Cash use is consistently diminishing and digital currencies are the future. In this fortnights update we talk about how money has gone digital and what central banks are doing about it.
C.R.E.A.M.
In 1993 the rap group Wu Tang Clan released their album titled 36 Chambers which had a song called C.R.E.A.M on it. This was an acronym they created to stand for ‘Cash Rules Everything Around Me’ and while the world has changed since then, one thing that is still true is the paramount influence of cash and money.
Embedded in a song about life on the streets of Brooklyn in the 1980s, oppression, gang violence and survivalism when coming up through adversity is a narrative on financial system architecture. Or at least, they hooked onto a notion of how money makes the world move around them. Either through how money itself moves or how it influences people.
The chorus repeats the phrase ‘cash rules everything around me’ for them to commentate on the power of the dollar, cash, and money. Of course, life in that time and that kind of place is not something most of us have experienced, but we can all relate to the idea that we can’t live without money.
We work to get money to do and buy things we need and want.
This is a constant truth. What has also been constant but now starting to change is who controls the cash and money. More on that further below.
In the 1980s electronic payments were an early-stage technology with limited adoption meaning cash was still the predominant method for everyday transactions.
People saw physical money and cash moving all around them every day.
Most everyday payments were being made in cash, not card or even tap and go payments from phones like you can now. It was a time of more analogue payment methods and cold hard cash.
In 2021 the world is much more digital and electronic payments, at least in Australia, are the norm rather than using cash.
You can see in the below graphic that the % number of cash payments is decreasing and the value $ of cash transactions is also decreasing.
Source: RBA calculations, based on data from Colmar Brinton, Isos and Roy Morgan Research
While the physical exchange of cash is diminishing the essence of what the clan was talking about – money influencing behaviour – is still true, we just hold less of it as paper and more of it on our screens and digital bank accounts.
The interactions we have with our money is vastly different when it is digital not physical.
You will not always see physical cash moving around but rest assured more money is moving around you, ruling everything around you, more than ever before.
Electronic payments are not entirely new and have been dominating for decades in terms of volumes of payments, transfers, and purchases, but there is a new form of money now in the form of cryptocurrencies.
Bitcoin is the most well-known crypto but there are thousands of blockchain based tokens (cryptocurrencies) available through various exchanges and platforms.
The rise of crypto is perfectly timed with the diminishing use of physical money.
The issue, from a government perspective, is regulation of a form of payment or currency that they do not control.
This makes central bankers and governments incredibly nervous but ultimately they do not have the ability to contain it and will need to seek an alternative method to combat it.
Enter the central bank digital currencies
In the near future you will be paying for something using a ‘new’ blockchain based Aussie dollar that comes from a ‘wallet’ you hold directly with the Australia’s central bank the Reserve Bank of Australia.
Broadly speaking there are two types of digital currencies.
The first are ones like Bitcoin which are not controlled by a government, and the soon to be released is a government version of existing fiat currencies.
While Bitcoin and other cryptocurrencies dominate any discussion about that market one of the biggest changes coming is ‘Central Bank Digital Currencies’ (CBDCs).
The key difference between a CBDC and another crypto like Bitcoin is that the ‘currency’ being used from the CBDC is still managed and controlled by the Australian government, just like the AUD is now, rather than it being controlled by an expansive decentralised network of computers which run Bitcoin, but that is not managed by any single entity or source.
Not controlled vs controlled.
Without going into the technical details on ‘Distributed Ledger Technology’ or ‘Blockchain’ the key difference is the government and the central bank would have a new fully digital version of the Aussie dollar.
You might be wondering at this point isn’t the Aussie dollar pretty much digital now what is the point?
This is a good question and fundamentally it comes down to oversight and control.
If the RBA issues a blockchain based AUD it will have more oversight of who spends it, when, how and where and have a more nuanced ability to create more of it and record the ledger.
The current form of the AUD, while very digital in how it is mostly used, is mostly built upon archaic financial foundations that are largely ill equipped to facilitate the level of digital interoperability needed in future forms of money in society.
The central bank cannot track every physical piece of cash. They do not know where it is, who holds it, or where it has been spent in the past. With a CBDC that all becomes transparent and gives incredible power to a central bank.
Further, central banks and governments will not want other digital currencies like Bitcoin to have any meaningful market share in their countries because it undermines financial stability and their role (control) in the economy.
This is why governments around the world will create “GovCoins”. So that the foundation of the country’s currency is built for a digital future and importantly they continue to own the currency being used by its civilians. There will also be government legislation that comes into effect.
A new sort of process or system will emerge and might look something like this…
Whether you are a believer in the ideals of a fully open digital currency like Bitcoin or not is up to you, but it is almost a certainty that a government will move to regulate or block any significant use of alternative currencies.
Bitcoin has a market capitalisation equivalent to about USD $1 Trillion. That is significant. But it is not enough to be a truly global form of payments or store of wealth, at least not yet, especially with the recent volatility we have seen. In Australia, the financial services industry as a whole contributes roughly 10% to GDP and make up about 30% of the ASX200.
It is also likely that as CBDCs become prevalent the government will regulate other cryptocurrencies to ensure their GovCoin has dominance. Evidence of this is seen already in China as the government there has warned financial institutions not to accept crypto as they start to scale up their own CBDC the digital Yuan.
As the Wu Tang Clan insightfully rapped, cash rules everything (around me), and the ones controlling the cash have power (over me).
Whether you pay for something with a classic dollar or a CBDC dollar, from your experience it would pretty much be the same. The key difference will probably just be which bank account or ‘wallet’ you make the payment from.
You will have a digital ‘wallet’ with the RBA instead of a bank for the new GovCoin AUD. That is a profoundly serious change to the current banking market structure.
If people have a bank account directly with the RBA, and are using and getting paid in GovCoins, then what is the point of banks?
We have talked before about how banks face the risk of becoming utility providers and when GovCoins arrive this risk will heighten, or at least accelerate the banking markets transformation.
It is not preposterous to think that GovCoins and blockchain related businesses could eliminate hefty legacy fees that banks currently earn across credit cards, international currency transfers, lending, custodian services, savings and even in the financial markets.
As money changes the more it stays the same and rules everything around us.