Long reads

The death of cash: What does it mean for the future?

Yves Longchamp

Yves Longchamp

Head of Research, AMINA Bank AG

The use of physical cash in payments has gradually declined in recent years as consumers are increasingly using electronic money, whether through cards or mobile payments. Between 2016 and 2022, the proportion of cash transactions declined from 79% to 59% in Europe. This development reflects the growing confidence in digital technology and a strong preference for convenience.

Money takes many forms, and most of the time we use a card or banknote according to what is at hand. The use of one form of money over the other to settle a transaction has, however, strong implications as all forms of money are not the same.

A decision of quality and privacy

The demise of cash needs to be considered against the existence of a hierarchy of money. The highest quality of fiat money is physical cash as it has no counterparty risk. Deposits, on the other hand, are as good as the health of your bank that provides you with electronic payment solutions, such as cards or mobile payments. When bank runs occur, as was the case in March 2023 when Silicon Valley Bank went bankrupt, customers scrambled to withdraw money from their accounts (deposits) to get physical cash, or to transfer their balance to another solvent bank.

This is why “cash is king”; there is no counterparty risk associated with cash. Cash is central bank money and central banks cannot default on the money they issue as they can always print more to face demand.

Secondly, money is memory. Electronic money is easily traceable and always linked to an individual or corporate account holder. Electronic money does not offer full privacy as it is not anonymous. In comparison, physical cash is not traceable and cannot be linked directly to an account holder or individual, “it ensures your freedom and autonomy and your privacy,” according to the ECB.

This is because physical cash is token-based, meaning that the transfer occurs by transferring the value of the token itself. For electronic money, the transfer of value is based on an accounting operation between two parties that occurs by debiting an account and crediting another one.

Using electronic money or physical cash is therefore a decision of quality and privacy. If physical cash disappears, as it is silently doing, we lose access to the highest quality of fiat money and to a form of exchange that guarantees privacy.

The drawbacks and benefits of digital cash options

While a few would think about Bitcoin as digital cash, it is not a substitute for cash as Bitcoin’s price is too volatile to be used as a medium of exchange in daily transactions. Notice there is no counterparty risk associated with Bitcoin and privacy is guaranteed, similar to physical cash and physical gold.

Before Bitcoin, there was already an attempt to create digital cash in 1983. The idea was proposed by David Chaum, a cryptographer, whose work is at the root of the cypherpunk movement. While his idea proved successful and the coin he created did work, his digital cash called DigiCash remained a curiosity and his venture went bankrupt in 1998, at a time when e-commerce and the internet were not as integrated or used as they are today.

Reaching privacy and quality

In 2021, Chaum wrote a working paper, “How to issue a central bank digital currency”, in collaboration with the Alternate Member of the Government Board of Swiss National Bank, Thomas Moser and Professor Christian Grothfoff from Bern University of Applied Sciences.

The paper demonstrates how far the level of collaboration on the future of money has come in the last thirty years. Central bankers and cryptographers have different backgrounds and views on what digital cash should be. The combination of their views is promising as it guarantees that both the privacy and the quality aspect of money are considered.

What this paper proposes is to create a retail Central Bank Digital Currency (rCBDC), with strong privacy features. rCBDC is money issued directly by the central bank that retail (private person) can hold, like banknotes. To guarantee that this rCBDC has no memory, the transaction is “blinded” via special encryption, making it a true digital bearer instrument.

This working paper proposes a way to create an rCBDC with strong privacy features, in other words, a no-memory, high-quality token, and a genuine digital bearer instrument. The possibility of creating digital cash is promising as it provides the convenience consumers are used to, in addition to the benefits of physical cash.

The silent death of cash is a risk to a fair and level playing field when it comes to payments. In a few years, this evaporating transaction method may completely disappear from our financial ecosystem with dramatic consequences for our financial freedom and privacy. It is time for a digital equivalent to emerge - an rCBDC with strong privacy features is needed now to guarantee our future financial rights.

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