‘Cybercash’ as many like to call it, may become the new norm in the future of how we process our daily transactions. Is digital currency a fantasy of cyberlibertarians and tech-anarchists, or is it something needed in the current state of payment methods?
The power of cash
The first known form of currency dates back more than 5,000 years to Mesopotamia. Since then, not much has changed. The discovering era of precious metals such as copper or silver led to the push for coins. The characteristics of coins persisted until now. Cash is viewed as valuable by society, fully accessible by individuals, exchangeable for goods or services and private. Yet, only 10% of consumers use cash-only for their purchases.
As can be guessed, today’s trends indicate that people switched to modern payment systems, mainly credit and debit cards, electronic payment systems, and mobile wallets. The debit cards are the true winners here — as their usage more than tripled in the last ten years, becoming the most used payment method around 2017 with cash being checked to the second position.
When it comes to card payments, there are certain worrying questions we need to ask ourselves. As previously mentioned, ten per cent of customers do not use credit or debit cards at all. It can be deduced that it’s not their willing choice to not be included. There is still a smart percentage of people (including homeless people, low-income households, OAPs), within our society that was not given access to holding an account in the bank and owning a credit or debit card.
An interesting experiment was conducted in Australia where welfare recipients were handed out cashless debit cards. These cards restricted what can the recipient purchase, notably not any alcohol and gambling-related products. Debit and Credit cards could come with limits by regulations, transactions that can be blocked, and without any privacy by design.
Cryptocurrency and the birth of digital currencies
It has been more than twelve years since Bitcoin was launched for the first time. Since then, the cryptocurrency managed to appear in mainstream media and became a sensation that everybody was talking about, yet nobody knew how it worked.
Despite not being the first cryptocurrency created — DiGi Cash from ’89 or E-gold from ’96 were here for much longer — Bitcoin was the only one that captured the attention of the general public. It was usable without registration, operated electronically, was anonymous, and partly fungible. However, Bitcoin never took off as a payment method, rather it created a new type of financial asset that would be tradeable on the market.
The new, emerging digital currencies opt to merge the usage of cryptocurrency and retail banking together, such that the currency would be private by design, anonymous, yet able to block unlawful usage, and suitable for tax monitoring and fraud detection.
Central Bank Digital Currency
The Central Bank Digital Currency (CBDC) could become an alternative to the current payment methods. One major issue with cryptocurrency is its instability and unpredictability. By allowing the Central Bank to regulate the digital currency, the fluctuations should be minimized, assuming the Central Bank’s policymakers are trustworthy and enlightened in the topic.
What happens if they are not is the story of the Venezuelan government-backed cryptocurrency Petro. The project launched in 2018 and survived only the first seven months. Its launch was initiated in order to circumvent the U.S. sanctions, but right after the premiere, American president Donal Trump signed an executive order to ban the transaction of Petro by U.S. citizens and companies. Furthermore, analysts warned that the government-issued digital currency can lead to further hyperinflation. At the moment, Petro is not tradeable and does not appear to be used anymore.
China has now officially become the first country in the world to introduce an electronic payment system on its digital version of yuan. The system, which has been in development for the last five years, is backed by the central bank’s deposits of yuan. However, the Chinese CDBC is not fully anonymous, and the Central bank as well as the government officials are able to track all the payments and counterparties. Therefore one of the reasons why China launched this ambitious project is to better track the flow of money. Another reason is that China has the biggest population of citizens without access to retail banking. Digital yuan may be the right way of introducing this group to the mainstream economy.
According to the report from the Bank of International Settlements, 70% of 63 central banks that participated in the study are researching the opportunity of CBDC issuance. The actual date when would other major economies transform the national currency into the digital world is still unforeseeable, yet, the visible interest from the officials as well as cyberlibertarians can make this happen sooner than expected.
I believe that a proper digital currency that is private by design, anonymous, fungible, and yet powerful against tax evasion and fraud can be a game-changer and fully disrupt the current state of payments as we know it.