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Design Principles For Money In The 21st Century



Money is a wonderful invention, but in its current form outdated.


Money is the blood system of economies, yet its nature has not evolved through numerous industrial revolutions.

It is time to think about something new.


The white paper is co-authored by Unbox CEO Erik SAELENS and CTO Joeri TORFS, along with other members of the Unbox management team and the Unbox Board of Directors. The document is available for reading here: Design Principles for Money in the 21st Century.


Part 1: Antediluvian Design Principles for Money Still Live

 

We are so used to a concept of money rooted in millennia of history that we don’t interrogate it. We should. Because going back to the origins of money provides a lens to envision its future.


In the beginning were barter economies, which are efficient in small communities where roles can efficiently be distributed among members. But barter travels poorly. Someone trying to export goods in another community may receive in exchange another merchandise that has no value in their original community, which may be difficult to carry or deteriorate on the way.


As the issue grew with populations and their increasing interactions, a new system had to be invented. The solution was for one of the legs of barter to always be the same good, transforming a complex web of bilateral exchanges to a hub-and-spoke system centered on a unique reference, money, which can serve as a medium of exchange and unit of account. For the new system to work, money had to be defined by a set of features:

  • Unaltered by the passage of time, durable;

  • Easy to store and to transport, solid;

  • Easy to split into smaller portions and to reassemble, fungible;

  • Intrinsically valuable.


In the physical world, well before a virtual world was digitally invented, metals were the natural candidates, specifically those considered precious. This is how it all started.

The term precious is worth stopping by. For a good that has no practical use, the only source of value is the belief that, in the future, the good will still be deemed valuable. This implies rarity, as societies do not attribute any significant unit value to a good that can be easily produced. It also implies taking a view on future generations’ appreciation of value. The latter point is what creates inherent and inevitable uncertainty about the value of money when it cannot be directly used or consumed.


Thus, money started in 5,000 BC, by some accounts. Minting, the process of creating coins, which made exchange simpler by linking weight to shape, is credited to Lydians in 700 BC. By standardizing money, they created what is usually called currency. But what if we could get rid of the inconvenience of carrying those heavy gold coins? In 1661, the government of Sweden astutely invented paper money, a document carrying 16 official signatures that could be redeemed against gold or silver. The new instrument became popular with banks, which also started to issue these notes.


Letting aside gold convertibility of state-issued money, which would lead us to different territories, the next big evolution was technology, which in 1872 enabled the first money wire in the US thanks to the nascent telegraph infrastructure. Most recently came the internet, making money transfers easily accessible by any bank account or digital wallet holder with a network connection, nowadays obtained via a mobile phone which doesn’t even need to be smart. For that reason and others, it is commonly assumed that one unit of currency has the same value across commercial banks and matches the value of the one-unit coin. As liquidity crises and bank failures have shown, this is not always true. Money is a claim on the balance sheet of its issuer and as good as its financial solidity. It is not fungible in times of crisis.


Why is all that relevant? Because money as it is constructed today is the result of innovations (smelting metal, minting, producing paper, printing, electricity transport, the internet) layered on top of each other. If we were to reinvent money today with no memory of its past, we would come up with a very different design.


Part 2: Design principles for money in the 21st century

 

Before we propose design principles for money, let’s explore functions of money that developed more recently. These new functions come in addition to core ones: medium of exchange, unit of account, and store of value. The latter brings the question of the link between value and money which is for an entirely different discussion. We’ll simply assume that a store of value is a way to differentiate a purchase and that what can be bought with one unit of currency today is not too different from what can be bought with the same unit in a not-too-distant future[1]. Someone receiving a wage would expect to have visibility on what can be purchased with it in the next few months, at least.


Banks are at the core of all liberal economies because they can create money, “loans make deposits”. In other terms, commercial bank-issued money plays the important role of amplification of monetary and economic policies. We, therefore cannot expect this type of money to disappear any time soon. This function is regulated, in different manners, sometimes loosely, sometimes more actively in what is often called macro-prudential approaches. In all cases, it makes for interesting discussions between central bankers and finance ministers because banks sit across economic and monetary policies.


For the system, which is one of different, bank-issued monies to operate, there needs to be money that is “as safe as possible” or a last resort money. This is provided by central bank money, a direct or almost direct claim on the balance sheet of the most powerful player in most of the world economies, the state. It comes with a notable caveat: states do default from time to time, and if not, they may be pursuing an aggressive devaluation policy. It makes safety a very relative notion. We will propose an alternative later when we discuss the role of money in global trade. Usually, only banks holding the required national license can access a country’s central bank money. There is a notable exception: in countries where the government provides deposit guarantees to retail bank clients, depositors enjoy access to a form of central bank money. However, let’s remember that 1.6 billion adults in the world don’t have a bank account. For them, money is held as physical cash or, at best, in a mobile phone electronic wallet. The risk of losing what they have is high, and they are prevented access to basic financial services.


Even though the risk of bank failures may have been decreased by post-financial crisis regulations and retail deposits are specifically protected, bank runs will still happen and might even become more frequent for two reasons: firstly, social media are powerful instruments to create instant distrust, secondly mobile banking makes the initiation of a bank transfer almost as easy as a screen swipe and immediate. The link between cyberattacks and cyberwars is explicit, and unfortunately, the threat they pose will not disappear quite the contrary.


Related to this, the prevention of financial crime has become inherent to all monetary systems. For the old version of money, the main risk to address was counterfeiting. This is now a small portion of financial crime, whose magnitude is staggering, amounting to perhaps $2 trillion annually. Fighting it is creating tension between full transaction traceability, which has become technologically possible, and individual freedom.


As is apparent from the sum of our previous observations, money is intrinsically linked to the highest national interests. At the same time, national money exchangeability is the condition of international trade. In this context, a global currency that enables trade sounds like squaring the circle. Even more so because any powerful state will want its own currency to be the one used, at least regionally, if not globally.


Critically, money will need to adapt to human societies as they evolve. Because the paths they will take in the future are impossible to predict, the pragmatic solution is to design money by making it inherently versatile. At a time when a sense of purpose increasingly permeates all sectors of economic activity, we would argue that the ability to link money to its usage will rank high on our list of new money characteristics.


This leads to our provisional conclusion, a new set of design principles for money (or monies) in the 21st century, so it can fulfil its role in modern societies, willingly oblivious of its previous avatars:

A)    Provide clarity on its nature;

B)    Be instrumental to financial inclusion;

C)    Operate as a lever of economic policies;

D)   Link usage to purpose;

E)    Support the fight against financial crime;

F)     Enable global exchanges.


This list of principles, which must be taken in conjunction with the traditional core functions of money, is by no means comprehensive. We indeed encourage our readers to challenge it and provides their own ideas. In subsequent papers, we will suggest some possible new types of money which could fit these principles.


 

Part 3: Design principles A and B - Clarifying the nature of money and its role in financial inclusion

 

It seems never to go away. Bank runs have happened many times in history and still happen. The most recent one occurred less than a year ago, triggered by the Silicon Valley Bank’s balance sheet issues.


At the heart of these recurring events is the mismatch between the contractual availability of deposits at commercial banks and the availability of the corresponding amount of ‘cash’ on bank balance sheets. The definition of cash itself is subject to variations, but it can roughly be identified with central bank money or short-term government debt. Central bank money is the money that banks, authorized as such, have deposited with the central bank itself.


There is currently no other way than bank accounts to make money available to individuals and businesses on a large scale for at least one excellent reason: it enables banks to finance economies by lending a large part of those deposits. Total outstanding credit provided by banks in the USA amounted to more than 17 trillion dollars as of 2023 mid-year, as much as they had deposits. Naturally, regulators have established many guardrails for the banking system to remain safe and stable while still allowing some risk-taking, without which financing would not be possible.


One of the banking regulations (the Basel III reform) requires banks to hold enough high-quality liquid assets to withstand 30-day stress cash outflow scenarios. They, however, don’t include a scenario where all depositors want their money back at short notice, otherwise all bank lending will end. Then bank runs happen. They have even become more likely with the generalization of mobile banking and regulations meant to encourage competition by facilitating bank switching.


To specifically avoid them, states often guarantee depositors up to a certain amount: 250,000 dollars insured by the FDIC in the USA, 85,000 pounds in the UK, and 100,000 euros in the EU. What it really means is that bank depositors unknowingly hold accounts in two currencies: one in government-guaranteed money, and one in commercial bank money. It is not much of a simplification to say that one can be seen as central bank money, the other one as money issued by a commercial bank. Consequently, many households and enterprises already hold currencies of a different nature in their bank accounts, even though they bear the same name, like “Euro current account.”


Parking liquidity with a specific banking counterparty comes with risks and rewards in the form of interest rates. This is well understood by large corporations and banks themselves, who systematically use several of them, actively diversifying their exposure and taking various forms of security against it. Risk management of this sort is practically out of reach for many smaller depositors. For their sake and for risk transparency purposes, we would argue that central bank money, in the current shape of guaranteed deposits, must be explicitly labeled as such. That is why Central Bank Digital Currencies (‘CBDCs’) cannot be avoided: they are already in existence in many countries. To be more precise, they already exist as a store of value accessible by individuals and small businesses. What crystallizes most of the debate on the matter is the new payment infrastructure that will come with CBDCs. Some argue it will set the foundation for a new cycle of innovation in the financial sector, and others argue it will centralize too much information in one place, threatening privacy. What is at stake is also the architecture and ownership of cross-border payment systems and, with them the infrastructure of global trade. We will come back to that later.


The question which arises is the role of banks in this new construct. We assume that no central bank will want to open accounts to the entire depositor base of their countries because of the associated costs and risks, notably financial crime. The fear of centralized control and access to retail payment data is another reason why we believe it is unlikely that central banks will directly hold retail accounts in Western democracies. In our view, the most common structure will mirror the well-proven and efficient model used for the custody of securities. In that model, banks will hold CBDC accounts on behalf of their clients, with the exact same amount deposited by them on their own account at the central bank.


This model seems very straightforward but has a major implication on the role of banks because they won’t be able to use that liquidity to finance other clients. In that world, and depending on the issued volume of CBDCs, all bank clients will have two accounts: one in a CBDC, which will hopefully pay some interest (see the Financial Times article of Andy Haldane, July 2023 for a view on this), and a traditional banking account, exposed to the risk of the bank’s default but in the meantime used to finance economies. With added transparency, there will be a growing expectation that the latter type of deposit, which allows banks to generate profits, will be entitled to receive a share of those profits. On the other hand, the part deposited in CBDCs will equally reduce the availability of bank balance sheets for lending. The search for higher returns and the reduction of bank balance sheets will support the demand for mutual funds or other types of pooled investment vehicles which allow investors to provide lending and profit from it directly. In an extreme scenario, it can be envisaged that banks merely become wallet providers, offering safe custody of CBDCs and funds to their clients rather than bank accounts. Their role would become limited to client onboarding and enabling transactions, leading to a drastic reduction in their size and role in the economy. They will compete with many fintechs that have been natively set up as digital wallet providers and very efficiently so.

However, although CBDCs, as clearly labeled stores of value backed by an issuing state, can be useful to depositors, banks have little incentive to offer them because it erodes their own franchise and, more broadly, their ability to finance economies. For that same reason, governments will have to keep the stock of CBDCs under control, and it wouldn’t be surprising to have it commensurate to the combined stocks of physical money and total deposit insurance.


From an individual standpoint, bank accounts matter not only because they are a safer place to store money than under a mattress but also because they are the entry point to financial services. Credit, mortgages, insurance, and investments provide protection, enable life goals to be achieved, and are a source of long-term wealth accumulation. They are extremely difficult to access without a bank account, which will receive and send all relevant payments, provide credit history, and come with a range of controls on the account holder and source of funds. Some countries have passed laws, like the EU, to guarantee that all individuals can be attributed to a bank account, which becomes difficult after they have had financial difficulties or if they are unprofitable clients for a bank. Despite this, many are left outside of the financial system, 1.7 million in the UK alone, for instance. It indirectly pertains to the role of money in facilitating the opening of bank accounts by making them inexpensive and efficient to operate.


In summary, we would expect transparency on deposits and their role and risk to increase over time, with a CBDC being an available option in some countries. In the long term, it may affect the role of banks, potentially redefining the role they play in financing the economy. It will pave the way for a generalized fragmentation of the ‘production chain’ of money, which transforms deposits into various forms of financing. It will create an opportunity for specialized players who can insert themselves in the gaps that will appear or grow, some of them digital natives, already well placed to benefit.


Part 4: Design principles C and D - Beyond economic policies, money has to be linked to purpose

 

The separation of duties is a well-engrained principle in Western ministries of finance and central banks, dating back to 1951 in the USA or 1998 in the United Kingdom. As both administrative entities share the common objective of supporting economic growth and assuming that economic and monetary policies can be managed separately, the roles of these entities can be distinctly defined. This assumption is grounded in an economic theory in which controlled inflation is a requirement to ensure stable economic growth. In that model, central banks are independent of governments and dedicate their efforts to the clear objective of inflation control, while governments create and implement economic policies to support long-term growth while being prevented from instrumentalizing mechanisms like devaluations to fabricate short-term growth. Recent history has nevertheless shown that ring-fencing roles in this manner can sometimes be sub-optimal, which has put economic development on the mission statement of institutions like the Bank of England:


“The Bank's monetary policy objective is to deliver price stability and, subject to that, to support the Government's economic objectives, including those for growth and employment.”


The evolution of the roles of central banks was triggered by the extreme economic conditions resulting from the GFC and, later, COVID-19. On the other hand, even though technology has over the past 20 years, completely changed our lives, it only had a limited impact on the architecture of monetary and economic systems. We believe it is likely to change soon, starting a transformation that will have numerous ramifications.

For instance, real-time, transaction-level monitoring of inflation is, in theory, perfectly possible by directly collecting transaction data from payment infrastructures. Fortunately, it is possible to obtain the same reliable result while preserving individual liberty thanks to sampling or other methods. It makes it even more surprising that all trading rooms on the planet are still holding their breath when comes the moment of a monthly CPI announcement or central bank decisions on interest rates.


Can we imagine an economy where inflation will be published second by second and monetary policy adjusted accordingly by an AI overseen by central bankers? This could include real-time adjustment of liquidity provision and time-continuous change of interest rates, for instance. Even though the effectiveness of such a new system is to be proven, it is tempting to explore through some limited implementation.


By the same token, the levers of economic policies have not evolved much over time. On the revenue side, they mainly rely on the taxation of income, transactions, and assets. When it comes to funneling money to the economy, direct impact is obtained through the distribution of subsidies, including tax breaks, indirectly through activities under state control through its various departments or local governments. It is hazardous to change the revenue drivers too often because visibility on tax is required to plan spending, saving, or borrowing, whether it applies to households or multinational corporations. Allocation of government spending can only be marginally amended on a year-on-year basis. Subsidies in various forms allow for more flexibility. For example, one-off interventions are widely used by administrations and so are targeted recurring subventions.


This is where technology can redefine the design and implementation of economic policy. It is perfectly possible to create new types of currencies that can only be redeemed for a specific use case or for a specific period. Besides, the redemption value can depend on time, who spends it, where, or any other factors. Such a currency is de facto programable money, which is by nature non or only partly fungible, as opposed to traditional money (see our design principles). It can unlock an infinite number of use cases and solve multiple issues. Subsidies provided to support low-income families or education could only be spent by the identified recipients to purchase food, medication, books or any other intended goods or services. Tax-advantaged employee benefits are common. They could be made much more efficient by reducing costs and preventing cash monetization in a secondary market of sorts, as may happen with traditional food or grocery vouchers. Local communities could issue local currencies at a low cost to achieve objectives such as support of targeted businesses or to encourage specific behaviours like using a city’s public facilities or making homes energy efficient.


In the simplest and most likely setup, the party receiving the local or purpose-linked currency will be able to redeem it with the issuer for the national currency. Other mechanisms can be envisaged. The currency can simply change hands without alteration of its properties and intended use, for instance, local spending. It can also change nature. A healthcare provider receiving currency units issued as subsidies by a national government may have to redeem them for employee benefits. The possibilities offered by a technology-enabled currency are infinite.


It can be pointed out that local currencies have been tried, and some still operate, in Bristol, Brighton (UK), and Nantes (France), for instance. Their success has been limited. In our view, it is because they were trying to mimic national currencies, were sometimes clunky by design, and relied on local citizens to buy them in the first place. Conversely, digitally native purpose-bound currencies can succeed for several reasons. Nowadays, smartphones are ubiquitous. They provide accurate location and advanced identity verification. Payment methods have, in the meantime, proliferated, and with them, technologies that make them simple to accept. Account-to-account payments are developing fast and achieve money transfers at a very low cost. Blockchain and smart contracts, designed to generically handle transactions and to link them to external factors, offer a solution to an audience concerned by the threats to personal freedom that may stem from a central transaction ledger.


Cryptocurrencies have been precursors and demonstrated that a new type of technology architecture could be invented to exchange value. Bitcoin was designed to have value because it is rare, expensive to mine, completely fungible, unaltered by time, and based on the assumption that people will attribute value to it in the future. Does it sound familiar? It is the technological answer to design principles for money of previous centuries and, in many respects, the 21st-century equivalent of gold. It is intellectually brilliant but addresses the wrong questions, not those so acute to the world we live in.


Although all foundations seem laid for currencies designed for our century to be created, this is not enough for them to appear at scale. What are then the triggers to adoption?

Convenience comes first. Payment infrastructures have been in existence for a long time and are constantly evolving and extremely complex. They are all about protocols, messaging, and records, or in other terms, information technology. Hence, they are prone to adopt all kinds of innovation and have been for decades the most active fintech sector. They are, in most situations, efficient, inexpensive, and convenient to use. Think of retail payments and the wide choice of options offered to customers at the point of sale. An attempt to replace payment infrastructures altogether is doomed to fail. Adoption of new currencies will only happen through them initially.


In addition to convenience, the new purpose-linked currencies must find their way into the wallets of individuals and corporate accounts. Incentives need to be created for a national currency to be exchanged for the new currencies, which will be some form of discount on goods or services purchased. They can also be gifted, which is especially applicable to governments, not-for-profit organizations, businesses, or individuals themselves. Let’s take a few examples. A government can decide to distribute subsidies to underprivileged families that can only be used to purchase essential services, food, or education materials for instance. An NGO can adopt the same approach to support refugees. Individuals can send money to their families abroad to help them purchase health insurance or sustain their families. Businesses in a specific sector can join forces to reward clients for recycling consumer goods by gifting them money that can be spent on sustainable products.


Our company Unbox is ideally positioned for success for all the reasons above. We provide a traceability system that embeds itself in the existing payment infrastructure and empowers communities to create their own purposed-led currency. It is rapidly adopted by governments, charities, NGOs, and businesses for use cases like those we listed. Unbox is bound to be a driving force in the reinvention of money.


Part 5: Design principles E and F - Supporting global exchanges while fighting financial crime

 

According to the United Nations Office on Drug and Crime, “The estimated amount of money laundered globally in one year is 2% to 5% of global GDP or $800 billion to $2 trillion in current US dollars. Due to the clandestine nature of money laundering, it is however difficult to estimate the total amount of money that goes through the laundering cycle.” If not directly comparable, it roughly represents the same amount as the revenue pool for global payments (BCG, 2023), not to be confused with the total volume of payments processed by banks and infrastructure providers, which are several orders of magnitude higher. The Bank of International Settlements forecasts cross-border payments[2] to reach $250 trillion in 2027.


Banks are the entry point in the financial system and as such play a major role in fighting financial crime. Over the past decade, with the rise of digital and international payment volumes, they have meaningfully ramped up their financial crime compliance divisions, hiring data scientists and experts from state intelligence agencies. They are partnering with technology firms of all sizes and backgrounds, a sector that constantly presents opportunities for venture capital investors. They have embedded crime prevention in all operational business units commensurately to the magnitude of the challenge and the sophistication of criminals, often part or large well-funded and powerful organizations.


A theoretical manner to tackle that issue is the establishment of a global payment traceability system. Confronted with reality, this seems impossible in the foreseeable future. Even within the same banking group, sharing payment information across entities and countries is complex. A web of different systems must be connected, data reconciled, and processed; exceptions need to be investigated, and ultimately, a decision to allow a transaction must be made. Regulations on cross-country information sharing and data residency are to be complied with, information barriers between business units enforced, clients whose lawful transactions have declined by mistake dealt with, and risks of ‘tipping off’ avoided (giving indication to a criminal that their activity starts to be noticed before they can be arrested). The only near to medium-term avenue is through cooperation between government agencies and, whenever possible, information sharing on the most dangerous and expansive criminal networks.


At a more local level, solutions can be found though, on a case-by-case basis. We previously argued that transactions can be traced so that the intention of the party providing initial funding is adhered to, like for government grants or employee benefits. The prevention of financial crime is the mirror image of it: it is about disallowing certain transactions. Consequently, the same technology can be used in both cases. Most likely, users will be governments, NGOs, philanthropic organizations, or families sending money to their relatives. The potential of this market is significant, and so are the challenges posed by criminality. We expect a full range of solutions will develop, provided by mission-driven specialist providers.


Lastly, let us touch on design principle F, money as an enabler of financial trade. The current state of world affairs doesn’t leave much space for optimism in general. It has become even more utopic to believe that countries will agree to form and back a new currency that can be the standard for global trade. Quite the opposite, superpowers are supporting their national currency as the reference unit for their trade partners, aiming at regional or global preponderance. This is one other reason for CBDCs to be closely looked at, especially through the lens of the payment infrastructure that is developed to operate them. A primary objective of some of the countries promoting their CBDC is to make its payment infrastructure interoperable with the local clearing systems of their main trade partners. Beyond supporting their currency as a trade standard, the new infrastructure reduces dependence on the current payment rails operated by banks and cross-border infrastructure operators and may ultimately make them obsolete.


If we were to risk a proposal, we believe the only viable global currency will have to be indexed on the global economy. A candidate for a global currency is a basket representing a pool of global assets weighted by their market value, an equivalent of a stock market, cap-weighted index, but encompassing equities, fixed income, cash, commodities, and real estate[3]. A unit of the global currency would represent a fraction of this portfolio. An ETF (Exchange Traded Fund) or a stable coin are implementation examples.


We are reaching the end of these reflections on the future of money, at least for now. As a French humourist used to say: “Forecasting is a difficult job, especially when it deals with the future.” We nevertheless hope they will stir creative minds and help us think differently about the role of money in societies and its purpose. As the circulatory system of economies, its constant reinvention is imperative.


Thank you for investing time in reading our ideas. Should you have any questions or comments, we invite you to reach out and engage in a meaningful discussion on how money for the 21st century should be designed.


On behalf of all authors,


Erik SAELENS

CEO Unbox


[1] The time dimension is crucial. Transfer of value through time, especially when counted in years, can only be made by investing money to make it grow in proportion to the growth of an economy. Discussing value transfer over time is not our purpose here.

[2] By definition, this number doesn’t include payments processed within countries.

[3] For our readers interested in financial economics: it is in asset pricing theory the absolute optimal portfolio, realising the best balance between risk and return profile for an investor. It is also the ‘numeraire portfolio,’ the numeraire which can be used to discount the future cashflow of an asset and pricing it by computing its expected value under the historical, true world probability (as opposed to the risk-neutral probability of the Black and Scholes framework, itself associated to the risk-free asset, which is… a saving account at a central bank). See: “The numeraire portfolio: a new perspective on financial theory” by I. Bajeux-Besnainou and R. Portait, The European Journal of Finance, 1997.

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