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Bloomberg View: Banking’s rocky future as China, UK mull official “Bitcoin”

Among the more fascinating of my Davos interludes this year was hearing PayPal CEO Dan Schulman lambasting the financial establishment. A member of an early morning panel discussing the Edelmans Trust Barometer, Schulman pointed out financial services was one of the least trusted business sectors: “It’s not surprising. For two billion poor people, financial services are very expensive and incredibly time consuming – and costs them up to 10% of their disposable income. It’s ridiculous this still happens when we have modern technology – moving and managing money cheaply should be a right for all.” Sure, Schulman was talking his book. But he also made a point only the most backward financial Luddite would argue against. Why shouldn’t currencies be digitised? And as they’re then seamless, transacting becomes free or carries only fractional costs? With China, the UK and other countries looking at how to digitise their currencies into their own official versions of “Bitcoin” there’s an inevitability around all this. Which raises serious challenges for the traditional banking sector and others which rely on the expensive, clunky status quo. But societal benefits stretch far beyond the obvious, as this excellent Bloomberg editorial argues. – Alec Hogg

(Bloomberg View) — Cash had a pretty good run for 4,000 years or so. These days, though, notes and coins increasingly seem declasse: They’re dirty and dangerous, unwieldy and expensive, antiquated and so very analog.

Sensing this dissatisfaction, entrepreneurs have introduced hundreds of digital currencies in the past few years, of which bitcoin is only the most famous. Now governments want in: The People’s Bank of China says it intends to issue a digital currency of its own. Central banks in Ecuador, the Philippines, the U.K. and Canada are mulling similar ideas. At least one company has sprung up to help them along.

A collection of bitcoins stand in this arranged photograph in London, U.K., on Friday, Jan. 29, 2016. The International Monetary Fund extolled the potential benefits of virtual currencies and said they warrant a more nuanced regulatory approach, at a time when the future of bitcoin, the most well-known example, is in doubt's. Bitcoin traded at about $379 on Jan. 20, about a third of its peak in 2013. Photographer: Chris Ratcliffe/Bloomberg
A collection of bitcoins stand in this arranged photograph in London, U.K., on Friday, Jan. 29, 2016. The International Monetary Fund extolled the potential benefits of virtual currencies and said they warrant a more nuanced regulatory approach, at a time when the future of bitcoin, the most well-known example, is in doubt’s. Bitcoin traded at about $379 on Jan. 20, about a third of its peak in 2013. Photographer: Chris Ratcliffe/Bloomberg

Much depends on the details, of course. But this is a welcome trend. In theory, digital legal tender could combine the inventiveness of private virtual currencies with the stability of a government mint.

Most obviously, such a system would make moving money easier. Properly designed, a digital fiat currency could move seamlessly across otherwise incompatible payment networks, making transactions faster and cheaper. It would be of particular use to the poor, who could pay bills or accept payments online without need of a bank account, or make remittances without getting gouged.

For governments and their taxpayers, potential advantages abound. Issuing digital currency would be cheaper than printing bills and minting coins. It could improve statistical indicators, such as inflation and gross domestic product. Traceable transactions could help inhibit terrorist financing, money laundering, fraud, tax evasion and corruption.

Read also: US Regulator: Bitcoin now officially a tradable commodity like gold, oil

The most far-reaching effect might be on monetary policy. For much of the past decade, central banks in the rich world have been hampered by what economists call the zero lower bound, or the inability to impose significantly negative interest rates. Persistent low demand and high unemployment may sometimes require interest rates to be pushed below zero — but why keep money in a deposit whose value keeps shrinking when you can hold cash instead? With rates near zero, that conundrum has led policy makers to novel and unpredictable methods of stimulating the economy, such as large-scale bond-buying.

A digital legal tender could resolve this problem. Suppose the central bank charged the banks that deal with it a fee for accepting paper currency. In that way, it could set an exchange rate between electronic and paper money — and by raising the fee, it would cause paper money to depreciate against the electronic standard. This would eliminate the incentive to hold cash rather than digital money, allowing the central bank to push the interest rate below zero and thereby boost consumption and investment. It would be a big step toward doing without cash altogether.

Read also: After Bitcoin: What’s next for cryptocurrencies?

Digital legal tender isn’t without risk. A policy that drives down the value of paper money would meet political resistance and — to put it mildly — would require some explaining. It could hold back private innovation in digital currencies. Security will be an abiding concern. Non-cash payments also tend to exacerbate the human propensity to overspend. And you don’t have to be paranoid to worry about Big Brother tracking your financial life.

Governments must be alert to these problems — because the key to getting people to adopt such a system is trust. A rule that a person’s transaction history could be accessed only with a court order, for instance, might alleviate privacy concerns. Harmonizing international regulations could encourage companies to keep experimenting. And an effective campaign to explain the new tender would be indispensable.

If policy makers are wise and attend to all that, they just might convince the public of a surprising truth about cash: They’re better off without it.

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