Do you remember the last time you paid in cash? If your memory falters, don't worry: you're not alone. We are silently sliding towards a cashless world, and central banks around the planet (90% of them(at least) are preparing. At what? Well, creating digital versions of our beloved national currencies. But are we really ready to say goodbye to crumpled banknotes in our wallets?
Central bank digital currencies: an overview
According to a recent report from the Bank for International Settlements (BIS), over 90% of the world's central banks are exploring the introduction of a central bank digital currency (CBDC). This move represents a significant step forward towards an increasingly cashless society.
A CBDC is not a new currency, but a digital representation of an existing national currency. For example, a European CBDC would have exactly the same value as one euro and would be considered legal tender for all intents and purposes.
CBDCs are divided into two main categories: those retail, intended for daily use by consumers, and those in bulk, reserved for financial institutions.
Retail CBDC, the main road to the cashless world
Retail CBDCs are designed to enable point-of-sale purchases, facilitate payments to institutions and enable transfers between individuals.
Most (not all?) central banks are considering not charging interest on these digital currencies, making them similar to physical cash in this respect. The opposite would seem frankly absurd to me.
Cashless yes, cashless no: four bonuses and two penalties
The introduction of central bank digital currencies could bring at least three different benefits and two rather big problems. Almost a dilemma. The four benefits (one is really interesting, and deserves the next paragraph):
- Preserving the role of central bank money in an increasingly digital economy.
- Maintain the effectiveness of monetary policy.
- Making cross-border payments faster and cheaper.
- Promote smart contracts very effectively.
The concerns are quite broad, also because they are antithetical. If transactions were not anonymous, privacy issues could arise. If they were completely anonymous, they would facilitate illegal activities. How do we get out of this?
CBDC and smart contracts
One of the most promising applications of CBDCs is in the field of smart contracts. These are IT protocols that facilitate, verify or enforce the negotiation or execution of a contract, sometimes allowing the partial or total exclusion of a contractual clause.
CBDCs could provide a reliable foundation for smart contracts, overcoming the limitations of private stablecoins.
Anything that cryptocurrencies can do, CBDCs can do better.
Hyun Song Shin, Chief Economist of the BIS
CBDC in the world: the state of the art
There is a cashless vanguard in the world. Some nations have already adopted CBDCs: the Bahamas, for example. Theirs Sand dollar has been standing since 2020.
DCash is the name of the digital currency issued by Eastern Caribbean.
The Jamaica e Nigeria have launched their own CBDCs called respectively JAM-DEX e enaira.
In UK, a possible CBDC from the Bank of England, nicknamed “Britcoin”, is still under evaluation.
La China, last but not least, is the most advanced economy in this field, with the digital yuan (e-CNY) already extensively tested.
And Europe? He uses?
In Europe, the euro digital currency project, known as “Digital Euro“, is currently in the preparation phase. The European Central Bank (ECB) has decided to proceed with the preparation phase, which will last approximately three years: at the end, a final decision will be made. The digital euro will be an electronic form of payment available free of charge to all euro area residents, can be used for online and offline payments, and will guarantee a high level of privacy.
In the United States, the “Digital Dollar” project is still in the discussion and research phase. President Joe Biden issued an executive order in 2022 to promote research into a possible digital currency, but there are no concrete plans for issuing it yet.
The cashless future: final considerations
As the world moves towards an increasingly cashless society (who knows what they think Japanese people), CBDCs represent a significant evolution in the financial landscape. They offer potential benefits in terms of efficiency, speed and financial inclusion, but also raise important questions regarding privacy, security and the role of commercial banks.
The transition to a fully digital economy will not be immediate or without obstacles. Central banks are proceeding cautiously, aware of the long-term implications of these changes. For consumers, the prospect of a cashless future could bring greater convenience and new opportunities, but it will also require an adaptation to new technologies and an understanding of their implications.
In summary, barring black swans, physical cash is "in danger of extinction", but it will be a slow and gradual farewell. The rustling banknote may not disappear completely in the near future, but it's clear that we are entering a new financial era. CBDCs represent a significant step towards a world where digital money increasingly becomes the norm. As consumers and citizens, it will be crucial to stay informed about these developments and actively participate in the debate on how these new forms of money should be implemented and regulated to prevent them from backfiring.
