The Changing Concept of Money: A Threat to the Monetary System or an Opportunity for the Financial Sector?

Abstract

Money as we know and use it is a puzzling phenomenon. Central bank money is not backed by gold or anything else of value. Bank money appears even less reliable. It consists of nothing more than a claim against a bank. And yet—the general public trusts the money generated in traditional ways by the financial industry. Even more surprising is the success of privately-issued digital coins. Especially Facebook’s Libra project raises concern that not just established payment systems, but even central bank-issued fiat currencies might feel the disrupting effects of an unprecedented success story in the making. To explain these phenomena and analyse the effects of new developments on the financial system, several clarifications are needed. The article discusses the traditional concept of money, the different types of central bank and commercial money including e-money and contrasts them with new and mostly unregulated types of digital coins. It looks at the characteristics of the Libra project, the biggest stable coin project in planning, and discusses the potential implications on the operations of central banks and the banking industry. The article argues that the established financial industry should embrace the opportunities stemming from new technologies and compete with the providers of new types of payment services and issuers of digital coins. It cautions against the radical effects of central bank-issued digital coins and considers them a measure of last resort when e-commerce or social media giants establish digital coin schemes that rival fiat currencies. Until this undesirable scenario occurs, central banks should capitalise on their prominence resulting from decades of unrivaled trust in their currencies.