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  • Writer's pictureLili Lantos

The Rise of Digital Currencies

Updated: Dec 21, 2020

Lili Lantos explores recent developments in digital currencies, including central-bank digital currencies (CBDCs).

The pandemic is not only changing our lives, but also monetary policy. The possibility of digital currencies replacing cash has been amplified since the pandemic, mostly due to the unprecedented weariness around cash payments. Many countries started researching the adaptation of possible digital currency systems – should we cherish the thought?

Although the idea of electronic currencies has been around for more than a hundred years now, the recent pandemic caused novel fear of virus transmission when paying with cash. The number of internet searches fearing the spread of COVID through cash has skyrocketed. Many health institutions have urged customers and citizens to avoid the use of cash, resulting in central banks around the world disinfecting banknotes and ATMs removed to promote social distancing measures. Could the pandemic speed up digital transformations towards innovative ways of electronic payments and central-bank digital currencies (CBDCs)?

According to the UK’s largest ATM provider, Link, cash withdrawals have decreased by 60% since the first lockdowns, and ATM usage was 40% lower this September compared to 2019. This new emerging pattern in consumer behaviour may not be totally unexpected – customers have been increasingly preferring digital payments over the years, as well as countries researching and experimenting with digital currencies. Graham Mott, director of strategy at Link, rather believes that COVID19 speeds up existing trends, instead of creating new ones.

Originally, the first digital payment systems were from Apple, Venmo and Google Pay, but none of these initiatives have reduced cash spendings or served as a digital currency. Then came Facebook’s Libra (a global stablecoin, with the possibility to reach nearly €3tn of assets under management), followed by China’s CBDC, the digital yuan, and the possibility of introducing redeemable tokens on platforms such as Amazon. Other countries, such as Sweden and Canada have discussed their potential take on introducing similar kinds of digital currencies in the future. The European Central Bank has started researching the feasibility of digital currency solutions, which will most likely result in a unification of the digital payment systems across EU countries, reducing the dominance of foreign payment systems.

The motivations for such CBDC systems lie in the nature of such digital payment systems: immediate, inclusive and risk-free payment systems are the main motivation factors for central banks today. A further benefit would be the ending the anonymity surrounding paper currency, which reduces laundering money or evading taxes. Another new implication for monetary policy would be the possibility of negative interest rates attached to digital currencies offering more flexibility to central banks as well as new ways to prevent and manage bank runs (read more). Finally, many of such digital monetary systems could bring more inclusivity to finance. For instance, similarly to the European Central Bank, the Bank of Canada would provide the opportunity of digital currency to all Canadians, even to those without a phone number or bank account.

The potential drawbacks of such newfound systems would include the vulnerability to cyberattacks and software bugs, and in this case, rapid loss of trust. The introduction of deeply negative interest rates would require the elimination of cash so to decrease potential of savers demanding another currency or asset. Finally, high demands for CBDCs would hurt the banks’ deposit bases, resulting in an increased reliance on costly and unstable wholesale funding (although this could be eliminated with withdrawal limits).

The pandemic has driven unexpected changes to monetary policy, with the digital currencies and CBDCs offering serious potential as well as threats. Regardless, designing resilient payment systems will take time – hopefully it will be worth the wait.

The UCL Finance and Technology Review (UCL FTR) is the official publication of the UCL FinTech Society. We aim to publish opinions from the student body and industry experts with accuracy and journalistic integrity. While every care is taken to ensure that the information posted on this publication is correct, UCL FTR can accept no liability for any consequential loss or damage arising as a result of using the information printed. Opinions expressed in individual articles do not necessarily represent the views of the editorial team, society, Students’ Union UCL or University College London. This applies to all content posted on the UCL FTR website and related social media pages.

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