Means of payment have been changing over the years, going hand in hand with technological development. They perform such functions as storing value, being a means of exchange, and being a unit of settlement. The progress of the world's development creates new needs, opportunities, and risks for monetary operations. Depending on a country's policies and individual needs, society is orienting itself towards selected forms of payment, such as digital money or cash (and, in the future, cryptocurrencies more broadly). In this article, we will talk about the idea of new money. We'll describe a government initiative that is becoming increasingly popular around the world - Central Bank Digital Currency (CBDC). We'll also describe the pros and cons of the possible disappearance of cash as part of the "cashless society" concept.
What is the Central Bank Digital Currency?
It is a new direction in the evolution of the payment field, which most of the world's developed economies are currently working on. It is programmable money based on Distributed Ledger Technology (DLT). CBDC differs from cryptocurrencies in that, among other things, the validator of transactions will not be any network participants but institutions spread around the world, and the user won't be able to track every transaction. CBDCs will be decentralized to some extent - DLT is based on databases that are replicated, synchronized, and shared. The work on CBDCs was pioneered by the People's Bank of China in 2014. Soon after, most economies worldwide began researching the new form of money. The motivation for the research was to create a backup system, a new payment system, a response to the decline in the popularity of cash and increased financial integration. In the assumptions, CBDC will execute transactions in real-time, much safer and faster between the P2P network participants, ensuring privacy and accessibility for everyone. So far, several central banks have launched CBDC programs at various stages of development. Among them are economies like Nigeria, China, the Union of Eastern Caribbean, India, and Singapore.
Challenges of CBDC implementation
The money is expected to be managed from the app. This is a modern solution that may seem difficult to understand for many people, especially the elderly, so countries will have to thoroughly educate citizens on what the new means of payment is. Another challenge will be to build a complex legal background related to the correct functioning of the new currency to ensure proper regulation and security from its use. The most difficult challenge, however, is purely cultural and behavioral. Some societies are open to technological innovation, such as Scandinavian countries, where the share of cash in overall payments is low, and people are used to omnipresent digitization. Unfortunately, in countries where societies still widely use cash, adoption may be much slower and hindered by people's lack of trust in the new solution.
Nevertheless, the CBDC concept itself has its advantages. It is a much safer form of money because of DLT. It does not solve the drawbacks of money itself, but we can consider some scenarios for CBDC.
When developing the foundation of the value of CBDC, countries will base it on a fundamental value like gold, which will prevent inflation. Then we would have an interesting alternative to fluctuating fiat money. Will this happen? Time will tell.
Countries will begin the process of phasing out cash in favor of a new means of payment, explaining that the old relic that is cash should give way to an innovative solution. In that case, society's situation can become more complicated.
Could a "cashless society" be the right direction?
Currently, in the world, the highest percentage of cashless payments is in countries such as Singapore (61%), the Netherlands (60%), France (59%), and Sweden (59%). The worst performers in this regard are countries such as Nigeria (0%), Indonesia (0%), Egypt (1%), Peru (1%), and Saudi Arabia (1%). Cash was the means of payment that people used before payment cards gained widespread use. Cash counting was replaced by a quick transaction by phone. Its disappearance would bring with it a number of both advantages and disadvantages.
- Failures in banks' security systems result in temporary or permanent lack of access to funds.
- Registration of every transaction is a limitation of privacy.
- The ability of transaction providers to dictate additional transaction fees.
- Shopping on credit results from the ease of spending money that is non-physical.
- The push to adapt society to digitization is especially difficult among the elderly.
- Online fraud by not being able to buy goods on delivery.
- Greater revenue to the treasury by eliminating part of the cash-based shadow economy.
- Popularization of blockchain.
- No more cash crimes like robberies.
- Faster transactions and shorter queues in stores.
- Elimination of diseases carried by bacteria on banknotes.
- More efficient collection of statistical data for analysis.
A cashless society could work well in countries such as Scandinavia, where the public is already voluntarily abandoning cash, treating it as an inconvenient and outdated means of payment. Forcing an end to its use may not have the best effect in economies with low levels of digitization and an aging population.
There is still a long way to go for CBDCs. Let's remember that one of the characteristics of money is its general acceptability. In order for Central Bank Digital Currency to come into wider use, one fundamental condition must be met - citizens must accept it and start using it more widely, and this is an individual issue. It is worth citing here the example of Nigeria, where there is a high level of interest in bitcoin, which allows it to bypass government control, while after the implementation of the eNaira, it turned out to be a complete failure, society didn't treat this CBDC as the real-value means of payment. After 12 months of its launch, only 1 in 200 Nigerians were using it despite government incentives such as discounts offered by the government to speed up adoption. The eNaira project was discontinued in July 2022.
A Central Bank Digital Currency that has the proper foundation and is implemented reasonably, with the right education of the public, will be nothing to be afraid of. CBDCs have some features in common with cryptocurrencies, so their adoption will also go hand in hand with blockchain adoption, which is positive. In an ideal scenario, CBDCs would be implemented on a solid foundation, such as gold parity, without compromising the use of cash. Then turning to such an asset could result in the declining popularity of fiat in the long term, which is money based on government debt.
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