which could be traded like a traditional ETF.

SEC approval of Bitcoin ETFs has not been granted to funds that own Bitcoins. Bitcoin ETFs backed by futures contracts traded on the Chicago Mercantile Exchange (CME) have been approved.

A futures contract involves the exchange of a specific quantity of assets, for a specific price, on a particular day. The Bitcoin futures contract consists of exchanging a contract unit of Bitcoin between two parties. In this instance, a contract unit is five Bitcoins.

Funds create shares based on the price of one contract unit and then trade them on exchanges. Bitcoin was first linked to an ETF in October 2021 when the Securities and Exchange Commission approved the Proshares Bitcoin Strategy ETF (BITO).

What Bitcoin ETFs Achieve

A Bitcoin ETF in its current form - and the form desired by many investors - enables more people to make investments in Bitcoin without incurring the expense and hassle of purchasing it. While providing a familiar investment type, they eliminate the need for security procedures and excessive funds.

Security and Bitcoin ETFs

Your wallet doesn't physically contain cryptocurrency, but you do have security keys that you need to protect. You can opt to store your cryptocurrency keys on an exchange if it offers that service, if you purchase your cryptocurrency through that exchange.

It requires no cryptocurrency ownership or storage, nor does it require you to move keys between different types of storage. The fund, on your behalf, is responsible for storing keys. The downside is that your cryptocurrency can be stolen if wallets and exchanges are hacked, and keys are obtained. Several methods exist for keeping your keys offline, but none is 100% safe or guaranteed. The keys can be stored in a "hot wallet" (online) or "cold storage" (offline). Both have their advantages.

Obstacles

The most significant obstacle for the average investor is the price. Soon after the Proshares Bitcoin ETF went public on the NYSE, the cost of Bitcoin (BTC) reached a record high of close to $69,000 per BTC. The price then declined over the next few months, hitting close to $35,000 per BTC. It may not be possible for retail investors to buy a BTC, even at low prices. Budget, risk appetite, and investment goals are considered when investing in an ETF.

ETFs are More Known About than Crypto In addition to their increasing popularity, digital coins and tokens are becoming more complex. It's more beneficial to learn about exchange-traded funds than blockchains, mining, distributed ledgers, key storage, and cryptocurrency to trade digital currencies. Furthermore, investors are more familiar with ETFs than cryptocurrencies.

Bitcoin ETF Investing

Your broker or advisor may offer Bitcoin ETFs if available to you. Several Bitcoin ETFs are traded on exchanges like the New York Stock Exchange, ARCA, and Nasdaq. Bitcoin ETFs track Bitcoin prices either through spot markets, derivatives, or Bitcoin ownership. Before making this investment, a professional should be consulted because it is hazardous.

Which ETF is best for Bitcoins?

Bitcoin ETFs are based on Bitcoin futures contracts, and there are several available. Bitcoin Strategy ETFs from ProShares, Valkyrie, and Van Eck are a few examples. If you wish to invest in a Bitcoin ETF, consult a professional advisor. 