Cash is king…until it isn’t

George Zarya is the CEO of cryptocurrency exchange BEQUANT. Founded in May 2018, BEQUANT Exchange averages over a billion dollars in monthly volume with more than 200 active institutional clients. The ongoing fight of the Covid-19 pandemic has accelerated the global trend towards cashless society. Here he argues the case that the days of cash are numbered and that era of financial payment innovation is a matter of when and not if.

Much of the developed world is moving away from using cash on a day to day basis. The so-called ‘cashless society’ dream of many central banks may finally be coming to fruition. Sweden is leading by example, where the demand for cash has dropped by more than 50% over the past decade as a growing number of people rely on debit cards or a mobile phone application, Swish, which enables real-time payments between individuals. In addition, more than half of all bank branches no longer handle cash. According to the Riksbank 2018 study of payment habits in Sweden, cash now accounts for just 13% of payments in stores.

The Nordic states may be leading the way in moving away from cash, but the data from the IMF indicates that most countries still rely on cash. For example, even in the high-tech powered nations such as Japan, cash in circulation accounts for almost 18% of its GDP. The European Union is around 10%, while the United States is just under 8%. Digital solutions for large payments between banks have existed for some time and just as an example of recent spree in digital innovation, individuals are now also able to make small payments using mobile phones instead of cards or cash. 

There is evidence to suggest that the spread of the COVID-19 has accelerated the trend towards a cashless society. The researchers from the Bank of International Settlement (BIS) have examined the following and noted that “the COVID-19 pandemic has led to unprecedented public concerns about viral transmission via cash”. CoinDesk have noted that circulation surged in the US whilst in the UK, ATM withdrawal volumes have plummeted. Some central banks sterilized reams of banknotes while others asked retailers to stop refusing cash, or called on the public to place science over fear.

The Beginning

Bitcoin was born in 2008, at a time when the world learnt the meaning of financial Armageddon, as the collapse of a number of banking institutions across the world threatened to bring the world as we know it to a halt. Sovereign credit default risks spiked to unheard of levels and while Iceland was made to be an example of things going wrong where, relative to the size of its economy, Iceland’s systemic banking collapse was the largest experienced by any country in economic history. It was the bailout of Greece several years later after the financial crisis that really put Bitcoin on the map. 

Back then, reports emerged that Greece’s minister of finance Yanis Varoufakis held a top-secret meeting with high-ranking finance ministry officials to prepare them in case negotiations at the upcoming Eurogroup fail. The sources noted that everybody in the room was staring at each other when Varoufakis said “We ‘ll go to Bitcoin, we will be ahead of all the world economies and although it may be painful in the beginning, Greece’s economy will thrive in the long term.” Of course, in the end of gruelling negotiations, the policymakers on both sides agreed to a deal and the threat to move away from using EUR remained just that, a threat.

The Second Act

More recently, it is the global spread of the Covid-19 virus, which has subsequently paralysed much of the economic activity and prompted central bankers, together with fiscal policy makers to enact another round of policy easing actions that has raised questions of the current financial system. Specifically, the policy looks at how governments deal with debt, bail-out of the private sector and furthermore, explicit rhetoric towards state intervention.

Credibility is particularly important when it comes to fiat money, since it is no longer backed by gold. Instead, it is a legal tender whose value is backed by the government in which it was issued. Should the government in charge of finances lose credibility over its ability to maintain price stability or to repay debts, the value of respective currency comes under a barrage of selling pressure. 

The latest round of policy easing actions by various central banks risk doing this which could potentially lead to undermined credibility because of the much riskier composition of its balance sheet, which as per the Fed’s latest move will include corporate debt risk. In turn, this “credibility risk” is positive for alternative currencies, such as Bitcoin and gold. 

It is usually in the times of crises and high levels of uncertainty that the current financial landscape is scrutinized. Whilst Central Bank Digital Currencies and cryptocurrencies in general have been on the agenda for some time, the debate on the topic may accelerate as a result. 

In fact, researchers at the Bank for International Settlements (BIS) think COVID-19 may accelerate the adoption of digital payments and sharpen the debate over central bank digital currencies (CBDC). The idea of a digital dollar also appeared numerous times in the United States after language describing a central bank-operated system appeared in three different bills, including one by the U.S. Senator Sherrod Brown.

Overall, the digitization of currencies looks to be a matter of when and not if. For cryptocurrencies and in particular stablecoins, this will mean greater regulatory scrutiny. A positive take away from the recent market volatility is that in spite of the aforementioned market-based liquidity crunch, the stablecoins remained exactly that – stable. 

This is a great win for the concept of stablecoins but more importantly for the digital assets industry as a whole. It was only earlier in the year that the Bank of England’s chief cashier urged support to explore the launch of an official digital currency, noting that “we need to think as an institution about how to position ourselves to make sure society still has a broad range of payments that it can use with confidence. It is absolutely right that central banks think about whether a public sector or private sector would be best to provide a digital currency going forward.”