Could digital currencies be the solution?

  • techUK techUK
    Tuesday13Oct 2020

    Technology has brought many changes to the payments landscape and could bring new ways for the Bank of England to issue 'state money'.

The latest National Audit Office’s (NAO) report made the headlines with findings that £50 billion is the approximate value of notes in circulation not being used for transactions or identified as savings held by UK households.

But the report goes beyond this finding as it examines the role played by the public bodies in operating and overseeing the cash system at a time of rapid change in society’s use of cash. 

Cash usage is declining but demand is increasing

With the use of cash in transactions declining rapidly and the COVID-19 pandemic accelerating this trend, the conversation around cash has become ever more important. Whilst forecasts have suggested that cash will be used in only one out of 10 transaction by 2028 (compared to six out of 10 in 2010), many people and communities still rely on cash.

The report also notes that the demand for notes has increased continuously over the past 20 years. In July 2020, the number of notes in circulation reached a record high of 4.4 billion, with a monetary value of £76.5 billion – compared to £24 billion in 2000.

One of the potential factors highlighted by the NAO include low inflation and interest rates, leading to increasing confidence in the real value and lower opportunity cost of holding cash. Confidence in payments systems is essential and this trend raises some questions about the role of the Bank of England as an issuer of state money, and what can be done to a) effectively produce cash for as long as people want to use it b) provide innovative solutions.

Digital cash, a solution to the decline of cash?

Cash is a physical form of state money. With the innovation brough to market by industry, electric money is now vastly used; bringing faster, more convenient, and innovative ways to calibrate, exchange, store and settle claims we hold on each other in the economy.

As pointed out by Sir Jon Cunliffe, Deputy Governor Financial Stability at the Bank of England, the shift from physical cash to electronic transactions has not only been a shift from paper to electronic form; it has also been a shift from using a form of money issued as a direct claim on the state to money created and issued by commercial banks as a claim on themselves.

There is currently no form of digital cash, or digital state money. Other forms of electronic money are claims on the bank, commercial bank money. Providing digital cash, in the form of Central Bank Digital Currencies could be part of the solution, the transition from physical cash to digital money for many.

It could also open new ways for the Bank of England to achieve its missions of monetary and financial stability, as well as having an active role in using and stimulating technology and innovation for all end users.

In essence, CBDCs could be a step to address some of the issues highlighted in the NAO report and for the BoE to accomplish its missions even further.

techUK’s contribution to the debate – read our white paper

techUK published ‘Future of Digital Currencies’, a crucial contribution to the current debate around digital currencies and serves as a vital resource for both the public sector and industry when considering the impact that digital currencies will have on the payments landscape in the months and years to come. The report encourages industry and the public sector to ensure the design and delivery of digital currencies brings both security and value to consumers. 

Understanding the existing landscape is critical to developing new solutions. Future of Digital Currencies provides the context for exploring digital currencies by commenting on the role of currencies and payments.

There are different forms of digital currencies, detailed in the white paper, from crypto to stable coins. Our view is that fully assessing the benefits and risks associated with each form of digital currencies is critical for consumer security and to enable continued innovation in financial services.

The current environment, as well as the proposed launch of new private led initiatives, has stimulated debate across the globe, with regulators taking a vivid interest in regulating digital currencies. We welcome this increased involvement and interest from the public sector and hope this paper can provide a basis for wider discussions and precipitate the next phases for digital currencies.

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