The Chinese were first with the great transition from commodity money to paper money. They had the necessary technologies (you can’t have paper money without paper and you can’t do it at scale without printing) and, more importantly, as I’ve written here before, they had the bureaucracy.
In 1260, Genghis’ grandson Kublai Khan became Emperor and determined that it was a burden to commerce and taxation to have all sorts of currencies in use, ranging from copper ‘cash’ to iron bars, to pearls to salt to specie, so he decided to implement a new currency. The Khan decided to replace copper, iron, commodity and specie cash with a paper currency.
Just as Marco Polo and other medieval travellers returned along the Silk Road breathless with astonishing tales of paper money, so commentators (e.g., me) are tumbling off flights from Shanghai with equally astonishing tales of a land of mobile payments, where paper money is vanishing and consumers pay for everything with smartphones. China is well on the way to becoming a cashless society. Around a seventh of the population relies on mobile payments (carrying no cash), according to the Renmin University of China. I spoke to Professor Hu Bin, deputy director general of the Institute of Finance and Banking at the Chinese Academy of Social Sciences (CASS), who confirmed this astonishing figure, and told me that last year in China there were almost 100 trillion mobile payments, and that will double this year.
At some time in the not-too-distant future, then, notes and coins will become the exception rather than the rule, and people will begin to think about introducing a digital currency. Indeed, last year the governor of the People’s Bank of China (PBOC), Zhou Xiaochuan, set out his thinking on the topic, saying that it is an “irresistible trend” for paper money to be replaced. China’s millennium-long experiment with paper money may well be coming to an end.
The governor went on to say that, as a legal tender, digital currency should be issued by the central bank, and after noting that he thought it would take a decade or so for digital currency to completely replace cash, went to state clearly that, “he has plans how to gradually phase out paper money”. As I have written before, I don’t think a cashless society means a society in which notes and coins are outlawed, but a society in which they are irrelevant. Under this definition, the PBOC could easily achieve this goal for China, and I suspect this is what he may have had in mind as the 10-year goal.
Yes, we can
The central bank in China, and those in a number of other counties, could therefore give up on physical currency and to go digital. But should they do this? Yao Qian from the PBOC technology department wrote on the subject earlier this year:
To offset the shock to the current banking system imposed by an independent digital currency system (and to protect the investment made by commercial banks on infrastructure), it is possible to incorporate digital currency wallet attributes into the existing commercial bank account system so that electronic currency and digital currency are managed under the same account.
I understand this rationale. The central bank wants the efficiencies that come from having a digital currency, but also understands the implications of removing the exorbitant privilege of money creation from the commercial banks. If the commercial banks cannot create money by creating credit, then they can only provide loans from their deposits. Imagine if bitcoin were the only currency in the world: I’d still need to borrow a few of them to buy a new car, but since Barclays can’t create bitcoins, it can only lend me bitcoins it has taken in deposit from other people. Fair enough. But here, as in so many other things, China is a window into the future:
Alipay, WeChat Wallet, and other Chinese third party payment platforms use financial incentives to encourage users to take money out of their bank accounts and temporarily store it on the platform itself.
You can see the potential problem with digital currency created by the central bank. If commercial banks lose deposits to new players at the same time as they lose the privilege of creating money, then their functionality and role in the economy is much reduced. Whether you think this is a good idea or not, you can see that it’s a big step to take, therefore understand the PBOC position.
In summary, then, central banks are not going to issue cryptocurrencies and they’re not going to issue digital currencies either (at least in the foreseeable future, until they can work out what to do with the commercial banks). But what they might do, as suggested by the PBOC researcher, is to allow commercial banks to create digital currency under central bank control. You could have the central bank provide commercial banks with some sort of tamper-resistant smart chip that would mint commercial bank money under the control of the central bank, and in return for commercial bank assets. Wait a moment, that reminds me of something …
So here’s a what-if, and I’m genuinely curious as to your comments …
What if we dust off the old Mondex specifications, but this time implement it in SIMs and secure elements, as well as contactless smart cards? Then we would have digital currency that could work online and offline, work for interpersonal transactions as well as business transactions, and allow things to pay other things. With the 20th anniversary of Multos just gone, maybe Mondex’s time has finally come!
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– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. The original article was called ‘Back to the Future, Again’. Image by Virgiliu Obada, Shutterstock.com