Central banks react to lower liquidity


Cash use falls to less than 10% of total payment value in major economies

The pandemic has had a profound impact on the global payments industry. In many major economies around the world, cash has fallen to less than 10% of the total value of face-to-face payments in 2021.

In many emerging economies too, more than 50% of payments are now made through digital means, as reported in the 2022 Global Payments Report by financial services firm FIS.

Among developed markets, notable outliers are Germany and Japan, where cash preference remains strong for cultural and demographic reasons.

Advancing electronic payment markets

The United Arab Emirates and Italy, still largely dependent on cash three years ago despite their advanced banking and payment sectors, are now firmly in the e-payment camp.

Digital payments accounted for 80% of the total value of payments in the UAE in 2021, up from 33% in 2019, reflecting the growing sophistication, diversity and competitiveness of the payments industry in the UAE.

India is one of the most notable transformations, where electronic payments have grown from 29% to 63% of the value of total payments.

This reflects the success of a massive financial inclusion campaign embedded in the Digital India program, launched in 2015 to digitize all government services available to citizens, reduce the informal economy and strengthen social safety nets.

While most emerging economies share these goals, few have pursued them on such a scale and in such a strategic way.

The proportion of banked adults in India rose from 54% in 2014 to 81% in 2018 – a phenomenal leap among emerging economies that has firmly positioned India alongside China as the engine of the digital economy.

The two are also leading the world in their progress towards issuing central bank digital currencies (CBDCs).

The dangers of lack of money

An unintended consequence of the increase in digital payments caused by the pandemic is the new impetus given to CBDC plans.

For several years, central banks in major economies have feared that the decline in the use of cash by individuals and its acceptability by merchants could lead to a situation where payment systems end up being entirely controlled by private entities, which whether they are banks, card associations or privately managed companies. digital currencies.

In Sweden, the e-krona project is seen as a necessary response to this scenario, enabling the central bank to replace cash with a national digital currency that is secure, efficient and accessible to everyone.

Japan’s central bank deputy governor expressed similar concerns in 2019, saying that as technological innovation evolves, “the structure of the retail payments market could suddenly change drastically, pushing us towards a society without In some cases, the need for CBDC issuance may suddenly increase”.

In its digital currency white paper published in June 2021, the Bank of England stressed that any CBDC design must be compatible with offline payments, potentially using low-cost smart cards, to be accessible to those who don’t have a smartphone or internet access.

A stabilizing role

This concern with protecting money as a public good seems to have been lost in cryptocurrency circles, with claims that cryptocurrencies threaten national currencies or should actively seek to replace them.

Beyond their catchy effect, these statements reflect a misunderstanding of the economy and the monetary hierarchy.

A century ago, the British economist Ralph George Hawtrey, in his book Currency and Credit (1919), explained in detail how the cashless economy is unsustainable in the absence of central bank money.

Central bank money stabilizes the value of commercial bank money, which would otherwise fluctuate erratically, and ensures that debt and credit instruments will eventually be convertible into a universally accepted means of payment: cash.

This reinforces the credibility of modern banking and payment systems, including cryptos, which are only viable because they are denominated and convertible into national currencies.

As many economic sectors went into hibernation during the pandemic, much of the excess liquidity was directed to equities, commodity markets, real estate, and cryptocurrencies.

These asset bubbles, along with broader supply chain issues and the war between Russia and Ukraine, are increasing the risks to the global economy and partly explaining the renewed interest in crypto investments.

Still, as regulations tighten and cryptocurrencies resolve scalability issues and achieve price stability, there’s no reason why they can’t work alongside national currencies or exchanges. CBDC, as many complementary currency systems have been doing for decades.

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