When was the last time you paid for something with cash?

I mean actual notes or coins: have you reached into your wallet and pulled out a note to pay somebody recently?

I bet you are doing it less and less.

During the pandemic, we practically stopped using paper money (ATM use is down a third in the last three years).

And increasingly, we are relying on cards and phones to make transactions.

Money is changing.

Technology is disrupting the way we transact with one another.

And one of the key drivers for this story is the emergence and popularity of cryptocurrencies.

Australia launches a digital currency

Take the news that Australia’s central bank is launching its own digital currency.

For the next year, the cental bank is going to issue this currency through commercial banks in the hope of modernising their financial system.

Why now?

Well in the last few years, the Australian central bank has watched as cryptocurrencies exploded in popularity.

And it probably spooked them.

A recent Australian Securities and Investments Commission report on investor behaviour found that cryptocurrencies are second only to Australian shares as the most common asset that people hold in that country.

In terms of the value of the holdings, cryptos are now on a par with residential investment properties.

And so, understandably, the central bank wants a piece of the action.

They see that crypto is fast achieving mainstream adoption, and that they need to catch up.

Fast, cheap and easy to track

What they are proposing is a “Central Bank Digital Currency” or a CBDC.

This is very different from a cryptocurrency such as Bitcoin.

A CBDC is controlled by a central bank.

While Bitcoin is decentralised (there is no single point of control).

Both forms of payment are fast and cheap: allowing two parties to transfer huge sums of money, seamlessly, without a middleman.

The key difference is the point of control.

There’s two basic models.

The “Maximalist” model sees a government directly issue a digital currency directly to the populace through your phone or bank account.

In this model, you cut out commercial banks entirely.

It’s a radically new kind way of issuing and overseeing money.

Source: Bankless

Then there’s the Minimalist model.

In this model, the central bank will work through intermediaries such as banks and payment companies.

It’s a slight change on the existing system.

Right now, there are 91 central banks across the world experimenting with projects like these.

That includes the Bank of England and it’s “Britcoin” project. And also the People’s Bank of China, which has pushed for a Digital Yuan.

What they won’t say publicly is that CBDC’s are a great way to collect information.

That’s because a digital currency is easily tracked.

Every time you use a digital currency, the transaction is logged on the blockchain.

And so these currencies will allow central banks to keep tabs on exchanges, on taxes, on illegal activities… on all sorts of things.

As Bankless point out:

“CBDCs are fundamentally different from cryptocurrencies like Bitcoin and Ethereum — in fact, they’re diametrically opposed.

CBDCs exist on centralized ledgers surveilled and controlled by central banking institutions and government bodies.

Crypto means decentralization, while CBDCs necessitate a consolidation of control over finance by central banks.

Whatsmore, the programmability of CBDCs permits governments to track movements of currency from its origin…reverse transactions… even set and revoke arbitrary rules.”

Key Takeaway

It sounds scary.

But there is one more thing to consider here: competition.

The fact is that CBDC’s will compete with a host of already very popular cryptocurrencies.

For example, they will compete with Bitcoin, who’s network is growing at an annual rate of 113%.

At the current page of adoption, Bitcoin will have 1 billion users by 2024 and 4 billion users by 2030.

CBDC’s will also compete with stablecoins: cryptocurrencies whose price is nominally “pegged” to a stable asset such as the U.S. dollar.

These decentralised currencies already solve a lot of the problems of CBDC: they are fast, cheap and, depending on how they are designed, stable in price.

Since 2021, the total stablecoin circulating supply has seen an exponential growth of 534% from ~$29B to ~$155B today.

And increasingly we will see projects where money is created by an even wider variety of authorities.

That includes cities, companies…communities of every description.

This is the future that fintech expert David Birch has been predicting for years.

“We should set ourselves up for a world in which there are hundreds, thousands or even millions of kinds of money,” says Birch in his book Before Babylon, Beyond Bitcoin.

Your phone will show you the price of a latte in London Loot but transfer money in California Cabbage, Apple Apples and SF Parking Permits.”

At Vanguard, we believe we are entering a period that will change the way we think of money.

It might sound scary… but it’s also fascinating, and exciting and provides us with all sorts of investment opportunities.

We’ll keep track of the best ones here.