Future of money: Is this the end of cash and rise of digital currencies?
With innovations such as contactless cards, mobile money and digital currencies gaining popularity, are we heading to a cashless future?
How we handle money is on the verge of dramatic transformations that will reshape the lives of ordinary people.
This is since the emergence of cashless transactions like the use of credit cards and mobile phone payments like MPESA, and where the disruption of the physical cash market began.
We are now in the conversations of cryptocurrencies like Bitcoin and Central Bank Digital Currencies (CBDC). New cryptocurrencies have gained popularity which has led to central banks across the world to start developing their own more stable forms of digital currencies.
While CBDCs aren’t cryptocurrencies, they are digital currencies only that they operate differently. Central Bank Digital Currencies are simply centrally issued fiat currencies that are managed using a centralized ledger which is now the central bank. They basically act like digital cash.
On the other hand, a cryptocurrency is a tradable digital asset or digital form of money, built on blockchain technology that only exists online but, in this case, is not reliant on any central authority such as a government or bank.
Here at home the Central Bank of Kenya (CBK) has already kicked off discussions around introduction of CBDC by inviting the public for comments on whether there is a potential for their use in the country.
This will mean that instead of CBK printing physical notes and coins, the banking regulator will issue electronic coins or accounts and would be controlled from a central point.
Kevin Ngige, Equities Trading at Genghis Capital notes that since the emergence of these digital currencies, this could be or is actually the end of printed or cash money.
And just like how mobile money use especially here in Kenya was quickly adopted, he says, it may be hard to go back to cash once the public gets to enjoy the convenience. It will also be easy for the regulator to easily monitor and track the movement of money unlike the way it is with cash.
“I could give you a professional opinion and personal opinion. My personal opinion? Cash is trash. It is dead. It won’t go any further. The only thing anchoring cash right now is protection from the Central Bank,” Kevin notes. “Meanwhile the advantage of digital currencies is that they are instantaneous. You can make payments from here to Barbados in two or three seconds as opposed to you going to a bank, transferring money or writing a cheque then it has to go through clearing and processing and maybe payment will be after 72 hours.”
With several African countries like Nigeria, South Africa, Ghana, Mauritius and others testing their CBDCs, it’s important that Kenya not be left behind. At the moment, at least 100 countries across the globe are exploring CBDCs by either researching or testing and with a few already distributing.
Countries already distributing digital currencies include China (Digital Yuan), Sweden (e-krona), Bahamas (Sand Dollar), Eastern Caribbean Area (DXCD) and Marshall Islands (Sovereign).
So how will digital currency operate? If CBDCs were used by individuals as a regular form of currency, each person would need to have access to a digital wallet, likely in the form of a smartphone app.
“Central Bank types some numbers in a computer say a trillion shillings, cascades that to several banks as the distributers like 30 or 40 now in Kenya, then say when you go to an MPESA shop with the digital money say Ksh 1000, they will type the same number of the same money to your account that you have with them (MPESA),” Kevin explains.
Kevin advises the public to start familiarizing with a future with no cash, which has already kicked off so well in Kenya due to the use of MPESA, Airtel Money, credit cards, Paypal and others.
However, just like any innovation there are potential risks involved with an economy operating purely on electronic money which perhaps remains as the biggest headache for the regulator before it kicks off use of CBDCs.
“The cons of having CBDC is now the presence of the issuer which is a single source security, and in this case, you have CBK issuing the central bank digital currencies. I just need to hack into the central bank system, into your coins, and allocate some to myself. And that process most of the time is usually irreversible because also CBK cannot admit its system has been hacked,” he explains.
This is unlike the case of cryptocurrencies which are held in a blockchain which is not controlled from a single source and which the transfer of ownership is trackable.