Physical cash is extraordinary when you think about it.
It lets you pay somebody instantly, and with finality. It works when the power is off. It gives a regular person the ability to hold a financial claim against their country’s central bank. Nobody needs permission to use it, and nobody gets to find out what you spent it on. It is an instrument of personal liberty, but also an enabler of crime.
We are on the cusp of a new era for money as we currently know it, with retail central bank digital currency (CBDC) initiatives already being undertaken by a growing number of central banks around the world.
But how can the personal liberty that physical cash enables be preserved while ensuring a CBDC does not unleash a tidal wave of unstoppable, untraceable illegal activity?
Times are changing
Physical cash is a truly radical product, but it's so familiar to us that we don’t notice its subversiveness. Indeed, central bankers are among the most respected public servants in the country, sitting at the heart of the most powerful political institutions.
However, if cash had only been invented today, its creators would likely find themselves dispatched to an altogether less congenial institution.
However, times continue to change. The usage of cash is declining as more payments are being made digitally and central banks around the world are considering how to respond.
The emerging consensus is that consumers need access to a new form of money. This product would be issued by the central bank, just like cash. However, unlike cash, it would exist in a digital form. Enter the need for a CBDC.
In countries like Sweden, the stark decline in cash payments means that a CBDC may become a complete cash replacement. Elsewhere, it is unlikely that cash will become obsolete, but it will play less of a role in the overall payments system and so the case for a CBDC is something we expect to arise globally.
What about my privacy?
But how should a CBDC work? What features should it have? Some politicians are excited by the idea of ‘purpose-bound’ or ‘programmable’ money, which can be used to make conditional transfers to people with lower incomes who need help with their grocery shopping, for example.
But for every well-meaning politician, there is a citizen who suspects ‘they secretly want to control what I can spend my own money on’.
How can we balance these competing desires for freedom, privacy, and control? How much should I be able to spend per month with a guarantee of privacy? How much should I be able to spend per month on items that the rest of society may regard as controversial?
The correct answer isn’t ‘infinity’, as is effectively the case with cash. But surely, nor in a free society is it ‘zero’?
