An initial perspective on the future of currency by Patrick Teng, CEO of Six Capital in Singapore. This is the starting point for the global future agenda discussions taking place as part of the futureagenda2.0 programme. www.futureagenda.org
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Future of Currency - Initial Persepctive
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Patrick Teng -CEO, Six Capital
The Future of Currency
Currencies are influenced by social, economic
and political change, so it is little surprise
that all around the world they are in a state
of flux. In Europe the future of the Euro is
a real concern; the ASEAN markets, fearful
of making similar mistakes, are backing
away from their flirtation with a collective
currency unit; in China, the ambition to
extend economic influence and desire that
the Yuan is recognized as an alternative
reserve currency is being tempered by
a financial slowdown; in the US there is
growing uncertainty about whether the dollar
will maintain its status as the primary unit of
global currency, and on top of this, instability
in the Middle East and the dramatic fall in
oil prices have all combined to make the
currency markets increasingly volatile. The
result is a fragile global financial system
continuing to face the real possibility of
further financial crises.
While few are suggesting the imminent
demise of the existing currency order, key
questions stand out. What will be the real
role of currency in the next ten years? How
will regulation adapt to this? Given all the
disruptions, how best can we stabilize the
marketplace? How can currency markets
organize themselves more effectively? In ten
years’ time will the focus remain on national
currencies or will alternative currencies, such
as Bitcoin,Amazon Coins or BerkShares take a
more prominent role? The future seems like
a complex game of musical chairs – positions
are yet to be decided and it is by no means
clear that there will be a seat for everyone
when the band eventually stops playing.
The Global Challenge
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Options and Possibilites
First let’s consider the role of currency.
Money acts as a store of value and as
a means of exchange either between
individuals, corporations or nations and
as such its real value is derived from the
faith we have in it. The buying and selling
of currency effectively measures a nation’s
credibility and helps to stimulate growth
and stability in the global market place.
But the opposite is also true. Attempts to
control the impact of currency fluctuations
have been unsuccessful and following the
2008 economic crises the global monetary
system has become increasingly fickle,
grappling with speculative investments
while attempting to manage the imbalances
between countries (their current account
deficits and surpluses) and to control
g
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2. the gross capital flows that are currently
overburdening emerging markets.
Given this role, there are 6 key themes
expected to impact currency markets over
the next 10 years: the pace of trade; pegs
and floating exchange rates; the role of the
dollar as the global currency; the rise of the
Chinese Renminbi; regulation; and emerging
alternatives.
Technology has increased the speed and flow
of currency trade. This pace can often be at
the cost of appropriate consideration and
due diligence. With profit as the motivator
and with deal speed at a premium, currency
traders are rarely able to pause to consider
what the impact of their transaction could
be on a wider society. Currencies change
in nanoseconds. And yet it can take nations
years to recover from a fall. Perhaps it’s now
time to recognise that the way we manage
money is not fit for purpose in today’s world
and is unlikely to adapt to the changes over
the next decade. We need a new order that
can help stabilise the global marketplace and
deliver appropriate returns.
A critical lesson that Europe has taught Asia
is that combining currencies doesn’t work.
Over the long term neither do currency
pegs. In many ways a single currency across
a group of countries is simply an extreme
version of a peg and in times of crisis its
inflexibility imposes unnecessary constraints
on national governments, limiting options
and reducing their ability to respond to
market conditions. This can have a huge
impact on the local population. For example
in Greece, a Euro member struggling under
the weight of national debt, incomes have
fallen by nearly 30% since 2007 while almost
26% of the workforce is unemployed. In
truth, Europe’s single currency, created to
foster unity and ease trade, has become the
source of significant issues for many member
states. As the challenges for continental
Europe continue to increase many
commentators expect that the next decade
will see an unraveling of the European
model, including a possible devaluation of
multiple currencies in order for the smaller
nation states to be able to compete globally.
There are already major indications that this
is taking place, including the Swiss National
Bank’s decision to unpeg the Swiss franc and
the European Central Bank (ECB) programme
of quantitative easing.
Over in the US, the situation is in as much
flux, but for different reasons. The US has
been the primary trading nation of the
20th century and it is no slouch in the 21st,
accounting for 23% of global GDP and 12%
of merchandise trade. This has allowed the
dollar to dominate the markets. This is,
of course, good news for America as it has
paved the way for US fund managers to
run about 55% of the world’s assets. About
60% of the world’s output is in one way
or another influenced by the dollar, either
because currencies are pegged or because
they move in relation to it. It’s easy to see
the advantages from a US perspective but
not for everyone else, particularly because
the current system does not include a
guaranteed lender of last resort. Many
countries have built up enormous safety
buffers of dollar reserves to counter this but
that means that they are obliged to mimic US
policy. The result is that a rise in US interest
rates or even the threat of it has knock on
consequences across the world, particularly in
emerging markets. For many, the cost of the
dollar’s dominance is beginning to outweigh
its benefits, particularly as the US share of
world trade and GDP is in decline. Countries
would ideally let their currencies float so
that they can more easily adjust to changing
market conditions. Despite all this, the reality
today is that the dollar dominates global
trade, with even China’s trade into Africa
being contracted in dollars. The question,
however remains: is it sensible or sustainable
for this to be centralised in one country?
As the US draws back China’s influence
is extending. Currently its share of world
GDP is similar to the US, at 16% and 17%
respectively1
but all the expectations are
that China will continue to grow. Even if
Chinese growth decreases as predicted,
this will be the big political issue of the
next decade. Increasing international use
of the Yuan is the result of the Chinese
Central Banks efforts to slowly loosen the
restrictions on cross border capital flows
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Technology has Increased
the Speed of Currency Trade
With profit as the motivator
and with deal speed at a
premium, currency traders
are rarely able to pause to
consider what the impact of
their transaction could be on
a wider society.
Unfit For Purpose
Perhaps it’s now time to
recognise that the way we
manage money is not fit for
purpose in today’s world
and is unlikely to adapt to
the changes over the next
decade.
Combining Currencies
Doesn’t Work
A critical lesson that Europe
has taught Asia is that
combining currencies doesn’t
work. Over the long term
neither do currency pegs…
Many expect that the next
decade will see an unraveling
of the European model.
The US is in Flux
60% of the world’s output
is linked to the dollar. It’s
easy to see the advantages
of this for the US but not
for everyone else: The
system does not include a
guaranteed lender of last
resort.
US Global Control
Some countries have build
up significant dollar reserves
but, for many, the cost of
its dominance is beginning
to outweigh the benefits,
particularly as the US share
of world trade and GDP is in
decline.
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3. 3
and to free up the country’s financial system.
China is opening up and wants the natural
privileges a vast economy might expect: a
big say over global rules of finance and trade
and a widely used currency. Special Drawing
Rights (SDRs), are a start as they effectively
mean official recognition by the IMF that
the Yuan is acting as a reserve currency,
despite China’s extensive capital controls.
China’s government is preparing the way; the
next ten years will see its financial markets
continue down the path of liberalization,
helping to cement its place on the world
stage. Granted, the markets are still immature
and no-one expects an easy ride, but the
direction of travel is clear.
Regulation is key in all of this as, properly
designed, it provides a basis for stability,
security and confidence in the system. As
with all regulation, however, it has to battle
the speed of technology and come up with a
process that allows innovation, competition
and change but restricts malpractice, crime
and terrorism. As ever these are dynamic
choices and as a consequence are not stable
over time. Ironically the response to the
2008 crisis has not had the desired effect,
limiting the activity of bankers but enabling
asset rich investors, sovereign wealth funds,
hedge funds and the like, hungry for new
investments, to take a greater share of the
pie. Because of their scale these funds
bring with them huge influence and this
has fundamentally changed the function of
currency. Every day trillions of dollars are
exchanged, much more than is needed for
international trade. The currency markets are
attractive to speculators whose measure of
success is dependent on the yield.
Traditional currencies, despite their long
history, are being challenged in other ways
too. The most important of these would
appear to be the recent arrival of distributed
ledger or blockchain technology. Distributed
ledger technology can be used to transact
anything of value without requiring a
trusted third party, with proven ownership
and timestamps of transaction enabling
instant settlement and clearing. Blockchain
is to trade and currency what email was for
the postal service – allowing direct trade
without recourse to a trusted third party
and at a fraction of the transaction cost.
The mysterious Bitcoin is still the largest
currency using distributed ledger technology,
but both Central Banks and global banking
institutions are taking seriously the potential
advantages available, with initiatives such
as SETL, Ripple, Uphold and Circle already
showing the possibilities in currency, trade
and payments. One potential accelerator
of adoption of the distributed ledger could
be the growth of the Internet- of-Things, as
this would allow objects to be connected
directly to trade, payment and currency
simultaneously.
Adjacent to this, there has also been
continued exploration of more “local”
currencies – be these defined by geography
(e.g. the BerkShare – a hyper-local currency
only accepted in the Berkshires, a region
in western Massachusetts. More than 400
Berkshires businesses accept the currency,
and 13 banks serve as exchange stations;
according to its website “the currency
distinguishes the local businesses that
accept the currency from those that do not,
building stronger relationships and greater
affinity between the business community
and the citizens”) or by a closed user group
or corporate ecosystem (e.g. the Amazon
Coin or Starbucks’ Stars). None of these local
currencies have yet to take off, and their
widespread growth potential would appear
to be limited.
There are of course other non-traditional
currencies. These include those that have
been around for a few decades such as credit
scores, loyalty rewards and points systems
(e.g. airmiles). However, in recent years
others have begun to emerge, most notably
in the domain of authentication, validation
reputation and trust. Examples here include
eBay seller ratings, TripAdvisor reputation
scores, LinkedIn or Quora knowledge
ratings – as well as the emergence of trust
aggregators such as Digi.me.
Two final stresses adding to the pressure on
traditional currencies as a means of exchange
are also worth mentioning. The first is the
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The Start of Change for
the Yuan
Special Drawing Rights
(SDRs) are a start as they
effectively mean official
recognition by the IMF
that the Yuan is acting as
a reserve currency despite
China’s extensive capital
controls.
China’s Influence is Extending
China is opening up and
wants the natural privileges
a vast economy might expect:
a big say over global rules
of finance and trade and a
widely used currency.
Good Regulation is
Significant – for Stability
and Confidence
The response to the 2008
crisis has not had the desired
effect - limiting the activity
of bankers but enabling
asset-rich investors, sovereign
wealth funds, hedge funds,
hungry for new investments,
to take a greater share of
the pie.
Traditional Currencies are
Being Challenged.
Blockchain is to trade and
currency what email was
for the postal service. It is
allowing direct trade without
recourse to a trusted third
party and at a fraction of the
transaction cost.
Changing Times
Traditional currencies as
a means of exchange are
challenged by the growth
of non-traditional payments
systems and peer-to-peer
currency exchange and
remittance firms.
4. growth of peer to peer currency exchange
and remittance firms (e.g. TransferWise;
Western Union). The second is the rapid
growth of non-traditional payments systems
(e.g. Paypal, AliPay, ApplePay, Mpesa). In the
case of AliPay (Alibaba’s equivalent of PayPal),
it is worth noting that success has been not
only due to its distribution via the Alibaba
platform but also on the back of Chinese
distrust of US based or influenced payment
schemes such as Visa and Mastercard.
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measured at PPP
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A 3D View of Currency
Technology will allow
multiple variables to be
compared in real-time,
producing a 3D view
allowing traders to consider
what they are buying, why
they are buying it and the
impact that this may have
instantaneously.
Empowering the Crowd
In the future anyone will be
able to trade, immediately
knowing the amount they
are paying in the currency
of their choice. The number
of participants will drive the
market rather than single,
large-scale investors.
Born Free
Change across all regions
is inevitable: The emerging
markets, free of constraint,
are likely to seek to stabilize
their currencies and so be
able to support more foreign
investment.
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I believe that in the next decade we will all
be able to establish a much clearer picture of
capital flows and understand who is buying
currency and where that currency goes.
The information around currency value is
currently flat and limited in its extent, making
it difficult for anyone to compare multiple
market options concurrently. Technology will
change this and allow multiple variables to
be compared in real-time, producing a more
rounded, three-dimensional view allowing
traders to consider what they are buying,
why they are buying it and the impact that
this may have instantaneously. In addition
there will be more multi-currency platforms
for all stock and commodity trading making
it possible to see the real-time value of
an Australian share in, for example Yuan.
Perhaps more importantly over the long-term,
new data analytic capabilities will also help
traders identify emerging trends before
they happen.
Technology is also democratizing the
financial sector. In the not too distant future
anyone will be able to trade, immediately
knowing the amount they are paying in
the currency of their choice. This increased
transparency will make trading accessible
to a much larger base and in so doing will
limit the ability of the largest institutions
to use their size and scale to control the
market. Technology also enables resources
to be scaled like never before – entire
populations can now be targeted in order
to bring together huge numbers of small
investors. The number of participants will
drive the market rather than single, large-
scale investors. The force of the crowd could
begin to overpower the influence of the few.
When under threat, for example, it would be
possible for thousands of individual investors
to work together to stablise their national
currency and prevent possible disruption.
This sort of crowd intervention would be
revolutionary but is indeed a real possibility.
At the very least it will reduce the influence
of banks and similar institutions.
Given the shifts in global trade and the
opportunities that technology offers, change
across all regions is inevitable. In particular,
the emerging markets, free of constraint, are
likely to seek to stabilize their currencies
and so be able to support more foreign
investment. The crowd will be in control and
many small time traders are likely to join in;
if 100 million people all make the same $100
investment the impact will dwarf the power
of the hedge funds. Technology will also
make the markets more integrated while the
focus can remain fluid easily shifting from
a global to regional to local perspective. It
doesn’t mean that the competition will be
less fierce.
In summary, nothing is stable in the currency
markets but I believe over the next ten years
they will be shaped by three key elements.
Geopolitics, the rebalancing of power
between East and West and change the flow
of global trade will reduce the dominance
of the US as a centralised power. Secondly,
technology will continue to disrupt, enabling
more insight than ever to be derived through
the analysis of data and resources of the
many to be amalgamated and scaled. In the
process these dynamics will cause significant
decentralization. Influence that has
traditionally been held by select institutions
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Impact and Implications
5. 5
Market Chaos
The currency markets are
chaotic and they are likely
to become even more so
over the next ten years as
nations increasingly unpeg
themselves from the dollar
and other currencies.
will increasingly be moved to individuals and
crowds. All of these factors are in flux and
will interact with each other to determine
the state of the industry in 10 years’ time.
No-one can predict exactly what the currency
markets will look like in a decade, but
for the reasons outlined, it is likely to be
unrecognizable from what we see today.
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The currency markets are chaotic and they
are likely to become even more so over
the next ten years as nations, increasingly
unpeg themselves from the dollar and other
currencies. It is likely that many will look for a
different system that bypasses the US clearing
banks and indeed they may well return to
using the gold standard as an alternative.
Advancements in technology will undoubtedly
make a significant difference to currency
trading and has the potential to fundamentally
disrupt the industry entirely.Technology
developments have overturned countless
industries over the last decade and currency
markets will be no exception.At its core,
technology will enable data to be collected,
analysed and then provided to traders in a
way which allows multiple variables to be
compared in real time.This will enable the
true value of currency to become far more
transparent.
Although the industry suffered from the
impact of High Frequency Trading (HFT), which
allowed securities to be bought and sold in a
fraction of a millisecond and arguably caused
the Flash Crash in 2010, the next decade
will see a more mature technology emerge.
The analysis of Big Data will enable a more
responsible use of HFT, driven by a processed
response to accurate information and not on
the knee jerk reaction of traders.
The collection and then application of Big
Data analytics will in the process transform
the industry. It has the potential to contribute
to overall liquidity and to create a new
paradigm that could even help to protect
sovereign currencies from speculative attacks.
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The Proposed Way Forward
6. 6
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CEO, Six Capital
Lead expert on the Future of Currency.
Founder, Chief Dealer and CEO of Six Capital,
a revolutionary fin-tech company, Patrick is a
30-year industry veteran with a track record
in innovation.
While in his 20s, Patrick was VP and Chief
Dealer of Chase Manhattan – making him
one of Singapore’s youngest Chief Dealers.
Subsequently, he was VP for Treasury for the
Union Bank of Switzerland in Tokyo, actively
trading in one of the world’s largest currency
markets.
He has also served on part of the Singapore
Foreign Exchange Committee, where he and
his sub-committee were responsible for an
ambitious aim: to grow Singapore’s treasury
market and open lines of communication
between market participants and the
Monetary Authority of Singapore (MAS).
In 2009, Patrick founded Six Capital with
the aim of developing a pioneering fin-tech
company focused on leveraging the potential
of the currency markets. His vision is ‘to
create the future of jobs’, producing lasting,
positive impact on economies and society
through Six Capital’s services and operations.
Lead Expert – Patrick Teng
7. About Future Agenda
In an increasingly interconnected, complex
and uncertain world, many organisations
are looking for a better understanding
of how the future may unfold. To do this
successfully, many companies, institutions
and governments are working to improve
their use of strategic foresight in order to
anticipate emerging issues and prepare for
new opportunities.
Experience shows that change often occurs
at the intersection of different disciplines,
industries or challenges. This means that
views of the future that focus on one sector
alone have limited relevance in today’s world.
In order to have real value, foresight needs
to bring together multiple informed and
credible views of emerging change to form
a coherent picture of the world ahead. The
Future Agenda programme aims to do this
by providing a global platform for collective
thought and innovation discussions.
Get Involved
To discuss the future agenda programme and
potential participation please contact:
Dr.Tim Jones
Programme Director
Future Agenda
84 Brook Street, London. W1K 5EH
+44 203 0088 141 +44 780 1755 054
tim.jones@futureagenda.org
@futureagenda
The Future Agenda is the world’s largest open
foresight initiative. It was created in 2009 to
bring together views on the future from many
leading organizations. Building on expert
perspectives that addressed everything from
the future of health to the future of money,
over 1500 organizations debated the big
issues and emerging challenges for the next
decade. Sponsored globally by Vodafone
Group, this groundbreaking programme
looked out ten years to the world in 2020
and connected CEOs and mayors with
academics and students across 25 countries.
Additional online interaction connected over
50,000 people from more than 145 countries
who added their views to the mix. All output
from these discussions was shared via the
futureagenda.org website.
The success of the first Future Agenda
Programme stimulated several organizations
to ask that it should be repeated. Therefore
this second programme is running
throughout 2015 looking at key changes
in the world by 2025. Following a similar
approach to the first project, Future Agenda
2.0 builds on the initial success and adds
extra features, such as providing more
workshops in more countries to gain an
even wider input and enable regional
differences to be explored. There is also
a specific focus on the next generation
including collaborating with educational
organizations to engage future leaders. There
is a more refined use of social networks
to share insights and earlier link-ups with
global media organizations to ensure wider
engagement on the pivotal topics. In addition,
rather than having a single global sponsor,
this time multiple hosts are owning specific
topics wither globally or in their regions of
interest. Run as a not for profit project, Future
Agenda 2.0 is a major collaboration involving
many leading, forward-thinking organisations
around the world.
Context – Why Foresight?
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