Will Cash Wither Once Central Banks Support Cryptocurrencies?

Most agree that bitcoin and other cryptocurrencies aren't intended for everyday transactions, but what about central bank digital currencies? Several countries are close to launching one, which could become a regulated, easy-to-use digital alternative to traditional currency. Here's a rundown on what's happening and its potential impact for the banking industry.

While the world has been fixated on bitcoin’s roller coaster price ride, a potentially bigger digital currency development has been steadily moving forward.

This is central bank digital currencies (CBDCs). The European Central Bank (ECB) published a report on a digital euro in October of 2020, voicing possibilities that the concept may be implemented soon. And several countries have digital currencies already functioning, with others, including the U.S., researching or working on their versions of a CBDC.

Banking leaders are wondering if these digital currencies will force cash out of people’s wallets. The review below of implementation stages, premises, and benefits of CBDC will help answer that and other questions.

What Is a CBDC and How Is it Different from Bitcoin?

A central bank digital currency is an electronic form of fiat money of a particular country or region. It comes as no surprise that the concept of CBDC was inspired by bitcoin, the cryptocurrency created in 2009. But there is a significant distinction between the two. The CBDC is issued and regulated by the government or an appropriate monetary institution of a country, while with bitcoin and a variety of other cryptocurrencies, regulation is an ongoing hot issue.

Some countries like Japan and Switzerland adopted regulations for bitcoin, and other countries are working on the legislation, but as a whole, cryptocurrencies remain unregulated. While that has certain advantages, with no regulations in place, it’s easier for scammers to get their hands on someone’s money, as most cryptocurrency transactions are irreversible.

That’s why some countries put their twist on the cryptocurrency concept and developed CBDCs — a regulated and easy-to-use electronic money. When describing the digital euro, ECB puts it simply: It is a regulated “digital representation of cash,” which remains a risk-free liability of the central bank.

For now, the digital euro is only in the preparation phase. The ECB plans to announce whether it will launch the project in the middle of 2021.

Where are CBDCs Cropping Up?

The ECB is hardly the only government entity exploring digital currency issuance. Here is a rundown of what others are doing based on news reports and other sources.

China’s digital yuan is one of the best known CBDC’s at present. Its development began in 2014 and is backed by China’s central bank. The country even distributed 10 million digital yuan (about $1.47 million) in Shenzhen as a part of an experiment in the fall of 2020. Digital wallets containing 200 digital yuan each ($30) were sent to random consumers via the official Digital Renminbi app, Reuters reports.

It is expected that mass testing of the currency could begin in time for the 2022 Winter Olympic Games to be hosted by China.

Japan has taken a different approach to the digital yen: Private banks will be responsible for issuing the digital currency as part of an experiment. A group of 30 large enterprises (the three largest banks, plus brokerage companies, retailers, and others) will start issuing digital currency in 2021 with a common settlement platform.

Japanese people strongly prefer physical money to non-cash payments, which account for only 20% of the total payments there, according to Reuters. Thus, the digital yen initiative is set to boost the country’s progression to using digital means of payment.

Sweden started a CBDC pilot project known as e-krona in February 2020. The government, which is working on having Sweden become the world’s first cashless society, is already considering the possibility of a full transition to digital currency. Bloomberg reports that Sweden could be ready for this by as early as November 2022.

Great Britain
The Bank of England has announced that the discussions on digital currency are underway. In news reports, the governor of the bank, Andrew Bailey, said he believes that the possibility of launching such a project will appear after the coronavirus pandemic subsides.

United States
In the U.S., the Federal Reserve System said that research on this topic is being carried out to better understand the opportunities and risks associated with CBDCs. In addition, the Federal Reserve Bank of Boston is collaborating with the Massachusetts Institute of Technology to build a hypothetical digital currency for central bank use.

Why Central Banks Are Interested in Digital Currencies

As the above listing indicates, CBDC implementation projects take time for both consideration and preparation. It will take years to adopt such concepts and even longer for everyday people to get used to them.

Still, the fact that several major countries are interested in introducing digital currencies is highly significant. It’s certainly not about coming up with a rival to cryptocurrencies. Here are some of the reasons these countries are looking into implementing CBDCs:

  • It will encourage further digitalization with its benefits of faster and more secure transactions.
  • CBDCs will help make payments more inclusive by reaching rural areas and unbanked citizens more efficiently and securely.
  • A digital currency will lower the costs of issuing and managing physical cash.
  • CBDCs will be more convenient for tracking the flow of money.
  • If the digital currency is interest-bearing, it can increase an economy’s reaction to changes in the policy rate, which will lead to enhancement of monetary policy transmission.

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But Will Digital Currencies Replace Cash?

To answer the question directly: Not in the near future. As we’ve established, CBDCs are only starting to emerge worldwide.

It’s true that Sweden plans to become a cashless society by March of 2023 or sooner. In fact, as of 2020 only 9% of its population used physical money. But it’s highly unlikely that this dramatic change in consumer spending habits will happen globally.

The issue in part is that not all people have access to technology. For instance, the global internet penetration rate is currently 59%, and as of the end of 2019, 51% of people couldn’t use the mobile internet due to lack of coverage, affordability, or digital skills, according to GSMA.

And of course, some people simply can’t break the cash habit. Though cash usage dropped from 2017 to 2020, 73% of Europeans still were using it for pocket money, according to ING research. 40% of the respondents explained it’s quicker to pay with cash for things like taxis, public transport and lunch.

When asked whether they wanted cash to disappear, only 11% strongly agreed, while 29% disagreed completely. Also, there are still small shops that only accept physical money. And, of course, cash is very prevalent in crimes, as it is easier to steal and harder to track.

Still, cash usage will likely continue decreasing with changing generations, but when it will disappear globally — if ever — is hard to say.

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