Will Covid-19 Be the Tipping Point for a Cashless Society?

By Jame DiBiasio, Founder of Digfin groups, author of Cowries to Crypto: The History of Money, Currency & Wealth

Money is going digital. We are in the midst of a transformation that is on par with previous innovations: Coins in the ancient Mediterranean. Paper banknotes in China. Commercial banking in Renaissance Italy.

What we think of as money has grown increasingly abstract. It’s no longer a commodity that we consume – like bolts of silk or heads of cattle – or respect as a unit of account – like cowrie shells. It’s not a precious metal that we prize. It’s not even the change in your pocket or the notes in your wallet.

Money has already been freed of the surly bonds of earth, at least since the emergence of the credit card in the 1960s. In 2007, a Kenyan telecom operator invented the mobile wallet, letting Kenyans exchange value like they would a text message.

Some places today, like Sweden, have gone mostly cashless because everyone uses plastic or a mobile wallet.

 What’s different about digital currency is that it’s programmable. We haven’t experienced this yet, except in the budding world of cryptocurrencies. And even there, the story is mostly about Bitcoin, which runs on software but is otherwise not changeable. But programmable money is coming.

Covid-19 is playing a catalyzing role. The coronavirus has made us all too aware of how dirty physical money is to handle. Social distancing and working from home have turbocharged online commerce. Changes in how we spend had been gradual; now they are sudden, and widespread. Perhaps just your teenager wanted to move money with a mobile phone, but now it’s grannie too.

But a health crisis is not creating brand new trends. It’s speeding up those trends that were already jelling. It’s speeding us to a future we had already begun to approach, even if blindly. Especially blindly.

Electronic money has proven itself. People like it once they start using it. They will wonder how they ever put up with the hassles of what used to be normal life.

People in developing countries are increasingly paying with their phones, because they don’t need a bank account (or at least a good banking service) to do so, and a merchant can make a payment happen by just printing out a simple QR code, instead of having to buy a lot of expensive point-of-sale kit.

In rich cities like Stockholm and Paris, people happily walk around cashless, preferring their card or, increasingly, phone.

But these transactions are still just digitized versions of the banknotes in our bank accounts. Economists call this “M0”. It is how they count the cash in our pockets, and the deposits in our accounts that we could turn into cash upon request. (A banking crisis occurs when the bank can’t meet this demand.)

What is stirring now is turning this into official digital currency. And that is going to have a big impact on society. On us.

That’s because our use of electronic money is voluntary and private. A corporation like Alibaba, say, makes us an offer and we accept doing business on their app using e-money. For mass uptake of e-money instead of physical cash, those corporations and banks have to convince us. We have to decide it’s more convenient or safer to transact via a phone.

Covid-19 is advancing this argument, but it’s worth noting that in many places, cash is still king. Consumers in the US and Germany haven’t taken up mobile payments with any enthusiasm; Americans still make most of their payments via cheque. Most emerging markets, despite the growing use of mobile wallets, are still profoundly cash economies.

Money is a cultural technology: some people trust cash, they don’t trust electronic stuff, or they’re just habituated to old ways and can’t be bothered to change.

When money becomes programmable, though, this could change. Most of the world’s central banks are seriously exploring digitizing their currency. This means they will be setting new rules for how money gets issued and how it can be used.

To understand what this means, we should start with China. China has good form when it comes to financial innovation. It can claim the first coins, bronzed imitations of cowrie shells. It invented paper banknotes, with its various dynasties financing themselves with fiat paper for centuries before anyone dared try in Europe. China is now going for the fintech trifecta: the People’s Bank of China is road-testing a digital yuan, which could well be in circulation in time for the Beijing Winter Olympics of 2022.

China has been studying this since at least 2014. Other governments have too but China has a special problem. Two giant internet companies, Alibaba and Tencent, now dominate 96% of all electronic payments. Together they have over a billion users using their “superapps”, meaning mobile apps that connect payments to a vast range of services, from food delivery to social messaging to buying insurance.

These two internet companies filled a big hole in China, where banks work hard to serve state-owned companies but have ignored retail customers and small business owners. A lack of an established financial system and, importantly, a lack of trust in official bank services created an opening for technology players. The speed and scale by which Alibaba and Tencent gobbled up this vast market shocked China’s banks and administrators.

The PBoC’s study of digital currency stems from a desire to control these corporate e-money operators. A banknote is a banknote regardless of where it’s spent, but a payment via AliPay is not compatible with one made via Tencent’s WeChat Pay. All the customer data is kept on corporate servers. Together this posed a risk that the government could not properly supervise payments and banking at the most basic level. It has also created a major threat to banks.

That said, China might have tread slowly. Programmable money has many alluring features to a government. It also has risks.

It wasn’t Covid-19 that sped things up. It was Facebook. Last year, the Silicon Valley behemoth announced a plan to issue its own currency, Libra. This would be a “stablecoin”, a blockchain-based token that would track a basket of regular currencies, like the US dollar and the euro. This was Facebook’s attempt to not just mimic the Chinese superapp model, but surpass it. Facebook claims 2.5 billion users across its properties who could use its cryptocurrency for payments, purchases, and investments.

This set off alarm bells around the world. Many central banks from smaller economies fear Libra could displace their own monetary sovereignty. US politicians view it as an attack on cash, or on the dollar. China is different, in that it bans Facebook, so nobody at home would ever use Libra. But it has broader ambitions for a digital yuan than just backstopping M0: it’s a wedge to promote the internationalization of the renminbi and free China from depending on the US dollar.

Jame DiBiasio

The fact is that the dollar underpins most foreign exchange trading, trade financing, and settlements of payments. This is true even when nobody is American or transacting in US assets. This gives the US enormous leverage. Look at how it sanctions companies who do business with Iran or with Chinese tech company Huawei.

In the process of issuing a digital yuan (which is not based on blockchain, but will rely on mobile technology governed by the state), China wants maximum uptake among the population, while maintaining financial stability and control. There are a lot of questions that go into designing a government digital currency. It can be programmed to pay people interest for holding it. Money could be programmed to be spent, to stimulate the economy – for example, by giving people a bonus for spending it quickly, or programming it to be only spent on certain projects.

And it can be programmed to comply with the law. All banks around the world have to report payments above a certain amount and run checks on clients to make sure they’re not criminals or otherwise risky. The money itself could be programmed to reject someone on a government list from using it. Or it can be surveilled, so regulators can see if a “coin” passed through a suspicious account.

Some of this is useful, legitimate, and prudent management. The real-time data that a central bank could get from aggregate payment trends would be far more useful than waiting for commercial banks to send over paper-based reports. But it’s also quite possible for money to be made into a coercive instrument.

There are other considerations. A digital currency represents a potential threat to commercial banks. Disrupting the banks risks wounding the economy’s ability to create credit. One supervisor’s boon might be another regulator’s nightmare.

For these reasons, central banks are approaching the issue with caution. But once a big economy like China issues digital currency, others will have to follow, especially if China’s experiment is a success and other countries agree to transact in digital yuan for its convenience or its access to China’s economy.

This does not mean the end of US dollar dominance, nor the inevitable rise of a renminbi-led world. China’s capital markets are too closed, and the political reforms necessary to open them seem unlikely to transpire soon.

But what China could unleash is a multipolar world of digital currencies, along perhaps with one or two Libra-like corporate competitors, that creates an entirely new world of competing forms of money, each with their own specially programmed features.

Any such system will still merit trust in a central bank like the Federal Reserve to serve as lender of last resort, as the Fed has done since the 2008 Global Financial Crisis. But it could also promise investors nervous about the parlous state of American finances a way to diversify out of the dollar.

And for you and me? Programmable pounds, euros and yen could mean we will be convinced to adopt digital money sooner than we might think. Imagine your government deciding to pay health or pension benefits in digital form. Who’s going to say no to that?

Getting the technical design right is one critical mission for our central banks. So too is getting right issues around privacy, security, and fairness. That is a job for politicians and civic leaders. It won’t be long before these issues begin to dominate our headlines.