In Switzerland, SFr1,000 ($1,000) notes offer an efficient way to evade taxes or capital controls. They are also popular gifts when grandchildren become adults. Young Swiss may soon prefer payment in Libra, Facebook’s Geneva-based cryptocurrency.
The social media group’s digital currency plan suggests a cashless world is moving closer. Cash is rapidly falling out of favour, although its use rose in value terms after the global financial crisis. Money handling is costly. Large denomination notes aid criminals. In fast-growth countries, consumers have already leapfrogged traditional banking to mobile payments. Think China’s WeChat Pay or Kenya’s M-Pesa.
The shift away from cash has implications for regulators and banknote printers. Unsurprisingly, banknote manufacturing is in trouble. Shares in the UK’s De La Rue have fallen 55 per cent in two years. The Swiss National Bank spent SFr20m in 2017 bailing out a supplier of banknote materials.
But a shift from cash to digital currencies also has the potential to threaten the role of central banks in providing basic means of payment. If Facebook has first-mover advantage, access to finance could fall into the hands of a private monopoly. Cross-border systems backed by the US currency would lead to “dollarisation”, hitching more of the world to US Federal Reserve policymaking. Central banks might try to preserve cash as a means of payment but shops may simply stop accepting it.
Central banks could respond by issuing electronic versions of their currencies — e-francs, say. That would save the bother of printing banknotes with elaborate security features, although cyber hacking would be a risk.
In Sweden, cash has almost disappeared already. The Riksbank is close to introducing an e-krona. If other central banks follow, traditional finance houses should worry. Higher interest rates would have to be paid on deposit accounts to keep customers. Worse, at times of crisis, bank runs might be amplified. Money in banks could be switched with a click into safe, central bank-backed funds. Such problems are manageable if central bank e-currencies are correctly calibrated, suggests Riksbank research. But that puts the onus on private payment and currency systems to work with regulators and central banks. If not, future young Swiss may be given not Libra but e-francs.