What is the future of money? The two giant forces of change in the twenty-first century, globalization and technological advances, have created a perfect storm for currency. In the coming years currency will take a variety of forms, not just the cash we are all so familiar with.
From cryptocurrency to payment apps, the new types of virtual money will be almost instantaneous to use, making cash look sluggish and clumsy in comparison. It is essential to understand these new payment methods so that you don’t fall behind.
According to Bhaskar Chakravorti, the Senior Associate Dean of International Business and Finance at Tufts University, the future of money is trending towards a “less cash” system. You may have noticed this happening already. Have you ever offered to pay a babysitter with Venmo or another app? These days, cash alternatives are standard.
This trend cannot be easily denied because the pattern is clear. In 2012, 40% of transactions in the US were made with cash, while in 2015 the amount went down to just 32%. A recent survey by the Federal Reserve found that from 2015 to 2016 the trend continued and card payments increased by an annual rate of 7.4%.
Why are we trending away from using cash? For one thing, paying with cash is time-consuming. You must go to the bank, take out paper bills, transport them to your vendor of choice (all the while keeping them safe and not losing them), wait in line and pay with the cash.
The vendor on the other end of the cash transaction must count the bills, deposit them into a register, count them again at the end of the shift, keep them locked up overnight, and then eventually deposit them into a bank. They will pay banking fees to cover the bank’s expenses of again counting, registering, transporting, and keeping the paper bills safe and sound.
All of this takes time. Experts have likened ATMs to “Blockbusters” insinuating that the act of going to an ATM to take out paper bills is the same as going to a video store to rent a movie. Why not stream the movie instantly instead? People opt for the faster, simpler, “cleaner” (as one Netherlands shop owner puts it) method of processing payments instead, just like we opt for digitized movies.
If cash is phasing out, and the societies of the future are expected to use less and less of it as time goes on, what will replace it? There are several forms that currency will take — some that are used widely today, some used by niche communities, some not yet discovered.
Electronic Payment Options are Standard
Thinking about what currency will look like in the the coming decades takes some imagination, but not all forms of payment will be “futuristic.” Some you have used before, and seem so natural that you might even think of them as extensions of cash. Examples of this are debit cards, credit cards, and payment apps.
Debit cards are extensions of cash — merely one step removed from the cash you hold in the bank. A debit card is sometimes called a bank card because it is issued by a bank and can be used by the holder to get cash out of an ATM.
The card represents cash that you have in the bank at any given moment in that if you wanted to, in theory, you could take all of your savings out of the bank in the form of cash.
If debit cards are once removed from cash, than credit cards could be thought of as twice removed. This is because unlike with a debit card, where the card represents or stands in for cash that you have in the bank, a credit card stands for cash that someone else controls. They can lend it to you, and you can spend it.
Electronic payment systems are also extensions of cash. Think about a service like PayPal. It is an electronic payment option that allows any PayPal user to send dollars to another PayPal user’s account. The dollars started as “cash” or value held in a centralized bank, and it can end up as a value in a centralized bank.
Each PayPal account is connected to a bank account. If you wish to send 200 dollars to your sister, when you send the payment it is extracted from your bank account and put into your sister’s bank account. She can then elect to transfer it to her bank, and take it out of the bank as cash.
Within electronic payment systems, users also have the option of sending dollars to someone else, directly from the app. With the example of sending cash to your sister, above, your sister may opt not to transfer the 200 dollars to her bank account. Instead, she might use it to pay her massage therapist. In this case, the dollars leave her account and goes to someone else without ever turning into cash.
You can see that there are more steps involved, but primarily PayPal or other electronic payment options give people ways of moving cash from one place to another without ever touching the actual bills. All transactions are still connected to centralized banks, and government authority regulated currency.
Niche Communities and Cryptocurrency
Whether it’s pulling out your credit card at the grocery store or shooting a friend a donation through PayPal, you’ve likely performed electronic payments often, even if you didn’t give it much thought. Cryptocurrency, on the other hand, is more of a niche phenomenon.
Though it is becoming more and more a part of our cultural lexicon, it is used by a much smaller percentage of the general population — most notably young people. While only 5% of people 55 and older reported interest in investing in Bitcoin, one of the most well-known cryptocurrencies. In contrast, 40% of the 24 to 35-year-old demographic showed interest in investing.
Not everyone is on board with cryptocurrencies, but as the younger population grows older and more and more people are raised with the technology, it is clear that cryptocurrency is the future. Already there are 800 Bitcoin ATMs in the US alone, and MIT might become the first college campus to be ruled by cryptocurrency.
Here’s everything you need to know about this tech phenomenon, and how it applies to the future of money.
What is Cryptocurrency?
Currency at its most basic form is a medium of exchange. It is similar to bartering, except instead of making a direct trade, you can hold a symbol of that transaction so that you can transfer it to another commodity.
For example, in the old days, you could have traded a chicken a fur coat. In this case, currency comes in to make things more convenient. If there wasn’t a fur trader that wanted a chicken, you could instead sell the chicken for a few coins, and then use the coins to buy the coat.
The “coins” in this example must be an agreed-upon symbol of value. Since any group of people can deem any symbol as having value, it makes sense that virtual currency was a viable option. If a community could decide that a virtual symbol had value, it could be used for exchanging goods and services and traded back and forth just like gold coins were.
There are a variety of forms of digital currency and virtual currency, but many of them have problems of security. The idea is simple enough — a group can decide that a digital symbol holds value and then exchange only that symbol. The problem lies in how to regulate the exchanges. What is to stop one person from spending the same symbol twice — or many times?
This problem remained unsolved until 2009 when an anonymous entity known as ‘Satoshi Nakamoto’ shared the idea and software that enables Bitcoin. Through a specialized form of security called blockchain technology, Nakamoto found a way for everyone within a community to have access to a record of transactions.
Because of the public record, no one could spend the same symbol twice. The use of blockchain tech created a peer-to-peer currency system. This means that no central authority regulates its use.
Technological Advances and Our Monetary System
In the future, we will use electronic payment options and may eventually transfer into a society in which cryptocurrencies are common. Also, as technology evolves, we will likely see new and as-of-yet not invented forms of currency. There may be currencies localized to specific virtual reality environments, just like some physical places have localized virtual currencies.
Motivation for Faster Payments: Time Value
Currency is linked to time inextricably. This is called the time value of money or TVM. When you think about it, it makes sense that a dollar is worth more today than it is in five years, right? This is because if you have the dollar today you can invest it and it will earn interest.
Because of the TVM, the faster you can have your payment in hand, the more it is worth. This principle is behind the concept of digital currencies and electronic payment systems because each of us wants to be paid as quickly as possible.
You can see the numbers for yourself if you use a “Future Value Calculator”, a tool which helps you know what an asset is worth at an upcoming date.
Our society is moving away from cash and towards cash-free payment options. Forms of payment like mobile apps, plastic cards, and digital pay are replacing paper bills. Cryptocurrency is gaining popularity and the TMV principle encourages the use of instant payment methods rather than cash.