The UK will be almost entirely cashless within three years according to a just-released report by Worldpay, the payments processor that used to be owned by RBS. Other countries such as France, Sweden and Norway are ditching cash at an even faster rate than us.
“The sun is setting faster on cash” says Worldpay. “Cards, mobile wallets and other digital alternatives were already catching up or exceeding cash at the point of sale”. I agree, but what is coming down the track to replace the pound in your pocket?
One of those digital alternatives is of course the now much discussed cryptocurrency with Bitcoin as the most visible talisman thanks to its promotion by Elon Musk (subsequently dropped by him, like a hot potato) and many others.
The view has grown up that as central banks pump more and more fiat money into the likes of Bitcoin, which is limited to just 21 million coins, crypto can provide a feasible alternative to continually debasing currency issued by the Bank of England et al. I think this argument quickly falls apart for three key reasons. Firstly, Bitcoin is not in fact limited to 21 million coins as almost endless fractions of a bitcoin can be created (or “mined” in the digital jargon). Secondly, if you want an inflationary hedge in a highly tradeable, long established form, go for gold. Central banks themselves hold considerable amounts of gold – they don’t hold bitcoins and therein lies a clue. Finally, and most importantly, central banks and their national governments will never allow a digital alternative that they cannot control to overtake the use of their own currencies; that way mayhem lies, including quite possibly major civil unrest.
But in my view digital currency is the future, by which I mean Central Bank Digital Currency or CBDCs as they are usually referred to. In other words, central banks such as our very own Bank of England will in the next five years or so end the issuance of notes and coins and switch over entirely to its own digital currency. China is close to doing just that and the advantages are obvious. In no particular order, they are:
– The removal of the cash economy does away with the untaxed black economy.
– As all digital transactions are instantly traceable it makes it much harder for money launderers to operate successfully.
– Digital transactions are demonstrably more efficient than lugging cash around the place.
– If the United States so wishes, it can, like China, monitor all its citizens’ financial transactions and thereby put in another layer of control over its citizens.
– Switching to digital potentially gives China a very valuable first mover advantage in that it can insist on those countries that want to do business with trade only in the Chinese digital currency thus bringing about a challenge to the dollar as the world’s reserve currency.
On this last point the Fed is very well aware of such issues, which is why it has recently stepped up its research into whether it goes the digital route sooner rather than later.
There are of course downsides to CBDCs conquering the final digital frontier. It is argued that if the Bank of England goes digital it would control the money supply, whereas under the current system clearing banks effectively issue fiat pounds as they decide on who
they lend money to through fractional reserve banking.
Theoretically, that is entirely possible. But in practice I would expect the BoE to put in place a system that continues to allow the traditional banks to carry on lending to whom they choose. That shouldn’t be beyond the wit of man/woman to achieve.
More importantly, what is to be done to prevent Boris Johnson and Whitehall using this new found tool to increase surveillance of the public? The answer, sadly, has to be yet more legislation to limit the circumstances when the government can legitimately see our financial transactions. This could cause a major political row. But in reality we see ever greater acceptance, particularly amongst the young in this pandemic era of the state monitoring your health through apps. So it is, I suggest, but a short step towards acceptance of CBDC ‘s implications.
This week the Bank of England published another discussion paper on the future of digital currencies. It is a masterpiece in careful central bank speak. It notes the continuing interest in cryptocurrencies and homes in on stablecoin, which aims to offer price stability by backing the crypto with a reserve asset such as the dollar or gold.
Whilst noting the rise in popularity of such cryptos, the Old Lady raises the traditional eyebrow, stating that there are important issues to consider. These include: “public confidence in money and payments and in the financial system as a whole; banking sector liquidity resilience; credit conditions; money market functioning, and the implementation and transmission of monetary policy”.
Yet the Bank then let slip that respondents to its previous paper on whether it should issue its own digital currency “showed strong agreement that the Bank should, at the very least, be carefully studying CBDC”. You bet. The Old Lady then goes on to list five core principles which will underpin its “exploration” of CBDC. In the fifth one, she decides to show a bit of ankle:
“While CBDC should “do no harm” to the Bank’s ability to meet monetary and financial stability, opportunities to meet our policy objectives more effectively should also be considered in CBDC exploration. The Bank is primarily focused on possible benefits CBDC might bring for ‘payments’. It is also considering the possible opportunities that CBDC may offer for monetary and financial stability”.
In other words: we know there are huge advantages to the BofE in issuing its own digital currency but we just have to educate you lot as we journey along this path to a bright future.
However you want to look at it, cash has no future. The attraction of CBDCs to those who rule over us is just too strong. You may choose to keep under the proverbial bed other tradable instruments such as gold, diamonds or possibly cryptos, but that is up to you.