The future of electronic currency

Every few years, we are party to predictions on the future of money. These conversations typically coincide with innovation in the payments world.

Checks at one time were believed to largely replace cash. Later, it was forecasted that credit and debit cards would, for all intents and purposes, would eliminate the need for cash. Some have noted that the development of person-to-person payments (Venmo, for example), cryptocurrency and digital wallets also would eliminate the need for cash.

But, despite all the changes in technology, we continue to use cash, checks, debit cards, credit cards and now yes, person-to-person payments, digital wallets and — a few — cryptocurrency or “electronic” currency.

It is important to be clear, cash use is in decline. The number of checks written annually also is in a steep decline. However, the dollar value of checks written continue to remain higher than other payment types. In other words, larger ticket items are being purchased with checks. (Think business-to-business payments.) Credit and debit card transactions continue to hold steady; while person–to-person payments and ACH payments continue to rapidly increase.

So that leaves us with the million dollar question, which is: What does the future hold for electronic currency?

First, let’s define the term. Electronic currency is essentially a way to transmit payments electronically from one person to another.

There may or may not be any physical backing to the monetary instrument. For example, most cryptocurrency has experienced considerable value/exchange fluctuations when compared to the U.S. dollar.

For the past several years, cryptocurrency was a favored investment by some, while the past year has demonstrated the speculative nature of the product.

One of the drawbacks to a true cryptocurrency for daily transactional use is that the bulk of cryptocurrencies are not pegged to the value of a major currency like the U.S. Dollar. That volatility essentially renders the currency for mass transactional adoption relatively useless.

This is due to the simple fact that one could lose (or gain) considerable value between accepting the currency and exchanging it for U.S. dollars. The last area of risk most business owners want to absorb is wild swings in exchange rate of their primary currency.

In the past couple of years, we continue to hear much more about a U.S. backed digital currency that would be controlled by the Federal Reserve. The digital wallet on your phone would essentially “hold” digital representations of actual currency. The digital currency would have the faith and backing of the U.S. government as well as the digital and physical dollar being universal in value to one another.

As we proceed closer to a common system of digital payment with stability in exchange, backing of a major government system, we will reach a significant tipping point away from physical currency, checks and even the use of credit and debit cards. This technology over a relatively short period of time would likely dominate the payments system.

Not only does the technology pose advancements for consumers, but it also offers a host of benefits for businesses. Additionally, the ability for the federal government to help ensure stability and integrity of the system presents extraordinary inherent value.

At the present time, cryptocurrency is the payment of choice for some due to its lack of government tracking. Is this good or bad? Being in the financial services world, I seek to protect the privacy of transactions yet respect the role of the federal government in limiting the ability to anonymously fund terrorism, buy and sell drugs, detect fraudulent activity and other similar scams.

In the event the Federal Reserve opts not to roll out a digital currency of their own, it could be many years before a regulated electronic currency comes to market that has U.S. government support; is pegged to the value of the U.S. dollar; and, offers the global acceptance associated with the world’s currency — the U.S. dollar at the present time.

In the meantime, remember that products like person-to-person payments and cryptocurrency are not FDIC or NCUA insured and carry transactional and exchange risk.

Your method of payment should be based on your desired level of appetite for risk. Cryptocurrency is more viewed as a speculative investment than a convenient method of payment.