Is cash in danger of extinction? Unlikely, at least in the short term and in most countries, but we are seeing more and more cashless transactions and even establishments that no longer take cash. However, it is a possibility that has not gone unnoticed by the private sector and regulators, and especially by several central banks. So, we are faced with several questions. What would be the consequences of a cashless future? Who should issue a digital currency? Should central banks play a more prominent role?
The financial sector is perhaps one of the most active in developing new technologies, and there are hundreds of fintechs with millions of users. For instance, bitcoin, blockchain, and cryptocurrency are already familiar terms. Bitcoin proposed, in very general terms, an electronic payment system where cryptography would replace the trust put in a third party and this intermediation (i.e. a bank).
The technology behind bitcoin and blockchain currently has countless applications in different industries, and shortly after the appearance of bitcoin, dozens of cryptocurrencies were created, although these are not without their critics.
Bitcoin and other digital currencies were not the answer to create a cashless world, but they did highlight some of the limitations of the payment system and they continue to develop new initiatives. For example, Libra, the digital currency launched by Facebook, is making headlines and causing concern among regulators and politicians around the world. Interestingly, other players have taken the decision to issue digital currencies – the central banks.
Christine Lagarde, the former Managing Director of the IMF and future ECB President, has said that the possibility of a State issuing a digital currency should be considered, i.e. central bank digital currencies. As its name suggests, CBDC’s would serve as a new form of money issued digitally by a central bank as a legal currency, which is one of its most relevant aspects. It is one of the main differences compared to unofficial digital currencies which are currently regulated as securities or commodities in various countries).
One of the arguments for issuing CBDC’s is financial inclusion, particularly in a scenario where the use of cash decreases or eventually stops being used; security and protection for the consumer; low transaction costs, and privacy. However, the design of a CBDC and the specific circumstances of the country that issues it will determine its success or failure. For example, in November 2018 it was estimated that 69% of central banks were already analyzing this, including Australia, Bahamas, Brazil, Canada, China, Curaçao, Denmark, Israel, Norway, Philippines, Sweden, United Kingdom and Uruguay.
Some initiatives were unsuccessful. Ecuador is one of the countries that attempted to implement its version of “electronic money” but it was withdrawn in April 2018; and Venezuela’s petro failed drastically. However, there are other much more sophisticated options such as Sweden’s E-krona, and China is interested in developed its own CBDC, especially given the potential new market entrants like Libra. The Bank for International Settlements (the bank for central banks) has also analyzed the potential advantages and challenges of CBDC’s. It highlights a possible consequence of not issuing CBDC’s, that is, private currencies replacing traditional money issued by a central bank.
In short, CBDC are another example of how money could evolve, and this glimpse of a cashless future, although distant, shows how technology and innovation can influence the integrity and stability of the financial system. Admittedly, not all innovation is necessarily positive, but it is necessary to be open to new technologies and debate, which in turn could contribute to public policies and align public and private interests.
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