Can I Pay By Card? Digital Currencies And The Advent Of Cashless Society
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Some would attribute the saying “May you live in interesting times” to Confucius, others to a famous Chinese saying. While none of these hypotheses are backed by solid evidence, we can’t help but agree with the saying itself. Especially because the period of change we are experiencing now is quite unique.
If we look at its underlying characteristics from a sociological perspective, Bauman’s “Liquid modernity” will explain the lack of stability and the enhanced mobility. From a technological point of view, we can’t be anything but amazed at the speed at which information is now able to travel. From an economic / financial view, we can see how “whales” strive to automate as much as possible to drastically cut down on staff. And finally, us, the people, typically motivated by the good old laziness, the mother of invention, who out of pure convenience, happily welcome new features in our smartphones.
Curiously, all the above developments are bringing about the same change: the move towards a total digitization that would allow a complete automation of most everyday interactions globally, regardless of the location. In some fields, this change has already taken place: look at mobile phones or email messaging. In others, such as the red tape or finance, tradition and generational aspects hinder the progress. But let’s not forget that the so-called “interesting times” are often times of disruption: if something obsolete obstinately resists change, in the end, it gets replaced through evolution.
From a cashless society to a contact-less one.
What is a “cashless society”? To better understand, we should look at the definition of a “cashless society”: a society that does not use paper money as a means of exchange and instead uses other equivalents, such as pre-cash barter exchange options or post-cash virtual currencies (digital representation of national currencies or cryptocurrencies). As we have seen above, a whole range of societal changes have been impulsing innovation in different fields towards automation and digitization. This would have slowly continued towards what was denominated as a “cashless society” and even promoted at different levels.
But this process has been altered as a truly unexpected (for the most) factor entered the game - the COVID19 pandemic and the corresponding consequences. If the coronavirus hadn't been present then things wouldn't be changing so quickly. Being highly contagious, it has forced people to introduce social distancing so we can urgently implement contact-less solutions for all sorts of interactions that would previously require physical contact. (Remember the last time, when you gave a kiss / a hug / a handshake to a friend you ran into in a park?) At the beginning, contactless payments were sort of a cool application to play with your smartphone or watch, or credit cards would not be accepted at Sunday markets or in bars. In contrast, the current need to avoid any contact with anything potentially contagious made us rapidly move towards a contactless society which has almost pushed the paper money out of use completely.
The disruption does not end there. If the COVID had not altered our lives, we would have still been approaching an era of digital currencies, such as Bitcoin that has been gaining its place in the sun for the past 10 years, but at a slower pace. Banks, at least in Europe, have been slowly but firmly digitizing their systems and user offerings, such as totally fee-less mobile phone accounts with instant transactions and numerous useful features. The societal changes we’ve mentioned before have always been pushing progress ahead. But what has been lagging truly behind were the governments — lingering with providing clear regulations and diffidently pondering a possibility of digitizing national currencies, such as a digital yuan or digital dollar.
While it may seem that this niche is already occupied by cryptocurrencies, such as Bitcoin fighting for the status of the international currency, or stablecoins pegged to national currencies to provide its digitized version, the reality is not so straightforward. Bitcoin is struggling to solve the scalability issues and the stablecoins, apart from being largely unregulated, have a tiny problem. Since Tether, USD-D, USD-C, etc. are considered to be virtually pegged to the USD, the providers behind them have to keep enough USD reserve to back all the corresponding circulating coins / tokens, which is a huge investment. If in theory it is supposed to be so, in practice, there are often doubts on whether these virtual assets are actually backed by a reserve.
The interesting news is that the growing number of cryptocurrencies and a rising mass adoption, together with the requirements of our brand-new contactless society, seem to have finally given the governments the necessary motivation to digitize their national currencies.
Is it Time for Central Bank Digital Currencies?
The first CBDC has been just recently released by the Bank of Lithuania, however, it’s not a representation of the national currency, it’s a collector coin issued to commemorate the country’s 1918 Act of Independence and its 20 signatories. In relation to the movement towards digitization of the national currency, the absolute leader is China with its Central Bank Digital Currency (CBDC) project referred to as Digital Currency Electronic Payment (DCEP). According to experts and the local press, the Chinese government got inspired by blockchain technology and cryptocurrency (that the country has repeatedly banned) in creating the architecture of its national payment system. However, apart from being digital, the currency will have little in common with decentralized coins and tokens: it will not run on blockchain, it will be issued by the Central Bank and at the beginning, only a small proportion of the yuan supply will be digitized.
China has two major reasons to digitize the yuan: an attempt to enhance the traceability of money flaws together with the AML policy enforcement and an attempt to internationalize the yuan to shake the US dollar international hegemony. From the user’s perspective, the positive side will possibly be, apart from the speed and easiness, a possibility of conditions execution (sort of a smart contract idea) and offline instant transactions from phone to phone.
The advances that China has made seem to have motivated the US to reconsider its approach to the Digital Dollar. The US Digital Dollar and Bitcoin also have little in common, the dollar would be a Central Bank Digital Currency, like the RNB where the Bitcoin is not. The idea and the discussion around it are fostered by the Digital Dollar Foundation under the framework of the Digital Dollar Project (check this website for the concept of digital dollar explained). The Project’s main purpose is to “to do things the right way” in what it concerns the digital dollar implementation.
According to J. Christopher Giancarlo, one of the project directors and a strong blockchain advocate, the nature of the USD is quite unique because it’s the international reserve currency and hence, the responsibility in digitizing it is extremely high. For this reason it’s important to analyze the Chinese experience and learn from possible mistakes, while maintaining the US core values such as private property and free enterprise when designing the digital dollar. However, if the US wants to maintain its economic supremacy in this new contactless society, it’s time to move forward from the obsolete USD-based systems such as SWIFT or Fedwire. Indeed, it seems like the understanding of this pressing importance is rising at all levels in the USA, including the highest, such as the Senate, according to the latest news.
The US government so far has been quite skeptical towards the expansion of cryptocurrencies, especially in the case of Libra, initiated by Facebook. Libra was originally designed as a stablecoin pegged to a basket of national currencies and available to billions of users through such apps as Facebook and WhatsApp, so it seemed a threat to national monetary sovereignty of nation-states.
Creating national digital currencies and moving on to a cashless society raises a wide range of challenges that the governments have to foresee and take into account. Removing cash means that the whole cash-supporting ecosystem will become obsolete and useless. ATMs will end up disappearing meaning a loss of touch-points for the banks. The possibility of storing digital money in an app will question whether the very custody function of the banks is still necessary. If the banks remain without the continuous influx of private money for custody, they will be unable to offer their lending services, which essentially would deprive them of their core business and question their very existence.
However, disruption is not an end — it’s a transformation, even if often radical. With numerous P2P lending, micro-lending, and crowd-lending services run on blockchains and driven by the idea of democratizing finance, the future of finance does not seem so gloomy. To conclude, the question is no longer “are we entering a cashless society”, but rather “how long until a cashless society” or even “when will this cashless society begin?”