Pandemics always trigger a revolutionary change in the way people pursue their lives. In the last ten weeks, I do not recall a single instance of having touched a coin or banknote. Instead, I have relied exclusively on electronic payment systems and credit cards only. Even businesses that have resisted credit cards for decades are now welcoming digital payments.
Throughout much of human history, physical money has evolved from promissory notes to precious metals and now into paper and plastic notes backed by central banks. Any "legal tender" backed by faith can be used as money.
The novel coronavirus is forcing societies to ask whether we have outgrown the need to carry "physical money". The developed economies certainly have the technology to pay for all transactions digitally through highly secure biometric authentications in addition to the availability of point of sale (POS) terminals.
If a 100 percent shift is made towards a digital payment society for all the citizens, no one would feel the need to carry "dirty coins or cash".
China's central bank introduced the "digital yuan" as a pilot scheme across four of its states earlier. It will be the world's first major economy to issue a "national digital currency" (NDC) or as otherwise labelled by the Bank of England, a "Central Bank Digital Currency" (CBDC).
At the moment, people all around the world can hold money issued by their respective central banks' in the form of banknotes, while banks and certain other non-banking financial institutions can hold "central bank electronic money" as 'reserves'.
Households and businesses can use this form of electronic central bank money to make payments and store value. In simple terms, it is a "digital banknote" which can be used just like paper money to provide for goods and services using digital payment platforms.
On top of that, unlike privately owned corporations who distribute the technology for digital cash transfers, like credit cards and mobile payments, for example, the "digital banknote" will be the state's liability, just like cash.
This could create new opportunities for the payments industry and the way central banks maintain monetary and financial stability.
The process of utilising "Blockchain" through implementing "Distributed Ledger Technology" (DLT) is something many are still working on. Blockchain, bundles transactions into blocks which are then chained together and broadcasted to the nodes in the central network.
This central network is DLT. It is the technology that powers the likes of bitcoin and other cryptocurrencies. The public aspect of blockchains generally implies that anyone can use blockchain while serving as a validating node to the system.
Anyone assigned as a node can in return, act as part of that blockchain's governance mechanism. Thus theoretically, blockchains are decentralised and resistant to undue control or influence from any single party.
In contrast, a distributed ledger generally doesn't enable most of these public features. It can impose restrictions on its users which is why it is often referred to as a "permission network". They don't rely on a single central party and don't need proof of consensus.
Although the realm of "permissionless networks" exists the conflict of interest between banks, big businesses, and the government should now appear to be crystal clear. If any particular government, wants to impose a "centralised NDC", it would mean that there would be no need for banks to act as intermediaries!
People would simply utilise blockchain for transaction purposes, without having to deposit their savings in commercial banks. Only the central issuer of the NDC would have all the required data to monitor the system and facilitate transactions.
This could give birth to one large private corporation or a state-owned entity. The CBDC can eventually replace all cash in circulation, but is a country like Bangladesh prepared for the transition?
Excluding the collateral damage of thousands of lost banking jobs to DLT, Bangladesh has an even bigger problem going cashless: a large percentage of the population is still not associated with any kind of banking service!
In 2013, around 20 percent of the population had access to some form of banking service, and in 2019, 65 percent reported to use mobile financial services. In contrast, half a billion people in China possess smartphones enabling them to provide for goods and services using mobile payment apps.
Although there has been a jump in the number of people coming under the financial net, a large informal economy like ours will find it extremely difficult to pay for basic services like transportation through a CBDC.
Unlike the western world, our rickshaw pullers and cab drivers don't carry a POS terminal for electronic payment purposes. Many people still don't have a basic bank account. The stringent KYC requirements discourage most of the people from even stepping inside one of their local bank branches'.
Banks need to cater to these people, come up with financial products that will address their needs. Also, the transaction needs to be minimised. According to recent reports, mobile banking costs are Tk 18.50 per Tk 1,000 being cashed out. Such schemes will further discourage the ones on the brink of poverty to use such services.
One of the greatest dangers to the growth of developing economies is the middle-income trap, where crony capitalists slow down growth with the aid of oligarchs. A key step to improving essential public services can, therefore, be achieved by financial inclusion, removing any hidden charges imposed by middlemen.
The implementation of an NDC would minimize costs associated with excessive ATMs and bank branches, eventually leading them to become obsolete. The earnings of an individual would deposit directly into their wallets which can then be spent accordingly.
It will eliminate the hassle of overpaying for microloans as the time lag to pay for them would decrease, reducing interest payments. Every business could have a digital ledger of its cash flow and sales, making it more difficult for employees or middlemen to embezzle cash because customers would pay directly into the seller's digital wallet. Many enterprises would be far more visible in regards to paying their sales and income taxes.
While countries like China have already gone from "paper to bytes", Bangladesh is still focusing on expanding the number of its bank's branches. The number of people who still believe in paper money is quite substantial. Most parts of the country don't have people with access to either mobile phones or electricity.
Banks aren't willing to go out of business and the government can certainly not risk people losing their jobs and a reduction in direct and indirect taxes that these big banks provide them with. People are still not open to the idea of disclosing all their data and most of the IT infrastructure isn't updated regularly to fight financial crime.
Putting regulations aside, the rise of digital wallets could also threaten banks' access to the deposits they need for loan origination and servicing. Thus, even if the idea is implemented, executing it would be extremely difficult. The current infrastructure and unequal access to technology will make the most vulnerable unable to reap the benefits.
A former investment analyst, and alumni of both the University of Toronto and Imperial College London, Sayeed Ibrahim Ahmed is currently a Senior Lecturer of Finance at American International University Bangladesh (AIUB) pursuing research along the lines of capital markets and economic policy.