Why digital money is on the horizon

Cash in the form of coins and notes has existed for centuries, whereas cashless payments have only been around for a few decades. Having said that, credit cards, debit cards, online banking, and platforms, such as PayPal and GooglePay, are strictly speaking just transactions using non-physical money. The amount is debited from the customer’s bank account and credited to someone else. At present, there is no genuine digital money guaranteed by governments as legal tender that can be used in every situation without the need for a bank account. “But that’s set to change,” according to Raoul Herborg, Business Lead Digital Currencies, G+D. The Covid-19 pandemic has accelerated the trend that an increasing number of people around the world prefers to use digital payment methods.

None of the many payment options on the market currently fully meets the various needs of governments, businesses, and consumers. “Central bank digital currencies actually come very close to checking all those boxes. They combine the advantages of cash with the convenience and speed of cashless transactions,” says Herborg. Development of these currencies is therefore well under way. The European Central Bank (ECB) will decide by mid-2021 whether to launch a digital euro project. China has already announced that a central bank digital currency will be in circulation in time for the 2022 Winter Olympic Games. Many other countries, including India, South Africa, Canada, and Japan, are expected to follow suit.

“The easiest way to understand central bank digital currency is to think of it as a payment method that works just like cash but has electronic form,” says Herborg. That is what sets genuine digital money apart from virtual currencies, such as Bitcoin or Facebook’s proposed cryptocurrency, Diem. Such privately created currencies are not universal legal tender; they are restricted to certain user groups and often leveraged as tools for financial speculation. CBDC, on the other hand, would be created, put into circulation, and controlled solely by governments. It is not driven by the commercial interests of tech giants. Furthermore, it could provide privacy protection in the same way as cash does, up to certain amounts. No personal data needs to be provided as part of a customer contract and when shopping no digital footprints are left behind that others could seek to monetize. “However, control mechanisms need to be put in place for digital currency in order to prevent activities like money laundering and tax evasion,” stresses Herborg.

As legal tender, CBDC can be used by individuals and companies for all payment transactions. There’s no need for a bank account; the digital money can be stored on a device, such as a smartphone or smartwatch. But cards – commonly referred to as “plastic money” – are also an option. “The advantage of storing digital money on a card is that you can always make a payment even without access to the Internet or the cell phone network and theoretically also during a power outage. And remember not everyone on the planet has a smartphone,” says Herborg. There are other advantages, too. Unlike credit cards, for example, payment transactions using digital money don’t incur any additional costs for consumers or merchants, e.g. retailers and restaurants. “All these aspects also serve an important social purpose,” says Herborg. “Central bank digital currency promotes financial inclusion, as millions of people in developing and emerging countries don’t have a bank account or access to infrastructure like ATMs and high-speed Internet.”

But can this kind of money really be secure? “Future central bank digital currency systems will meet the strictest security requirements. These requirements will also need to apply once quantum computers become widely available,” adds Herborg. Details on the CBDC infrastructure that governments have in mind are sketchy as yet. But it will likely still be the case that central banks don’t have direct contact with businesses and consumers. They will operate as a kind of “digital money factory” that makes specific sums available to commercial banks, who then pass them on to the economic actors. However, while a central bank digital currency offers many advantages, it would not be wise to scrap cash completely. During the Covid-19 pandemic, there has been a sharp increase in demand for banknotes around the globe. “Cash remains essential for ensuring the robustness of our modern societies,” states Herborg.

Published: 31/03/2021