The advent of new technologies is profoundly changing the delivery and distribution of financial services. Periods of “disruptive innovation” have always transformed the inequality map. For example, following the Industrial Revolution, European countries saw their entire populations benefit from improved GDPs and increased living standards. However, economic inequalities widened in comparison to the rest of the world. By learning from the past, policymakers can spot early trends and ensure that this technological revolution will benefit most people rather than just a few winners.
In this Conclusion, we will first summarize the ways in which key trends are deeply disrupting financial services. Next, based on an outline of previous financial crises and economic revolutions, we will provide recommendations designed to help policymakers avoid future mistakes. Then, we will show that the global spread of Covid-19 might be the catalyst that finally brings digital payments more fully into the mainstream. Finally, we will argue that the new fintech revolution has the potential to significantly improve life for people in advanced and emerging economies.
We here identify six key revolutions in modern financial services and present them in chronological order. These trends range from online brokerage services, a mature segment, to the recent rise of cryptocurrencies, which are challenging the core function of central banking.
The shift to online financial services was probably the first modern disruption. Online comparators and brokers allow individuals to compare financial products, banks, and insurance policies in a matter of seconds from home. This has made the old job of main-street brokerage nearly obsolete, except for very niche or complex products. This has increased product transparency and imposed downward price pressure—to the benefit of the end consumer.
This second wave of the modern technological revolution mostly automated the input, storage, and analysis of data. Data management is a critical and central part of banking and insurance sectors, which employ thousands of people to handle middle- and back-office processes. McKinsey estimated that around 50 percent of current work activities in these sectors are technically automatable. They also estimate more than 30 percent of the activities in six out of ten occupations today could be automated.1
Blockchain offers the next generation of data management. A decentralized system of trust enables blockchain to avoid data duplication when services, transactions, and contracts are handled by several banks. Automation and other improvements in bank data management will continue to evolve and challenge current organizations.
The first wave of automation mostly targeted back- and middle-office functions. Now, new algorithms and other forms of AI are replacing people in higher-paid, more sophisticated front-office jobs. For example:
In the long run, progress in software development and artificial intelligence will continue to replace parts of value chains and key roles within banks.
A massive digitalization of basic banking services (such as account management, transactions, money transfers) is bringing increased convenience to consumers. To date, northern Europe appears to have the most advanced online banking industry. Nordic and Dutch banks have already cut their branch numbers by 50 percent. The larger and more traditional markets of western Europe and the United States are likely to follow, cutting 30 percent to 50 percent of existing branches within the next decade.
While traditional banks adapt their networks to the new reality, new banks like N26 have managed to offer fully digital processes without using any branch or physical interactions. This allows online banking platforms to rapidly gain market footholds across countries and regions. These innovations will continue to challenge the traditional banking model’s core value-chain components.
The coming decade will see a rapid increase in digital payments, leading to the death of the plastic credit card. Over the next five years, mobile payments are expected to constitute two-fifths of in-store purchases in the United States, which is quadruple the current level. A similar rate of growth in digital payments is expected to occur in other developed countries; however, the rate at which the use of cash and plastic cards declines will vary from country to country. Many customers in emerging markets are transitioning directly from cash to mobile payments without ever owning a plastic card.
As digital payment technologies become more widely used, people might consume more. Digital payment platforms will be able to gather increasing amounts of highly personal data from consumers. That data will become increasingly valuable, which in turn will allow these businesses to significantly reduce the fees they charge, perhaps to nearly zero. The reduced fees will allow consumers to spend more.
Developments in China offer a preview of the future of payments. The country is developing a world-leading digital payments infrastructure. The value of online payments is equivalent to three-quarters of China’s GDP, which is almost double the proportion in 2012. Today, nearly half of in-store purchases in China are made with a digital wallet, which is far above the levels in any other country.3
With bank accounts paying low interest rates, cryptocurrencies are becoming another treasury-management tool for companies. A few publicly traded companies have started converting cash in their treasuries into Bitcoin as an alternative store of value. For example, MicroStrategy, a business analytics company, stated, “Company leaders believe that Bitcoin, as the world’s most widely adopted cryptocurrency, is a dependable store of value.” They “continue to believe Bitcoin will provide the opportunity for better returns and preserve the value of our capital over time, compared to holding cash.”4
The increased mainstream acceptance of cryptocurrencies is threatening financial stability, and central and commercial banks. Cryptocurrencies operate peer to peer, so they have the potential to disintermediate the banking system as we know it. Central banks are unlikely to give up their monopolies easily. For now, central bankers are reacting to the rise of cryptocurrencies by speeding up research and launching pilots for their own digital currencies.
These dramatic, rapid changes can be confusing for policymakers, making it difficult for them to develop long-term plans. For this reason it is important to study previous financial crises and revolutions. Understanding the past can help us avoid mistakes in the future. Below are three recommendations.
A key element of the 2007–2008 financial crisis was subprime lending, which led millions of people into unsustainable financial situations. There are at least three ways to avoid making the same mistake: investing in citizen financial education, controlling commercial lending sales pitches, and limiting the power of new fintech.
In regard to financial education, the IMF demonstrates that spending on financial and health education reduces inequality by promoting upward, generational social mobility. Financial literacy efforts can help people rise above a paycheck-to-paycheck way of life and help them avoid high debts that lead to serious loss of wealth. Financial literacy basics (e.g., compound interest rates, mortgages, types of investments) should be taught in schools and could even be part of mathematics curricula.
It is also important to regulate against predatory lending, which often occurs with commercial lending sales pitches. During the 2007–2008 financial crisis, banks were rightly blamed for pushing people into debt. They often spread alluring messages that promoted debt through their brokers or branch networks. Today digital ads and social networks have become new springboards for start-up and established players to promote financial products. To protect consumers from loan sharks, financial services regulators should create specialized teams to monitor the commercial activity of financial companies and regulate the aggressive campaigns designed to push vulnerable populations into risky debt (such as payday loans) or investment gambling (such as leveraged trading activity).
Finally, policymakers should find ways to add transparency, consumer protections, security, and accountability to start-up fintech companies. These protections are well established for traditional banks, but many new fintech firms are relatively unregulated. Thus, if a fintech start-up firm goes out of business, or mismanages customer accounts, consumers could lose money and have little or no recourse.
In the film Minority Report, the government deploys psychics to predict future crimes, allowing police to swoop in before the crimes can be committed. This possibility is no longer mere fiction. In China, for example, law enforcement agencies stop “pre-crimes” by using algorithms and the country’s immense surveillance infrastructure to identify potential dissidents. We are seeing a rapid development of methods based on Big Data about individuals’ demographics, payment history, browser history, medical history, and social network connections. Powerful computers track correlations and causality to generate predictions about the likeliness of defaulting on debt and the propensity of diseases.
Likewise, as large companies increasingly gather consumer data and then use algorithms to sell products and services, governments should make sure that these powerful tools do not lead to unfair exclusion and pricing. The usage of such predictive methods could be harmful in several ways. First, they provide companies and governments with detailed knowledge about consumers. This information enables companies to tailor convincing messages related to spending and debt. We can imagine a person who has recently become unemployed receiving a message such as: “Running low on cash? XYZ company can cover your need.” Similarly, if a health insurance company can predict a high likelihood of cancer or diabetes in individuals, then the company could deny insurance to those people or charge higher premium prices, putting the whole system of group insurance and solidarity at risk.5
To prevent these problems, the use of data must be regulated. Regulators should appoint specialized teams to test company algorithms and ensure they are competently designed, unbiased, and nonexploitative.
Governments must monitor, regulate, and coordinate to avoid “too big to fail” or “too powerful to regulate” scenarios. Although financial regulation over banks has been strengthened since the 2007–2008 financial crisis, most fintech players operate below the radar and benefit from weak or no regulations. As we have seen in other industries (such as Uber, Airbnb), when a company grows to become a multinational leader, it becomes much harder to regulate. Fintech giants, such as Alipay in China, already manage too much money across countries, which increases systemic risks within the global financial system. Similarly, digital firms offer an opportunity to scale-up products across multiple countries, with giant companies, such as the GAFA companies, arbitraging and optimizing local fiscal systems.
In light of these critical risks, there is an urgent need to create a cross-regulator taskforce to discuss and monitor emerging unicorn companies before they become so big that authorities are not able to effectively impose regulations.
This book was finalized in the middle of the Covid-19 crisis. At the time of this writing, we recognize that it is far too early to draw conclusions. However, we believe this pandemic—the fear it has created and the unprecedented government measures—is a catalyst for accelerating current trends in financial services.
There is little disagreement that physical currency can serve as a vector for transmitting some disease-causing pathogens, much like a mosquito. Studies have shown that the average European banknote contains 26,000 bacterial colonies, including strains such as E. coli and salmonella, which can cause food poisoning. Tests show that up to 94 percent of US dollar bills in circulation are contaminated with high levels of bacteria. Unpublished research by New York University’s Center for Genomics and Systems Biology found about 3,000 types of bacteria residing on US notes, and even traces of cocaine. Although most bacteria on banknotes are harmless, tests have found some pathogens.
With the Covid-19 pandemic there has been strong public concern that cash and cards might transmit the virus. Globally the number of internet searches on “cash virus” surged to unusual levels, with the highest in Australia, Canada, France, Ireland, Singapore, Switzerland, the UK, and the United States. The human influenza virus has been found alive and infectious for up to seventeen days on banknotes.6 A recent study suggested that SARS-CoV-2, the virus that causes Covid-19, “can persist on inanimate surfaces like metal, glass, or plastic for up to nine days, but can be efficiently inactivated by surface disinfection procedures.”7
To bolster trust in cash and guarantee universal acceptance, several central banks have actively communicated that risk of surface transmission is low. The Bank of England has noted that “the risk posed by handling a polymer note is no greater than touching any other common surfaces such as handrails, doorknobs, or credit cards.” The Bundesbank has advised the public that the risks of transmission through banknotes are minimal and that a sufficient supply of banknotes is guaranteed. The Bank of Canada has asked retailers to stop refusing cash payments. The South African Reserve Bank has counteracted scams by clarifying that there is no evidence of transmission by cash and it is not withdrawing cash from circulation.
Other central banks have taken additional precautionary measures, believing that handling cash is a potential risk factor in the Covid-19 pandemic. First, the People’s Bank of China, and the central banks in South Korea, Hungary, and Kuwait began to disinfect and even destroy banknotes to mitigate the spread of the virus. The governments’ decision to undertake such radical action suggests one of two conclusions: first, that leaders believe that currency can be an effective mode of Covid-19 transmission; second, they deem the investment required to disinfect, destroy, and reprint currency as worthwhile compared to the potential health care costs of spreading the disease.
As a result of the fears described above, central banks or governments in India, Indonesia, Georgia, and several other countries have encouraged cashless payments.
The effect of the Covid-19 on payment systems in Asia could be seen sooner than in Europe and the United States, given the already high penetration rate of digital payments in Asia. By the end of 2020 there were around 855 million online payment users in China, up from 137 million in 2010. One reason for this rapid increase is that in China and Southeast Asian countries the young populations are significantly larger than those in Europe and the United States, and young populations are usually more open to adopting new technologies.8
But the Covid-19 pandemic could be a game changer in the West. Older people are the most vulnerable to this virus, and they are the people who most use cash. It seems likely that the risk of infection from cash will compel older generations to more frequently use digital payment alternatives.
According to our research, Americans and western Europeans are much more dependent on cash than are other parts of the world. It takes much longer to change the ingrained habits of people in a legacy system. In terms of disease control, this could be a significant problem, especially in cash-based societies where populations are aging, such as Germany, Japan, or the United States. To reduce physical contact and queuing at checkout, contactless card payment limits rose from £30 ($35) to £45 ($52) across most European countries in March 2020. This increase, coupled with worldwide lockdowns and social distancing measures, has driven more and more people to use cards over cash. In the UK the number of sellers accepting only digital payments in 2020 jumped from 8 percent in February to 50 percent in April.9
Over the medium to long term, concerns over handling cash will certainly add to the calls for central banks (CBs) to develop central bank digital currencies (CBDCs). Over the past two years, central banks around the world have multiplied their digital cash initiatives. In early 2021, 86 percent of CBs were developing a CBDC. The work goes far beyond research. About 60 percent of CBs were experimenting with proofs-of-concept, and 14 percent were already running pilot projects.
This process is already in motion. In April 2020 China began a CBDC trial. In February 2020 Sweden, a country where the amount of cash in circulation now is only 1 percent of GDP, began its first trial of the e-krona. Several countries have already launched their CBDCs, including the Bahamas and the Organization of Eastern Caribbean States. In the United States, the drafts of the first Covid-19 stimulus bill first included and then discarded the creation of digital dollar wallets.
Periods of profound “disruptive innovation” have always reshuffled the inequality map. For example, during the Industrial Revolution, European countries saw their entire populations benefit from improved GDPs and increased living standards. At the same time, the inequalities widened in comparison to the rest of the world.
As we have noted, disruptive innovation has always impacted economic inequality. The same is true with fintech disruptive innovations. Next we summarize the primary ways in which new fintech advances are influencing the inequality map around the world.
First, developing countries struggle to close many remaining gaps in access to banking services. Millions of people (not only millennials) in advanced economies lack bank accounts. In 2015, 7 percent of households did not have access to a checking or savings account. This suggests that about 15.6 million adults and 7.6 million children in the United States were unbanked. A primary reason for not having an account is the expensive bank fees. In response to this problem, after the 2007–2008 financial crisis many companies launched digital-only, branchless banks that offer simpler, cheaper accounts and card services. The German start-up N26 was created in 2015 with the objective to offer lower-income millennials more accessible banking services.
Second, freelance workers and others with unstable careers often lack access to credit.
Online peer-to-peer lending, crowdfunding, and crowd-investing platforms have been established to increase access to financing. This approach allows project leaders to connect with digital communities for the purpose of investing, acquiring funding, and borrowing outside traditional and institutional intermediaries (banks, asset managers, and so on). Since it was launched in 2009, Kickstarter has been regarded as the pioneer in this field, at least in terms of crowdfunding. But the Kickstarter’s genesis occurred much earlier, in the early 2000s. Perry Chen, then a musician who was frustrated about not being able to invite two DJs to a jazz festival for lack of funds, came up with the idea of a fundraising platform that would let citizens express themselves. Today the company faces increasingly stiff competition. Online jackpots and specialized funding sites abound and multiply the alternatives to Kickstarter.
Third, there continues to be unequal access to the “revenue” from capital. Wealthy individuals have access to a wide range of investment opportunities, including investments in alternative asset management plans (such as hedge funds), whereas small investors typically hold more “vanilla” investments (such as bank deposits and government bonds). An investment of $100 in 1927 in T-bills would have yielded $2,082 in 2020 and the same investment in stock would have yielded $592,868.
On average, stocks have outperformed short- and long-term bonds during most periods over the last two centuries. Clearly, long-term dormant savings can add up to a lot of money. We also see that small differences in investment returns make a big difference over the long term, via the compounding effect. Regular savings, even in moderate amounts, can accumulate significant wealth. These facts apply to pension planning and complementary retirement investments. Even small differences in investment fees can make a big difference over time.
To provide lower-income populations with access to more lucrative investment products and financial advice, fintech innovators launched robo-advisors (automated online financial advice) as an alternative to traditional financial advisers. Robo-advisors are based on algorithms that consider the investor’s profile and his or her relationship to risk, with different objectives and varying time horizons. The robo-advisor then offers an investment proposal that best suits the client’s needs. Robo-advisors offer low and transparent fees, convenience, affordability, and other benefits. Many people who never thought they could invest can now begin.
First, public services, such as tax collection or ID creation, could leverage new fintech payment and blockchain technologies. This should help civil servants move away from jobs that entail data gathering, inputs, and verification—freeing them to work more directly with citizens. Banks and insurance companies are already leveraging blockchain technologies to significantly improve back-office processes. Adopting these technologies at scale could help governments improve tax collection and reallocate civil servants to functions that offer higher value to citizens. In the short term, workers will likely fear change; many jobs could be replaced by algorithms. But in the long run, fintech can improve services to citizens and offer more rewarding jobs for public servants.
Second, it is important at this time to modernize fiscal and labor policies as the world enters the new era of peer-to-peer employment platforms and cross-border digital commerce. Governments need to rethink the definition of taxation and employment protections so as to include those people who work in freelance jobs. We envision the creation of a social security and insurance framework—including the collection of social contributions—for freelance platform workers. In the era of Big Data, it is possible for governments to gather income information, to facilitate tax computation, and even to automate tax collection directly from online work platforms.
Third, governments should join forces to gather data and collaborate against individual and corporate tax evasion. Blockchain offers a great backbone for the dematerialization, centralization, and management of citizen data. It can track financial flows (taxes, authentication, and social benefits) while keeping some data confidential. The US government has already started to force foreign banks to share data on US citizens through FATCA. This effort could be extended by and between other governments. Banks could share data through a common platform, which would allow governments to map the cross-national assets and revenues of individuals and corporations.
There are, of course, barriers in developing nations as they seek to implement the fintech recommendations described above. First, the lack of official documents impairs access to financial services. A functioning banking system is based on individual documentation (IDs). Account holders must have reliable identity data that can be verified. In developing countries, many people lack basic IDs and documentation to access financial services. Aadhaar in India is a good example of a government-led initiative that could act as an enabler for the broader fintech ecosystem. Aadhaar was a groundbreaking initiative that enabled the Indian government to develop an online database with information about 1.2 billion people. It was created with the goal of enrolling up to one million new users every day and is capable of handling 600 million transactions per day. By comparison, Visa processes 130 million transactions every day.
Second, many developing nations face endemic fraud and corruption, which is harmful to economic development. In emerging markets, bribery systems means that a large part of taxes and social redistribution is “captured” by government employees or other predatory individuals along the chain of money collection or redistribution. Digitalization of payments, which requires the right infrastructure (e-wallet and so on) allows governments and citizens to disintermediate money collection and redistribution, thereby diminishing bribery and theft. This type of fintech innovation keeps track of transactions, enabling governments to monitor and identify fraud and bribery. This would increase the funds available for redistribution, perhaps reduce taxes, and potentially unleash the economy for the benefit of people.
Third, many developing nations have limited commerce in rural areas, which reduces access in those regions to goods and the capacity to sell. E-commerce could be a solution. It could enable rural small businesses to sell goods far beyond local boundaries. By establishing online stores, for example, merchants could avoid the high sunk costs of opening physical shops and they could reduce fixed costs related to rent, staffing, and so on. Small business owners could increase sales by utilizing lost-cost search engine optimization, social media traffic, and online evaluations. Fintech, specifically digital payments, could help rural e-commerce merchants to easily receive payments from distant clients. China has also seen explosive growth across online e-commerce and social networking platforms. The nation provides payment services that are almost universally accepted within China. They are used by low- and high-income, rural and urban households alike. These platforms include Alipay, developed by the Alibaba Group’s affiliate Ant Financial, and Tencent’s Tenpay, which operates the social media platforms WeChat and QQ.
A fourth barrier is that many developing nations have large unbanked populations, especially in rural areas. Many citizens lack access to banking services and / or must travel long distances to access banks. As we showed in Chapter 6, for example, unbanked citizens usually do not earn a formal salary or income. Most are paid in cash. This condition prevents them from opening a traditional bank account. And even if they have such an account, bank transfers are expensive. People do not want to pay high bank fees to transfer extremely small amounts of money, say to distant and unbanked relatives. In Kenya, for example, people often turn to a risky alternative. They often entrust matatus (privately owned minibuses), drivers, or train conductors to deliver their money. Not surprisingly, the money often vanishes.
Fintech is helping these populations. Any citizen in Kenya can open a M-Pesa account with a valid ID and a phone number. Safaricom set a goal of enlisting 350,000 customers during the company’s first year, but it ended up with 1.2 million. According to its 2017 report, Safaricom is serving “thirty million customers in ten countries and [offering] a range of services, including foreign transfers, loans, and health provisions.”10
Fifth, the lack of infrastructures to create social services redistribution is a significant problem in developing nations. Citizens who most need social redistribution often lack IDs, addresses, and bank accounts. There is a clear need to have a simple, cost-effective identification system that enables citizens to transfer and store small payments. As we saw in Chapter 7, the United Nation’s World Food Programme (WFP) Building Blocks initiative has helped distribute cash-for-food aid to over one hundred thousand Syrian refugees in Jordan. In 2017, the WFP transferred over $1.3 billion in Building Blocks benefits. The use of blockchain since then has reduced bank fees involved in those transfers by 98 percent. This has saved the WFP millions of dollars that can now be used for higher purposes, such as expanding programs or offering greater benefits per recipient.
Our first recommendation for emerging economies is to launch vast programs to digitize IDs and create a positive ecosystem for e-commerce and financial services. The Indian government led with way with its Aadhaar ID system, which also enabled more people to obtain bank accounts and other financial services. Taking a proactive role and creating a digital infrastructure will serve as a backbone for opening banking accounts, launching or revamping national health systems, and creating start-up services such as e-commerce, digital wallets, and payment solutions.11
Second, the public sector should develop partnerships with start-ups to invest in telecom and payment infrastructure for rural areas. In emerging economies, the combination of mobile, e-commerce, and digital payment options helps business expansion. This creates a virtuous cycle that leads to stronger economic growth, better development, and higher living standards. Governments should continue working with the private sector to develop PPPs (public-private partnerships) to offer access to broadband, e-commerce, and payment solutions in the most remote areas. We can envision governments offering public tender for start-ups to partially fund fintech projects in remote and poor areas of each country.
Finally, newly created fintech ecosystems are a great steppingstone for government services and wealth redistribution. As stated above, one of the biggest barriers to creating social security or other redistribution services is the lack of official identities among the most remote citizens. Without IDs and residential addresses, for example, citizens are not able to access government services and they become more susceptible to theft, loss, and corruption. Fintech solutions can help gather valuable data, such as addresses, and create digital wallets or other means for people to receive government benefits. Governments should continue to strengthen partnerships with private-sector fintech companies to deliver public services to citizens in remote areas. These services could be delivered through newly created payment infrastructures.
We conclude by thinking ahead and trying to identify some of the key themes and next waves of disruption. This list is by no mean exhaustive, but this is a first glimpse of … dreaming of the future.
The all-encompassing social network. An underlying trend is the convergence of social media, payments, and e-commerce. Facebook has been used as a springboard to launch and advertise businesses and services to its users. It is now taking the next step to develop its own digital currency. Facebook could become a cross-border closed market in which people can exchange goods and services with a new currency. On the other side of the world WeChat services include a mix of social media, instant messaging, e-commerce, and instant payments. It would overlap with Amazon, WhatsApp, and Apple Pay services, just to name a few.
The full-service bank at your fingertips. We could easily envision a deeper and stronger integration between various digital and mobile services, such as mobile banking, robo-advisors, card payments, money transfers and remittances, trading and investments, and aggregation of banking accounts. Apart from in China, these services are not all-in-one and would benefit from further integration under the same umbrella. In the end, full money management will be available from a single mobile and a single app—unless it becomes a chipset inserted into the body as in the movie In Time.
The revolution in government administration. The pandemic has put additional pressure on already weak government finances, forcing them to reduce costs. They will probably follow the footsteps of the banking and insurance industries by automating back-office jobs and significantly reducing staff (by 40 percent or more). As we saw in Chapter 7, government data management will become incredibly more efficient through blockchain and algorithms thereby allowing for better tax collection, social redistribution, and fraud prevention. Smaller countries like Estonia or the UAE are already at the forefront of better, faster, stronger government services. They are pioneering new technologies and ideas not only to save costs but to improve services to their citizens. Clearly, this revolution will also be a political challenge. And as government workers fear losing their jobs, the transition to fintech solutions could take longer as people retire.
The cross-border digital or cryptocurrencies become mainstream. The pandemic has hastened the decline of cash by four or five years. Now, the world has shifted from asking whether digital currencies will succeed, to how and when they will become mainstream. Both PayPal and Venmo added cryptocurrency capability to their wallets in 2021. Central banks will continue to develop a digital cash alternative. The Bahamas launched the first nationwide CBDC in October 2020, and both Sweden and China launched pilots in early 2020. We can envision cashless societies and fully digitalized national currencies (with mobile payments secured by fingerprints or personal chips) as well as new cross-border payments to support trade using Bitcoin, Facebook, or …
The twenty-first century fiscal revolution. The value-added tax (VAT) is now increasingly difficult to manage when goods and services are far from their consumption markets. Today, small and medium industries (SMEs) in France are using advertising services based anywhere in the world while advisors are based in Ireland. These advertising services are transacted through a self-service platform that was coded by engineers from Facebook in California or India. How and where could these services be taxed? In a globalized post-Covid area, where people will increasingly travel again, what will and should drive VAT? Will the VAT be directly charged to and collected from the end consumer based on nationality or geo-localization? Similarly, the employment contract as we know it today will likely become rare as the freelance economy expands. The Covid-19 pandemic has led people to get paid in one country for services offered in another country while being confined in a third country. This short-term problem is only the tip of the iceberg. Platforms like Upwork allow people to hire freelancers anywhere in the world to offer services to clients in other parts of the world. During the pandemic, many companies have announced that people could work remotely from wherever they want. How should income tax be collected and social services be offered in that context? Governments will have to define new ways to calculate income tax for the freelancers while relying on technology and cooperation with freelance platforms to enforce income tax payments and to avoid fraud.
Each of these possible scenarios is already disruptive, but the combination of them may forever change the world as we know it. In the previous millennium, people fought for land causing the emergence and reshuffling of countries. A country was simply “a territory with a legal system, currency, and language that bound people together by birth, upbringing, and community. It was administered by a government responsible for maintaining the system (law, security, infrastructure) and funded by taxing the economic activity generated by this ecosystem.” Each of the pillars in the definition have already been challenged by global forces, such as access to information, international travel, and global trade—to name a few macro trends. This system will be challenged by the emergence of cross-border currencies, and by platforms for global marketplaces of goods and services. Estonia may be pioneer in the through-process of offering “e-citizenship.” This notion will be increasingly challenged. So will the legitimacy and capacity of governments to operate within this new context.