The Digital Revolution of Money has Arrived
“You’ve Got Mail.” Do you remember when electronic mail (email) became mainstream? In the 1990’s email was a novelty. Almost immediately, it became obvious that electronic mail would replace physical “snail mail”, and just as quickly, the idea of a stamp tax was floated in a desperate attempt to save the postal service. However, that strategy never materialized. Over time, other digital first innovators like Amazon (with big assists from digitally enhanced physical operators like DHL, UPS and FedEx) saved the post office…not the Federal Government levying taxes, regulations, and policies.
The list of industries transformed for the better by the forces of digital innovation is long and growing. Travel agencies, taxi services, drug stores, video rental stores...did bureaucratic regimes shield these retailors from digital disruption? Now, opportunity is banging on the vault doors of bank and credit union industries! Today, we’d be wise to remember the lessons of the past, resisting the forces of digital innovation has always been a fools’ errand.
You’ve certainly participated in these increasingly digital trends and can anticipate the future of finance. Like mail, movies, travel, music, and transportation, money is now trading in its old physical form for the efficiencies of a dynamic, digital life. That means cryptocurrency, digital assets, and CBDCs are all but certain to be components of banking and payments. The money industry has now reached a crossroads. Will your institution be disrupted and displaced by the digital revolution of money, or have you defined a strategy to marshal digital money within your community? Do we expect our representatives to try to preserve the past though legislation and regulation? Is it even possible? Or can the metamorphosis of money into a streaming phenomenon, fusing currency with the internet, fuel a renaissance in democratic, inclusive, and fair local economies and community commerce?
The metamorphosis of money is only accelerating, and the nature of financial literacy, and the function of your products & services are morphing, too! Distributed Ledger Technology (DLTs), Cryptocurrency, Digital Assets, Virtual Currency, Stable Coins, Central Bank Digital Currency (CBDC), and Decentralized Finance (DeFi) are changing the way consumers ‘do banking’. National and international forces—including governments—are trying to redefine the future of finance, but at what cost to our local banking infrastructure? Central banks are aggressively investing in these digital frontiers to reshape the nature of commerce, value storage, and wealth generation, developing CBDCs (Central Bank Digital Currencies) as a means of transcending the limitations, expenses, and systemic vulnerabilities of the electronic dollar (ACH/NACHA/SWIFT).
Illustrating these developments, at the start of this year, the Fed released a CBDC feedback form to incorporate in their research and analysis paper, Money and Payments: The U.S. Dollar in the Age of Digital Transformation, and published an executive order “ensuring responsible innovation of digital assets and distributed ledger technology”. Since then, the NCUA released a letter to credit union’s sanctioning their use of DLT’s, US Senators proposed a Cryptocurrency Bill, and CUNA released a letter citing potential concerns and impacts intermediaries and direct-to-fed wallets (“retail CBDCs") would have on the credit union industry.
“One of the most pressing concerns with a retail CBDC would be in its design as a direct liability of the Federal Reserve, unlike commercial bank deposits which are liabilities of the financial institution. This would transform the role of the financial institution to one of custodian or wallet holder. In a retail CBDC model, the ability of consumers to transfer balances from commercial bank deposits to central bank currency could have a catastrophic impact on the ability of financial institutions to continue their operations. As the deposits are no longer on institutions’ balance sheets, it is presumed that they will be unable to utilize these funds to support the lending and investment operations of the institution, thus reducing the credit supply, increasing the cost of credit, and causing a slow-down of the economy. This would be even more pronounced during times of economic uncertainty when central bank currency would be seen as the safest form of money because it serves as “the foundation of the financial system and the overall economy” and thus would become a risk-free store of value akin to cash stored under the mattress.”
As these agencies continue to refine their positions and concerns, how are local FIs and credit unions helping direct the transformation of the financial system? Are you waiting for the government to dictate the path forward or are you proactively positioning your institution to locally secure and steward your members digital assets? As the institution your community already trusts to preserve and protect their assets and access to finance, you have a unique advantage in this digital revolution.
Private Cryptos. Your members are already leading the way. Peek at your transaction history. How much of your deposit dollars are leaving to names like Binance, Kraken, Coinbase? Cash is cascading out of your local FI, and the dollar universe, to become part of the world of money living on the internet – like mail did in the 1990s. Your members are swapping their electronic USD to participate in these digital markets; buying, holding, selling, and making payments with currencies like Bitcoin, Ethereum, USDC, Litecoin, Ripple, etc. So naturally, these coins are the countermeasures for local FIs to balance risk in the face of the Fed potentially displacing community institutions from the 'dollar' business via a CBDC Digital Dollar. We're living at a tipping point where money is no longer the exclusive domain of governments, and community FI’s can now engage their clients digitally, stewarding their assets and protecting their access to effective financial tools. Simply stated, as money becomes digital, distributed, decentralized, and democratically controlled, local FIs should be prepared to use their trusted position in the community to create valuable, relevant consumer experiences.
As money morphs into data on the internet, will your institution remain stuck in the dollar business; or, will you move your strategy, operations, and digital delivery into the era of online money?
We understand that the digital revolution of money can feel daunting, but if you’ve been following along, you know DaLand has the formula designed specifically for this moment. The formula to insulate your organization from the risks of global and local economic instability inherent in the struggling, centralized forms of money. The formula designed to lead our partners in this digital journey, generating relevant experiences that will preserve local financial services, foster financial literacy, and advance local economies, digitally. The formula we call… The Relevance Equation.
Tune in next week to uncover more about the unique advantage your local FI holds in this digital revolution of money and tools to help you solve this formula for relevance.