Is 2020 the year that we the people lose control of money?
13 January 2020: banks around the world are developing their own digital currencies, ready for the time when banknotes cease to exist. Professor Gavin Brown believes this shift towards digital currencies could change accounting and finance professions forever.
Money and accounting fit together hand in glove. But what if the ability to issue currency and control monetary policy was no longer the preserve of nation states? This was a radical thought a decade ago, but very much a potential future reality today.
It has been 10 years since the creation of the first Bitcoin on 3 January 2009. This led cryptocurrency to a price and market capitalisation today of $7,264 (£5,451) and $131.5bn, respectively. A value not to be sniffed at given the pseudo-anonymous nature of its creator, Satoshi Nakamoto.
However, total cryptocurrencies – of which there are nearly 5,000 – are now valued some one thousand times smaller than the total global fiat currencies (legal tender issued by a government) that they wish to challenge. Fear not! Such cryptocurrencies “do not pose risks to global financial stability at this time”, according to Mark Carney, Bank of England governor and Financial Stability Board (FSB) chairman, in a letter to G20 finance ministers last year.
The key words here though are “at this time”
Permissionless cryptocurrencies are often based upon distributed ledger technology (DLT) – aka blockchain. They may be small today, but it is their potential to disrupt our financial world that has got the world of finance and politics talking. Deutsche Bank predicted that cryptocurrencies could overtake fiat currency by 2030 in its December 2019 Imagine 2030 report. You’d be forgiven for a wry smile of professional scepticism at this point. I certainly had one.
Short of another financial crisis or similar global macro shock, it is difficult to envisage how we could so quickly move our money away from the regulated safe-harbour that is fiat, to the volatile, largely unregulated, shadowy world of cryptocurrencies. Even with a desire to do so, this is legally prohibited in some countries such as India and China.
However, upon closer inspection of Deutsche’s futurism claims, it is not Bitcoin et al to be mindful of, but rather the new kids on the block: corporate issued non-sovereign currencies.
JP Morgan’s "JPM Coin" has been in existence for almost a year now and is used by more than 320 banks globally. Given that JPM is the largest mover of capital in the world (just over $6trn per day), it is not to be ignored. Wells Fargo has committed to launch its own currency pilot early this year, while the FT reported in early 2019 that 13 global investment banks plan to do likewise in 2020. The race is on for first mover advantage.
So, what does this mean for the economy and our accounting profession?
Whether we like it or not, technology is disrupting our perceptions and use of money. The future of money is a three-way race between permissionless cryptocurrencies, corporate issued coins and nation states. The latter will not take this lying down. Indeed, the Bank of International Settlements reported last year that 70% of central banks were exploring central bank digital currencies to mitigate these threats.
Going forward, the functional currency of the financial reports which we prepare, audit and analyse, as well as the complexities of IAS 21 (The Effects of Changes in Foreign Exchange Rates), may be about to become much more interesting.
Gavin Brown FCA is associate professor at the Future Economies Research Centre in Manchester Metropolitan University’s Economics, Policy & International Business Department