Money is dirty. Literally. Empirical findings (also here and here) show that various strains of bacteria, viruses, and fungi live on our banknotes and coins. This disease-transmission channel is especially relevant now with the COVID-19 pandemic that killed thousands of people worldwide.
While the probability of getting infected with COVID-19 through a banknote is unknown, and the World Health Organization and certain established epidemiologists do not recognize it is a major disease vector, some retailers are reluctant to accept cash. So if cash is undesirable as a retail means of payment, what does that leave us with?
This void has been filled by bank (debit and credit) cards. The preference for non-cash payment is by no means a recent trend, as the use of cash has been on the decline for several years already. In the Netherlands in 2018, consumers paid in cash 37% of the time, a decrease from 41% in 2017. The decline is even steeper in Sweden, where user reported cash use in their last transaction fell from 39% in 2010 to just 13% in 2018. Debit cards and digital payments through smartphone apps now seem to be the preferred means of payment. This is especially true considering the massive increase in online shopping, that is rarely possible to perform in cash.
From the perspective of hygiene, the push for the use of cards is probably a prudent measure. Card payments, at least for small amounts, do not even require physical contact with the POS terminal. The same is true for payments through smartphone apps. As a front-line measure of disease containment, this is justified. However, in the long term, it is a worrying development.
Using credit and debit cards means settling the payments using bank deposits. It is a transaction in private, bank money. Increase in use of this type of money increases the presence and influence of the private sector in the money supply. This dependence on private actors leads to various instabilities and market failures. For instance, when large, systemically important private banks collapse and their users’ money is inaccessible, it is often the public itself that is burdened with saving these banks. This bank ‘bail-out’ took place in the last financial crisis.
If cash is a no-go right now and card use is undesirable in the long run, what are we left with? For a number of years already, academics and civil sector organizations have argued for the introduction of central bank digital currency (or ‘CBDC’ for short). This new kind of money would be issued by the central banks, just like cash is now, but would assume a digital form, like bank money does already.
CBDC would, ideally, be the best of both worlds. It would have the convenience of bank money, with smartphone apps that enable instant transfers, online shopping, initiating payment requests from other users. On the other hand, CBDC would be a form of public money, like cash. Introduction of CBDC would reassert the dominance of the public sector in the money supply, reclaiming a part of the gargantuan 93% share of private money in the economy. It would also give more credence to the central banks’ promise to preserve the stability of the payment system and the access public money.
This is not to argue that notes and coins should be abolished. While digital forms of money are very convenient and effortless, cash still serves a purpose. Many groups [PDF link] in society still either prefer cash or are fully dependent on it. Furthermore, physical currency is necessary as a back-up utility. Calamities such as power outages, natural disasters, and cyber-attacks can disrupt the functioning of the electronic payment system. Lastly, cash is the only truly private means of payment. While each digital transaction is tracked and stored, cash exchanging hands leaves no trace, for better or worse.
The design and implementation of such a system is a colossal endeavor. It contains technical challenges for the infrastructure of the central banks. There are also legal questions surrounding the legal tender laws as it pertains to this new form of digital currency. The last but not least are the economic implications of it on monetary policy and the financial sector.
The size of the challenge makes it unlikely that CBDC will see the light of day anywhere in Europe before the COVID-19 is suppressed. But this isn’t the last pandemic the world will encounter, and neither was the financial crisis of 2007-2008 the last of its kind. We should be ready for the next crisis, whatever it may be, by having the access to a public, digital – and clean – form of money.
