Why we need digital cash

Dr. Seidemann, cash has numerous qualities that underpin its popularity and attractiveness. Even in the current global crisis, which is boosting digitalization, the demand for cash is increasing. Do you consider cash to be essential for public freedom?

Yes, I do. Cash provides huge value to society: it’s the only payment instrument and store of value that makes the user independent from the issuer. The central bank – which is guided by public interest rather than profit – guarantees its value and liquidity. Cash is inclusive, universal, and resilient, and it protects our privacy.

The World Payments Report 2019 found that emerging markets will experience a growth rate in cashless-payment transactions of around 23.5% in the coming years. Do you think that cashless payment could take over from cash in the near future – and, if so, can cashless alternatives provide the same level of public inclusion?

Because the consumers’ payment preferences are highly diverse, cashless-payment providers target specific customer segments. So no, they can’t reach the same market share or level of inclusion as cash. Some users may opt for cashless alternatives because of perceived added convenience, such as credit functions, loyalty points, or promotional discounts. But such extra functionalities usually either incur fees or involve the collection of data.

Today, cash serves as the benchmark regarding costs for all non-cash systems and keeps their fees low. Cash could certainly become less prevalent if access becomes difficult, if acceptance becomes uncertain, or if digital business models that reject cash prevail. But such models often force the user to subscribe to a third-party contract with a profit-driven provider. If global, private, digital schemes were to take the lead in digital payments, central banks’ ability to preserve economic and financial stability would be undermined.

So cash is also crucial to a future that’s going digital. How do you see the role of central banks’ own digital currencies – or CBDCs – developing?

I hope for a future in which cash continues to play a role but is complemented by an equally valuable central bank–governed digital currency. CBDC is a public good, too: it’s universally accepted, free from social and economic barriers, and can be used independently from the issuer, making it a truly democratic and free instrument.

To be widely accepted, CBDC has to be truly anonymous to the honest user. At the same time, it must be secure and protect users against criminal activity. Mechanisms that prevent untaxed economies and financial crime in the physical world – none of which reduce the value of cash or restrict citizens’ freedom to make transactions – must be transferred into the digital world. For example, anomaly detection of cash flow needs to observe anonymous payment transactions, and regulators must continue to enforce the registration of transactions above certain values.

If these mechanisms are indeed transferred into the digital world, do you think CBDCs will be widely used and accepted for non-cash payments?

A CBDC that includes such mechanisms could have the greatest network effect in non-cash payments. It could become the new means of payment upon which greater functionality is built. Fintech and the commercial banking system are already innovating within this context. So CBDC is rather the basis for payment innovation, and central banks do not compete with private schemes. We will see more diversity, and consumers can choose from a variety of solutions.

Is CBDC built on blockchain technology, and is today’s cryptology strong enough for a digital currency?

CBDC should be value based rather than account based, so the user should be able to use it even if they don’t have an account. Blockchain isn’t the right solution to deliver this: leaving aside any ecological aspects or scalability, central banks are trusted as the guardians of currencies, so to replace these trusted institutions with an algorithm and participants’ consensus would be the wrong approach. Obviously, strong encryption technology will be a crucial component to carry a public payment scheme into the post-quantum era. That’s why we developed G+D Filia^® for a general-purpose CBDC.

And will we still have banknotes and coins in our wallets when CBDC becomes reality?

I’d say that, in the future, banknotes will remain in use but coins will probably become digital. This will facilitate efficiency gains at the point of sale, including speeding up transactions. There will be people that trust physical cash more than digital information for store of value. The cash cycle will then include digital components as a complementary format: so, for example, money withdrawn from an ATM as banknotes would be used at the POS and the change deposited digitally onto a smartwatch.

Finally, how will these developments affect the public?

The future of digital payment systems will greatly affect the public’s freedom. Before deciding how a digital payment system of the future will function, we need to discuss the balance between freedom, privacy, and transparency of payments with the general public. I hope the answer in most countries is that people will be able to use multiple payment schemes as well as banknotes and CBDCs as their digital equivalent. This would ensure the continuation of the central banks’ mandate to issue currency to the entire society and guard financial stability as the basis for our economy.

Published: 30/06/2020