A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to & view previous editions at: http://blogs.deloitte.co.uk/mondaybriefing/

Spending money just keeps getting easier. Internet shopping, electronic bank transfers, contactless and mobile payments are increasingly popular ways of spending. Last year the number of contactless payments tripled in the UK and on-line shopping rose nearly 20%. Digital versions of traditional central bank currencies are in the ascendant in the West.

These digital central bank currencies face growing competition from the private, all-digital, so-called cryptocurrencies. Bitcoin, established in 2009, is the dominant player, but the rash of new currency launches or ‘initial coin offerings’ means it has plenty of imitators.

At the heart of bitcoin is the blockchain, an anonymous, electronic record of all bitcoin transactions. Transactions are processed by a distributed network, not through the banking system as with central bank currencies.

Some bitcoin users distrust banks and want to operate outside the traditional banking network and financial system. Bitcoin’s anonymity appeals to libertarians, those who particularly value privacy and, of course, criminals. Some fear that central banks, with their ability to create money at will, cannot be trusted to maintain its value against inflation. These users see bitcoin, with a fixed ceiling of 21 million of issuance, as a better store of value than pounds or dollars. Finally, the vertiginous rise of bitcoin this year suggests that many see bitcoin as a quick way of making money.

Bitcoin excites different reactions. China, Russia and a number of other countries have put obstacles in its way. Murky governance and its potential as an anonymous means of payment for criminals worry many. The CEO of JP Morgan, Jamie Dimon, has branded bitcoin a “fraud” which will blow up.

Other countries have encouraged its use, most notably Japan which in April recognised bitcoin as legal tender. To its supporters bitcoin could become a stable and trusted global currency, like a latter day Gold Standard or dollar, facilitating trade and commerce.

That would pose problems for central banks. Controlling the price and quantity of money is a vital arm of economic policy and, in the modern world, an expression of sovereignty. It is also a very profitable business. It is difficult to see why governments would want to cede control of money to private currencies.

Practical problems also stand in the way of bitcoin becoming a global currency. Wide fluctuations in its value means that it does not meet one of the definitions of an effective currency – that it offers a stable store of value.

In less than 48 hours last week the value of bitcoin fell from $7681 to $6773. In the last month the value of bitcoin has varied by 70%. Such fluctuations create huge uncertainties for buyers and sellers when transactions do not execute immediately (imagine agreeing to buy a house in a month’s time and finding that the effective cost of the purchase has risen 70%). To be an effective medium of exchange a currency needs to be liquid and widely accepted. Despite stories of property in Dubai being sold in bitcoin, it currently has neither characteristic.

But while central banks may not want to hand over the control of money to private digital currencies, they might want, in time, to invent their own.

A central bank all-digital currency would, in all probability, differ in one important respect from today’s private cryptocurrencies. It is hard to see why central banks would create an anonymous digital currency with all the criminal possibilities that offers. Though a long way off, some central banks have begun to consider what benefits an all-digital currency might bring.

An all-digital central bank currency would eliminate the cost and risks associated with the use of cash. Assuming, as seems likely, it was not anonymous, it could enable the authorities to track transactions, making tax evasion and money laundering more difficult.

An all-digital currency would also enable a central bank to set interest rates below zero – enabling the bank to penalise holders of money in order to stimulate spending. Eliminating cash, and requiring money to be held electronically, would mean that consumers would not be able to insulate themselves from negative interest rates by holding cash. For a central bank in a world of very low interest rates, digital cash would help restore the power of monetary policy.

But what central bankers see as opportunities would look like threats to many consumers. It is not only criminals or tax evaders who might feel uneasy about the state being able to monitor all transactions. Savers would not be happy to be find that they could not hold physical cash and that, if the central bank set interest rates below zero, they would, in effect, be taxed for saving, rather than spending money.

More generally, and despite the rise of contactless and on-line spending, cash remains popular. 2.7 million people in the UK, 5% of all adults, spread relatively evenly across all age groups, rely almost entirely on cash to make their day-to-day payments. It is an important budgeting tool. As London Business School professor, Niro Sivanathan recently said, spending on a contactless card, “anaesthetises the psychological pain that accompanies payment, seducing us into splashing out”.

Cash is universally accepted and, unlike electronic spending, there is immediate certainty the transaction has occurred. Perhaps surprisingly, cash is cheap for retailers to process, with the cost being 0.15% of tender value compared with 0.22% for debit cards and 0.79% for credit cards.

Cash is also valuable as an insurance for the times when technology is either absent or not working. This is not just a matter of a patchy Wi-Fi preventing you buying a sandwich on a train or encountering a cash-only cab in the rain. In the wake of the storm-induced damage to power supplies and communications in September, Puerto Rico became what the New York Times described as a “cash only island”. To cope with the extraordinary demand the Federal Reserve had to fly in more notes and coins. Even in far richer countries some people prefer to store funds outside financial institutions in case of bank failures, emergencies or disaster. To move to an all-digital currency society would need to be confident that digital money would, at all times and in all circumstances, be no less available, reliable and acceptable than cash.

Digital spending is on the rise, but in the UK cash still accounts for 40% of all payments. Contrary to what one might expect, demand for cash is still growing. The total value of Bank of England notes in circulation peaked in the run up to Christmas 2016 at over £70 billion, an increase of 10% on a year earlier. Most countries, including the US, Canada, Australia and the euro area are seeing growth of 5 to 10%. The outlier is Sweden where the value of notes has been falling for a decade.

Digital spending is rising, led by younger, more affluent and urban consumers. But we seem some way off a world of all-digital money. Cash remains too useful for too many people. To paraphrase Mark Twain, reports of the death of cash are greatly exaggerated.

PS: Recently published data from the Office of National Statistics show that over the last 20 years the UK has had the lowest levels of investment relative to GDP of any of the 35 advanced, OECD economies. UK investment has averaged 16.7% of GDP over the period. South Korea, which tops the list, averaged 30.8%. Some of the UK’s poor performance is due to meagre government investment. The link between investment and productivity is not straight forward but these numbers suggest that the UK has not been investing enough.

PPS: Conservative MP and former minister Nick Boles released a book last week advocating an end to “the age of austerity”. The timing is significant as the Chancellor prepares to deliver the budget in two weeks’ time. Mr Boles urged the Chancellor to scrap his deficit reduction plan and unveil a “massive boost” in public investment. He said that austerity was the right policy when the deficit stood at 10% of GDP, but it would be acceptable to maintain the current 2.6% level indefinitely and prioritise public investment.