The future of digital currency

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Back in October 2017, the British Legion, which runs the iconic Poppy Appeal, announced it would be accepting contactless — an effort to combat declining donations. The charity isn’t the first one to have had to do this. Oxfam, the NSPCC and others have also been trialling contactless donations. And churches across the UK have ditched the collection plate for its digital equivalent. 

It’s safe to say that the move has been a success. Charitable donations have more than doubled, after having hit a seven-year low in 2015. But the true significance of this statistic doesn’t lie in the numbers. It lies in what it says about the future of physical cash. 

It’s a sign of the times that even centuries-old institutions are feeling the pinch. Most people simply don’t carry that many notes and coins on them anymore, which means they don’t usually have spare change for donations. 

But does this mean we’re ready to ditch physical cash once and for all? And what would happen to those who are unable to adapt to cashless living?

Lessons from India

In Chandigarh, a city in the North of India, e-Sampark centres — where citizens pay utility bills and property taxes —  stopped accepting cash in December 2016

Meanwhile, the central Indian government has taken 86% of its cash out of circulation and launched a series of initiatives to encourage the uptake of alternatives, including discounts of up to 10% for those who purchase train tickets, insurance and fuel or pay for highway tolls through digital payment methods. 

But as keen as the government is to go cashless, 98% of consumer transactions by volume in India still happen in cash — one of the highest levels of usage around the world. 

More to the point, despite a drive for financial inclusion, 19% of Indians don’t have access to banking facilities. And without a bank account or credit card, it’s impossible for them to participate in the digital economy. 

Banking the underbanked

In most of the Western world, the shift to cashless payments is hardly shock therapy. When we asked a cross-section of British and North American respondents about their attitudes to cash, over 60% told us they carry less than they did a year ago. And over 50% expect to carry even less in 2 years’ time.

Nonetheless, a sizeable section of the population in the developed world still lack access to basic banking services. 15.6 million Americans didn’t have a bank account in 2015, while 1.5 million people are unbanked in the UK. A cashless society risks leaving these people financially excluded. 

Interestingly enough, easier access to the traditional financial system may not necessarily be a solution. According to the UK Financial Inclusion Commission, only about 50% of the unbanked want a bank account. And, 15% of the newly banked close or abandon their account soon after opening, simply because it leaves them “net losers” — they pay more in fees and charges, for instance because they go overdrawn, than they gain by having access to a bank account. 

Even when people do retain bank accounts, they may still depend on physical cash to survive. The Taylor Report, an independent study on work practices commissioned by the UK government, reckons that up to £6 billion worth of wages a year are paid in cash.

A return to “too big to fail”

Aside from issues of accessibility and relevance, going completely cashless could also increase social inequality and lead to exclusion in other ways. 

The Swedish central bank — the Riksbank — has observed that the rise in digital payments is concentrating power in private actors’ hands, which risks making the market less competitive. Ultimately, it’s the most vulnerable who’d have the most to lose from the fallout. 

Case in point, M-PESA, widely regarded as one of the greatest financial inclusion success stories, impacted the Kenyan central bank’s seigniorage revenue — the profit central banks make from the difference between a note or coin’s face value and the cost of manufacturing and recycling. In turn, the Kenyan central bank levied an M-PESA tax which caused per transaction prices to rise. 

Similarly, a report from Positive Money, a London-based non-profit, observes that further growth in cashless payments could increase liquidity and credit risk. This is because non-bank-to-bank payments involve private deposits which have to be settled through other banks, rather than through the central bank. Aside from allowing larger banks to dictate transaction fees, there’s the danger of another 2008-style crisis precipitated by banks that become too big to fail. 

Putting digital cash to work

Back to Sweden — one of the countries closest to going completely cashless — the solution being floated by the Riksbank is a government-backed digital currency called the e-Krona. This isn’t a new concept. The first country in the world to roll out digital currency was actually Ecuador, which did so in 2014

Under the Ecuadorian system, any citizen can hold an account at the Central Bank of Ecuador into which they can deposit physical cash in exchange for an electronic balance. Senegal and Tunisia have also followed suit, using blockchain technology as a foundation for their digital currencies, the eCFA and e-Dinar. 

Advocates of government-issued digital cash, such as UK-based nonprofit Positive Money, see this as a solution that could promote financial inclusion without trying to square circles whilst also addressing liquidity risk, credit risk and other wider economic issues. However, the question remains: does digital cash keep all the benefits of traditional notes and coins, or is it, to a certain extent, a poor substitute?

In Ecuador, adoption of the government-backed digital currency remains limited, mainly due to trust issues. In contrast, Bitcoin, which is prized for its anonymity, is enjoying record levels of popularity despite being illegal. 

Surprisingly, Swedes aren’t particularly enthusiastic about the e-Krona, either. In January 2017, only 10% supported its introduction. The main reason for lack of support here seems to be complacency — people are happy with the way things are. At the same time, the Riksbank has said outright that the e-Krona should be traceable, which raises the issue of trust and the spectre of Big Brother. 

The road ahead

That physical cash is in decline seems beyond question. People continue to carry less and less of it. And, in turn, this is forcing merchants, nonprofits and even public services to adapt. 

But the decline of physical cash also brings with it real dangers — the risk of financial exclusion and wider economic implications — which need to be addressed. Ultimately, while a cash-free society might seem Utopian, it may not be all that it’s cracked up to be. 






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