By Natalia Kaczmarek, Digital Content Creator
We’ve all heard the saying ‘cash is king’. And it certainly has been for a long time. While some people still largely rely on notes and prefer them for everyday spending, others have permanently shifted to credit cards. Whatever the preferences, we can’t ignore that the financial system is changing, with mobile payments on the rise and a boom in crypto and digital currencies.
In fact, the Bahamas is the first country to issue central bank digital currency (CBDC). Launched in October 2020, the sand dollar is a digital iteration of the Bahamian dollar and one of just two fully operational retail CBDCs worldwide. The second one is electronic yuan (e-CNY) backed by The People’s Bank of China. The blockchain-powered e-CNY is China’s response to the declining role of cash, aiming to eventually and completely replace it.
But will more countries follow China’s footsteps to kill cash?
CBDCs are currently a hot topic, with many governments running initiatives and pilot schemes to explore the applications and impact. In July this year, the European Central Bank (ECB) announced it was approaching the next phase of its digital euro development project. However, it explicitly stated that the digital euro will complement, not replace, cash. The Bank of England has also set up a taskforce to coordinate the exploration of a potential UK CBDC. Sweden, South Korea, Saudi Arabia, Ghana and Nigeria are all among 81 countries looking into digital currencies. Interestingly, while the race is hotting up, the world’s foremost economic power, the US, is quite behind. Could this be an omen?
Benefits of digital currencies
As an inclusive digital payment medium, CBDCs would be available to all citizens and businesses, offering an array of benefits in the future. Unlike unregulated cryptocurrencies and stablecoins, they’re issued centrally as digital tokens or deposit accounts, and have real values not set by the market’s supply or demand. That means they should be stable through the enforcement of monetary policies.
Digital currencies could allow financial service providers to improve efficiency and offer innovative, progressive services to us all. They could drive the Internet of Things payments forward. Your smart vehicle could pay for its own power or toll, or your smart home could sell excess electricity from solar panels to the next-door neighbour. And maybe finally we won’t need a coin for a supermarket trolley?
With CBDCs, local and cross-border payment transfers can occur almost instantly, with much lower fees. Faster, more convenient and cheaper transfers can promote economic growth and benefit poorer regions. People visiting foreign countries for business and pleasure could have easier access to local currency, encouraging them to spend more and boosting the economy. With digital smart wallets, we won’t have to check our pockets every time we leave the house. Just a small benefit for the forgetful.
Privacy considerations ahead
It seems like the future of CBDCs is promising. However, one of the greatest concerns with any digital currency and the transition to fully cashless banking systems is consumer privacy. Many businesses have betrayed our basic right to privacy in the past, so some might be more hesitant than others to permanently switch to this new means of payment. As central banks will be able to monitor every transaction performed through CBDCs, the culture of greater surveillance might be born. Banks could trace our whereabouts and create detailed personas of their citizens and spending habits, leading to unstable governance and highly dissatisfied nations. It could be argued that most of our moves are already being scrutinised, yet we’re still happy to geo-tag our latest Instagram posts…
Whilst electronic currencies are picking up and promise many benefits for the society of the future, it will take a few years for us to forget about good old cash. For now, I’ll personally keep hold of any coins from the back of the sofa. One day, they might be worth a lot of e-money.