This is part of a series of op-eds previewing the World Economic Forum in Davos, Switzerland. CoinDesk will be on the ground in Davos from Jan. 20–24 chronicling all things crypto at the annual gathering of the world’s economic and political elite. Follow along by subscribing to our pop-up newsletter, CoinDesk Confidential: Davos.
“Transactions are slow and costly.”
“What is it backed by?”
“Can we conduct anti–money laundering compliance?”
“There are serious security flaws.”
“It carries tremendous operational risks.”
“We have concerns around stability.”
Are these comments about cash or cryptocurrency? It is a little hard to say.
The similarities between the two represent an uncomfortable truth, particularly when you consider that many of the parties who have leveled such criticisms at cryptocurrencies over the last three years have been the issuers and defenders of cash itself: central banks.
Ahead of the annual meeting in Davos, where many central bankers, movers and shakers will gather to discuss what the future of finance holds, it is worth remembering where we have come from. In particular, we should remember the characteristics – and the consequences – of the existence of cash, that relic of the past.
I have long held that, were cash invented today, it would be dismissed by policymakers, bankers and law enforcement as dystopian, absurd and dangerous. Regulators would wring their hands over tax evasion and terrorist financing. Central bankers would worry about the implications on their ability to institute negative interest rates. Executives at the heart of the financial system would scoff at the idea of such an archaic system: “What does one do with it?” they would laugh. “Carry it around in a suitcase?”
And yet, for the last hundred years, physical cash has been central to the global financial system. Ahead of his time, economist Ken Rogoff wrote in 2014, in “The Costs and Benefits to Phasing Out Paper Currency,” that roughly 10 percent of the U.S. Federal Reserve’s M2 money supply was held in paper cash. Clearly, despite the many issues posed by this asset in this medium, cash remains in high demand.
This should be little wonder. Physical cash can perform many wonders that digital forms of money have (until recently) never been able to offer. Cash is more immune to seizure from banks and governments than a savings account. Cash offers underground economies a cloak of privacy. Perhaps most importantly, cash enables those who do not have access to bank accounts an ability to save and transact in their local currency. These guarantees have formed an important foundation of demand for paper currency.
While paper money remains relevant today, the world is trending in another direction. Digital payments systems, from AliPay to Zelle, are replacing the use of cash. These shifts have prompted policymakers, politicians, and pundits around the world to explore central bank digital currencies (CBDCs) and corporate-issued coins as the next generation of money. Sweden’s Riksbank is working toward an “e-Krona” in the face of dwindling cash use. Facebook’s Libra project has been framed by Mark Zuckerberg himself as a direct answer to China’s digital cash systems, both existent and emerging.
Amidst all of the printed words and proofs-of-concept, however, policymakers would do well to remember that perhaps the most important experiment with digital money – bitcoin – has been running for over a decade in plain sight. The last year has seen CBDCs and corporate coins grab headlines while decentralized cryptocurrencies have often been relegated to a footnote, dismissed as unusable, untenable and even unethical.
But cryptocurrencies have much in common with that other product that has long been a central part of the global financial system: cash. Cryptocurrencies' importance and implications – for local and global policymaking, for matters of privacy and for the preservation of civil liberties – ought not to be underestimated and ought to be just as central to the conversations of those gathering at Davos.
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