In recent months, the race for the development of a central bank digital currency (CBDC) has been accelerating. The latest warning shot was launched by Chinese President Xi Jinping, who publicly stated the need to invest in a core technology like the blockchain.
The euphoria of the Chinese markets following the presidential declaration then induced Mark Zuckerberg - who is encountering considerable resistance at the start of the Libra project by the Western authorities - to sound the alarm about an alleged Chinese overtaking on the subject of digital currencies.
A CDBC is a new type of legal tender which will expand digital access to central bank accounts, limited to commercial banks today. As a result, this tool will combine the digital nature of bank deposits with the classic advantages of cash in daily transactions.
The key point to consider carefully is: to what extent? Would the new currency take the form of a deposit account at the central bank that could even pay an interest rate, or that of an anonymous digital token without interest like the current cryptocurrencies?
Recent research by the International Monetary Fund has explored the optimal monetary and technical characteristics that a newly coined CDBC should have depending on the economy and the banking system in which it is grafted. Indeed, sudden changes in the use of payment instruments can become particularly disruptive and produce cascading side effects in the highly undesirable economy.
Because of these effects, in the face of the "successful" introduction of a digital currency, other payment instruments previously in use may disappear when their use falls below a critical threshold. For example, with the decline in the use of cash, banks can reduce ATMs or businesses can refuse to accept cash, a process currently in advanced development in Sweden.
In general, economic operators have different preferences with respect to anonymity and payment security. In simple terms, cash guarantees always an anonymous transaction, while bank deposits satisfy the need for security.
Anonymity has its value and is not always to be regarded with suspicion despite its indisputable link with tax evasion: recently the ECB President Lagarde said that there is an irrepressible demand for non-traceable payment methods, which can be helping to protect consumers from unauthorized use of personal transaction data, e.g. for credit assessments.
A digital currency can satisfy any combination of anonymity and security, depending on its design. For example, the central bank could guarantee only partial anonymity in the use towards other users but not towards the authorities, depending on significant events such as the revocation by order of the court or even setting transaction limits.
A CBDC can approach the non-traceability of cash only if it takes the form of a token, such as a classic cryptocurrency such as Bitcoin accessible from a user account possibly not verified, or through an anonymous payment card that can be purchased in commercial establishments or online. These forms of CBDC would obviously suffer from the risk of loss and theft associated with cash and Bitcoin: physical (card loss) or digital (loss of account access).
Assuming a completely opposite design, an account at the central bank for each citizen that can only be opened through the use of official documents would replicate (and exceed) the security and traceability of bank deposits.
A digital currency can impact the collective well-being to the extent that it displaces the demand for cash or deposits. The problem is not only the possible disappearance of cash; a CDBC design similar to a bank deposit would force banks to raise deposit interest rates to remain competitive.
This would be reflected in higher rates on loans and in an involuntary contraction of credit to businesses. It does not escape our notice that due to the (more or less intense) dependence of an economic system on bank credit, this decline in intermediation could reduce investments, production and employment, even if families would obviously benefit from interest rates on higher deposits.
This problem is exacerbated if we consider that a digital currency could easily be bearing interest through a trivial technical modification. However, the possibilities are multiple: the interest rate could be positive (as on a fixed deposit) or negative. In that case the value of digital cash would be eroded much faster than the official inflation rate, perhaps to prevent it from hoarding and to encourage consumer spending.
Basically central banks are working on CDBC that do not pay interest, such as cash, to protect the banking system from potentially devastating consequences. This puts cash at greatest risk as a major competitor to digital currencies.
However, the pace of supporters of the sword is a cashless society, the elimination of cash has obvious costs especially in less developed economies, although less visible than the disintermediation of the banking system.
The most recent data show that there is a formidable digital divide at the global level also as regards payment instruments.
In India, where an attempt is being made by the government to force the development of banking intermediation, the value of banknotes and coins in circulation has grown at an annual rate of 14% between 2006 and 2015.
In Kenya, cash still accounts for 98% of the value of all transactions. Although 3/4 of the adults in Kenya use money through mobile devices, a survey of low-income families found that only 1% of the value of the expenses and only 3% of the value of the transactions was carried out electronically at a distance.
The accelerated attempts to replace cash with digital payment systems therefore risk exacerbating a new monetary gap, with a worsening of the social and economic problems that the excluded already face.
In fact, in fact, when introducing a digital currency, low-income families tend to remain the biggest users of cash. Since cash, unlike bank deposits, does not pay interest, if there is a crowding-out effect on loans due to the CDBC with negative repercussions on the economy, these families suffer a proportionately greater loss than deposit holders.
Furthermore, if the digital currency sends cash out of circulation, as in Sweden, these families suffer from a further decline in welfare due to the loss of the main payment instrument.
The fact that from the simulations depositors emerge as the main beneficiaries and users of cash as the main "losers", makes possible a potentially regressive impact on income that central banks and governments must carefully ponder.
Advanced bank deposits and new digital currencies can increase savings, consumption and investments, guaranteeing innovation and job creation. They can also be the key to tackling the problem of tax evasion at the root. A financial earthquake that could cause side effects is however to be taken into account.
The best solution that minimizes the "injured in the field" probably lies not in the elimination of cash or in the total disintermediation of banks, but in a "3-way" financial system where the various payment systems coexist in balance, reconciling everyone's needs economic operators.