The Future of Money | Eswar S. Prasad

Summary of: The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance
By: Eswar S. Prasad

Introduction

Embark on a fascinating exploration of how the digital revolution is transforming money and finance around the world. This summary of ‘The Future of Money’ by Eswar S. Prasad offers readers an insightful overview of the significant developments, such as the rapid decline of cash, the rise of digital currencies, and the proliferation of fintech services. You’ll learn how countries like Sweden and China are delving into digital currencies and how the rise of Bitcoin sparked a debate over decentralization and the role of banks in monetary policy. Furthermore, you’ll discover the unintended consequences and challenges that new financial technologies present to governments and regulators.

The Future of Money

The way we handle money is changing rapidly. Physical currency may become extinct, and digital currencies like Bitcoin are disrupting traditional finance. Sweden’s central bank predicts the disappearance of physical krona by 2030. China has embraced electronic payments, and Ant Group has originated loans of over $300 billion. While Bitcoin’s volatility has dimmed its initial promise, Facebook, Amazon, and other tech giants are experimenting with their own alternative currencies. Central banks and treasuries are also exploring digital currencies, with The Bahamas launching a government-backed option in 2020. The rise of Bitcoin has accelerated the push towards more efficient payment systems, and the way money is exchanged may look vastly different even within the next decade.

Digital Currencies Reshaping Economies

The rise of digital currencies is rapidly reshaping monetary policy worldwide. Central Bank Digital Currencies (CBDCs) are being embraced by nations like China and Sweden as a way of maintaining control of their economies while providing greater transparency in electronic payment systems. Fiat money, the dominant currency today, is being phased out as it has no inherent value and is prone to inflation. CBDCs also allow for greater government control over tax evasion and crime. All signs point to a digital future, as we say goodbye to physical cash.

Fintech Disrupts Traditional Banking

Kenya’s M-PESA launched in 2007 and revolutionized banking with its payment system that allows Kenyans to pay each other through mobile phones. Due to the country’s poor banking infrastructure, M-PESA became an instant success. In the developed world, fintech companies like Chime, N26, and LendingClub are gaining customers by providing more affordable and accessible financial services. Traditional financial institutions like Robinhood have also felt pressure from fintech challengers. Fintech promises to bring financial services to underserved markets by lowering costs and expanding access, disrupting the traditional banking industry.

The Rise and Evolution of Bitcoin

In the midst of the 2008 global financial crisis, Satoshi Nakamoto introduced the world to the concept of bitcoin as a solution to the inherent problems of conventional currency. Following its launch, Bitcoin quickly emerged as a viable store of value, and by 2021, over 1,700 cryptocurrencies claimed a market capitalization of at least $1 million each. Bitcoins are created through a complex system whereby miners solve cryptographic puzzles, and as more coins are created, the difficulty of the puzzles increases and the reward for solving a puzzle decreases. The total supply of bitcoins is limited to 21 million coins, and while 18.4 million coins have already been mined as of 2020, the remaining coins aren’t expected to be harvested until 2140. As a result, bitcoin’s deflationary features present a challenge for it to be a primary means of exchange. Bitcoin’s story highlights the need for alternatives to the traditional financial system as well as the evolution of currency in general.

Bitcoin’s Credibility and Flaws

Bitcoin’s credibility comes from the blockchain, making transactions transparent and decentralized without the need for government backing. However, its value is highly volatile and difficult to use for transactions due to slow processing times and limited capacity. Despite these flaws, the innovation behind bitcoin’s credibility is noteworthy.

The power of bitcoin lies in the blockchain, a decentralized platform that enables trust between two strangers without a government-backed currency as an intermediary. Transactions are transparent and viewable by anyone, eliminating the risk of fraud. However, Bitcoin’s biggest flaw is its instability. For a medium of exchange to be effective, its value must be predictable and consistent, which is not the case with bitcoin’s erratic value fluctuations.

Additionally, bitcoin’s processing capacity is limited, making transactions slow and difficult to complete. It can only handle about 2,000 transactions at a time, and the system can process just seven transactions per second, leading to congestion on the blockchain. Despite these challenges, the innovation behind bitcoin’s credibility and decentralized platform is worth noting.

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