Our conversation, conducted via email and lightly edited, is below.
What the ruble in craters says about the currency
WHAT MATTERS: When we first discussed doing this Q&A, it was to talk about cryptocurrencies and his book "The Future of Money." Meanwhile, Russia has been partially isolated from the world economy by invading Ukraine and its currency has been devalued. How does this episode influence your thoughts about how the world will do business in the future?
PRASAD: The United States and other Western economies have deployed a very powerful set of financial weapons against Russia with remarkable speed. Cutting off access to global financial markets and a country's war chest of foreign exchange reserves in currencies of Western economies is a crippling blow to the Russian economy. This episode shows that while the locus of global economic activity has shifted east to emerging market economies, the US dollar continues to dominate global finance.
Meanwhile, bitcoin and other cryptocurrencies appear to be entering the mainstream. Paradoxically, while bitcoin has failed in its stated purpose as a medium of exchange for transactions, it has become a speculative financial asset.
Cryptocurrencies are unlikely to seriously challenge major fiat currencies like the US dollar. But they are starting a major revolution. New financial technologies, including bitcoin's blockchain technology, could make it easier to create new financial products and services and give everyone, including low-income households, easy access to them.
Digital payments, both within and between countries, are becoming cheaper, easier and faster. This will benefit consumers and businesses, exporters and importers, and even economic migrants who send remittances to their countries of origin.
Is cryptocurrency a way to avoid sanctions?
WHAT MATTERS: One way Russia will try to get around sanctions is in bitcoin and other forms of cryptocurrency. How would that work?
PRASAD: Bitcoin and other cryptocurrencies do not yet provide the scalability to evade economy-wide financial sanctions, especially in light of the need to ultimately convert cryptocurrencies into more widely accepted global currencies for making international payments. In other words, the Russian government cannot count on bitcoin to evade sanctions; after all, payments for international transactions still need to be settled in real money, like dollars or euros. Furthermore, cryptocurrencies cannot significantly prevent a country's currency from losing value relative to major reserve currencies, as those values โโare determined in formal financial markets.
In fact, cryptocurrencies could hurt Russia if the country's citizens see them as a better option than the sinking national currency. Therefore, bitcoin could end up precipitating a flight of deposits from Russia's banking system and even as a conduit for capital flight out of the country.
On a more positive note, the Ukrainian government appears to have been able to obtain foreign donations in cryptocurrencies, bypassing the slower conventional channels.
How should cryptocurrency be regulated?
WHAT MATTERS: Are there other reasons, besides patrolling bad guys like Russia, to regulate cryptocurrencies? How should governments act now to regulate these new forms of currency?
PRASAD: Cryptocurrencies are rapidly entering the mainstream. Governments are rightly concerned that cryptocurrencies could be used for illegal trading and tax evasion, as well as fueling speculation that could hurt investors and infect the rest of the financial system.
Cryptocurrencies also have positive aspects. The blockchain technology underlying bitcoin is enabling the creation of new products and services that could one day revolutionize the way we make payments, bank and other transactions. The technology could make business transactions more efficient by cutting out inefficient middlemen, not just banks but even lawyers and settlement agents. Variants of the technology could also make low-cost real-time digital payments, both within and between countries, easily accessible even to low-income people. This will benefit consumers, businesses, investors, and even economic migrants sending remittances back to their home countries.
The US government has an opportunity to take the lead, if it acts quickly, in setting standards for this industry and guiding international cooperation. It is also essential to promote digital and financial literacy that makes investors, who can get carried away by technology, more aware of the risks. The industry itself will need to recognize various kinds of risks rather than ignore them and engage with regulators rather than simply offer to police itself. Indeed, this could help the technology gain legitimacy and allow it to truly disrupt the existing financial system by correcting its many inefficiencies.
Why the Dollar Is Probably Going Nowhere Yet
WHAT MATTERS: The United States has an important reason to keep its focus on the dollar, since much of our social safety net is funded by the sale of US debt. Would that be possible if the dollar were replaced by a more international currency?
PRASAD: International payments are certainly ripe for change. New financial technologies are making it easier to conduct financial transactions directly between emerging market currency pairs without involving an intermediary currency such as the US dollar. Directly exchanging Russian rubles, Indian rupees, or Chinese renminbi with each other without the intermediate step of exchanging those currencies for dollars or dollars will be easier. This means that the dollar's role as a payment currency in international transactions could become less important over time.
But the US dollar is likely to remain the world's dominant reserve currency, the world's main store of value. The United States enjoys a powerful combination of advantages: it is the largest economy, it has the deepest and most liquid financial markets, and it has a strong institutional framework that includes an independent central bank, an open and transparent government, an institutionalized system of brakes and checks and balances, and the rule of law.
China's renminbi is often mentioned as a possible competitor to the dollar. Unless China is willing to remove restrictions on capital flows across its borders and the tight control it maintains over its currency, the renminbi will not become a major reserve currency. More importantly, private investors are unlikely to put their trust in a reserve currency that is not backed by a strong institutional framework.
What is the future of money?
WHAT MATTERS: What is the most important thing in your book that What Matters readers should know about the future of money?
PRASAD: The era of cash (physical currency) is coming to an end. Digital payments have already become the norm in many rich and developing countries, such as China and Sweden, and are rapidly displacing cash in other countries as well.
Meanwhile, national central banks around the world are looking to issue digital versions of their official currencies. China, Japan, and Sweden are already experimenting with central bank digital currencies, and a digital dollar is also likely in the offing. Large corporations like Amazon are also likely to one day start issuing their own stablecoins, digital currencies that are backed by US dollar reserves and can be used for payments within and between countries.
Many of these developments have been catalyzed by bitcoin's blockchain technology, which will help create better digital payment systems, automate a wide range of transactions and help democratize finance. But we must be cautious about giving digital technologies free rein without hindrance. Failure to do so could result in the erosion of confidentiality and perhaps further intrusion by corporations and governments into financial systems and the workings of society.
