Last week the upper limit for contactless payments in the UK, whether by debit or credit card, rose again to £100. Although fears have been expressed that this higher limit will mean a greater risk of fraud and loss for cardholders, there is little sign from earlier increases that the general public is afraid to make use of higher limits, and no evidence from those countries where the limit is already over £100 (in Australia for example it is about £110, while in Canada it is even higher at around £150) that fraud increases inevitably follow.
What is clear is that the use of cash as a means of payment, which has already fallen sharply – the proportion of UK transactions in which cash is used has fallen by over 35% since March 2020, and the number of people living almost entirely cash-free lives has more than doubled – is likely to continue to decline. And with cheques now all but dead, this brings forward the time when society will rely almost totally on electronic payment methods. And therefore, what form these payments take and who controls them matters.
For the moment, the main electronic methods of making payments are via charge and credit cards, debit cards, other payment systems (eg Paypal and mobile phone-based systems such as Apple Pay) and direct bank transfers. Although they are all different in both design and operation, and although they have different sponsors, they all make use of the national currency and all in one way or another rely on and settle through the commercial banking system. And for that reason, central banks have on the whole felt relaxed about which one is gaining at the others’ expense, which one the public prefer and make most use of.
This is changing because of two new payment methods which have the potential to become both larger and more mainstream. These are Stablecoins, the most high-profile of which is probably Facebook’s Libra, now rechristened Diem, and Crypto-currencies, the best known of which is Bitcoin. The two are very different – stablecoins are usually denominated in a reference currency, often actually backed by it, and aim to offer a stable value (the clue is in the name), while cryptocurrencies are usually unbacked by any assets at all and often as a result highly volatile in value – but they share one important characteristic, which is that the settlement system they use, ie the way one transfers them from one holder to another, bypasses the banking system altogether.
It is this that has attracted central banks’ interest; indeed the initial launch of the Libra project in the summer of 2019 sparked first a flurry of central bank statements on the subject of digital currencies and their effect on the economy and banking system, and then a burgeoning of central bank digital currency or CBDC projects, some of which, eg China’s Digital Currency Electronic Payment, an e-payment system run by the People’s Bank of China using digital yuan or e-CNY, are moving beyond the testing phase and being rolled out for general consumer use. And although China is further ahead than most other countries, it is far from alone in pursuing CBDC, with most major central banks working on them in one way or another – see for example this statement by the Bank of England some 6 months ago for work on the subject in the UK: https://www.bankofengland.co.uk/news/2021/april/bank-of-england-statement-on-central-bank-digital-currency.
This looks like a classic instance of established practices being challenged by innovation and disruptor technology, and deciding to emulate and compete with them. Indeed the main point of interest is how fast central banks have moved beyond the usual initial response to such innovations, which is typically to dismiss or ignore them. Instead, central banks seem to have collectively decided very quickly that stablecoin technology could not be dismissed and could become very disruptive to their monetary control, and so demanded an urgent response. Even if the probability of the banking system being significantly bypassed by stablecoins is not high, the damage to central banks were this to happen was simply too serious for them to do nothing.
Our view is that central banks will be successful here in seeing off the threat of private sector stablecoins and in maintaining their position at the centre of the payment system. Faced with a choice, for example, between a £-denominated stablecoin issued by and operated by some private sector corporation, and a CBDC issued by and operated by the Bank of England, an e-£ say, we think most people will prefer the official e-money – they may also hold private sector stablecoins as well, but we doubt that many will eschew the Bank’s version completely.
Whether or not central banks are ready for what comes with the launch of CBDCs and the concomitant creation of a direct link to the general public – what one central banker has called “the dreaded three Cs” of Consumers, Call centres and Complaints – remains to be seen, but it does look as though this is the direction central banks are going.
If the official response to the threat of stablecoins has been impressive and rapid, the same cannot be said for their response to the other disruptive innovator, crypto-currency. Crypto-currencies have in fact been around for more than 10 years (Bitcoin was launched as long ago as 2009), and have been causing the authorities concern for at least 5 years, but they seem no closer to working out how to respond to them or handle them.
This is partly because crypto-currencies are many-faceted – they have multiple uses and multiple types of user. The demand for crypto-currencies comes from true libertarians who distrust anything to do with officialdom and revel in the anti-establishment nature of the asset class, investors/speculators who with varying degrees of understanding are using it as a way, they hope, to make money, and last but unfortunately not least the criminal fraternity who value its secrecy and lack of official oversight or even transparency to the authorities.
On the supply side one has a mixture of techno-enthusiasts who are enthralled by the technical side of blockchain etc, more libertarians who enjoy discomforting the authorities, and alas more crooks out to make money out of everyone else. And both supply and demand sides have now attracted major financial institutions whose nose for a potential profit has once again proved stronger than their ability to assess whether this is a field they ought to be getting involved in.
The result is a multi-headed hydra which central banks are struggling to know how to handle. The approach they have used with the threat from stablecoins – ie emulate and compete – will not and cannot work, because the point of crypto-currencies is not that they aim to replace an official monetary system that doesn’t work, but that they aim to provide something that isn’t official at all. If your purpose is to escape officialdom, either because you want to hide your activities or because you don’t trust banks, then there is not much officialdom can do to tempt you away from your chosen solution.
On the other hand, doing nothing is not really an option either. This is not because crypto-currencies are about to supplant other forms of money as a means of making payments, or, despite the experiment in El Salvador (which made Bitcoin legal tender some 6 weeks ago), even seriously make inroads into general economic life – the volatile nature of the asset class, and crypto-currencies’ widely fluctuating values, make them most unsuitable for pricing anything on a long-term basis.
Instead, what worries the authorities more is a consumer scandal where large numbers of ordinary investors lose their life savings as a result of “investing” via some dodgy foreign website with a get-rich-quick message. At which point, and however much the central banks have warned in advance that such sites are wholly unregulated, unapproved and unsafe, the pressure to rescue people from the consequences of their gullibility and greed may prove difficult to resist.
But what to do? At various times and in various countries, the authorities have tried to ignore crypto-currencies, explain and warn people off them, ban them outright, and legalise and regulate them. This is strangely reminiscent of the debate about what to do with class A drugs, where again the options are ignore, explain, ban, or legalise and regulate, or for that matter the similar set of approaches tried at different times and by different societies over the millennia for dealing with the sex trade.
There is good reason for this similarity, because all three activities are for most people who partake of them enjoyable and entertaining with just a frisson of risk, for others a way of making serious money, often out of sight of the authorities, and for a few very seriously damaging – though sadly too few for society to rise up and put an end to the cause of their distress.
And this strongly suggests to us that the result of the authorities’ agonising and concerns about crypto-currencies will be the same as for the other two too – they will not go away of their own accord because there is a demand, they cannot be banned or legislated out of existence because too many people enjoy them, and they will not be controlled and will resist being regulated into some sanitised mainstream role. But equally, and importantly, they are unlikely to become a dominant force in society either.
Where does this leave the future of money? The move to a cashless society will continue and will gather pace – this move was already happening, and the pandemic has merely speeded it up (as it has many other innovations, like video conferencing, working from home and the like), and while notes and coin are unlikely to disappear completely in the near future, their role will diminish to a small fraction of their current one.
The disintermediation of the commercial banks will also continue; this too is a longer term trend, and is unlikely to be reversed completely. But banks are unlikely to lose their important place in society any time soon. (The retreat from banks maintaining a bricks and mortar branch network, on the other hand, will we think continue and gather pace as cash plays an ever smaller role in the economy).
And the erosion of the position of central banks? To us this looks unlikely. In the case of stablecoins they have shown they understand the threat they potentially pose, and they have also displayed a remarkable turn of speed, compared to the usual pace at which central banking developments take place, in designing a counter which may even make stablecoins redundant completely. On crypto-currencies, where the central banks are much more at sea, there is the saving grace that the dangers they pose for the authorities are very different, and the fact that they are much more difficult for central banks to manage will matter less and will not, we think, threaten central banking.
Physical money, in the form of notes and coin, may be approaching its sell-by date. But fiat currencies, and central banks as their issuers, are unlikely to follow them into obsolescence just yet.
 See for example https://www.lowyinstitute.org/the-interpreter/china-s-digital-currency-takes-shape; there is every sign that the Chinese will be enthusiastic adopters of the system and the main question will be whether and when China decides to allow people outside the PRC access to it. It is a nice question for the government of the balance between extending their influence and commercial opportunities on the one hand and the risks of losing some control on the other.
 I am indebted to my good friend Philip Middleton, Deputy Chairman of OMFIF, for this taxonomy – and for the comparison with class A drugs. See his article https://www.omfif.org/2021/10/policing-the-virtual-frontier/ for a deeper discussion.