We are on the precipice of a new form of finance that will use a range of technologies to change the way we use and manage one of our most fundamental tools: money.
Gone are the days of taking out cash from an ATM, applying for a mortgage by visiting a bank branch, or shopping in a department store. Now, for many, conducting financial transactions of any kind is a purely online experience, escalated over the past two years by. Increasingly, the future of money exists in the Ether, via phones and laptops.
But there's a bigger future for money, the early stages of which are now taking place. Cryptocurrencies and faster, more powerful financial technologies are transforming our concept of money and challenging the financial institutions that currently manage it. The year 2021 was a transformative year for finance, and 2022 is shaping up to bring more change. ZDNet looks at two categories that are diving into the future of money: blockchain and fintech innovations.
Blockchain and digital currency
Cryptocurrency is a digital token that's secured and transferred cryptographically using blockchain technology. Bitcoin -- the world's first decentralized cryptocurrency, launched in 2009 -- is the biggest and most popular, with a market cap valued at $786 billion as of early January 2022. Plenty of people have heard about Bitcoin, but few know how it truly functions.
The first thing to remember: Bitcoin and blockchain are not synonymous. Blockchain -- often defined as a shared, immutable ledger that securely links blocks of encrypted data transactions in a network -- is the medium for recording and storing Bitcoin transactions. Bitcoin operates on its own blockchain network.
There are currently more than 16,000 cryptocurrencies, of which Bitcoin is the biggest, followed by Ether, which operates, along with all cryptocurrencies other than Bitcoin, on the Ethereum blockchain. Estimates suggest the total value of cryptocurrencies is about $2 trillion.
But already this year, the value of Bitcoin and other cryptocurrencies dropped after the Federal Reserve took a more hawkish stance on its monetary policy, scaling back on the amount of bonds it holds and indicating that it'll raise interest rates. Cryptocurrencies, which operate outside of central banks and government organizations, certainly aren't impervious to the shocks of the global banking system and marketplace.
In addition to their market risk, cryptocurrencies remain highly controversial because critics point out they aren't tied to a regulated central bank or a sovereign institution, which makes them much harder (or even impossible) to regulate. That means cryptocurrencies and Bitcoin, in particular, have already been seized on by those who want to use them for money laundering, buying illegal goods or circumventing capital controls.
But despite such controversies, crypto's popularity and use are growing rapidly as of late, to the point that it's well on its way to becoming a significant disruptor to the world economy in the next few years.
As a result, many corporations, financial institutions and investors -- many with a big case of FOMO -- are trying to calculate the potential financial rewards of getting involved with crypto.
Currently, about 300 million people, or 4% of the world's population, are using cryptocurrencies in some form, and some industry players hope and believe that could rise significantly by the end of the decade.
According to Gartner, by 2024, for example, at least 20% of large enterprises will use digital currencies for payment, store of value or collateral, which will disrupt current financial networks and business models. Stablecoins -- a token that's pegged to a fiat currency, such as the US dollar, and therefore more 'stable' than that of a decentralized currency -- have more than quintupled in value from $29 billion to $163 billion in the past year. Credit their popularity to the fact that they're stable in value and that they're capable of supporting more transparent and efficient value transfers than legacy payment networks.
Upcoming trends in cryptocurrency
Avivah Litan, distinguished analyst and VP at Gartner, who also co-authored its report, Predicts 2022: Prepare for Blockchain-Based Digital Disruption, told ZDNet that you'll see cryptocurrencies being used for retail payments in about three to five years. Now and in the next couple of years, you'll see a lot of interest and adoption of cryptocurrency by investors as an investment tool, namely as a hedge against inflation and as an alternative to gold. However, it remains an extremely volatile investment. Currently, a Bitcoin is valued at around $31,187, well below its all-time high of $68,223 on November 10, 2021.
Despite this, there's little sign that investors or companies are backing down from the potential reward crypto has to offer.
That's not just down to speculating on the price of cryptocurrencies. Some investors and companies are also interested in crypto to get into decentralized finance or DeFi. "Companies want to get in on the action; even the hedge funds are putting more money into cryptocurrency," says Litan.
Banks have to serve these companies, becoming digital asset custodians, and it's a global phenomenon, not just in the US. "DeFi's starting to attract institutional finance; cryptocurrency is about 0.08% of assets held, and some surveys say, for example, that hedge funds will hold 7% of their assets in cryptocurrency in five years," Litan said.
Governments throughout the world are also opening up to blockchain and crypto now. So far, 83 countries are experimenting with or implementing so-called Central Bank Digital Currencies, or CBDCs, which represent 90% of global GDP, according to the Gartner study. China, which recently banished miners from mining all forms of decentralized cryptocurrency in favor of implementing its own – the 'digital yuan' – has distributed more than $5 billion of digital yuan to its people as of June 2021, and India's government is scratching its head over how to tax cryptocurrencies as its central bank develops its own CBDC.
Clamping down on crypto scams and misuse will be key to gaining mainstream legitimacy. By 2024, Gartner predicts that successful cryptocurrency thefts and ransomware payments will actually decrease by 30% due to criminals' inability to move and spend funds off of blockchain networks. That's welcome news today as cryptocurrency-related crimes -- primarily scams and stolen funds -- hit an all-time high of $14 billion in 2021, up from $7.8 billion the previous year, according to research from Chainalysis. Among the more recent types of scams are so-called 'rug pulls' in which developers build crypto projects that appear legitimate only to then abscond with investors' money, never to be seen again. Meanwhile, cybercriminals in North Korea extracted close to $400 million of digital assets in 2021 after it issued at least seven attacks on crypto platforms, targeting investment firms and centralized exchanges.
But with the dramatic growth of cryptocurrency use in 2021, there is encouraging news: illicit activity is at its all-time low. Only 0.15% of cryptocurrency transaction volume in 2021 involved illicit addresses, down from 0.62% in 2020, Chainalysis says.
Another benefit blockchain is having with regards to the future of money is in customer loyalty rewards programs. For years, loyalty and rewards programs were met with hostility by customers for being inflexible with customers' needs. Sign up thinking you can redeem points for a product or a discount on a service, and you're met with conditions and constraints about how and when to spend those points. The frustration and disappointment ultimately lead to loss of revenue and customers. As online shopping becomes the preferred choice for consumers, retail businesses are adopting blockchain technology to help them track and manage transactions in hopes of elevating the user experience by providing more dimension, flexibility, clarity and transparency.
Perhaps the most technically innovative, financially lucrative, and most misunderstood blockchain-based crypto asset is the Non-Fungible Token, or NFT. Like a one-of-a-kind piece of artwork valued for a large amount of money, such as a painting in the analog world, NFTs are their digital counterpart and can be anything -- from a tweet to a video clip to physical property such as real estate. It all comes down to tokenizing the asset in the digital landscape, be it an algorithm or code for a video or JPEG, to the digitized paperwork of the deed to a piece of land. Whatever it is, it's unique and can be identified as such in the virtual world. (Cryptocurrencies, however, are fungible in that another cryptocurrency of equal value can replace them.)
NFTs are one of the more creative waves of the future of money. Although most people still see very little value in the existence of NFTs, by 2026, Gartner predicts that NFT gamification, or GameFi – which takes video game elements such as point scoring and applies blockchain tech, so users can trade or swap game assets – will have the ability to propel an enterprise into the top 10 of highest value companies. What's more, NFTs are expected to become a more powerful digital marketing tool in the coming years and that more traditional enterprises may 'auction' limited digital use rights for some of their unique intellectual digital property, according to Gartner's report. And this is not just in video games but also in sports, financial services, social media and manufacturing.
Here comes the metaverse
There's plenty of debate about what the 'metaverse', the next-generation virtual reality-powered version of the Web, might look like. Yet despite the uncertainty of this hybrid physical/virtual landscape, the metaverse is inevitably going to be a fully functioning marketplace – among other things – where users can dart around from one place to another as digital replicas of themselves, purchasing products in virtual stores.
Although not owned by any one company – Google, Microsoft, and Samsung are also participating with Facebook with their involvement in the XR Association – Facebook has placed the biggest stake in this virtual land with an elaborate marketing campaign, which included renaming itself, Meta. It claims that its concept of this digital marketplace will be "a set of virtual spaces where you can create and explore with other people who aren't in the same physical space as you." Hang out with friends, work, play, learn, shop, create, and much more.
Where there is plenty of skepticism, fear and downright hostility toward the metaverse concept, many argue that it will be the place where retail shopping and cryptocurrency converge. Gartner's Litan believes that while businesses start making money in DeFi, consumers in a few years will notice the effects of spending digital currencies through the metaverse. "Facebook is taking us there, NFTs are there, so we're going to have to start paying for things with virtual, digital cryptocurrency. I think consumers will start feeling the crypto world through Facebook, the metaverse and play-to-earn games," Litan said.
"I think what we'll see in the metaverse in the next couple of years is going to be confusing to a lot of people because there's going to be a lot of talk, a lot of hype and initially very little to see," says Tal Elyashiv, founder and managing partner of blockchain-focused venture capital firm SPiCE VC. Elyashiv equates the metaverse of today with where we were with the Web in the 1990s when it took seemingly forever to download an email attachment. Elyashiv believes the issue with the metaverse is that a lot of technology needs to evolve to make it smooth and accessible for everybody, and it will evolve exponentially so that the early years will feel very slow. "I think we'll look back then years from now and will not understand how we lived before it," he says.