A cash free society – making sense of GovCoin
Splitting the bill isn’t what it used to be.
Not so long ago, the end of a dinner out with friends would be a cue to scramble for an ATM, dig deep for notes and coins, and write an IOU to settle the evening’s expenses.
Now it is more likely one person will pay the bill and the rest will send their share through an online banking transaction that might land with the payer in a few days.
And it’s not just restaurants.
Australians are well versed with electronic money, with most people familiar with online banking, e-commerce and tap-and-go – and thanks to COVID-19, many of us don’t carry any physical cash at all.
So what if we did away with cash altogether?
It’s a scenario that isn’t so far into the future – and in some countries, it’s already happening. Let’s explore the idea of a central bank digital currency (CBDC).
What’s a central bank digital currency?
Colloquially known as GovCoin, a CBDC would allow people to transact directly with a central bank, bypassing conventional retail banks and institutions.
Instead of holding an account with a retail bank, people would transact directly with a central bank – such as Australia’s Reserve Bank – and bypass conventional lenders.
But rather than issue physical coins or notes, a digital currency would be exactly that, a digital representation of cash with no physical form.
Transactions would occur through a digital wallet, which don’t require people to have a bank account. A bank account is almost a given for Australians but it’s not the case in many parts of the world.
But what many of the world’s ‘unbanked’ population do have is a mobile phone, which is why digital wallets are improving financial inclusion.
Has any nation got a CBDC?
Two nations at opposite ends of the size and influence scale are the global leaders in the GovCoin space – The Bahamas and China.
The Bahamas was the first nation to introduce a digital legal currency with the adoption of the Sand Dollar, which it rolled out across all its islands last year.
Digital currency was already being investigated when Hurricane Dorian devastated the islands in December 2019, leaving 74 people dead and much of the archipelago in ruins.
With many people unable to access money during the disaster, the Central Bank ramped up trials of the digital currency and the Sand Dollar proved so popular, it was rolled out across the nation.
Over in China, the nation is close to establishing a digital yuan, after successful trials across several regions, and next year’s Winter Olympics in Beijing could be its first international test.
So why have a CBDC?
A CBDC would have the effect of putting central banks back at the heart of the financial system and there are practical benefits, such as those demonstrated in the Bahamian example.
But a key reason is, lined up against cryptocurrencies and other digital currencies, transactions through existing retail financial systems are slow and costly.
The potential for near instant settlement under a CBDC would be a key selling point, particularly for business, and central banks would have an increased role in influencing consumers directly.
The question of what a CBDC would mean for commercial banks is the subject of debate but there is little doubt it would have a big impact.
The banking system can’t escape the digital transformation and the G20 fears that if central banks can’t play a lead role, tech companies will fill the void.
A CBDC is not a cryptocurrency
Digital currency has been inspired by the technology that has made cryptocurrencies such as Bitcoin and Etherium possible, but a CBDC is not a cryptocurrency.
It is a fiat currency in digital form, issued by a central bank.
Cryptocurrencies are not issued by a state, and they are not legal tender, even if they are being accepted as payment for goods and services.
We are unlikely to see a GovCoin in Australia any time soon, but we’re looking into it.
The new Digital Finance Co-operative Research Centre (DFCRC), a research program examining the digitisation of real-world assets, will also look at CBDCs.
In the meantime, the world will watch China’s developments with interest.