‘Sorry, we are cashless’ was already a common phrase before the pandemic started and not limited to hipster baristas in New York City or London anymore. As the Covid-19 black swan continues shaking our health and financial systems, it is also shaping our behaviour and public policies. Finance is certainly not the exception, as we can see the effects on digital payments and even in the trust in cash. Inevitably, this demands us to revisit the possibility of a brave new cashless world, its consequences, and to ask who should provide money.
Indeed, digital finance has a crucial role during the crisis, and digital and contactless payment technologies have furthered safety and facilitated services. However, this also highlights some of the implications that could derive from a reduced use of cash (or if it is not accepted at all). Particularly, how this could affect vulnerable groups, such as unbanked people, individuals who have limited access to digital platforms or who do not have access to an internet connection at all. Technology and innovation are not only constantly changing the nature of financial services, but also shaping the nature of something bigger, the nature of money itself, and the future of cash. Cashless transactions to access products and services are a reality, maybe shortly a necessity, and the question that follows then is whether states should take a more active role and take the lead upon a forthcoming cashless economy.
Is Covid-19 the next milestone in money evolution? Probably. Recent news tell us the developments of payment infrastructures, such as Facebook’s Libra, China’s national digital currency and its national blockchain platform, or a U.S. Digital Dollar. Some of these initiatives were in place far before Covid-19, but the current pandemic might accelerate them. In a recent bulletin, the Bank for International Settlements (BIS) addressed the implications of Covid-19 for cash and the future of payments. Specifically, the BIS noted how Covid-19 could speed up the shift toward digital payments, how the (apparently unjustified) perceptions that cash could spread pathogens could change payment behaviour, and how limited access to digital payments could affect the unbanked and older consumers. Interestingly, the BIS also considered that Covid-19 may rush the adoption of central bank digital currencies (CBDC).
Back in 2018, Christine Lagarde held we should consider the possibility for states to issue national digital currencies (i.e. CBDC) and, similarly, BIS’ General Manager, Agustín Carstens, also remarked that digital is not the most important characteristic of CBDC but their legal tender feature, which would make them a legally recognised payment instruments to fulfil financial obligations. Although a complete cashless society is hardly feasible in the short term, central banks around the world have already started studying CBDC, as some already anticipate that digital cash may start replacing the physical kind. By November 2018, 69% of central banks were analysing CBDC and at least fifteen central banks were seriously considering them.
Also, the International Monetary Fund has stated the potential benefits of CBDC in a scenario where there is a reduction in the use of cash, and concluded that central banks were considering CBDC particularly for two reasons: i) declining use of cash in advanced economies; and ii) financial inclusion in emerging markets and developing economies. For instance, there are sophisticated CBDC projects such as Sweden’s e-krona, where the Sveriges Riksbank affirms that it has the task to promote a safe and efficient payment system, which may be more difficult if cash is no longer used by the majority of households and companies. On the other hand, people in developing economies already have limited access to financial services in remote regions because governments and the private sector have not addressed these groups adequately, which would make them even more financially excluded if most people adopt a private digital form of money.
Still, despite the similar goals, there is no consensus regarding the form CBDC could take, plus these would have to look at the particularities of their jurisdictions and adapt to specific legal frameworks. Furthermore, the BIS considers that the design of the CBDC would have implications for monetary policy and financial stability, and reiterates that if the use of cash declines significantly this would be one reason for introducing CBDC. Conversely, not issuing CBDC could mean that unofficial digital currencies could displace central bank money, undermining the reliance of central banks and compromising their ability to influence the economy by regulating the money supply. As described by a World Economic Forum white paper, retail CBDC would be accessible to everyone and could be operated and settled in a peer-to-peer and decentralised way, widely available for consumer use, and as a complement or substitute for physical cash. Similarly, wholesale CBDC could be operated peer-to-peer and decentralised, but only available for commercial banks and clearing houses for wholesale interbank market and settlement transactions.
Irrespective of the possible forms that CBDC could take, the global lockdown has emphasised the main reasons to issue them, the declining use of cash and financial inclusion. Yet, these are challenges that must be addressed regardless of the financial technology that we use during and after the pandemic. Moreover, some issues will be more foreseeable than others if CBDC are implemented, such as how central banks use their balance sheets to control short-term interest, the new role of central banks in financial intermediation, or the structure of payment markets. Also, privacy and data protection will be crucial, as well as anti-money laundering and anti-terrorist financing regulation. Likewise, if CBDC are successful, will this cut the middle man? Is this desirable? Who do we trust more, companies, the government, technology?
Covid-19 has highlighted some of the deepest flaws in our health, labour, and financial systems but also reminded us of our fundamental challenges as a society. A cashless economy sounds both Darwinian and Orwellian. Yet, innovation always comes with scepticisms and criticisms. CBDC and any other financial technologies are no exception, as neither were checks, ATMs, or credit cards. Perhaps the real question is not whether we trust in code or the forthcoming technologies, but whether we actually have an alternative.
Camilo Martin Muriel-Bedoya is an International Law Clerk at Holland & Knight LLP.