Why Tomorrow’s Money Will Come in New Crypto Flavors: QuickTake

Photographer: Andrey Rudakov/Bloomberg

Five years ago, Bitcoin and its cousins in cryptocurrency seemed so unimportant that central banks could hardly be bothered to sneer at them. Now central banks in small countries like the Bahamas and big ones like China are rolling out digital currencies of their own, with the European Central Bank and the U.S. Federal Reserve watching closely. And these days, Bitcoin seems almost traditional compared with a raft of other new developments that might be pointing to a new path forward for money — or toward more of the ups and downs, scams and sudden fortunes that have marked much of the crypto era. Here’s a guide to some of the ideas that could transform the world of finance.

Central Bank Digital Currencies (CBDCs)

Central banks already deal with electronic versions of money, but a digital currency could extend some services that central banks provide to financial institutions to the public at large. A broadly used digital currency could mean payments clear more rapidly and make banking services available to the estimated 1.7 billion people around the world who lack them. The People’s Bank of China, the most aggressive of the large central banks, has held trials involving e-wallets in a few cities. Transactions with central bank currencies wouldn’t be anonymous — that would make it easier for governments to crack down on money laundering and tax evasion and, as privacy advocates note, give them a powerful new tool for surveillance. The PBOC and other central banks sped up their efforts after Facebook Inc. and a slew of collaborators last year unveiled plans for a digital currency called Libra. For central bankers, currency isn’t merely an economic issue; it’s about sovereignty.

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The People’s Bank of China has held trials involving e-wallets in a few cities.

Photographer: Qilai Shen/Bloomberg

DeFi

What if computer code could take the place of bankers? That’s the goal of the decentralized finance, or DeFi, movement that’s grown out of a decade of experimentation with crypto­currencies. A DeFi world could be one where money flows more efficiently and cheaply, its proponents say, and would create new ways for savers to earn money on their holdings. Critics say DeFi is more likely reinventing the hype, wild speculation, and money-losing possibilities of crypto. DeFi revolves around applications known as dapps that perform financial functions on digital ledgers called blockchains. Dapps let people lend or borrow funds from others, go long or short on a range of assets, trade coins or earn interest in a savings-like account. The transactions are governed by rules embedded in the software called smart contracts. Like everything else in the realm of digital currencies, or software in general, DeFi accounts can be vulnerable to hackers. Even buggy code can destroy value. Users wiping themselves out by accident is dismayingly common, too.

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