The Economist Report: Digitalization 2021 - Digital Currency from Fear to Acceptance

This article is from The Economist and is compiled by Mars Finance Bite.

Editor’s Note: This report is commissioned by Crypto.com and written by The Economist, focusing on the extent to which respondents trust digital payments, as well as the barriers to the fundamental currency functions of digital currencies. The report also compares respondents' attitudes towards digital currencies with similar surveys conducted in 2020 and includes perspectives from corporate and institutional investors.

From the respondents' perspective, the issues of usage and demand are the focus of the first part of this report, exploring how much trust respondents have in digital payments and what barriers may exist for the fundamental functions of currency to become primary electronic or digital functions. At the same time, respondents' attitudes towards cryptocurrency are compared with the 2020 survey. The second part of this report will explore how cryptocurrencies, represented by Bitcoin, are gradually moving towards the mainstream at the institutional and corporate levels.

Main Text:

Globally, the cashless society continues to move forward. Various methods, from credit cards, payment apps, cryptocurrencies to central bank digital currencies (CBDCs), are merging. The Chinese government has launched a large-scale CBDC pilot, introducing the digital yuan; the U.S. Commodity Futures Trading Commission has announced a cryptocurrency regulatory plan effective by 2024, which may accelerate institutional applications of digital assets.

Ray Dalio, founder of the world's largest hedge fund Bridgewater Associates, said in a recent research report: "In my view, Bitcoin has successfully crossed over from being a highly speculative product, with no speculative behavior in the short term, and even has practical value in the future. For me, the biggest question is what the actual benefits of Bitcoin are and how much demand there is."

1. The Shift from Fear to Acceptance

Respondents are increasingly favoring digital transactions. They further believe that due to the ravages of COVID-19, especially the persuasive nature of cryptocurrency assets, their preference for CBDCs and corporate-issued digital currencies closely follows that of cryptocurrencies. Mathew McDermott, Managing Director and Global Head of Digital Assets at Goldman Sachs, stated: "Given the impact of COVID-19 and low interest rates from central banks, the increase in demand for cryptocurrencies from both retail and institutional investors is inevitable. For companies, providing users with the ability to buy, hold, and use digital currencies with digital wallets at the right time is the right choice."

Figure 1: Respondent Barometer

1. The Rise of Digital Payments

In the past year, 27% of respondents reported using digital payments instead of cash, coins, or credit cards; another 41% claimed that at least half of their shopping was done using digital currency payments; in the 2020 survey, only 22% used digital currency for payments, with 42% stating they used it regularly, indicating that the overall level of digital payments is rising year by year. Additionally, 12% of respondents reported rarely using digital payments in the past 12 months, down from 14% the previous year.

18% of respondents indicated that the most common and used digital currency remains open-source decentralized currencies (like Bitcoin), followed by government-issued CBDCs (12%) or digital currencies issued by financial companies (10%), a preference order that has remained consistent over the years. However, it is noteworthy that while announcements of new CBDCs have surged in recent months, actual usage remains limited, primarily in the testing phase.

In terms of awareness, cryptocurrencies remain the most common option among all digital currencies. In the 2021 survey, over half (55%) of respondents stated that they had heard of cryptocurrencies but had never owned or used them.

McDermott stated: "As more people adopt and use digital wallets, you can see the number of people using and investing in cryptocurrencies continuing to expand."

2. Ongoing Barriers

Respondents identified three main factors hindering the realization of a cashless society: habitual use of cash, unfamiliarity with technology, and concerns about data privacy.

Among the existing types of digital currencies, despite slight differences, there are similarities. According to the survey, for open-source cryptocurrencies, the main barriers are lack of awareness (51% mentioned), followed by security issues (34%), sources for purchasing (29%), lack of education (28%), technical knowledge (27%), and people's distrust in the safety of the technology (25%) or concerns about privacy (24%) hindering more adoption of CBDCs. Similarly, corporate-issued digital currencies are also affected by lack of trust in security technology (28%), lack of education (25%), concerns about privacy (25%), and technical knowledge (24%).

3. The Trend of Digital Currencies is Changing

In the 2021 survey, 9% of respondents stated that their country had achieved cashless payments, a figure similar to the previous year (10%); however, in 2021, 17% indicated that their country would achieve cashlessness within one to two years, up from 14% previously; 19% of respondents believed their country would never become cashless, down from 28% in 2020. The uncertainty surrounding this issue seems to have increased this year (from 5% to 7%).

Given the pace of development of digital currencies over the past 12 months, the results may be expected.

Figure 3: Rising Expectations of Cashlessness - Respondents' Expectations for Their Country to Become Cashless

The trend of digital currencies continues, but it seems to be fundamentally changing. A year ago, among those who said their country was already cashless, over half (55%) believed that businesses had the greatest influence on the path to cashlessness, followed by consumers (24%) and governments (19%). With the increased coverage of CBDCs in the news cycle, governments have gained influence this year, reaching 27%, while consumers (30%) and businesses' influence has dropped to 38%. Although businesses still hold the most influence, it seems they will pave the way for an increase in the number of respondents and governments adopting cashless trends to a certain extent, thus reaching the peak of the cashless trend.

Figure 4: Influence of Cashlessness

According to the 2020 survey, developed economies face greater resistance to cashlessness compared to developing countries. In 2021, the situation remains largely the same, with respondents from developing countries (Brazil, Turkey, Vietnam, South Africa, and the Philippines) generally expressing a higher expectation of using digital payments instead of cash for most or all daily transactions within the next 12 months. Developing countries are also more confident about this prospect, with less than 1% choosing "don't know," while in developed countries (the U.S., U.K., France, South Korea, Australia, and Singapore), the figure is only 4%.

Figure 5: Preference for Developing Countries

In the next 12 months, most or all daily transactions are likely to shift from physical cash to digital payments.

2. Is Bitcoin the "New Gold"?

1. The Rapid Change in the Landscape of Digital Payments

The rise in prices of cryptocurrencies like Bitcoin has rekindled interest among banks, financial services companies, and corporate treasuries. For example, in February 2021, electric vehicle company Tesla announced that it had incorporated over $1 billion in Bitcoin into its corporate treasury and would accept Bitcoin as a form of payment in the future. However, Musk changed his payment stance in May, citing concerns over the energy consumption associated with Bitcoin's infrastructure.

The environmental issues surrounding Bitcoin are controversial, and the depreciation of Tesla's stock after the announcement indicates the volatility risks in this field, suggesting that Tesla may change its stance again. Respondents who participated in the survey before Tesla's announcement supported the use of settlement methods. When asked whether open-source digital currencies (like Bitcoin) should be strictly viewed as a means of transaction rather than as an appreciating asset, 34% of executives chose the transaction option, while another 27% chose both. 61% selected settlement use cases.

Henri Arslanian, PwC's cryptocurrency leader, stated: "Bitcoin is certainly used more as a store of value, more similar to gold, rather than something for everyday small payments. There are many similarities between Bitcoin and gold; both are scarce, can be divided, and are not subject to corrosion. Importantly, both gold and Bitcoin cannot be counterfeited."

2. CBDCs Leading Digital Applications

About 80% of institutional and corporate respondents indicated that CBDCs are necessary to establish an effective market for new financial instruments (such as digital bonds or other forms of digital assets) to complement the role of cryptocurrencies.

Arslanian said: "I believe CBDCs are complementary to digital currencies; if people are accustomed to central bank digital currencies, they can use central bank money in digital format, which will obviously make them more comfortable using other digital currencies."

74% of respondents believe that their country is currently or will soon achieve cashlessness, among which about 47% think it will happen within five years if it hasn't already. Mr. McDermott also predicted: "I believe CBDCs will be developed and actively used in some form within three to five years. The Bahamas and China have already issued digital currencies, and more countries are exploring this option."

Figure 6: The New Digital World of CBDCs

Most respondents (59%) also believe that establishing CBDCs will increase the overall demand for other forms of digital currencies and assets not supported by the government. Arslanian explained: "Using digital currencies allows you to monitor economic activity in real-time, which is also beneficial for anti-money laundering."

3. Diverse Interests

There seems to be a divergence among institutional and corporate finance departments regarding whether open-source digital currencies (like Bitcoin, Litecoin, etc.) should be strictly viewed as currencies for settlement transactions or as assets for storage or appreciation. About one-third view it as a currency (34%), an asset (31%), or a combination of both (27%).

Mr. McDermott asserted, "Bitcoin is not a payment mechanism today; it is more like an investable asset." Respondents believe that cryptocurrencies (80%), CBDCs (77%), or corporate-issued digital currencies (76%) can serve as diversification tools in investment portfolios or financial accounts. Perhaps due to this prospect, 80% agree that it is necessary to establish an international, institution-specific digital currency exchange (e.g., with the Bank for International Settlements).

Figure 7: Institutional and Corporate Barometer

According to the survey, the main roles of digital cryptocurrencies or assets in investment portfolios or financial accounts are capital appreciation (33%) and alternative asset diversification (31%), with additional functions such as large-scale settlement; inflation hedging (28%) ranks among the top five; speculation (21%) is near the bottom, indicating market maturity. Arslanian stated: "Many experts will tell you that Bitcoin can play a role as part of a diversified portfolio. Despite its volatility, Bitcoin can serve as a potential hedging tool, which is something many people are paying attention to."

Figure 8: More of an Asset than a Currency

Respondents' views on the primary role of cryptocurrencies in investment portfolios or financial accounts.

4. Cryptocurrencies Continue to Move Forward

Mr. Arslanian pointed out, "In the coming months, we will see institutional investors continuously entering the crypto space, just like any other new asset class; it takes time. Institutional investors took many years to become comfortable with emerging markets and derivatives."

On May 4, 2021, index provider S&P Dow Jones Indices launched three new benchmarks to measure the performance of Bitcoin and another open-source digital currency, Ethereum, on recognized cryptocurrency exchanges. Peter Roffman, the company's Global Head of Innovation and Strategy, quoted a widely circulated saying in the press release announcing these indices, jokingly stating: "Traditional financial markets and digital assets are no longer mutually exclusive markets."

Traditional financial markets and digital assets are in progress, but nearly three-quarters of respondents (72%) in the institutional and corporate survey stated that cryptocurrencies do not have third-party or sovereign organization control over supply (like Bitcoin), presenting relatively higher risk assets in investment portfolios or financial accounts compared to other currencies. As Arslanian noted, regulatory transparency could greatly help alleviate such concerns. In line with this view, respondents listed regulation (32%) as the fourth most pressing barrier to gaining greater institutional or corporate support for cryptocurrencies or other digital currencies. The overall trust or understanding of the market regarding digital currencies and assets (47%) and the structure of financial markets (43%) ranked high among the main barriers to further adoption of digital currencies.

Conclusion

56% of respondents believe that CBDCs have the potential to replace physical currency or legal tender in their country; while 80% of institutional respondents agree that the demand for all digital currencies has been increasing among respondents in their country over the past three years. For corporate organizations, digital currencies are gaining attention as both a unit of transaction and a means of storing or appreciating value; there may be a reinforcing correlation between the usage and acceptance levels of respondents and corporations.

McDermott stated: "Beyond Bitcoin, we hope to access an increasing variety of cryptocurrencies. The current cryptocurrency market is still very nascent, but we are looking for different ways to meet our clients' investment needs. From a regulatory perspective, this is very compliant."

The broader adoption and acceptance of CBDCs (31%), the availability of institutional digital currency trading platforms, and (29%) seem to be the main triggers for increasing cryptocurrency portfolio and treasury activities in institutional and corporate surveys.

Respondents believe that only institutional digital currency exchanges will trigger more investment and financial activities in open-source digital currencies, broken down by region.

Arslanian said: "Essentially, Bitcoin is a deflationary asset because we clearly know how many Bitcoins will be in circulation; there is no quantitative easing; you cannot simply mine more Bitcoins, just as you cannot extract more gold. I believe cryptocurrencies will be a very accepted asset class."

Note:

The data for the first part of this report comes from a survey conducted in February and March of this year, in which about half of the respondents are from developed economies (the U.S., U.K., France, South Korea, Australia, and Singapore) and half from developing countries (Brazil, Turkey, Vietnam, South Africa, and the Philippines); about seven-tenths of the respondents are aged between 18 and 38, with the rest being 39 or older; about half (46%) are male, and the rest are female (54%). The respondent pool includes a variety of educational backgrounds, with the most common degree being a university degree, and all respondents have used some form of digital payment to purchase products or services in the past 12 months.

The data for the second part of this report comes from surveys conducted in February, March, and April of this year with 200 institutional investors and corporate treasury management respondents, about one-third of whom are in the U.S., with the rest distributed among developed economies such as Australia, China, France, Germany, Singapore, and the U.K.; all respondents are familiar with their organization's investment decision-making process.