Key insights into the future of public currency

Cash is in the spotlight like never before. The rise of digital payments has posed questions about the future role of cash, even as demand for currency in almost every country around the world has soared. At the same time, the uncertainties and crises of recent years – from the pandemic to geopolitical upheaval and natural disasters – have only underscored the importance of cash to individuals and states. 

Against this complex and fascinating backdrop, we sat down with Wolfram Seidemann, the CEO for Currency Technology at G+D, to discuss where cash goes next, exploring (among other critical questions): the evolution of money, whether there should be a right to pay in cash, Gen Z’s newly discovered enthusiasm for hard cash, and the timing for central bank digital currency (CBDC) rollouts.

The persistent value of cash

How would you characterize the value of cash within societies today?

Cash continues to play a critical role. It’s completely inclusive. It’s fast. It’s private. It’s final in terms of the settlement of transactions. It’s universally understood.

Just ask a group of people to contribute to a colleague’s birthday present, for example. If it’s digital, they have to know and agree on the format and channel to use; in contrast, with cash it’s a single format that everyone gets.

There is another important aspect, though: cash as public currency is issued by the central bank, an authority guided by public interest and not by any profit motive. So, cash doesn’t incur fees and doesn’t require people to share data in order to use it. And that will also be the true for a well-designed CBDC, as a digital equivalent of cash.

Cash’s digital evolution

Digital channels are clearly having a huge influence on the public perception of cash. In a world that is becoming increasingly digitalized, is the relevance of cash being challenged?

Digital solutions play on convenience, and people are increasingly using digital payment at the point of sale. But, perhaps paradoxically, the amount of currency in circulation continues to grow. 

The fact that cash is physical and haptic means it still provides a unique proposition to the user alongside digital. It is also perceived by many as a better tool for budgeting. With the downturn in some economies, we see people being more careful with their spending and going back to the use of cash at the point of sale. Take, for example, the trend that has emerged recently among young people on TikTok for “cash stuffing” – the practice of stashing paper money in envelopes as a means of controlling and managing budgets in tougher economic times.¹

In many ways, current digital payments solutions have not so much been driven by demand but by supply, each with its own business case. The result has been the growth (and fragmentation) of digital payment solutions. And, of course, those dynamics were reinforced further by the pandemic as payment behaviors moved increasingly to contactless payments. 

So, cash has a close association with values, such as freedom and self-determination. On the other hand, cashless payments are aligned in people’s minds with other attributes, such as speed and convenient. In the end, CBDC can satisfy both of these.

Maintaining cash flow

Why is it so vital for societies to maintain easy access to cash – and in sufficient quantities?

In some countries, cash withdrawals from ATMs have now come back to pre-COVID levels. But in others, cash access and availability does not always exist in a way that it should. That’s something central banks are increasingly aware of. Many are closely monitoring the situation to ensure that the people who want to use cash can actually get hold of it and use it.

Because if the usage of cash falls below a critical threshold, it becomes difficult to sustain a continuous cash supply within an efficient cash cycle. That was the case in Sweden in recent years, for example, where the government had to step in and make it obligatory for commercial banks to continue to distribute cash. They also asked the general public to put some cash aside in case of a crisis situation in which digital payment systems were inaccessible.

Such a scenario is now seen as an acknowledgment that countries have to be careful that they don’t sleepwalk into a situation where the cash cycle becomes broken. It’s helped central banks better understand when they might need to step in to protect the cash cycle.

So, for whatever reason, if cash isn’t around, there’s a problem. 

Absolutely. Cash needs to be fully liquid, which means all the demands for cash need to be met. If cash is available, it is a de-escalating mechanism in a crisis. If it’s not available, it escalates the crisis. That’s the key design criteria for a resilient cash cycle: that demand is met no matter the circumstances. 

The five A’s of cash

Is there then a strong case that the fundamentals of cash – availability, accessibility, and acceptance – are enshrined in law, so the right to access and use in cash is protected (at least for certain essential goods and services)?

Personally, I like freedom of choice, the option to pay in the way that is most suitable for a given situation. However, we need to think about all parts of society, especially the weaker parts. Private payment schemes naturally want to earn money on their business activities. But that profit agenda means they don’t necessarily address the needs of all parts of society. So, that’s where central banks can step in: to ensure that no one is excluded from the financial system and that everyone is always provided with the three A’s of cash: availability, accessibility, and acceptance.

But I’d suggest there should now be two more A’s of cash. Authenticity: we also have to ensure that the cash cycle remains intact, that banknotes are being checked to ensure they are genuine. Because if we don’t do that and people think they may receive counterfeit banknotes, then there’s a risk that they will no longer have sufficient trust in the cash they are using and switch to other ways of payments.

The fifth A is affection. That relates to the perception of cash and how it is positioned. For new generations, we need to introduce them to the important role cash can play in their lives and to create affection for cash as a product. When young people learn about the values that cash can bring to them, we see them using cash more frequently. So, I believe that if we create awareness on these aspects, the next generation will appreciate cash and use it.
 

Generational shifts in attitudes

So, as younger generations – especially Gen Z – enter the economy, how do you think demand for cash will develop? 

You may have seen an interesting social media post that recently went viral: it shows that if you have €50 and pay with that at the grocery store, the retailer gets €50. They can then use that to pay their wholesaler €50, and round it goes. It’s always €50.

But when you pay using a digital payment system, there might be a 2% charge kept by the first merchant and another 2% kept by their supplier, and so on. So, as that form of payment circulates, it gets less and less. 

That’s just one example of the value that cash can bring. And I think it’s about time to make those values visible and understandable. I’m in favor of the marketing of cash. But that can be difficult to enact because there’s no single owner of cash, the product. 

We need to address the new audience of Gen Z in the language they understand, because for them very often cash is associated with older generations. 

We can say to Gen Z, “If you want to have control over your budgets, it’s feasible: pay cash,” or, “If you want to just spend what you have, pay cash,” or, “If you want to be able to pay when there’s an electronic blackout, pay cash,” or, “If you want to pay when you’re offline, pay cash.” There are a lot of easy, understandable messages if we address them properly. 

Gen Z might also see that some of the value associated with cash actually rather closely match their own values - in areas such as inclusivity, sustainability, individual privacy. And that would encourage them to continue to use cash. So, it’s very important that we are able to maintain this fantastic product for future generations.

CBDC’s complementary role

Even assuming physical cash will be around for a very long time to come, will the generational shift toward digital payments inevitably lead to the introduction of a digital version of public money, a central bank digital currency (CBDC)?

The world has become digital in many, many parts of our lives. Central banks are engaging with CBDC to ensure that we have an inclusive and universally applicable digital means of payment. But, notwithstanding the speed of all things digital, central banks want to do things thoroughly. And that’s reflected in many of the projected time scales for CBDCs.

The pace and decision-making processes for larger currencies, such as the euro, are naturally driven by a broad set of democratic values, with the related infrastructure, regulatory frameworks, and ecosystems all more complex. That said, in October 2023, we saw the European Central Bank move the digital euro project from the investigation phase to the preparation phase. 

Elsewhere, we will see other countries moving faster to implement and issue a CBDC. That is especially true in countries where there’s a high need for greater financial or digital inclusion. Many of those countries also want to create alternatives to existing payment monopolies, which involve high fees, and they want to see solutions that improve the efficiency and lower the costs of cross-border payments.

In other countries with more mature infrastructure, many of the needs for digital alternatives to cash are already being addressed – albeit in a disjointed way. That makes it more challenging to convince people about the benefits that a public form of digital money can bring and to identify a killer use case. But if you add all the marginal aspects together, you realize that no existing instrument can actually serve all of them. 

At G+D, the Filia^® CBDC solution we have deployed has over 24 different use cases – from QR-code payment to person-to-person payment, from offline/online capabilities to user-to-commerce payments via applets. 

If we design a CBDC well, as a platform for innovation that can be used by market participants to build new products and services, then a lot of people will use CBDC.

We strongly believe that CBDC is not competing with current schemes. It’s not a payment scheme; it’s a publicly issued instrument that everyone can use. The instrument is issued by the central bank, but the wallets and payment solutions, with which you trade and store digital money, are issued by market players. Fintechs and commercial banks can all use the same platform to focus on creating innovative CBDC products. They don’t need to take care of the underlying payment solutions. As such, its digital public infrastructure that can drive great economic value.

Published: 19/02/2024