Are digital currencies  
      the future of money?
      INSIGHTS ON THE INNOVATIONS THAT MATTER                     CATALYSTS
      Digital currencies have moved from the fringes to the mainstream. 
      A decade ago, few outside specialist circles even knew they existed.  
      Now, they are at the heart of the policy plans of the world’s biggest institutions – 
      both public and private.
      As technology and finance grow increasingly intertwined, how will new forms  
      of money shake up the global economy? And what opportunities will they create 
      along the way?                                              Stéphane Déo,  
                                                                  Head of Markets Strategy at 
                                                                  Ostrum Asset Management
      KEY TAKEAWAYS
      •  Bitcoin is well-known as a speculative instrument –  
       but as a currency it’s slow, hard to scale, and is environmentally damaging
      •  The debate around cryptocurrencies has opened a path for new thinking  
       about how technology can deliver new ways of story and sharing value
      •  Central Bank Digital Currencies build on some of the ideas  
       of cryptocurrencies but retain a central authority to maintain trust in the system
      • CBDCs could potentially radically shake up monetary systems around the world
      •  Private currencies like Facebook’s Libra project have yet to take off –  
       but they do point the way to a future where government-issued money  
       is not the only currency in day-to-day use
            When people think of ‘digital                       wider market. They have limited exposure 
            currencies’, they most likely think                 to tail risks, so a token investment could 
            first of bitcoin, and then other                    pay off in the long term. 
            cryptoassets. What position do                      There is also the ‘brand’ that bitcoin has 
            they now hold in the investment                     become. The original white paper was 
                                                                                    6
            landscape?                                          published in 2008 , and since then it 
            First of all, I want to stress that bitcoin         has gone from the fringe of the fringe to 
            is an environmental disaster. ESG                   something non-specialists have heard of. 
            considerations are increasingly central             It has driven the conversation forward, 
            to our industry, so any discussion of               demonstrated the potential – and 
            cryptoassets must start with the fact that          limitations – of the blockchain technology 
            bitcoin alone now has a greater carbon              that underpins it, and made the mass 
            footprint than the Netherlands1. Even a             delivery of cryptographically-secured 
            single transaction has a carbon footprint           digital assets something not only feasible, 
            roughly equivalent to a flight from Paris to        but likely.
            Moscow.                                             However, for the average retail trader, you 
            Added to that is the problem of scaling –           overall would have more fun in a casino.
            there are around 300,000 transactions a 
            day with bitcoin2. That sounds a lot, but the       Cryptoassets are just one of a wide 
            Visa network handles around 150 million             range of digital stores of value in 
                                 3                              existence. Where do you think the 
            transactions a day , and the infrastructure 
            around bitcoin and other crypto assets is           next stage of development lies?                        Bitcoin has demonstrated both 
            both slow and aging rapidly.                        Digital or electronic money is nothing new,            the potential and limitations of the 
            There’s also the problem of volatility.             of course – the overwhelming majority of               technology that underpins it, and 
            This makes cryptoassets excellent for               bank deposits and other assets have been               made the mass delivery of digital 
            speculation, but flawed as stores of value          stored and exchanged electronically for                assets something not only feasible, 
            and units of exchange – which are, after            decades.                                               but likely.
            all, the key purposes of money. If you want         The rise of e-money in recent years is also 
            to retain your wealth, or plan a significant        important in this story, allowing challenger 
            transaction, you don’t want to do it with an        banks and platforms like Paypal to offer 
            asset that can rapidly double or halve in           retail clients the kind of easy transfer of 
            value.                                              virtual funds previously available only on 
            Finally on the debit side, there is the             the wholesale market.
            issue of the uncertain regulatory and tax           This feeds into the narrative of the turn to 
            treatment across different jurisdictions,           a cashless society in the developed world, 
            which we as institutional investors must of         but even in mature banking markets this 
            course be very wary of.                             can be overstated. Some Scandinavian 
            This all sounds negative, but the facts             countries are well on their way, but                   1 https://cbeci.org/  
            remain that the total market capitalisation         within the eurozone – even allowing                      https://www.cnbc.com/2021/02/05/bitcoin-btc-
            of all cryptoassets in February 2021 was            for the very different banking sectors                   surge-renews-worries-about-its-massive-carbon-
                                                                                                                         footprint.html
            well over a trillion dollars4. This would           within the currency bloc – more than 
            make up which over 10% of the world’s               90% of transactions of less than €5 were               2 https://www.statista.com/statistics/730806/daily-
                                                                                                                         number-of-bitcoin-transactions/
                                 5                                                             7
            existing gold stock , so it’s not negligible        conducted by cash in 2017 . Even with                  3 https://www.visa.co.uk/dam/VCOM/download/
            in value. Also, 300,000 transactions a day          younger consumers significantly favouring                corporate/media/visanet-technology/VisaNet-
            is tiny on a global scale - but it’s also far       digital payments over cash, it will still take           Network-Processing-Overview.pdf
            from zero.                                          some time for the transition to occur.                 4 https://coinmarketcap.com/
            There is a positive case to be made about           However, the iterations of e-money used                5 https://www.sunshineprofits.com/gold-silver/
            them as non-correlated assets, as they              in these consumer transactions were in                   dictionary/size-the-gold-market/
            tend to be subject to different forces to the       effect representations of value on a ledger,           6 https://www.bitcoin.com/bitcoin.pdf
                                                                                                                       7 https://www.ecb.europa.eu/pub/pdf/scpops/ecb.
                                                                                                                         op201.en.pdfhttps://www.bis.org/publ/bppdf/
                                                                                                                         bispap114.pdf 
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           backed by bank reserves and ultimately a            Finally, there is the ‘tone-setting’ implicit in 
           central bank. In other words, they are little       their introduction by central banks – there 
           different to traditional bank deposits.             are hard to predict second-order effects, 
           The new idea of central bank digital                where innovation spurs further innovation in 
           currencies (CBDCs) – which have been                a virtuous cycle.
           largely spurred by developments around              What would they mean for banking?
           cryptoassets and blockchain – have the              There are degrees of radicalism to the 
           potential to catalyse radical innovation in         various proposals. Theoretically, the 
           the banking sector, and by extension the            implications for retail banking could be 
           wider economy.                                      enormous.
           What benefits could CBDCs deliver?                  If you deposit a euro in your bank account, 
           For the average consumer, CBDCs won’t               that’s a de facto liability for your bank. You 
           appear any different to the e-money they’ve         have lent your euro to the bank, who can 
           used to shop online for years.                      then use it on their balance sheet as they 
                                                               determine the extent they can reuse it as 
           However, they have the potential to                 they make loans, deliver mortgages, invest 
           significantly shake up the financial                it in equities and so on. Your euro is in 
           infrastructure of any jurisdiction where            practice a funding source for the rest of the 
           they are introduced. Transaction costs              bank’s activities.                                   Digital currencies have the potential 
           and settlement times for payments could             With a CBDC, in theory your wealth is                to significantly shake up the world’s 
           be slashed, resulting in huge efficiency            booked directly with the central bank – in           financial. Transaction costs and 
           savings across whole national – and in              our example, the ECB. This would have                settlement times for payments 
           the European Central Bank’s case and                serious consequences for commercial 
           transational, in the case of the European           banks, as the deposits that fund their other         could be slashed, resulting in huge 
           Central Bank (ECB).                                 activities could dry up or even disappear.           efficiency savings across whole 
           They can save in costs for the production           Any big shift in the balance sheets of major         economies.
           and distribution of physical cash, encourage        banks would have major disruptive impacts 
           competition between payments providers,             throughout the real economy. 
           and break down separations between                  Obviously, this is an extreme picture, and 
           walled-off payments environments and the            any disruption on this order will surely 
           wider payments system – for example, the            attract the intention of regulators and 
           proprietary ecosystems presided over by             lobbying efforts from the banks, but it 
           several Chinese online retail platforms.            should give a picture of how big any 
           At the macro policy level, CBDCs excite             changes could potentially be. The transition 
           central bankers as they offer the chance            will have to be handled very delicately.
           for the far more direct transmission of 
           monetary policy than is currently possible.         What stage of development are they at?
           They could offer infinitely greater visibility      A recent BIS survey of more than 60 central 
           on a whole economy than is now possible,            banks showed that more than 80% of them 
           which could make for very detailed and              had a digital money plan, or at the very least 
           responsive control of the money supply.                                       8
           Central banks could offer emergency                 a task force on the topic . 
           liquidity support far faster than is now            The most significant at present is the digital 
           possible, which could help prevent chain            yuan in China. A recent survey by the BIS 
           reactions in any future financial crisis.           on over 80 central banks showed that more 
           However, the processing of the huge                 than 60% of them had a digital money plan 
           quantities of data they would gather raises         or at least a task force on the topic. 
           questions around privacy.                           In Europe, there has been a steady drip 
                                                               of research from the ECB and other 
                                                                                                                    8 https://www.bis.org/publ/bppdf/bispap114.pdf
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            institutions, with momentum growing in                Let’s turn to Libra, Facebook’s 
            the last year. The ECB concluded a public             attempt at a digital currency that has 
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            consultation in January 2021  and are                 recently been rebranded as ‘Diem’. 
            expected to make a formal announcement                Was it ahead of its time – does the 
            in the Spring. A lot of the implications of           future of digital currencies also lie in 
            their choices will be in the fine print, so we’ll     privately-issued money?
            have to wait a while for full visibility on what 
            to expect.                                            Libra faced many issues with regulators, 
            In China, the People’s Bank of China is               based in large part on the cultural clash 
            significantly ahead. After five years of              between the engineer mentality of Silicon 
            developments, local tests are expected this           Valley and the – necessarily – more 
            year in Beijing, Shanghai and Guangdong               conservative approach of regulators around 
            Province. The digital yuan is known as                the world. 
            the DCEP – Digital Currency Electronic                In short, the main problems were that 
            Payment – and its two-tier system, where it           if Facebook wanted to keep Libra/Diem 
            is issued by the central bank but distributed         stable in value, it would have had to be 
            and retained in custody by commercial                 backed by what would be de facto one of 
            banks, is perhaps an instructive model                the biggest sovereign wealth funds in the 
            for how banking systems elsewhere can                 world, which they would likely to have at 
            manage the transition. This would be more             some point attempted to derive value from 
            akin to traditional deposits, hence for the           – creating incentives for actions that would 
            consumer their bank would in practice                 influence the currency. Also, Libra would 
            remain their funding source.                          have in effect turned the company into one 
                                                                  of the world’s largest shadow banks, which 
            If we think about where the                           greatly concerned authorities.
            complementary opportunities may                       That said, I’m surprised there have not been 
            lie – where do cybersecurity, KYC                     more Libra-like projects. There have been 
            and AML sit in this picture?                          suggestions Amazon may try something                    Digital currencies are foundational 
            If there is to be reorganisation in the               similar specifically in emerging markets,               technologies that can spur and 
            banking system in the long term, it seems             but most of the projects that have come                 facilitate innovation throughout 
            logical that the banks themselves will shift          to fruition have been very small-scale in 
            into something more along the lines of                comparison. For example, some regions                   the wider economy. The currencies 
            IT providers. It won’t be as a substantial            and cities in France have issued a local                themselves are not the end of the 
            a change as that sounds, although it’s                digital currency.                                       story – they are the beginning.
            clear that cybersecurity will be ever more            It’s likely that something like Libra will 
            central as the risk transfers from the                come along again, learning from previous 
            banks themselves to the payment chain.                mistakes and having more success in 
            However, it will likely be the same people and        making it past the regulators.
            institutions challenging these new problems.          One of the key hurdles they will have 
            If we look at KYC, AML, and other anti-fraud          to overcome is trust. The only reason 
            practices, we see a huge opportunity as               someone will accept a ten euro note from 
            the amount of data embedded in every                  me is that they have confidence they can 
            transaction means there is a huge efficiency          pass that note on to someone else. Trust is 
            saving in determining where resources are             absolutely critical, and for cash it is based 
            allocated. Even a small institution raises            on formal and informal structures that have 
            many thousands of suspicious transactions             developed in some cases over centuries. 
            every day: the kind of data that a digital            So, if Apple – for example – launched a 
            currency embeds in every transaction                  digital currency of its own for transactions 
            means that triage can be accelerated                  within its ecosystem, it would still be reliant 
            significantly.                                        on its users’ trust. Any crisis or crash 
                                                                                                                          9 https://www.ecb.europa.eu/press/pr/date/2021/
                                                                                                                            html/ecb.pr210113~ec9929f446.en.html
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