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01

Future of Money

What do advances in nancial

technology mean for state currencies?The Impact of Crypto-assets on State Currencies

02The Impact of Crypto-assets

on State Currencies

March 2020

This report is part of a series from the Dubai Future Foundation focusing on trends that are important to UAE decision-makers. It explores emerging ideas on key subjects - from space technology to water policy - and does not represent the views of the Foundation. Here we explore how digital technology is disrupting money, how this disruption could alter the existing global monetary system, and how some governments are approaching the advancement of these financial technologies. The report argues that there are risks to moving away from a centralized system, specifically for building resilience to economic crises. However, this should not deter us from embracing technologies like blockchain, the decentralized nature of which bring badly needed efficiencies to global financial exchange.

The Impact of Crypto-assets on State Currencies

Published March 2020

© Dubai Future Foundation

Introduction 02

01

What Does It Mean to Disrupt Money?

04 02

The Rise of Crypto-assets 18

03

A New Currency for a Stronger Society

30
04

Government Responses

36

Conclusion

46

Contents

The Impact of Crypto-assets

on State Currencies 02

Introduction

The Separation

of Money and State Ongoing digital transformation is fueling a global debate only for money, but also for the institutions that uphold it. Financial technologies such as crypto-assets and distributed to conduct transactions that are faster and cheaper than of money itself. Such a disruption, should it occur, could and the state. approaching this imminent disruption. 03

Key Questions

The study aims to answer the

following questions: How will advances in financial technology affect the role of central banks and the state? Will these advances weaken state authority over money, or even break the link between money and the state entirely? How can central banks respond? How can they balance the advantages of crypto-assets and the advantages of fiat currencies?

Will the diminished role of traditional

intermediaries eventually make banks and financial institutions obsolete?

What are governments doing to ensure national

economies are safe and resilient to global crises? 04

What Does It Mean

to Disrupt Money? 10 05 1

The Impact of Crypto-assets

on State Currencies 0 06 and companies typically must use the national currency of conduct transactions. be unique. In fact, money has undergone a number of

“Traditionally, money was almost

always an expression of sovereignty...

The distributed ledger, or blockchain,

offers a way of being absolutely secure about a transaction without the need for a central authority or bank as an arbitrator... It holds out the possibility of a major transformation in which the link between money and the state is broken." 1

Harold James

Professor of History and International Affairs

at Princeton University, Historian for the

International Monetary Fund

The Impact of Crypto-assets

on State Currencies 0 08 1 state currencies are no longer backed by gold, but by the US typically issued by its central bank. The central bank holds system collapsed. Although central banks are commonly this are issuing currency, thus controlling money supply, and setting interest rates, thus controlling money demand. 2 09

If central banks

lose control of issuing currency, they cannot influence money supply. If they lose control of setting interest rates, they cannot influence money demand.

Two Tools Central Banks

Use to Deliver Monetary Policy

ISSUING

CURRENCY

Controlling

Money Supply

SETTING

INTEREST RATES

Controlling

Money Demand

1

The Impact of Crypto-assets

on State Currencies 0 10

SPOTLIGHT ON

11

SPOTLIGHT ON

3 raise capital more cheaply than their foreign counterparts. on a stable dollar for trade.

The US Dollar

and Global Currencies

History

of the Debate

The debate around whether digital

technologies could cause another transformation or disruption of the global financial system first arose in the late

1990s when the use of the internet was

still relatively nascent in the financial sector.

In 1999, Mervyn King, the then-deputy

governor of Britain's central bank, the Bank of England, noted that if central banks are not "robust to changes in institutions and technology," real-time electronic transactions could make state currencies redundant.

Eventually, this could reduce the efficiency

of monetary policy and render it irrelevant. 14 "The key to a central bank's ability to implement monetary policy is that it 'remains, by law or regulation, the only entity which is allowed to corner the market for settlement balances'. Without such a role in settlements, central banks, in their present form, would no longer exist; nor would money... Central banks would [therefore] lose their ability to implement monetary policy. The successors to Bill Gates would have put the successors to Alan Greenspan out of business." 4

Mervyn King

Former Governor of the Bank of England

15 the economy and implement monetary policy results from policy could realistically be challenged by technological and can therefore force commercial banks to heed its recommendations. 5 15 16 Similarly, according to Michael Woodford, macroeconomist transform the payments mechanism, but on the grounds operations and other tools the central bank holds. Although this debate remained largely theoretical into the early 2000s, it has been rekindled in more recent times due

The debate has been

rekindled in recent years due to the growing use of digital technology in the financial world 16 17 18

The Rise of

Crypto-assets

20 19

The Impact of Crypto-assets

on State Currencies 0 20

2The 2008 global financial crisis generated

skepticism in the international financial system and spurred the development of early digital currencies. Advancing technology allowed for the innovation of digital value exchange, which sought to alter "the paradigm of state-supported currencies and the dominant role of central banks and conventional institutions in the financial system."

7 The creation of Bitcoin in 2 ushered

in a new era of digital transaction technology, which offered a technical platform that could d e- couple state institutions, both monetary and political, from currency.

Since then, advancements in digital technologies

have enabled the development of distributed ledger technologies and crypto-assets, which can perform various functions of money - arguably more effectively. 21

Distributed Ledger Technology

authority, such as a bank or legal body. This characteristic of DLTs representing the transaction has been added to the chain.

Crypto-assets

8

Of course,

Virtual

Machine.

The Impact of Crypto-assets

on State Currencies 0 22
2 increasingly dynamic, causing them to respond to the market Therefore, digital transaction technologies can, in crypto-asset consumers still remain. 23

EXCHANGE/

CURRENCY

TOKENS

Enables the buying or

selling of a good or service for investment purposes or for the storage of value

Example

INVESTMENT

TOKENS

Provides ownership

rights or entitlements to dividends or similar assets

Example

An initial coin offering

UTILITY TOKENS

Facilitates access

to a specific product or information

Example

of goods

Three Types of

Crypto-assets

24
Inadequate suitability checks (eg. the risk of a crypto-asset activity relative to a consumer's risk appetite) Inadequate governance arrangements to ensure risks are appropriately managed and mitigated, for example in the context of operational resilience, including data security, potentially resulting in the risk that crypto- assets may be stolen

Absent compensation schemes, such as deposit

guarantee schemes, investor protection schemes, or any other compensation schemes protecting the entity's customers Lack of a legal framework determining the rights and obligations of each party, especially liabilities rules

Gaps in the Regulation

of Crypto-assets

The Impact of Crypto-assets

on State Currencies 02 25

Gaps in the Regulation

of Crypto-assets

Decentralized Finance

cases, more transparent transactions. Some crypto-assets and DLTs do not retain the original characteristics o f channels because this particular characteristic of crypto-assets and DLT s or companies. therefore central bank decisions.

The Impact of Crypto-assets

on State Currencies 26
02 27S

POTLIGHT ON

L ibra their total Libra holdings, rather than their status as a founding membe r.

The Impact of Crypto-assets

on State Currencies 0 28
2

A Wider Purpose

a number of implications for users, and potentially for central banks challenges it may face in countries hosting the largest share and Pakistan. Facebook has noted this as a key risk factor in its seek to restrict user access to our products if they consider us that is not a state institution but is not strictly a decentralized system either. 29
0

A New Currency

for a Stronger

Society

3

The Impact of Crypto-assets

on State Currencies 0 32
3 supported the argument for separating money and politics past decade. Some argue that state-supported currencies can course, in many cases central banks successfully safeguard capital means that its central bank is able to easily maintain households strong predictability and certainty in trade. Proponents for de-coupling state institutions, both monetary currencies obsolete.

The Impact of Crypto-assets

on State Currencies 0 34
3

A Better Kind of Money

uncertainty, there are other arguments for using crypto- assets emerging from the technological disruption seen in disrupted a number of markets including transport and not necessarily for payments by minutes or seconds. economy. Financial technologies to enable such payments 35

The 2017 Venezuelan Currency Crisis

to skyrocket. assets could not immunize citizens against the economic family members in other countries. 0

Government

Responses

4

The Impact of Crypto-assets

on State Currencies 0 38
4

Central Bank Digital Currencies

can be harnessed are also looking at the adoption of cryptocurrencies. Of course, the persistent skepticism surrounding digital currencies means many monetary 39

The Impact of Crypto-assets

on State Currencies 0 40
Light

No Data

Tight

CANADA

CRYPTO EXCHANGES: REGULATED

ICOS: REGULATED

UPCOMING LEGISLATION: YES

UNITED STATES

CRYPTO EXCHANGES: GRAY AREA

ICOS: GRAY AREA

UPCOMING LEGISLATION: YES

MEXICO

CRYPTO EXCHANGES: REGULATED

ICOS: REGULATED

UPCOMING LEGISLATION: YES

Crypto Regulations

by Country 4 41

UNITED KINGDOM

CRYPTO EXCHANGES: GRAY AREA

ICOS: GRAY AREA

UPCOMING LEGISLATION: YES

EUROPEAN UNION

CRYPTO EXCHANGES: GRAY AREA

ICOS: GRAY AREA

UPCOMING LEGISLATION: YES

(FIFTH ANTI-MONEY LAUNDERING

DIRECTIVE, JAN 2020)

LITHUANIA

CRYPTO EXCHANGES: REGULATED

ICOS: REGULATED

UPCOMING LEGISLATION: YES

RUSSIA

CRYPTO EXCHANGES: GRAY AREA

ICOS: GRAY AREA

UPCOMING LEGISLATION: YES

CHINA

CRYPTO EXCHANGES: GRAY AREA

ICOS: GRAY AREA

UPCOMING LEGISLATION: YES

JAPAN

CRYPTO EXCHANGES: REGULATED

ICOS: GRAY AREA

UPCOMING LEGISLATION: YES

SOUTH KOREA

CRYPTO EXCHANGES: GRAY AREA

ICOS: BANNED

UPCOMING LEGISLATION: YES

SINGAPORE

CRYPTO EXCHANGES: GRAY AREA

ICOS: GRAY AREA

UPCOMING LEGISLATION: YES

Research by Comply Advantage

SWITZERLAND

CRYPTO EXCHANGES: GRAY AREA

ICOS: GRAY AREA

UPCOMING LEGISLATION: YES

Crypto Regulations

by Country

The Impact of Crypto-assets

on State Currencies 0 42T
he United Arab Emirates the transformation of the remittance industry and build and assess cyberse curity risks and determine the impact of 4 43

Singapore

the clearing and settlement of payments and securities. the settlement of tokenized assets on blockchain platforms is Although crypto-assets are not considered legal tender in Singapore, that is friendly to cryptocurrencies. The country has already been recognized for its large-scale support of crypto-related technologies based partnerships, furthering the cause of the cryptocurrency

The adoption of cryptocurrencies as tender

The Impact of Crypto-assets

on State Currencies 0 44
In order to demonstrate the strength of the system in currencies to make the cross-border payments process cheaper, faster, and safer.

Canada and Singapore

Digital Foreign Exchange

4 45

Sweden

The main aim of the pilot is for the Riksbank to increase its Additionally, the Riksbank noted that future digital currency responsibility for payments, this could lead to problems such as

Canada and Singapore

Digital Foreign Exchange

It is clear that distributed ledger technologies and their it is also clear that these technologies continue to pose face more immediate challenges to their business models, as continue collecting large economic rents. Further research

Conclusion

46
economic shocks are transmitted rapidly. The spread of bodies agree that though crypto-assets do not currently pose a threat to stability, they could at some point in the global approach. Smaller countries and more open economies and therefore need to ensure they are connected to thequotesdbs_dbs17.pdfusesText_23