In the past few years, digital or virtual currencies have been steadily gaining popularity and trending worldwide. The biggest accelerator behind this is the advent of cryptocurrencies such as Bitcoin, but are we ready to move towards a cashless society - from a consumer and a government perspective?
What is a cryptocurrency? And why is there so much hype around them?
A cryptocurrency is a virtual currency designed to make transactions transparent and secure, by operating a decentralised and trustless network that stores transaction details in a distributed transaction ledger (DTL) encrypted with mathematical algorithms. Transaction are validated by consensus over the network and added as new “blocks” to the “chain” of data making up the ledger - the “blockchain”. The data in the chain is immutable, and can be verified as a matter of public record.
Satoshi Nakamoto, the unknown inventor of Bitcoin, never intended to invent a currency. In his announcement of Bitcoin in late 2008, Satoshi said he had developed “A Peer-to-Peer Electronic Cash System.“ The single most important detail of Bitcoin’s architecture was its decentralisation. In the 1990’s, there were many attempts to create digital money, but they all failed due to the necessity for trust in a central party.
After seeing all the centralized attempts fail, Satoshi tried to build a digital cash system without a central entity, like a Peer-to-Peer (P2P) network for file sharing. This decision became the birth of cryptocurrency.
Basically, cryptocurrencies are just entries in decentralized consensus-databases. They are called CRYPTOcurrencies because the consensus-keeping process is secured by strong cryptography. Cryptocurrencies are built on cryptography. They are not secured by people or by trust, but by math. They have no involvement with any banks or governments, the historic decision-makers about currencies.
Most people think that cryptocurrencies could have many benefits such as reduction of middlemen and fees, increased security and accountability, and many more. On the flip-side, some people are worried about the potentially anonymous nature of cryptocurrency transaction and the fact that their ability to bypass banks and governments will lead to an increase in financial crimes such as money-laundering.
Enter the Central Banks and the CBDC
Although there are numerous tales of Governments around the world finding issue with cryptocurrencies in general and Bitcoin specifically, Central Banks have realised that there are many advantages to digital currencies and are now investigating their own, Central Bank Digital Currency.
For example, banknotes and coins are costly to produce, distribute, handle, as well as to replace. At the moment, handling costs related to cash are subsidised by commercial banks’ revenues. The Indian government has launched a demonetization policy which resulted of withdrawing 86% of its currency overnight back in November 2016.
Another benefit of eliminating banknotes is to help to fight illegal activities and create greater transparency and ability to audit any transaction or flow of money.
There is doubt amongst many that the Governments and Central Banks could, or should, be the ones to issue any digital currency, due to the centralisation of the currency and its susceptibility to manipulation the way that current paper money is.
Who is leading the charge?
Aside from various private and global initiatives like Bitcoin and ZenCash, there have recent efforts from countries like Sweden and China to move towards a cashless society and they are investigating a CBDC.
The objective is to complement or eliminate altogether the use of banknotes and coins, but there are many considerations to factor in. Any CBDC will revolutionise both the way money is created and distributed, disrupting the present two-tier financial system between the central and commercial banks.
Cash payments in the retail sector has fallen from close to 40% in 2010 to about 15% in 2016 in Sweden. Two-thirds of the country’s consumers are now able to manage without cash, and at the same time, most bank branches in Sweden no longer conduct over the counter cash transactions.
The Riksbank governor Stefan Ingves has suggested that the idea of the Swedish cryptocurrency (e-Krona) is around three to four years away but has no plan of completely eliminating physical cash because Ingves thinks that this would create a problem in times of crisis. He states that due to preparedness reasons, “we need notes and coins that work without electricity”. For instance, if the power supply is cut, electronic payments would not work.
For this reason, Ingves has suggested that all the Sweden’s banks should always expected to handle physical cash. More specifically, he thinks that people should be able to deposit money in the form of notes and to take out money. He also mentioned that a ban on cash goes against the public perception of what money is and also what banks do. However, Ingves realises that banks in Sweden would rather not have to deal with cash, due to the cost involved.
At first glance, it may seem technically simple and entirely logical for the Swedish Government and Central Bank to issue an e-Krona, however, the concept is entirely new and there is no precedent to follow.
Other countries such as Canada and UK already started to research the advantages and disadvantages of having their own digital currencies. However, none of them have yet to make a conclusion or issue anything. As a result, Sweden may be the first country to issue a digital currency.
While the future is unclear, digital currencies are here to stay
There are many areas for any Central Bank to look into before introducing any digital currencies, including possible technical, legal, and practical issues. Over and above the legal implications of a centralised digital currency, there is the mindset of the early cryptocurrency adopters, whom value decentralisation and transparency, not to mention anonymity, much more than any Government.
Regardless of what policy Central Banks come up with, and which cryptocurrencies or Central Bank Digital Currencies are issued, it is safe to say that digital currencies are the future. Consumer behaviour in this case will drive Government policy, even if there is a long lag between the two.
Some people have voiced concerns over the move to a cashless society, arguing that the lack of a tangible, physical object will lead to issues in budgeting and a change in the perception of money in people’s minds. This may be valid, but the move has been made several times previously throughout history.
First we had money based on an asset, such as gold. Then we had money based on politics, such as our current money (paper or otherwise). Next we will have money based on math.