The handling of cash became the subject of fierce debate during the pandemic, as various studies have shown that viruses can persist on the surface of banknotes or coins for days or weeks. Restrictions on freedom and measures of social exclusion only served to increase the use of cards to the detriment of cash.
The pandemic has also emphasised the leadership of countries such as China and Sweden in developing digital currencies. Lagging countries run the risk of their businesses being forced to switch to foreign digital currencies. Europe absolutely needs a common, independent payment solution.
The future of money: Why cash is becoming a thing of the past
Money has changed. Central banks are slowly beginning to rethink the 17th century cash model and accelerate the development of central bank digital currencies (CBDCs). But this takes time, especially in advanced economies where interest rates are low and privacy is a major concern. U.S. card companies, such as Visa and MasterCard, are benefiting from this trend by being able to set the prices charged to merchants and consumers.
In recent years, there have been a number of initiatives by public and private organisations offering an alternative to credit card payments that eliminates intermediary fees (e.g. Swish, Alipay and WeChat Pay). Central banks have long been working on ways to digitise cash, and the pandemic has accelerated this process.
Who dictates the rules of the game in a world of digital currencies?
A Bank for International Settlements study back in January 2020 found that 80 per cent of central banks are developing MNBCs and 10 per cent, mostly in emerging markets, are already piloting. China has clearly introduced its digital currency to improve financial inclusion. Sweden is pursuing its MNBC as a natural next step.
Sweden and China are leading the race, having been pushing digital payments for many years and with undeniable success. However, both countries have their own motivation for developing MNBCs. China introduced its digital currency to improve financial inclusion. Sweden, with its high level of financial inclusion, is using its MNBC simply as a natural next step. Sweden already has one of the lowest levels of cash payments in the world - around 1 per cent of GDP.
The digital dollar and euro: Lagging innovation
The US and Europe need to catch up in this race to digital currencies, but their progress is still too slow. In the US, the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology launched the MNBC initiative in August 2020. However, those plans have been abandoned. In Europe, the ECB has published a report on a possible digital euro, but is still in the research phase and has no plans to make a decision until mid-2021.
Impact on traditional banking
With bank accounts with low interest rates, MNBC could help to abolish intermediation in the banking system. People might prefer to keep their money directly with the central bank. Obviously, this would disrupt the existing banking system and affect financial stability. Credit card transactions, foreign exchange fees, payment transaction fees and interest margins on deposits would be severely affected. This would overturn the existing system and create additional responsibilities for central banks.
In addition, the reduced role of commercial banks in the custody and handling of money could lead to a redistribution of financial risks. Central banks will be forced to take on more responsibility for liquidity and lending. This could affect the availability of credit to households and businesses and change economic incentives in the banking sector. In the long term, digital currencies may accelerate the abandonment of cash, leading to the need to rethink traditional financing models.
Trust, Control and Privacy: The World of Digital Money
As governments accelerate digital currency initiatives, they need to consider cultural factors related to convenience and privacy. These will influence the pace of adoption. For example, the digital yuan in China will allow regulators to see and track every transaction.
Views on privacy and convenience vary across cultures. Studies have shown that people in developed countries are more concerned about privacy than people in emerging economies. This may explain China's leadership in the transition to MNBC.
Conclusion: The end of traditional banking?
Given the current geopolitical situation, it is important to strengthen the euro and maintain a position of data sovereignty. This requires an independent European payment solution. Currently, e-commerce and payments are dominated by US companies, although there is a strong emergence of Asian vendors. Central banks, governments, major banks and clearing houses need to work together to implement digital payments initiatives. Currently, there are two scenarios: either the market will find a solution on its own, or it will have to be imposed through regulation.
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