Internet sources state that the total current crypto asset valuation is between $1.2T and $1.3T as of May 2023. This is interesting. It shows strong demand for alternative payments and savings opportunities.

Many countries started to introduce digital accounts and payments. China has digital Yuan, India has a government backed electronic payment solution. The alternative to such centralized payment systems of the likes of India, China, and Russia are decentralized ones.

Whether it can be done is an interesting question. The Law of One Price dictates that if prices change, interest rates of the currency will follow. Why would digital currencies be different?

Digital currencies cannot be used to buy anything. The limited set of products available for such a currency dictates that their risk, rates, and exchange rate will vary. We see this today. They can be simple gambling, if no sites accept them, Ponzi scheme, if the sales pressure keeps their demand high, or speculative, if some retailers opportunistically accept them.

Rates can eventually be derived back to income gaps in a territory. Narrow income gaps cause lower risk and interest rates. More equality, the more likely a random investment pays off. There is less risk of choosing a borrowing party for an investment. Decentralized payment and investment systems will likely spread in countries with lower income gaps.

Cryptocurrencies are not always decentralized. Many rely on sites or central applications to trade them. A typical example is Paypal’s Bitcoin solution, or Coinbase. A real decentralized digital currency has a simple and public algorithm. It can be verified by hand, and it can be implemented on many platforms in plain English.

Many payment systems use the phone these days. WeChat, AliPay leverage power apps that can do many things including payments. They have an edge, when high-end processors allow operating systems with fancy UI that makes it difficult to switch between apps. Governments like phones, as there is a way to collect more information.

However, a real low risk payment solution will probably have paper as an option as well, so that it integrates well with paper contracts. Phones are expensive, and low risk payment solutions must be cheap. They need competing offers of the media used.

Some may say the phone is the deposit that creates trust. It happens today, some personal computers were made with golden chassis to increase their valuation. Phones may have gold or platinum embedded in their PCBs in the future to increase their value as an asset for purchases. This may replace part of the jewelry market, where your device becomes the jewelry. It is better than cash under the pillow, and it can be with you all the time.

Facebook had Libra, an alternative cryptocurrency. The projects were cut. Central Banks are wary of their independence and the sovereignty of countries is dependent on their currencies. Also, such a monopolistic solution based on a single brand would be more expensive.

Recent geopolitical turmoil showed that phones need to be extended and substituted by paper checks. Just the option to have paper checks reduces the risk and interest rates. Any digital payment that has paper fallback as an option is going to win the cost game.

Dollar is a reserve currency as it does not have much capital controls. Immigration also fuels the strength of the dollar. An example is the author, who could create more value in the US after immigrating here. This strengthens the dollar versus the currency realm that was left behind.

There is a new Central Bank Digital Currency, the FedNow service that is coming out soon. It may help to spark payment systems but the transactional amount will be limited. This leaves space to the traditional banking system in lending. Investors of Wells Fargo, or JP Morgan Chase may not need to worry.

Such digital payments may reduce the digital divide and pay inequality. The more smooth the income curve is, the less risky it is to lend and invest. This may eventually lower interest rates, and hopefully it will also ease inflation.