We asked a number of leading Swiss retailers whether consumers had changed their payment habits as a result of Covid-19. It turns out that the majority of people tended to use cash just before the pandemic, but cash payments have been in the minority since the outbreak. Around 60% of customers currently pay with an app or plastic. It's not clear yet whether people will go back to using cash once we have overcome Covid-19 – assuming there is no new strain of virus.
Even so, I predict the death of cash whatever happens. One very strong contender, with the rather unstylish name Central Bank Digital Currency (or CBDC for short), is gaining traction. Some central banks are already pushing ahead with the development of CBDC. In Sweden it is known as the e-krona, in Uruguay the digital peso, and in China DC/EP, short for Digital Currency Electronic Payment.
CBDC out front
Just over a year ago I wrote a blog in which I claimed we would soon see the emergence of new payment methods. Since then, I have become convinced that CBDC is well out front and will squeeze out both cash and plastic. Decentralised cryptocurrencies such as Bitcoin will keep their niche as a libertarian alternative, but other payment systems will merge with CBDC.
But let's take a step back for a moment: What exactly is CBDC? CBDC is an electronic currency issued by a country's central bank. The philosophy of CBDC is remarkably similar to that of hard cash. A digital eFranc has exactly the same value as a normal Swiss franc. Similarly, it too is a legal means of payment in Switzerland, so that all commercial traders must accept it.
The frontend of CBDC is similar to the frontend of a payment app such as Google Pay. Payments are contactless, and transfers between private individuals are made directly between their smartphones, just like Twint, for example. CBDC's backend, on the other hand, is more like the backend of cryptocurrencies. Transactions carry a digital signature, but there is no need for a blockchain or mining. Digital eFrancs are issued by the Swiss National Bank in exchange for cash, for example. All transactions are verified by a small group of computers or directly in a payment network.
Goodbye to negative interest rates...and other disadvantages
I have compiled a long list of drawbacks associated with conventional payment systems. I was actually surprised to find that an solid CBDC implementation is able to convert virtually all the disadvantages of traditional payment systems into advantages. CBDC is better than all the existing payment systems combined.
Unlike payment apps, individual privacy is protected and can only be lifted by court order. There is no need to place trust in the service provider: an eFranc does not disappear if a bank or payment provider goes bust. The central bank guarantees that transactions are completely cost free (and will remain so). Saving up lots of eFrancs will be completely cost-free as well – So goodbye to negative interest rates!
Other than cash, CBDC production costs are virtually nil and transactions across the counter are very quick. Online payments are error free. There is no possibility of forgery, tax evasion, loss or theft.
… But what happens if there's a power failure?
One technically challenging point is how money would be transferred in an emergency such as the failure of the electricity grid or Internet. In such a unique scenario, transactions should still be accepted. Bona fide handling of transactions in emergency situations would potentially enable a fraudster to withdraw the same amount twice with a manipulated smartphone. However, such a combination of circumstances would be extremely rare. In addition, this type of fraud attempt would be discovered the minute electricity and the Internet are restored. The books would then be balanced again, and the fraudster could be prosecuted, as already happens today in the case of money forgers. It is even easy to track the fraudster down through their address.
Transactions can be traced
And this brings us back to privacy. Cash can be transferred completely anonymously. In the case of CBDC there is a data trail. However, this is encrypted and furthermore only exists between the parties involved in the transaction. State authorities do not see normal transactions, but at the most the total transaction sum. But should they want to investigate a particular transaction, they are able to track a suspect's identity and the associated transactions. Lawmakers should take steps to ensure the disclosure of identities does not occur too often.
Only use something you understand?
Another criticism is the complexity involved. CBDC is built on the principle of asymmetric cryptography, an application of mathematical number theory which is not the type of subject taught at school. A certain amount of trust is therefore needed in a technology only understood by experts. But let's be honest, nowadays we trust a whole range of technologies that we don't fully comprehend, even asymmetric cryptography itself ("https").
People who are fond of cash claim they are not put off by its drawbacks, as these mainly concern the governments and businesses, rather than consumers. That's certainly true, but very soon the costs of cash are likely to be passed on to customers, who will then have to decide whether they like cash so much that they are prepared to pay more to use it. In fact that's already the case. Parking charges, for example, are billed to the exact minute if you pay with an app. Any charges for unused parking time are automatically refunded. The same happens with CBDC, but without the payment provider knowing where you have parked your car.