Financial Markets

For a true cashless society to exist, central banks – together with the private sector – must offer a robust digital alternative for consumers. By R3 co-founder Todd McDonald

Digital currencies continue to dominate conversations and headlines as we begin 2020 – but how can central banks begin to move them off the whiteboard and into real-world usage?

Following the introduction and adoption of stablecoins in the cryptocurrency ecosystem, initiatives like Facebook’s Libra and JPM Coin have pushed digital currencies further into mainstream consciousness and driven impassioned debate and collaboration among businesses across the globe. 

Senior officials across Europe are having a very public debate about the merits of a pan-European payment solution, while countries as diverse as Thailand, China, Russia, Bermuda and the UK are actively exploring the potential of creating digital central bank money for retail use. 

The US, conversely, seems to be taking a ‘wait and see’ approach, with treasury secretary Steven Mnuchin and Federal Reserve chairman Jerome Powell stating their reluctance to issue a digital dollar within the next five years. More recently, the former chair of the US Commodity Futures Trading Commission (CFTC) and the current IMF chief economist have argued both for and against the impact of a ‘digital dollar’.

As the powers that be debate the pros and cons, consumers continue to vote with their wallets. The trend for cash usage is clear – and that trend is overwhelmingly downward. A recent IMF paper showed a near 50% decline in cash transactions by value over a 10-year period, and the authors predict cash usage to halve again over the next 10 years. The onus now falls on central banks to adapt to this new reality and prepare for a cashless future. 

Minimise the heavy lifting

For many countries on a quest to digitise, the end goal is clear, but the path by which to reach it is still less so. Yet the solution will most likely follow a model with which central banks are quite familiar: a public and private sector partnership.

There are many examples of such collaboration happening today. The Swiss National Bank (SNB) and Bank for International Settlements (BIS) is working with the Swiss exchange group SIX to explore a central bank digital currency for settlement.

In Asia, the Bank of Thailand is moving ahead with its collaboration with eight commercial bank partners on building a blockchain-based prototype solution that settles interbank transactions via digital currency.

Other central banks have initiated work to completely rethink and redesign their public payment schemes, with a focus on open access and true real-time payments, yet without taking into account the advent of digital currencies. This includes the UK’s RTGS Renewal Programme and the FedNow Service in the US.

A cashless future

This increase in digital payments has signaled that a cashless future may be our most likely reality. However, without a central bank digital currency (CBDC), countries headed towards a cashless society would only have access to money created by private sector entities. 

As central banks have a mandate to provide a safe and efficient payment system, it is highly unlikely they would allow digital money to be exclusively issued by risky private sector entities. After all, money issued by the private sector has default risk (somewhat tempered by government backed deposit insurance schemes), while central bank-issued money does not. 

As Lael Brainard, member of the US Federal Reserve's Board of Governors, recently noted: “Payments are the economy’s circulatory system.” The public sector must consider future-proofing the long-term health of that circulatory system by anticipating the future settlement landscape, which will include digital currencies. Will the private sector provide this monetary substitute for consumers, or can central banks take the lead in digital currency by partnering with the leaders in the private sector?

Some have taken up the challenge already. Riksbank, the oldest central bank in the world, recently began testing a digital version of the Swedish currency, dubbed the e-krona. A CBDC would provide a public sector alternative to a private-sector dominated payments infrastructure in Sweden. 

Additionally, the European Central Bank (ECB) has started to explore how a CBDC could work in the euro area, researching potential technical features with R3 and Accenture, and is also collaborating with five other central banks and BIS to form a digital currency use case working group.

These initiatives are driving an unprecedented period of evolution across global markets. The next few years will be critical to drive this sustainable innovation through to implementation. 

We firmly believe that public-private partnerships are the catalyst for managing a cashless future – and a more efficient, cost-effective and secure method of transacting for consumers and businesses across the globe.

This article is free to read, request a no obligation trial access to Global Risk Regulator.