Will CBDCs Mark the End of Cash

Will the rise of a central bank digital currency (CBDC) mark the end of cash? For years, people have been concerned about how the use of cash has declined. But the rise of CBDCs has brought this concern back to the forefront because many people see the introduction of CBDCs as an attempt to replace cash.

Is that really the case? Well, different people will give you different answers.

"It's Not a Replacement"

In some jurisdictions, concerns about the potential cashless society that a CBDC could lead to have become so prominent that central bankers have made dismissing cash concerns a key part of their messaging. For example, the Federal Reserve has said it "is considering a CBDC as a means to expand safe payment options [like cash], not to reduce or replace them." The European Central Bank has said, "A digital euro would complement cash, not replace it." And the Bank of England has said a CBDC "would not replace cash."

In short, these officials have tried to make the point that a CBDC would only be an option to exist alongside cash.

However, it should be noted that these same central banks have often pointed to the decline of cash as a reason to create a CBDC. For example, after citing the decline in cash use, both the Federal Reserve and the European Central Bank have argued that a CBDC is needed to "preserve ready public access to safe central bank money" and to preserve "a public means of payment."

So while officials may say CBDCs are not meant to replace cash, it's difficult to square how that can be the case when the decline of cash is cited as a reason to introduce a CBDC. Perhaps the line being drawn is that they won't forcibly take away cash, like when the US government prohibited citizens from holding gold, but that is a fine line, to say the least.

Not Everyone Got the Memo

With that said, it seems not every central bank got the memo on the call for pro-cash messaging. Officials in Australia, the Bahamas, the Eastern Caribbean Currency Union, Lebanon, Nigeria, Peru, Rwanda, and the Solomon Islands have all openly said their goal is to go cashless and that CBDCs are a way to get there. Even the International Monetary Fund has recommended CBDCs as a replacement for cash. And proponents of CBDCs have often noted that cash needs to be removed for a CBDC to be used as a tool for monetary policy.

For some of these jurisdictions, the issue boils down to costs. The Rwandan central bank specifically recommended introducing a CBDC to "achiev[e] a cashless economy" because it cost the nation over $30 million to print and process cash between 2018 and 2022. Luke Forau, governor of the Central Bank of Solomon Islands, echoed this concern, saying he introduced a CBDC because "we want to reduce the use of physical cash as it is very expensive to print the notes and coins." Likewise, the Central Reserve Bank of Peru said a "CBDC can increase social welfare by reducing the costs and risks of using cash." Finally, International Monetary Fund managing director Kristalina Georgieva said, "CBDCs can replace cash which is costly to distribute in island economies."

Others, however, have been less clear about their reasoning.

The Eastern Caribbean Central Bank wrote in its 2019 annual report that it launched a CBDC to reduce the use of cash by 50 percent by 2025, but it didn't explain why that was a goal in the first place. Around the same time, the Central Bank of the Bahamas wrote that "reducing the ill effects of cash usage" was an objective of the Bahamian CBDC and that it expected the launch would lead to a "concurrent reduction in cash transactions." Riad Salameh, former governor of the Lebanese central bank, said he wanted to launch a CBDC to take the country cashless. Finally, after launching a CBDC, Central Bank of Nigeria governor Godwin Emefiele said, "The destination, as far as I am concerned, is to achieve a 100% cashless economy in Nigeria."

For a third group, going cashless is required to apply CBDC policies. As James Mackintosh of the Wall Street Journal put it, "The main monetary power of the digital dollar comes from the abolition of bank notes." What does Mackintosh mean by this? Policies like negative interest rates depend on the absence of cash.

Cornell professor and former International Monetary Fund chief Eswar Prasad noted this dependence when he wrote that a CBDC would be a "useful policy tool" because "[if] cash were replaced with a digital dollar [then] the Fed could impose a negative interest rate by gradually shrinking the electronic balances in everyone's digital currency accounts, creating an incentive for consumers to spend and for companies to invest."

In other words, a negative interest rate policy would be akin to fining people for not spending "enough" money. Prasad notes that cash must be replaced for this policy to work because cash would otherwise act as an escape hatch. In fact, as I have explained at length in my book, it's not just cash that would need to be banned for these CBDC policies to work. Cash, foreign currency, cryptocurrency, and even some commodities could all serve as escape hatches for citizens. Therefore, for their plan to work, the government would need to eliminate all these alternative payment methods to cut off any escape hatch from their "better" monetary policy.

The End of Cash?

So, is the introduction of CBDCs an attempt to replace cash? Well, it depends on whom you ask, but the answers don't seem all that different in the end. For some central banks, the answer is that a CBDC won't replace cash but also that we need one because cash is disappearing. For other central banks, the answer is that a CBDC should absolutely replace cash, but their stated reasons for doing so can vary. And for others, the benefits that CBDCs are supposed to deliver explicitly depend on the absence of cash.

No matter how you break it down, if the future of money involves CBDCs, then the future of cash does not look bright.

Are you interested in learning more about central bank digital currency? My new book, Digital Currency or Digital Control? Decoding CBDC and the Future of Money, is out now.

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