Digital currency’s uncertain transformation

There are varying opinions on the impact cryptocurrency will have on the world. But most experts agree there is some sort of transformation taking place in money and finance.

Cornell University Senior Professor of Trade Policy Eswar Prasad, author or “The Future of Money: How the Digital Revolution is Transforming Currency and Finance,” shared his thoughts on how digital currency will impact finance, central banking, and society Thursday at the 2022 Co-op THINK Conference in Chicago.

While financial innovation is nothing new, Prasad believes cryptocurrency and the blockchain will challenge how financial institutions do business. Financial institutions are adapting, such as offering cryptocurrency consulting services, and Prasad suggests that businesses that stick their heads in the sand won’t survive much longer. 

Therefore, credit unions should continue focusing on service while showing members they can adapt.

“One critical element credit unions have that’s not in decentralized finance is you already have the trust of your members,” Prasad says. “There’s already implicit trust built into the relationship.”

Cryptocurrencies, which started when an anonymous author posted a bitcoin whitepaper online in 2008, are a form of decentralized finance that serve as a medium of exchange allowing people to conduct secure transactions without intermediaries.

“This is the joy and problem of the decentralized world: there is nobody to go to,” Prasad says, discussing the issue of people losing their password and permanently locking themselves out of their digital wallet. “Likewise, if you make a mistake on a transaction, you can’t call with an angry tone because there is nobody to call.”

Credit unions can minimize the risks by holding digital wallets for members. Digital currencies give consumers easy access to the financial system, which Prasad says is key to success in a modern economy. 

But the most popular cryptocurrency, bitcoin, isn’t working as it was intended to, according to Prasad.

“Bitcoin’s problem is it has unstable value,” he says.  “Bitcoin has become something it was never intended to be—a pure speculative asset.”

He expects the true legacy of bitcoin will be the blockchain. The technology is secure and can be used to conduct efficient interbank payments and allow for flash loans. These loans allow people to borrow without posting collateral and pay that money back instantly. 

While the technology could change the future, Prasad doesn’t expect physical currency to completely give way to digital currency.

“It’s not going to fundamentally threaten the U.S. dollar,” Prasad says, noting the dollar has stored value, an institutional framework, and an independent central bank. “But the ability to have access to different currencies is potentially challenging to currencies of smaller countries. And the U.S. dollar’s role as a payment currency is going to shrink because technology is making it easier to offer more options. Digital is a way to keep financial institutions in the game and provide opportunities for new entrants.”

Prasad adds that technological advancements can lead society astray. Therefore, while there are clear benefits to cryptocurrency, society must consider the economic, technologies, and societal issues.

“Money might end up becoming an instrument not just of economic policy but also social policy. If we build technology on top of existing fissures in society, the problems might become even worse,” says Prasad, who titled the final chapter of his book, “A glorious future beckons, perhaps.” 

“Left to itself, this could all lead to a much darker world,” he says. “What role governments play in all of this is going to be crucial. We can create guard rails that prevent things from going off the rails.”