End of cash ‘is a near reality in many countries’
Why is the digital transformation of the economy necessary and when will we see the end of cash? Answering these two crucial questions, Eswar Prasad, professor of trade policy and economics at Cornell University in New York, tells Kathimerini that the digitalization of money transactions will, among other things, reshape the banking environment, curb transaction privacy and reduce illegal transactions.
Author of the book “The Future of Money: How the digital revolution is transforming currencies and the finance,” Professor Prasad explains that the creation of “central bank digital currencies” will cause competition between bank and private cryptocurrencies, triggering the era of the binary digital economy.
Why does our world need the financial digital transformation?
The world is going digital and money is no exception, with digital payments fast becoming the norm around the world. Compared to cash (physical currency), digital payments are typically easier, quicker and less vulnerable to loss or theft. In many low-income countries, mobile phones now allow consumers and merchants to conduct payments and other financial transactions electronically, and even provide access to basic banking products and services for managing savings, credit and risk. This has increased “financial inclusion” in many low-income countries and among low-income households even in richer countries, which previously had little access to even such basic financial services. New payment technologies are having other benefits as well. For instance, cross-border payments are becoming much cheaper and quicker. This is good for firms that export or import goods and even for economic migrants sending remittances back to their home countries.
‘Official digital currencies might reveal information about consumers and businesses that they would rather not share with governments’
In your book, you predict that central banks will be pushed to develop their own cryptocurrencies. Given that there are already dozens of digital currencies, would this create competition between banks and private cryptocurrencies?
The emergence of cryptocurrencies was fuelled by declining trust in central banks and commercial banks, especially after the global financial crisis in 2008-2009, and the desire of some people to have a payment system that bypassed all of these traditional financial institutions. This has created an additional challenge for central banks, which are already dealing with the concern that central bank money in physical form – currency banknotes and coins – is becoming increasingly anachronistic in the modern world. These developments have motivated central banks to start experimenting with or, in the cases of countries like China and India, issuing digital versions of their money. It is likely that we are entering an era of competition between central bank digital currencies and private digital payment systems. However, cryptocurrencies like Bitcoin have turned out to be highly inefficient payment tools. They have highly volatile value, which makes them unreliable mediums of exchange for transactions, and are also quite slow and expensive to use.
In the same vein, Bitcoin has a ceiling of 21 million coins, while the bank will be able to determine the number of cryptocurrencies it issues. Therefore, in a dual digital banking model (physical and private), how would the inflationary value of bank cryptocurrencies be determined?
Bitcoin was created as a medium of exchange that did not require the use of any “trusted” intermediaries such as a bank or credit card company to process transactions. While it has failed as a reliable medium of exchange, it has instead become what it was never intended to be – a speculative financial asset. Bitcoin devotees seem to believe that its scarcity – a specific number of Bitcoins are created on a predetermined schedule and there is a cap on the total number of Bitcoins that can ever be created – gives it value. They contrast it with central bank money such as dollars or euros, which in principle can be created in essentially infinite quantities by the relevant central bank. But scarcity by itself, with no intrinsic purpose, is a dubious source of value. Central banks, on the other hand, have an entire institutional framework behind them. Thus, my view is that central bank money is likely to have more durability as a store of value, even if that is eroded over time by inflation. Bitcoin and other such cryptocurrencies will remain highly volatile and highly speculative financial assets.
In the scenario where states adopt CBDCs, how would the financial system and our daily lives be impacted?
The widespread use of digital payments and the rapidly declining use of cash is already a reality in China, India, Sweden and most other low-, middle- and high-income countries. Curiously, private digital payments have become so cheap, accessible and easy to use that many countries that are issuing CBDCs are finding that there is little demand for them. One concern seems to be that official digital currencies might reveal information about consumers and businesses that they would rather not share with governments. In fact, this is a broader concern as we shift away from cash towards conducting transactions through private or official digital payment systems. Ultimately, anything digital is going to be traceable, even if new technologies allow for some degree of anonymity at least for low-value transactions. Still, no digital payment will ensure anonymity like cash. This, of course, has advantages as cash has often been used for illicit transactions such as drug trafficking and terrorism financing, as well as tax evasion. Also, digital payments are less susceptible to such illegitimate uses and are a great convenience but could result in all of us losing our last vestiges of financial privacy. They could also give governments in authoritarian societies an additional instrument for societal control.
So, when do you foresee a full transition to cryptocurrencies (in the US & EU) and would this transition mark the end of money as we know it?
The end of cash is already a near reality in many countries and will in a few years be a reality around the world. We are moving to a world where payments and other financial transactions, both within and across countries, will be cheap and practically instantaneous. This will be hugely beneficial in terms of access, convenience and cost. But it will also be a world in which we might cede most of our privacy to governments, financial institutions and corporations. It is important that these issues be debated at the level of society, rather than just among economists and technocrats, to put guardrails in place that prevent governments and corporations from becoming even more intrusive into our lives.
