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BIS digital currency paper predicts money will be unbundled

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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.

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.

With dominant platforms, a national currency might become secondary, raising the risk of “digital dollarisation”.

Digital money changes the dynamic between private and public money, with cash potentially disappearing as has significantly happened in Chinese cities. Hence the drive for governments to issue central bank digital currencies (CBDC) to maintain independence.