How Are We Going to Pay in the Third Millennium?

, by Donato Masciandaro - ordinario presso il Dipartimento di economia
The future of money is already being written: digital cryptocurrencies and ecash. How is this affecting central banking?

What will be the future of money? With increasing speed and depth, major digital corporations are exploring the supply of financial products and services traditionally provided by the banking sector. In parallel, cryptocurrencies are spreading, and they are generally produced outside the banking circuit as well. Finally, some central banks are exploring the possibility of issuing digital cash. What are these innovations about?

Starting from bitcoin and cryptocurrencies, what are the reasons that can explain the surge of interest in them? There at least two reasons: because their distribution differentiates them from either cash and banking instruments; and because their technology, based on cryptography, can be perceived as guaranteeing greater anonymity, both with respect to the counterpart, but above all with respect to third parties (including the government) when compared with other monetary assets, excluding cash; and also because it has a high expected return, albeit a very variable one.

Of these two reasons, in the last few months the most powerful engine for the diffusion of cryptocurrencies has been high returns. An operator seeking a high risk/ high return asset can be attracted to them; nothing wrong, provided s/he is aware of the speculative nature of his/her choice. Secondly, it may be thought that anonymity is a relevant motivation for people who dislike total transparency; in this group there are undoubtedly actors that have an interest in hiding their proceedings, for reasons of tax evasion or worse crimes. This is where a potential harm to the public arises out of the development of cryptocurrency markets.

And we come to the second and futuristic innovation in payment methods, represented by e-cash. Today the only government money that is directly available to the public is cash. Central banks should instead allow everyone to have a deposit at the central bank by issuing electronic cash. In other words, the central bank would issue to the public something akin to prepaid cards. It is essential that the central bank create debit lines rather than credit lines with individual citizens. In fact, the central bank's credit must remain reserved to private banks, since the process of lending money presupposes skills and knowledge, and the relative assumption of risk, which is unthinkable that it can be extended to all citizens. In other words, issuing digital money directly to the public does not have to mean becoming a Soviet-style central state bank.

Cash would continue to be issued, but only in small-denomination notes. Furthermore, if the progressive reduction in the use of cash is also an objective, the conversion of digital money into paper money should come at a cost, with the disincentive increasing as the volume of funds and/or frequency of transactions increase.

For a private citizen the choice of one form of money over another would be linked to his/her preferences with respect to various sources of risk. For example, today those who dislike transparency because they violate criminal laws and financial regulations tend to prefer cash or encrypted currencies; for these reasons, the introduction of a public virtual currency should be accompanied by penalizations of transfers toward cryptocurrencies guaranteeing greater levels of anonymity.

The idea of issuing e-cash is not a figment of the author's imagination: several central banks, officially or unofficially, are considering the idea of issuing digital currencies. The future of money in the third millennium is already being written.

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