For thousands of years, cash has been the predominant method of exchange. These pieces of paper printed with number signs and faces of famous people have been used globally.
However, as Bloomberg notes, with the dissatisfaction associated with cash, entrepreneurs have started to create digital currencies the most famous of which is bitcoin. At present, national governments have started to take an interest in digital currencies as well. For example, the People’s Bank of China states that it wants to issue its own digital currency. In addition, Central Banks in the U.K, Canada, Philippines, and Ecuador are considering the same idea.
Theoretically, digital currencies can be very advantageous. The pros of its presence can actually be coupled with a stable government unit. Obviously, digital currencies would make the transfer of money less difficult. It can be transferred between and among seemingly incompatible payment networks leading to transactions that are cheaper and faster.
Digital currencies can be beneficial to the poor as well. They would have the ability to send and receive money online without the need of their own bank accounts. With digital money, they could also conduct remittances without being cut off.
The benefits of digital currencies can be expanded to that of the government and their citizens. Printing monetary bills and creating coins are more expensive than issuing digital currency. The government can save more money with the digital alternative. Digital currencies can also enhance a nation’s statistical measures such as gross national product, gross domestic product, and inflation. In addition, with the traceable nature of digital currencies, they can help prevent corruption, fraud, money laundering, terrorist financing, and tax evasion.
A nation’s monetary policy can actually benefit with digital money. For decades, Central Banks have been inhibited by the “Zero Lower Bound.” This is the inability to push interest rates lower to negative values. However, increasing levels of unemployment and low demand necessitates interest rates to be imposed below zero. When interest rates fall near zero values, policy-makers create various methods (e.g. massive buying of bonds) to stimulate the economy.
Digital currencies can be the solution to this problem. For example, the Central Bank can impose charges when accepting paper currency from banks it transacts with. Thus, there would be an exchange rate between paper money and digital currencies. By increasing these charges, paper money would depreciate against its electronic counterpart. This would result to people holding less cash thereby permitting Central Banks to impose negative interest rates. The result of these lower interest rates would be increased economic consumption and investment activity.
On the flip side, digital currency can have its disadvantages. Monetary policies that devalue paper money would be met with political resistance. This could hamper the growth and innovation of digital currencies. Another concern would be security. Every digital transaction can be tracked by the higher ups and this can cause paranoia especially on a person’s financial life. In addition, people tend to overspend with the use of digital currencies.
Governments must be wary of these problems and cater necessary solutions. For example, a government can impose court orders to be the only method of accessing a person’s transactions. Campaigns for properly explaining the importance of digital currencies can be the solution to resistance. Thus, if policy-makers properly deal with the problems of digital currency, then the new face of cash might be digital in the future.