Notes on CBDC 1: Declines in physical cash usage

While dozens of countries see a marked reduction in the use of physical currency as a means of payment, the continued need for a physical currency is not disappearing from economies any time soon. There continue to be valid micro-transaction use cases in the marketplace that continue to drive physical currency usage amongst many communities.  Considerations on the impacts of eliminating physical currency in favour of digital currency will need to address many of the use cases dominated by physical currency exchange today and address the accessibility of virtual currencies to the unbanked individuals in society. 

Methods that allow for the storage of value and collection and dispensation of that currency at zero cost to the user and without the inclusion of an FI need to be assessed for this to become an operating reality; otherwise, already marginalized segments of society could be significantly affected by a transition to the digital currency.

It is a fact that Person to Person direct transactions are easy in a digital currency so long as the parties have the appropriate tools. In this case, the payer needs to capture the destination wallet and initiate the transfer of money to the other party.  In many cases, this can be accomplished very simply by having the payment receiver show a QR code or similar representation of their destination wallet.  The payer will have to be equipped to capture that code and set funds through their wallet device.  The receiver will still need their wallet device or a phone to confirm the transfer of funds being made.  This confirmation could be from accessing the receiving wallet or simple SMS notification of funds being added to the target wallet address.

When we operate in the world of debit and credit transactions, we are more accustomed to this working in the opposite direction.  The debtor is usually making the payment request. You supply the bank or credit details to the debtor in a secure manner with a pin code as an approval for the debtor to take the specified money from an account.  The confirmation is then coming from a 3rd party bank or credit provider that the funds are committed to the transaction request.  This model makes it simpler for the creditor to carry account details in a simple card form, as we do with debit and credit card transactions today.

The digital currency reliance on devices to facilitate direct transfers of funds between wallets has the advantage of not requiring the 3rd party bank or card company to be involved.  It does present a challenge for users of the digital currency to operate in a disconnected manner. Two wallets can agree on a transaction while disconnected. Eventually, these offline transactions will need to connect and be validated/updated to the ledger. Still, in a centralized ledger model, the debtor needs to understand the risks of the wallet transfer being spoofed if the wallet value cannot be validated against the ledger at the time of the transaction or that the wallet has an active ledger validation certificate of value to provide in the transaction process.

In cases of very isolated communities, they may either be operating in a barter model or have a supply of cash that circulates within the community, with very limited cases of the fund pool changing via transactions with entities outside of the community.  These micro-economies will be a challenge for digital currencies to implement effectively, especially in locations where those communities have no network to the world outside of that community.

In closing – should declines in physical cash be a factor in the decision to move to a digital currency? yes.  Should the digital currency be an out right replacement to physical cash? No – we need a transition period to move from one model to the other and to further prove if the elimination of physical currency is warranted.

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Craig Borysowich
Craig Borysowich

Craig Borysowich has over 30 years of Technology Consulting experience with both public and private sector clients, including over ten years in Project Leadership roles. He is also an Author, thought leader and techno-futurist.

Central Bank Digital Currencies (CBDCs)
Central Bank Digital Currencies (CBDCs)

Exploring some of the detailed design factors and decisions that need to be made in the design and implementation of central bank driven digital currencies and how these decisions will impact money, payments and economies.

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