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The Future of Money

By: Louis Mukama

What’s the future of money in the digital age? Imagine pulling out your phone and logging into a digital wallet and sending cash anywhere instantly. There’d be no middlemen, no fees, no waiting for deposits or payments to clear. That’s the future promised by proponents of digital currencies.

Earlier this month, El Salvador made history by becoming the first country to make Bitcoin legal tender. Bitcoin will join the U.S. dollar, which has served as the country’s official currency since 2001, as an acceptable means of payment for goods and services nationwide. El Salvador went as far as to offer $30 in Bitcoin to every adult citizen who downloaded and registered the government’s cryptocurrency app. El Salvador is not alone in recognizing the disruptive and innovative potential of cryptocurrencies. China and the Bahamas have instituted digital versions of their national currencies and the European Central Bank is investigating how a digital euro might work. In the U.S., the Federal Reserve Bank of Boston has partnered with MIT to build and test a digital dollar before any official action is taken.

Americans have been using cash to purchase things less and less over the years. That’s part of the reason why the Federal Reserve is considering digitalizing the U.S. dollar. People would then be able to access money on their personal devices, bypassing payment instruments that may be slow or costly for consumers and businesses. While some see this as a necessary upgrade to the plumbing of the American financial system, others worry that it could upend the traditional banking system.

“There are many subtle and difficult policy choices and design choices that you have to make,” Federal Reserve Chairman Jerome Powell said in an interview this April.

“We’re doing all that work,” he said, referring to the program at MIT. “We have not made a decision to do this because, again, the question is will this benefit the people that we serve? And we need to answer that question well.”

Digitalization and cryptocurrencies are driving dramatic changes in the economy and transforming the way business is conducted. International, e-commerce and peer-to-peer payments are especially open to this new solution as cheaper, frictionless, and faster transactions are likely to attract end users like consumers and merchants. The coronavirus pandemic accelerated this migration toward digital payments and highlighted the importance of access to safe, timely, and low-cost payments for all.

Long before the pandemic, platforms like Facebook were developing stablecoins—digital currencies whose values are tied to traditional assets of value such as the dollar or gold—for use in payment networks. This drew the attention of policymakers, because money is a foundational public good and cannot be left to the private sector alone. Many countries have chosen to develop (or at least explore) central bank digital currencies. Unlike cryptocurrencies which operate on decentralized systems, central bank digital currencies would be issued, backed, and controlled by domestic national banks, giving them the ability to pay money directly to individuals. That would allow central banks and national governments to monitor every transaction and keep a record of all money movements in their economies. In a recent speech, Lael Brainard, a governor of the US Federal Reserve, outlined the steps the US was taking to maintain the dollar’s dominance: The Federal Reserve Bank of Boston has been working with the Massachusetts Institute of Technology on developing prototypes for a digital dollar platform.

The pandemic has also demonstrated the potential benefits of timely, efficient and affordable access to payments for all Americans cannot be understated: while the majority of relief payments could be made via direct deposit to bank accounts, it took weeks to distribute stimulus to the unbanked and underbanked. In fact, The Federal Deposit Insurance Corporation's latest household survey, from 2019, found that 5.4% of U.S. households — or 7.1 million households — did not have a checking or savings account at a bank or credit union. The financial plumbing that moves our money around is highly antiquated. Under a digital currency system, these transactions could have been near instantaneous and effortless. Government-backed digital currencies represent a viable alternative to cash, offering new units of account, stores of value, and means of payment. The only question is whether the pendulum of public approval will swing in their direction over time.


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