The Risks of Monetary DemocracyANDREA MUNARI, BOCCONI ALUMNUS AND CEO OF BNL, LOOKS TO THE FUTURE OF MONEY AND ITS REGULATION. A FUTURE IN WHICH A HYBRID SYSTEM WILL EMERGE
by Andrea Munari, CEO and General Manager of BNL
Rapid advances in technology are affecting every area of our daily business, leading to considerable changes in habits and lifestyles. Cash is gradually giving way to electronic payment tools, and credit cards and debit cards are flanked by digital purses managed via mobile applications. At the same time, economic and financial operators have a growing ecosystem of monetary instruments at their disposal: worldwide, there are now several hundred complementary currencies. Some of these systems have extended the concept of exchange value, attributing it to elements that are not typically monetary, such as time or reputation. Interesting examples of complementary currencies with local relevance are proving successful, such as Sardex, a commercial credit circuit in Sardinia, which now boasts more than 4 thousand member companies and 700,000 transactions, and which is also extending to use by private individuals. However, what characterizes cryptocurrencies (starting from Bitcoin) is a substantial reversal of the fiduciary relationship at the base of all modern monetary systems. It is no longer an issuing body (a central bank or a state) to guarantee the value of money and the fairness of exchanges, but a validation system distributed in peer to peer mode within a community. The promise underlying these systems is fascinating and revolutionary in principle: a sort of monetary democracy managed from below.
The reality, however, is that any system without regulation almost always hide risks, especially for the weakest and least prepared interlocutors. Complementary currencies are often linked to current currencies, so that any inflationary phenomena could undermine the system of credit within the communities. Cryptocurrencies are also highly exposed to the risk of potentially uncontrollable speculative phenomena.
The speed and breadth of change have led to questions about the future of money, as we understand it today, and about the possibility of arriving at a cashless society. Personally, I do not think it will come to that any time soon. Traditionally, the currency, in addition to being a unit of account, performs two important functions: as medium of exchange and as value reserve. Cash is a widely accepted, easy-to-use payment method and does not require the possession of a bank account or a mobile device. The immediate availability of cash is also an element of security in the face of unforeseen circumstances, emergency situations or sudden crises in banking and financial systems. Concerning the greater or lesser propensity to hold cash there are many factors, above all income and interest rates. As income increases, the volumes of expenditure and the amount of cash that individuals tend to keep in order to cope with their purchases increase. However, holding money means renouncing a possible remuneration that is measured by the rate of interest. When interest rates are very low this replacement cost tends to decrease and the volume of cash in circulation tends to increase.
Is it really feasible to expect a progressive abandonment of physical currency? The data available to us do not seem to indicate this path. Despite the increasing use of electronic payments globally, in many advanced economies, the demand for cash has increased since the advent of the financial crisis. This is due to a higher perception of risk and exceptionally low interest rates. The World Bank has shown that between 2000 and 2016 the amount of cash in circulation, measured as a percentage of GDP, has increased from 7 to 9%. The increase is mainly explained by an increase in advanced economies that occurred after the onslaught of the financial crisis. This trend implies that money still plays a significant role as a value reserve, mitigating the reduction of money in circulation linked to the growth of alternative payment systems.
The digital evolution is accompanied by a constantly evolving regulatory framewor; those who work in the bank know it well. In this context, technological development, the evolution of payment systems, digital banking and blockchain remain key priorities and drivers for the future architecture of financial systems. However, despite the wide variety of digital options, the demand for banknotes and coins remains high at global level and does not seem to show signs of slowing down. Digital or physical, currency is changing and will keep changing. In the realm of environmental sustainability, the future is hybrid. As it is for energy, so I think it will be for currency.
Graduated in Economics from Bocconi in 1989, he is CEO and general manager of BNL bank
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