Our conversation, conducted by email and slightly edited, is below.
What the crater ruble says about money
WHAT MATTERS: When we first discussed this Q&A session, it was to talk about cryptocurrency and your book “The Future of Money”. Meanwhile, Russia has been partially isolated from the world economy for invading Ukraine and its currency has devalued. How does this episode take into account your thoughts on how the world will do business in the future?
PRASAD: The United States and other Western economies have deployed a very powerful set of financial weapons against Russia with remarkable speed. Cutting off access to global financial markets and a country’s war chest of foreign exchange reserves held in the currencies of Western economies is a crippling blow to the Russian economy. This episode shows that while the focus of global economic activity has shifted eastward towards emerging market economies, the US dollar remains dominant in global finance.
Meanwhile, bitcoin and other cryptocurrencies seem to be entering the mainstream. Paradoxically, while bitcoin failed in its stated purpose as a medium of exchange for conducting transactions, it became a speculative financial asset.
Cryptocurrencies are unlikely to seriously challenge major fiat currencies such as the US dollar. But they trigger an important revolution. New financial technologies, including Bitcoin’s blockchain technology, could facilitate the creation of new financial products and services and give everyone, including low-income households, easy access to them.
Digital payments, within and between countries, are becoming cheaper, easier and faster. This will benefit consumers and businesses, exporters and importers, and even economic migrants sending remittances back to their countries of origin.
Is cryptocurrency a way to circumvent sanctions?
WHAT MATTERS: One of the ways Russia will try to circumvent sanctions is through bitcoin and other forms of cryptocurrency. How would that work?
PRASAD: Bitcoin and other cryptocurrencies do not yet offer the scalability needed to evade financial sanctions at an economy-wide level, especially given the need to eventually convert cryptocurrencies to more widely accepted global currencies. to make international payments. In other words, the Russian government cannot rely on bitcoin to evade sanctions – after all, payments for international transactions must always be settled in real money like dollars or euros. Moreover, cryptocurrencies cannot in any way prevent the value of a country’s currency from collapsing against major reserve currencies since these values are determined in formal financial markets.
Cryptocurrencies could actually hurt Russia if they are seen by the country’s citizens as a better option than the fall of the national currency. Thus, bitcoin could end up precipitating a flight of deposits from the Russian banking system and even as a conduit for capital flight out of the country.
On a more positive note, the Ukrainian government appears to have been able to collect foreign donations of cryptocurrencies, bypassing slower conventional channels.
How should cryptocurrency be regulated?
WHAT MATTERS: Are there other reasons besides patrolling bad actors like Russia to regulate cryptocurrency? How should governments act now to regulate these new forms of money?
PRASAD: Cryptocurrencies are rapidly entering the mainstream. Governments rightly fear that cryptocurrencies could be used to conduct illegal trade and evade taxes, in addition to fueling speculation that could harm investors and infect the rest of the financial system.
Cryptocurrencies also have positive aspects. The blockchain technology underlying bitcoin enables the creation of new products and services that could one day revolutionize the way we make payments, banking and other transactions. Technology could make business transactions more efficient by removing inefficient intermediaries, not just banks, but also lawyers and settlement agents. Variants of the technology could also make low-cost real-time digital payments, both within and between countries, easily accessible even to low-income people. This will benefit consumers, businesses, investors and even economic migrants sending remittances back to their countries of origin.
The US government has the opportunity to take the lead, if it acts quickly, by setting standards for this industry and guiding international cooperation. It is also essential to foster the digital and financial literacy that makes investors, who might get carried away by technology, more aware of the risks. The industry itself will need to recognize various types of risks rather than discount them and engage with regulators instead of just offering to self-monitor. In fact, it could help the technology gain legitimacy and allow it to truly disrupt the existing financial system by fixing its many inefficiencies.
Why the dollar is probably not going anywhere yet
WHAT MATTERS: The United States has an important reason to continue to focus on the dollar, as much of our social safety net is funded by the sale of US debt. Could this be possible if the dollar were replaced by a more international currency?
PRASAD: International payments are certainly ripe for change. New financial technologies make it easier to conduct financial transactions directly between emerging market currency pairs without involving an intermediary currency such as the US dollar. Direct exchange of Russian rubles, Indian rupees or Chinese renminbi without the intermediate step of exchanging these currencies into dollars or dollars will become easier. This means that the role of the dollar as a currency of payment in international transactions could become less important over time.
But the US dollar is likely to remain the world’s dominant reserve currency, the world’s primary store of value. The E. and the rule of law.
The Chinese renminbi is often mentioned as a possible competitor to the dollar. Unless China is willing to abandon restrictions on capital flows across its borders and its tight control over its currency, the renminbi will not become a major reserve currency. More importantly, private investors are unlikely to place their trust in a reserve currency that is not backed by a solid institutional framework.
What is the future of silver?
WHAT MATTERS: What is the most important thing in your book that readers of What Matters should know about the future of money?
PRASAD: The era of cash (physical currency) is coming to an end. Digital payments have already become the norm in many developing and wealthy countries like China and Sweden, and they are rapidly replacing cash in other countries as well.
Meanwhile, national central banks around the world are looking to issue digital versions of their official currencies. China, Japan and Sweden are already experimenting with central bank digital currencies and a digital dollar is likely on the horizon as well. It’s also likely that big companies like Amazon will one day start issuing their own stablecoins, digital coins backed by reserves of US dollars that can be used for payments within and between countries.
Many of these developments have been catalyzed by Bitcoin’s blockchain technology, which will help create better digital payment systems, automate a wide range of transactions, and democratize finance. But we must be careful before giving free rein to digital technologies. Otherwise, the result could be the erosion of privacy and perhaps greater intrusion by big business and government into financial systems and the workings of society.