Cash could become history within a decade, thanks to new financial instruments, including virtual currencies, some of the world’s leading bankers said during the World Economic Forum on Wednesday (20 January).
The impact of technology, the overarching theme of this year’s meeting, will be very significant.
The evolution would be so significant that John Cryan, co-CEO of Deutsche Bank AG, predicted that, in ten years’ time, “probably” we would not see cash anymore. It is “terribly inefficient”, he added.
“Cash should be dematerialized,” he said in a panel on the future of finance- and governments “should be interested” in this process because it would make transitions “more traceable” and would help to combat illegal financing or money laundry.
Echoing his prediction, Dan Schulman, the CEO of PayPal, stated that “money is digitizing in front of us”. Although 85% of transactions (in number, not in volume) are made still in cash, “it is inexorable that this process is going to happen” although still “we have a long way to go”, he said.
For bankers, and even the International Monetary Fund, one of the most promising disrupters will be the virtual currencies powered by blockchain technology.
On Wednesday (20 January), the IMF published a report on virtual currencies.
The Fund’s Managing Director, Christine Lagarde, summarized the conclusions of the document by using the opening line of the novel, A Tale of Two Cities: “It was the best of times, it was the worst of times.”
On the positive side, she pointed out that virtual currencies could be “extremely beneficial” to reach out to people who live in very remote areas, for example.
However, these new currencies could also be “a great instrument for crime”, because the regulation remains inexistent. Moreover, if this technology develops very rapidly, it could become a “threat to financial stability” or even “disrupt monetary policy”.
But this new sector is still “too small”, she said. The total market value of virtual currencies is only $7 billion. And even if “we know very little” about virtual currencies, potentially they could disrupt the industry very deeply, she said. Thereby, authorities still have “a little bit of homework to do” on the regulatory front.
Virtual currencies are not the only change-maker spotted on the horizon. The other big engine for development will be the use of data in a more sophisticated way.
‘Big data’ represents a “fundamental” opportunity for the insurance sector, underlined Tom de Swaan, CEO of the Zurich Insurance Group.
From car insurances to assessing life risks, the use of big data allow the insurance firms to do their business “in a more granular manner”, de Swaan commented.
The fast pace of change would shake the financial sector in the next five years more than what we saw over the past three decades, predicted Schulman.
This revolution will be a joint effort led not only by disrupters like his firm Paypal, but also the ‘incumbents’ of the financial market and even the regulators, he said.
“Life at the top of a financial institution was not easy and will not be easy,” admited de Swaan, as “it is difficult to predict the technology changes”.
In order to cope with them, he called for finding alliances with the disrupters, as both the newcomers and the traditional firms have strong incentives to join forces. “We should use them (the disrupters) to create new products and distribution systems,” he explained.
What kind of regulation?
In the years to come, the key issue would be how to regulate these new financial instruments.
James Gorman, CEO of Morgan Stanley, pointed out that regulators should get involved with issues related to cybersecurity, to address excessive concentration and therefore systemic risks, and to guarantee customer trust.
“Trust is at the heart of banking”, he stated.
Described as one of the “greatest technological breakthroughs since the Internet”, blockchain is a decentralised public ledger (or list) that keeps a record of all transactions that take place across a peer-to-peer network. Users provide their computers to verify the transactions in real time, therefore cuting the need for a central third party to certify the transfer across the Internet.
One of the first applications of blockchain is the development of so-called crypto-currency (or virtual currencies), of which Bitcoin is the best-known example. Its disruptive potential goes beyond being a payment method, as it could also affect credit card transactions, bank-to-bank money transfers, or bond and shares management.
Some banks and credit card companies are starting to explore the potential with small projects. For instance, Visa is looking into the possibilities of using Blockchain as an alternative to conventional remittance processing.