Analyst Ronit Ghose unpacks his new book, “Future Money: Fintech, AI and Web3,” a continent-hopping tour through the wild and wondrous state of financial innovation.
Duckbucks (DB): You write that “the world will be not so much flat as it will be kaleidoscopic” – more diverse, less Western and less U.S.-centric. Why have emerging economies been leaders in fintech innovation?
Ronit Ghose (RG): The high fintech growth in emerging markets is underscored by a few trends. One factor is necessity — a lack of access to traditional banking services and high shares of the underbanked. In terms of private credit extended as a share of GDP, countries such as Mexico (about 35%), Kenya (31%), Egypt (28%) and Pakistan (15%) rank far below economies such as the U.S. (216%), according to the World Bank. The story is similar for bank account ownership, which is 95% or higher in most developed markets, well above Kenya (79%), India (78%), Bangladesh (53%), Indonesia (52%), Philippines (51%), Nigeria (45%) and Pakistan (21%).
A second factor is populous markets with young, tech-savvy adults – like India and China – that make a perfect fit for payments innovation, given the sheer volume of transactions.The share of mobile internet usage is about 76% in China, 72% in South Africa and 66% in Indonesia. These populations are mobile-only or mobile-first; the youth are digital natives, and there are more of them due to younger demographics.
As frontier and emerging markets continue to grow and monetize, the demand for innovative financial solutions is only set to increase. We can expect further collaboration between “TradFi” and fintechs. Regulatory evolution to accommodate new technologies is ongoing, especially with a focus on financial inclusion. Fintechs will continue looking to expand products and services into new markets.
DB: Why did fintech in India evolve so differently than in China? What can other emerging economies learn from the success of the “India Stack”?
India has enjoyed rapid fintech growth since 2015, thanks to both public and private efforts. The government scheme Aadhaar (Hindi for “foundation”) managed to solve a fragmented personal identity system, which was an obstacle to access to financial services, by linking every ID number to biometric data. Another government program, Pradhan Mantri Jan Dhan Yojana, provided bank accounts to all.
Also key was the building of scalable platforms to move money such as the Unified Payments Interface and QR codes. Alongside these technologies, India’s 2016 demonetization initiative ushered in digitization (despite not meaningfully taking cash out of the ecosystem). As with most things that are free, payments became a utility – the chaiwala (small merchant) no longer had to worry about paying a merchant fee for each digital transaction.
In contrast to India, the emergence of fintechs in China was more so driven by private enterprises, supported by a high degree of tech-savvy users and underdeveloped banking systems. Regulations (or lack thereof) in the initial growth years further helped Big Techs and fintechs—for example, how the absence of regulations around nonbank payment systems enabled companies like Alibaba and Tencent to grow and reach critical mass.
Our lessons from the “India Stack,” then: Think of payments as a public utility. Design a robust legal and regulatory framework. Use public-private collaboration for innovation (like with the UPI). And make it a national project (as with Jan Dhan bank accounts).
DB: Could success stories like Alipay and Weibo happen in today’s China? What does the country’s changing political climate mean for the future of money?
RG: As we’ve said, the success of China’s superstars was driven by two things. First, its large population and the widespread adoption of smartphones — there was a lack of infrastructure as the digital mobile revolution unfolded, and private companies stepped in to drive that growth. Second, Chinese regulators, at least initially, had a relatively relaxed and hands-off framework in certain areas.
Today, China’s landscape looks different, with more market competition and increased regulatory scrutiny. Beijing is seeking to strike a new balance between fintech innovation and regulation. We’re also seeing more state involvement in new technologies now, compared to the earlier rise of Big Techs, such as in the case of the People’s Bank of China and the digital yuan.
DB: How will the rise of digital currencies affect the United States’s global economic dominance?
RG: Tokenized money is a digital representation of cash on a blockchain, or a distributed network, with the benefits of atomic (instant) settlement and programmability. The growth of official-sector tokenized money projects has been driven by external catalysts, including the growth of public cryptocurrencies and digitally native financial and internet companies.
In 2022, daily global FX market volumes amounted to $7.5 trillion on a net-net basis — more than double the turnover in 2007. The U.S. dollar remains central to these flows, accounting for 88% of all global FX trades on one leg (which is broadly unchanged since 2004). Similarly, the US dollar also accounts for about 50% of commercial payment flows. The dollar is widely seen as the private sector currency of choice for investments and the flow of capital, and remains highly liquid and widely accepted globally.
The reality is that tokenized money is likely to be U.S. dollar-centric[YW1] . Newer digital markets are overwhelmingly dollar-denominated (the case for 100% of fiat stablecoins and 93% of all stablecoins). Given the unlikelihood of a U.S. dollar CBDC in the near term, the evolution of dollar-based tokenized money will probably be largely driven by private sector innovation and initiatives, fueled by fintech advancements and blockchain technology. These advancements will offer increased efficiency, accessibility and interoperability in cross-border transactions, catering to the growing demand for digital and borderless financial services. Globally, individuals and businesses will likely adopt dollar-based tokenized solutions for operational efficiencies and broader economic reasons, such as preferences for a stable store of value and a highly liquid currency.
DB: And in a global context, what is the potential impact of well-managed U.S. dollar stablecoins?
Private sector actors in markets that face hyperinflation and weak domestic currency will often prefer dollar-denominated assets; tokenized money may increase access to these U.S. dollar denominated assets. The risk of capital flight to dollar-denominated tokenized money or assets could exert pressure on local banking ecosystems and lead to increased domestic financial instability, making domestic policymakers potentially wary of international tokenized assets. Banking systems with a weak local currency and those that currently rely on local currency deposit funding could suffer.
The broad adoption of reserve-backed stablecoins or central bank digital currencies (CBDCs) throughout the financial system could significantly impact the balance sheets of financial institutions in all countries, depending on the source of funds and the composition of reserves held by the stablecoin or CBDC.
A positive scenario would see a certain portion of the banknotes in circulation migrate to stablecoins/CBDCs and the new reserves thereof are held as bank deposits. In a more negative scenario, bank deposits migrate to CBDCs/stablecoins, which are fully backed by securities or central bank money and not held in bank deposits.
DB: What roadblocks stand in the way of the blockchain transforming our financial infrastructure?
RG: One can point to the lack of a regulatory framework, as well as the need to build new infrastructure rails. Public blockchain infrastructure is just not a straightforward fit for many existing regulated financial systems and their legal and technological processes.
There is a risk of potential disintermediation, especially for intermediaries in traditional finance. There’s also a lack of standards and interoperability — different financial market infrastructures and consortiums are working on the same problem in parallel — and we’re seeing initiatives become siloed. Liquidity is fractured in different venues and pools, delaying the triggering of the network effects needed to drive more adoption.
DB: Despite some high-profile disappointments, you place the metaverse as a future endpoint in the evolution of money — capping off a historical transformation from IOUs to commodities, coins, paper, plastic, digital, AI and blockchain. What might the path from here to there look like?
RG: Gaming has played a fundamental role in shaping our imagination of the metaverse with immersive elements. A growing focus on Web3 and the creator economy is likely to further catalyze the discussion around the Metaverse discussion. Admittedly, we are still in the early days of building the metaverse infrastructure – computing, storage and network infrastructure all need improvement. The growth of digital assets, fueled by metaverse micro-economies within different platforms, will necessitate the creation of new forms of money. New formats are likely to emerge, including digitally native ones.
DB: You discuss the three attributes of money that converged over the past few centuries: the payment rail, the unit of account and the store of value. How will these “disentangle” over the coming decades — and should we welcome it?
RG: The convergence of these three attributes of money has been a hallmark of the traditional fiat system. However, the rise of digital currencies and DeFi is posing a potential disentanglement of these attributes. Digital currencies like Bitcoin and Ethereum, along with blockchain technology, enable payment rails to exist independently of traditional fiat currencies and banking systems. Fintech is also breaking up the combination of payments and deposits, which were bundled in banks. In the coming decade, we may see further disentanglement as new forms of digital assets and DeFi proliferate. For example, stablecoins could become the primary payment rails for certain transactions, while other assets may serve as stores of value or units of account within specific ecosystems.
Should we welcome this? Further disentanglement could lead to great financial innovation, more inclusion and lower traditional barriers — these are positives for customers. However, it could also raise concerns about regulatory oversight in new emerging segments, a higher cost of funds for banks along with lower profits or higher lending rates, and the potential for fragmentation in the financial system.
Ronit Ghose
Ronit Ghose runs the Future of Finance & Digital team in Citi Global Insights, Citi’s thought leadership unit. The team is focused on the intersection of the future of money and finance with emerging tech, including AI, Digital Assets, XR and beyond. CGI provides analysis and advice to Citi’s institutional clients and the bank’s leadership. Prior to his current role, Mr. Ghose was global head of banks research and global co-head of fintech research at Citi. Alongside his Citi role, he is an advisory board member of the Financial Technology Centre at Imperial College Business School and at several technology firms and early-stage VC investors based in the U.K., the Middle East, Africa and Asia. Before joining Citi, he worked in the policy world, including as Research Assistant for a former UK prime minister. His new book “Future Money” was published in March 2024, and presents a vision of the digital future of money, finance and culture.