The dawn of central bank digital currencies: will they take over the cash?

The European Central Bank (ECB) published a report on a digital euro in October of 2020, voicing possibilities that the concept may be implemented soon. The idea of this currency type is not new, as in the last couple of years other countries have been researching or working on their versions of it.

They are called central bank digital currencies (CBDC) and are something that becomes topical in the financial world, with some people wondering if they will force cash out of our wallets. A discussion on implementation stages, premises, and benefits of CBDC are what will help us answer the question.

CBDC and countries planning on implementing them

Central bank digital currency is an electronic form of fiat money of a particular country or region. It comes as no surprise that the concept of CBDC was inspired by bitcoin, but there is a significant distinction between the two. The CBDC is issued and regulated by the government or an appropriate monetary institution of the country, while bitcoin regulation has always been a hot issue.

The ECB plans to announce whether it will launch the project in the middle of 2021.

Some countries like Japan and Switzerland adopted the regulation laws for the bitcoin, other countries are working on the legislation, but as a whole, cryptocurrencies remain mostly unregulated, or even banned in some regions. With no regulations in place, it’s easier for scammers to get their hands on your money, as most cryptocurrency transactions are irreversible.

That’s why some countries put their twist on the cryptocurrency concept and develop CBDC – a regulated and easy-to-use electronic money. When describing the digital euro, ECB puts it simply: it is a regulated “digital representation of cash”, which remains a risk-free liability of the central bank.

For now, the digital euro is only in its preparation phase, the ECB plans to announce whether it will launch the project in the middle of 2021.

But what about CBDC in other countries? Here are some examples:

China’s digital yuan is one of the most known CBDC’s for now, as its development started in 2014 and is backed by China’s central bank. The country even distributed 10 million digital yuan ($ 1.47 million) in Shenzhen as a part of an experiment last fall. The digital wallets, which contained 200 digital yuan each ($30) were sent to random consumers via the official Digital Renminbi app. The currency could be spent in certain stores within a week but could not be transferred to others or transferred funds to a bank account.

It is expected that the mass testing of the currency can begin exactly in time for the Olympic Games in 2022 in Beijing.

Meanwhile, Japan has a different approach to the digital yen. Private banks will be responsible for issuing digital currency as part of the experiment. This year, a group of 30 largest enterprises (three large banks, brokerage companies, retailers, and others) will start issuing digital currency with a common settlement platform.

Japanese people strongly prefer physical money to non-cash payments, which account for only 20% of the total amount of payments. Thus, the digital yen initiative is set to boost the country’s progression to using digital means of payment. The Central Bank of Japan has not decided to issue a digital currency yet and will monitor the public’s reaction.

Sweden started the CBDC pilot project known as e-krona in February 2020, according to a Bloomberg report. The government of Sweden, which works on becoming the world’s first cashless society, is already considering the possibility of a full transition to digital currency.

Thus, the report that analyses the prospects for the country’s transition to a digital currency is forecasted to be ready in November 2022.

Great Britain’s Central Bank announced that the discussions on digital currency were underway. The governor of the bank, Andrew Bailey, believes that the possibility of launching such a project will appear after the coronavirus pandemic subsides.

As for the United States, the Federal Reserve System noted that the research on this topic is being carried out to better understand the opportunities and risks associated with CBDC.

CBDC pre-conditions and advantages

The CBDC implementation projects take lots of preparation time and consideration to finish. This means that it will take years to adapt such concepts and more time for regular people to get used to them.

Still, the fact that some of the bigger countries got interested in introducing these means that there are a couple of prerequisites to it.

• First and foremost, it represents the continuous effort of digitalisation, and it’s not only about using digital payments for online shopping. These types of transactions are overall easier to complete and monitor, they are more transparent, and can be distributed to the remote parts of the world much faster and cheaper.
• The 2020 lockdowns made many people had to shift from retail to e-shopping and didn’t use cash in brick-and-mortar stores as often due to the virus spread concerns. According to Capgemini’s World Payments Report 2020, in April the internet banking and direct account transfers became a preferred payment method to 68% of surveyed consumers, contactless cards took close second place (64%) in the category, and digital wallets came third (48%). And 58% of the European respondents agreed that they used cashless in 2020 than a year prior, compared to 20% that disagreed.
• Addressing the cryptocurrency fever. As mentioned before, more unregulated cryptocurrencies emerge, and countries come up with ways to use the digital currency premise and regulate it.

As for the latest point, there are many reasons the countries are looking into implementing the CBDC besides rivaling cryptocurrencies:

• It will encourage further digitalisation and its benefits like faster and more secure transactions.
• CBDC will help make payments more inclusive by reaching rural areas and unbanked citizens.
• The digital currency will allow lowering the issuing and managing physical cash costs.
• CBDC will be more convenient for tracking the money flow.
• If the digital currency is interest-bearing, it can increase the economy’s reaction to changes in the policy rate, which will lead to the enhancement of the monetary policy transmission.

Now, with all the main arguments addressed, can we expect that the CBDC will completely substitute the cash? Well, first and foremost, not in the nearest future, as we’ve established that CBDC is only starting to emerge worldwide.

Sweden can abandon cash before the decade ends: the country plans to become a cashless society by March of 2023, as in 2020 only 9% of its population used physical money. Can this sort of a change happen globally though – highly unlikely.

You see, the reason for a slow change isn’t a technological issue – credit cards were introduced in the 1950s and by now they are used only by 2.8 billion people, even though there are over 7.8 billion of us. It’s that not all people have the access to technology. For instance, the global internet penetration rate is currently at 59%, and as of the end of 2019, 51% of people couldn’t use the mobile internet due to lack of coverage, affordability, or digital skills.

And of course, some people simply can’t break the habit. Though the cash usage dropped between 2017 and 2020, 73% of Europeans still were using it for pocket money. 70% were paying with it in taxis and 56% in public transport. 62% were buying lunch with it last year and 40% of the respondents explained it’s quicker to pay this way. When asked whether they wanted cash to stop existing, only 11% surveyed on average strongly agreed. 29% disagreed completely, others stayed in the middle.

It is not only the customers’ issue, as there are still small shops that only accept physical money. Unfortunately, cash is very prevalent in crimes, as it is easier to steal and harder to track.

With that, the cash usage will likely continue decreasing with changing generations, but when will it disappear globally – if ever – is hard to say.

We believe that digital transformation will benefit most businesses in the long run and hope, that the fintech industry’s experience will help in establishing new CBDC and other relevant things.