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Seeking stability: the future of fiat money

Global Trends
6 Mins.

The world is an uncertain place right now, and we are all seeking stability – both political and economic. People rely on cash, finding comfort in its security and reliability as a store of value and means of payment. How can central banks safeguard trust in public currencies in an increasingly digital world?

Two years of the COVID-19 crisis certainly transformed the economic system, but as the Financial Stability Board (FSB) noted, it was weathered “thanks to … resilience, supported by the G20 reforms, and the swift, determined and bold international response.”1 Cash, currently the only public currency, proved particularly resilient during the coronavirus pandemic, and by August 2021, the number of people relying on paper money was almost back at pre-pandemic levels, despite a rise in the use of contactless payments, according to the numbers from the Bank of Canada.2 Moreover, the amount of cash in circulation is still growing. The ECB commented on the “paradox of banknotes” in the euro area: the demand for euro banknotes has constantly increased, while cash transactions have decreased.3 Indeed, cash in circulation in the eurozone rose 7.9% in the period February 2021–February 2022.4

There are multiple reasons for cash’s resilience and ongoing relevance in an increasingly digital world. Cash is a secure and universal payment method. It provides privacy in an era of rising fraud and personal data breaches. It is free of charge for consumers, ensures financial and social inclusion, and is tangible. And in an increasingly technological and uncertain world, the psychology of tangibility is not to be underestimated.

Global volatility calls for stable public currency

Line to ATM. Group of people waiting to withdraw money with bank card from an ATM (cash machine).

The war in Ukraine, China’s economic slowdown, the threat of recession and increased unemployment, monetary tightening: all of this – along with the coronavirus pandemic’s trajectory and inconsistent vaccine access – has changed our world dramatically. Indeed, this is part of a longer period of global turmoil, with natural disasters as a result of climate change and political crises causing market volatility. All of this has meant that society is keen for a modicum of stability. Our world is in flux, and what society looks for in an uncertain world is an anchor of trust. Experts of the Institute for Monetary and Financial Stability at the Goethe University Frankfurt have studied the stabilizing role of cash during various crises – technological crises, financial market crises, and natural disasters, for instance – and have found that cash contributes to a stable economy in times of economic and political tension. Cash serves as a psychological stabilizer, reducing uncertainty. Practically, cash can be used if cashless systems break down, helping to avoid a downward spiral.5

“Global economic volatility, rising energy prices in Europe, the war in Ukraine – there are many things causing public uncertainty. Public currency needs to remain an anchor of trust in such times“
Dr. Wolfram Seidemann
CEO G+D Currency Technology

How can central banks retain trust in public currency?

Ensuring availability and access to cash is the most obvious route to bolstering trust in a currency. At the same time, banknotes must continue to be highly secure while increasing levels of sustainability. The issue of sustainability is one to be tackled within the entire cash cycle – from cash handling to processing and transport. To achieve a holistic approach to sustainability, efficiency and automated solutions must be enhanced by all cash cycle players, from implementing logistics standards to improving data utilization and integrating efficient software solutions. Innovative solutions, particularly in the field of digitalization, will lead currency management into a dynamic, resilient, and sustainable future.

CBDCs: digital form of cash will foster inclusion

A complement to coins and banknotes, central bank digital currencies (CBDCs) are a digital form of cash that paves the way in innovation, transferring the benefits of and trust in cash to our digital world. CBDC pilot projects are underway in several countries, with the majority of central banks around the world researching them thoroughly. The benefits are many: financial inclusion is fostered, cross-border payments are made simple, and a CBDC would extend public access to central bank money, further stabilizing and safeguarding the financial system.

Several initiatives have been launched to look at the impact of central bank digital currencies on society, as we try to analyze the benefits of this evolution of currency. The international G20 TechSprint CBDC Initiative is one such project, aiming to foster innovation in the field of CBDCs. G+D has reached the final round of the challenge in the “Enabling Financial Inclusion”category with its Filia® solution, which aims to foster inclusion, with a particular focus on underserved people and offline regions that have thus far been excluded from digital payment solutions.

 
G+D Filia®: building a truly inclusive public digital currency

This digital form of cash requires a careful approach if it is to succeed, and modeling its impacts is crucial. Interoperability and the highest levels of security will safeguard the long-term future of CBDCs. A well-designed CBDC solution drives innovation, ensures widespread access and availability to a public currency, is highly secure and, as a central bank issued public currency, is stable in contrast to cryptocurrencies.

Ensuring a secure future of payment with public currencies

The payments landscape is changing, and digitalization and global affairs are driving that change. Payment is a part of our critical infrastructure, and it is imperative that in an ever-changing, globalized world, our currency offers monetary and financial stability for society. The addition of CBDCs into the payments mix could prove an asset, as a truly inclusive digital payment method that can be used by everyone in today’s digital age. The coexistence of cash and CBDCs within the payment mix fosters financial inclusion, provides greater freedom of choice and helps boost trust, further contributing to the stabilization of our economies.

  1. Lessons Learnt from the COVID-19 Pandemic from a Financial Stability Perspective, FSB, 2021

  2. Cash and COVID-19: What happened in 2021, Bank of Canada, 2022

  3. The paradox of banknotes: understanding the demand for cash beyond transactional use, ECB, 2021

  4. Monetary developments in the euro area: March 2022, ECB, 2022

  5. Doing away with cash? The welfare costs of abolishing cash, Institute for Monetary and Financial Stability, 2017

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