Monday, September 13, 2021

Cryptocurrencies and Future of Money

Based on the needs of the economy and the society, money has evolved over centuries. If we look at the history of money, we observe that the changes have taken place because the former forms were inflexible for the demographics. Regardless of the type of money, whether it is commodity money (e.g. gold) or intangible IOU (e.g. banknotes), three criteria were always fulfilled: (1) store of value, (2) medium of exchange and (3) unit of account [1].

It is estimated that the cumulative market cap of cryptocurrencies went up from 0.21 million USD to 1.78 trillion USD between July-2010 and May-2021 [2]. This huge growth can be attributed to people’s positive opinion about cryptocurrencies being the next big financial innovation that would disrupt the financial system and the current form of money. To me it is a highly speculative idea. The fact that bitcoin and other similar cryptocurrencies are attractive to many young first-time investors, who believe that they can sell it for a higher price at a later point in time, demonstrates a sign of bubble.

Estimate of overall cryptocurrency market cap per week from July-2010 to June-2021 in million U.S. dollars [2]

Cryptocurrency does not belong to any of the two standard types of money. It is neither a commodity money nor an intangible IOU. Cryptocurrency creators set up a novel category: “intangible commodity”. Although crypto technology is innovative even ingenious, it has several fundamental macroeconomic flaws.

Firstly, cryptocurrencies in their current form, use and technology do not fulfill any of the three purposes of money that we discussed above. Mainly due to their high price volatility [3], they have not experienced wider acceptance for payments and transactions nor store of value. A seller who prices her goods in any highly volatile currency such as bitcoin must continuously re-adjust the prices and the buyers will have little confidence in making the transaction as there is too much uncertainty about the movement in value.

Number of cryptocurrencies worldwide from 2013 to July-2021 [4]

The second problem is that there are numerous competing crypto currencies and it is relatively easy to create new cryptocurrencies. As of July-2021 there are nearly 6’000 cryptocurrencies available; an extreme increase from just 66 in 2013 [4]. This competitive environment with low entry barriers will determine the cryptocurrency prices in the future. As the better upcoming cryptos will displace the existing ones in the future, there is too much ambiguity around the sustainability of the competing cryptocurrencies.

The third and probably the most important complication with the cryptocurrencies is the regulatory issues. Even if the most modern and smart cryptocurrencies could partially solve the volatility issues such as some stable coins, like the dollar-pegged USD Coin [5] , I suspect that the governments will try to stop and outlaw these unregulated and decentralized assets. Governments are keen on being the ultimate controller of the money supply because it gives them control over their monetary policies and inflation through “Quantity Theory of Money”. Also by printing money, governments enjoy collecting the hugely profitable seigniorage and cryptocurrencies are threatening the seigniorage as they are competing with the central banks on money printing.

Presumably this speculative hype of cryptocurrencies will continue to grown in the near future and their market cap will grow even more. The risk for cryptos and for the crypto-holders is the more successful they get the more likely the governments will try to block this asset class. For these central reasons discussed above, I can hardly imagine any unregulated cryptocurrency will be the future of money.

Number of non-cash transactions worldwide from 2014 to 2018; with forecasts from 2019 to 2023, by regions (in billions) [7]

Although I am clearly skeptical about cryptocurrencies’ future as the next form of currency, it does not mean that there will be no changes in the future. People’s believes about crypto supported by several similar technological trends such as digital payment systems like Apple Pay [6], increasingly cashless economies [7] , growing trust in online shopping, frictionless retail experience (e.g. Amazon Go) imply that the future belongs to some sort of digital, cashless innovation.

Number of Apple Pay users worldwide [6]

As previously discussed, I hold the view that any innovation should still be controlled by the centralized authorities. Even though the technology and network effect is important for the exponential growth and acceptability of the next form of money, I would eliminate all potential scenarios that rely on private big tech companies like Facebook, Google or Alibaba. In the end, why should Switzerland or Turkey trust these foreign companies?

On the other hand, despite the fact that governments and central banks love the seigniorage feature of cash, at the same time they dislike that cash can not be easily traced and it can be exploited for money laundering, tax evasion and other illegal activities. That being said, for policymakers the best scenarios would be a non-cash, digital, traceable and centrally controlled form of currency.

Government coins (GovCoins) or central bank digital currencies (CBDC) seem like next reasonable step. China has already rolled out e-yuan as a pilot [8], alongside Sweden with its e-krona while Saudi Arabia and UAE are in the process of conducting cross-border trials [9]. On paper this idea looks promising but is difficult to execute and might have unexpected negative consequences.

Firstly not all governments have the capability and resources of handling such a complex and tremendously important project without the help of private experts considering all the data security, interpretability, financial integrity aspects. In case these developing economies ask for private support such as national FinTech or social network firms, then among the population there will rightly be some question marks regarding conflict of interest and the security features of the project.

Moreover even if some tech-savvy governments can manage to implement the new money platform without any private support, privacy will always be a concern while the government can manage and track all the transaction records. This informational footprint may allow governments to optimize their tax policy and discover illegal transactions, but still concerns about how policymakers are using our data will exist; at least in the beginning. I anticipate governments can also challenge these public concerns by showing data-driven tech companies as an example, which already obtain, store and use customer data. They might even quote Google’s ex-CEO Eric Schmidt who famously said “if you have something you don’t want anyone to know, maybe you shouldn’t be doing it in the first place” [10].

Any transition of money will bring along further fragmentation of the population. There will be evangelists embracing the new form but also some groups e.g. elderly, skeptics, unbanked population that will be burdensome to transform. Still, I can imagine this type of digital transformation is a great opportunity to leapfrog into new models. A good example is Kenya where 90% of the over-14 population use M-Pesa, a mobile phone-based money transfer service [5].

Another challenge with this government money digitalization is the cyber risk. Any system can be theoretically hacked and cyber defense is much more harder than cyber offense. There will be increasing number of cyber attacks and of course some cyber defense success stories. In any scenarios both the defenders and the attackers will be incentivized to improve their cyber skills which is positive for humanity’s advancement. As a positive side effect, some new and more advanced technologies can be realized out of this cyberwarfare.

The centrally controlled digital currencies would carry a significant risk of disintermediating the whole banking sector, which could lose deposits to governments or central banks. Instead of using a retail bank, one would be interacting directly with a central bank through an app-like interface [8]. It is hard to imagine a crucial sector like banking will disappear and millions of finance employees will be obsolete; however it is a possibility. We already observe that the role that banks play in the financial system is stagnating. Since 1950s the share of bank loans as percentage of GDP has been stable, whereas the non-bank loans and securities have risen significantly (see Figure 5 in Appendix). The current finance employees can use their skills and expertise in other areas like cyber-security, tech development or governments’ financial departments.

Everything evolves over time. Money will definitely take its share in the future as well. As discussed above, I see CBDCs as a potential candidate and there will obviously be lots of challenges along the way; like in any transformation. Personally, I am positive and looking forward to the upcoming revolution as any technological progress will bring productivity increase, rise in life quality and therefore help increasing the economic growth.


[1] A. Scott, Understanding International Macroeconomy, London Business School EMBADJ2022, 2021.

[2] Best, Raynor de, "Estimate of overall cryptocurrency market cap per week from July 2010 to June 2021," Statista, June 2021. [Online]. Available: [Accessed 21 July 2021].

[3] Charles Bovaird, "Bitcoin Price Volatility Reached Its Heighest In A Year During May," Forbes, 2 June 2021. [Online]. Available: [Accessed 21 July 2021].

[4] Raynor de Best, "Number of cryptocurrencies worldwide from 2013 to July 2021," 22 July 2021. [Online]. Available: [Accessed 23 July 2021].

[5] T. M.-G. Tobias Adrian, "The rise of digital currency," VoxEU, 9 September 2019. [Online]. Available: [Accessed 22 July 2021].

[6] Gene Munster, David Stokman, "Apple Pay Availability Growing 20% Plus," LoupFunds, 5 November 2020. [Online]. Available: [Accessed 23 July 2021].

[7] Rafael Roncancio, "World Payments Report 2020," Capgemini.

[8] "The digital currencies that matter," The Economist, 8 May 2021.

[9] Giorgi Mikhelidze, "Saudi Arabia and the UAE agree to introduce CBDC: Results of cross-border digital currency trial," CryptoDaily, 2 December 2020. [Online]. Available: [Accessed 21 July 2021].

[10] "Google CEO Eric Schmidt on privacy," CNBC,, 2009.