WHY THIS MATTERS IN BRIEF
- The use of cash in society is falling and some of the world’s largest central banks are creating new cryptocurrencies and planning for a future without cash
China’s central bank has announced that it’s going digital, but while that shouldn’t be a surprise to many of us, after all, almost every bank on the planet is embarking on some form of digital transformation journey at the moment, the People’s Bank of China (PBOC) are talking about another kind of digital revolution, one that I touched on in my Future of Money talk in Amsterdam the other day. They’ve begun trial runs of their prototype cryptocurrency and are taking a major step closer to becoming one of the world’s first major central banks to issue digital money that can be used for anything from buying rice to cars.
For most users in China using their smartphones and laptops to buy goods using a PBOC backed cryptocurrency won’t feel very different to some of the existing payment methods that have taken root in China such as Alibaba’s Alipay and Tencent’s WeChat. But for sellers the change would be huge – they’d be able to get digital payments instantaneously and directly from the buyer, cut out the middlemen who normally take a cut of their transactions and lowering their transaction costs – something that most retailers, for example, especially small ones, always moan about.
Furthermore, as PBOC builds up its own capabilities it’s also increasing its scrutiny of Bitcoin, the Blockchain technology that underpins it, and other types of distributed ledger technologies, because on the one hand it doesn’t want a Bitcoin bubble to blow up in its face and on the other, maybe more importantly, because it doesn’t want to cede any ground in the nacent cryptocurrency space to companies it has no control over.
Over the past few years the Chinese people have been one of the most prolific adopters of online payments, and the more they use them the less they rely on the central bank and the more PBOC feels challenged. It’s a vicious cycle, and one that PBOC want to break, so finally, after years of sitting on the fence and prodding the bear they’ve decided to get off the fence and join them.
“Getting to know precisely how much banks lend, where the money goes and the rate of credit creation is key to curbing money laundering and making monetary policy more effective,” said Duan Xinxing, Vice President of Beijing based OKCoin, one of the country’s biggest bitcoin exchanges, “and now issuing digital currency will make it easier for the PBOC to monitor risk in the financial system and track transactions economy wide.”
Early last year the PBOC announced that it would “soon” have it’s own cryptocurrency but it never set a deadline and went quiet on the matter, however, even though it went quiet there’s been a lot of vocal support for the initiative from some of its key executives, especially Fan Yifei, the banks Deputy Governor.
Like most countries China is finding it increasingly expensive to print money, try to combat fraud and manage the cost of handling cash, something that’s only exacerbated by the fact that there are over 1.4 billion people in the country. As a result PBOC hopes that by moving away from a cash economy it can increase the speed, convenience and transparency of all the transactions it manages.
“Cutting costs is an obvious benefit, but the impact of shifting to blockchain based digital money from the current payment structure goes beyond that,” said Larry Cao, director of content at the CFA Institute in Hong Kong, “there’s a potential you can pay anybody in the system, any bank, and any merchant directly. Blockchain will change the whole infrastructure. This is revolutionary.”
And there are other benefits too. Instead of relying on monthly surveys of businesses, or collations of spending from the national statistics authority, the PBOC, and therefore the Chinese government, would be able to monitor the pulse of the economy in real time. For example, not only would they have complete, real time visibility into every transaction made anywhere in the country, but they’d also be able to eliminate the cash in hand economy, which today is hard to monitor and tax, and eliminate the need to print and manage cash. All of which, as a result, means that they could apply an unprecedented level of precision to managing their national economy on a day by day, or even an hour by hour basis – something that until now would have been nothing more than an impossible pipe dream.
“For the PBOC, using blockchain will let them trace transactions and collect real time, complete and authentic data that they can use to compile precise monetary indicators such as money supply growth,” said Xinxing, “and the transparency of economic activities in every corner in the country will significantly improve. The central bank will have unprecedented knowledge of how the economy runs.”
Meanwhile, adding more fuel to the fire, blockchain is basically a digital ledger that contains the payment history of each transaction, and if the PBOC’s version became widely adopted that would challenge all of the country’s existing intermediaries such as banks, and payment services – including AliPay, who’s also developing their own virtual reality payment system, and WeChat.
“I won’t say banks and payment companies will disappear, but their role would definitely change,” said William Gee, a risk assurance practice partner at PwC China in Beijing, “they need to find their new role in the new payment ecosystem, and we will probably see some innovative business models emerge in this sector.”
Meanwhile, a PBOC research paper published last year outlined how the new system would work, they would create a cryptocurrency and transfer it to the commercial banks as and when they needed more liquidity, then, consumers could top up their digital wallets using modified ATM’s. And as far as purchases go buyers would simple wire the money from their wallet to the merchants account automatically at the time of purchase, and the merchant would deposit the money into their commercial bank account as normal.
In short, the cryptocurrency would be part of the overall money supply, replacing part of the outstanding paper tender.
“Talking about the impact of digital money now is like trying to predict how the Internet would transform lives in the 1980s,” says Xinxing, “we know it’s going to be huge. It has the potential to change the entire economic infrastructure. We’re just not sure about when and how.”
And it’s not just China that’s moving away from a cash based society – yesterday, for the first time ever digital payments accounted for 51 percent of all of the UK’s spending, and that followed on from Sweden’s announcement last year that cash now only accounts for 2 percent of their economy, and late last year, India’s Prime Minister Narendra Modi scrapped almost 90 percent of the bank notes in tender in a bid to target corruption and push people to use digital payments.
Elsewhere, the Bank of Canada, the Bank of England, Deutsche Bundesbank, the Monetary Authority of Singapore and the US Fed are also examining digital currencies, and more will inevitably follow.
Once upon a time cash was king, but it’s increasingly looking like the king’s crown is slipping…