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Home Industry Are central banks going to finally create a digital alternative to cash?

Are central banks going to finally create a digital alternative to cash?

According to a report from research and campaign group Positive Money, central banks should issue a digital version of cash to prevent the ‘privatization’ of money.

With the impending ‘decline of cash’ and the rise of digital currencies (such as Bitcoin), there are strong arguments for central banks to start issuing “digital cash” – an electronic version of notes and coins. But this raises a number of questions: how would central banks get new digital cash into the economy, and how would the public use it?

The Bank of England has already posed questions about the potential of digital cash, prompted by the ongoing rise of electronic means of payment, and the emergence of alternative currencies such as Bitcoin.

In the report, the pro arguments are that there are a significant number of benefits to issuing digital cash:

• It widens the range of options for monetary policy: Implementing digital cash can
allow new monetary policy tools to be used. If digital cash is used to completely
replace physical cash, this could allow interest rates to be lowered below the zero
lower bound (although this is not a policy we would advocate).

• It can make the financial system safer: Allowing individuals, private sector companies, and non-bank financial institutions to settle directly in central bank money (rather than bank deposits) significantly reduces the concentration of liquidity and credit riskin payment systems.

• It can encourage competition and innovation in the payment systems: The regulatory framework we propose would make it significantly easier for new entrants to the payments sector to offer payment accounts and provide competition to the existing banks.

• It can recapture a portion of seigniorage and address the decline of physical cash:
As physical payments are gradually replaced with electronic payments, the Bank of
England will want to replace physical cash with its electronic equivalent.

• It can help address the implications of alternative finance upon money creation and distribution: Non-banks, such as peer-to-peer lenders, are competing with banks and taking on a larger share of total lending.

The issue is, that there is not much to argue against, but the problems come with how to implement this system to the one we already have. The report has following answer:

“The Bank of England already issues digital money, in the form of deposits held by commercial banks in accounts at the Bank of England. It could provide digital cash simply by making these accounts available to non-bank companies and individuals (without the need for a Bitcoin-style distributed ledger payment system). There are two ways this can be done.

In a Direct Access approach, the Bank of England could provide accounts to all citizens in the UK, along with the payment cards, internet banking and customer service requirements this entails. However, the Bank of England is likely to see this as inappropriate state involvement in the private sector and a significant administrative burden.”

Jan Cerny
Jan is an innovation enthusiast and Fintech news reporter. He specializes in news distribution, social media, and content analysis.

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