Cash Is Dead. What's Next?

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• The shift to digital currencies is inevitable, with cash becoming increasingly obsolete in many parts of the world.
• Private companies and foreign governments are racing to establish dominant digital currencies, potentially threatening national economic sovereignty.
• Government-backed digital currencies, like the proposed "Fed Coin," could revolutionize finance while preserving democratic control over monetary systems.

When we talk about the future of money, most of us tend to think about credit cards, online banking and maybe even mobile payment apps, digital wallets and cryptocurrencies like Bitcoin.

But cash isn't dead yet, even if it's increasingly rare in our day-to-day transactions.

"What is money going to look like in the coming decades? Who's going to control it? Could it be a private company? Could it be Amazon or Google? Could it be a country like China?" These are the pressing questions posed by economist Richard Holden in his new book, Money in the 21st Century: Cheap, Mobile, and Digital.

Richard is a professor of economics at the University of New South Wales in Sydney. His previous roles include faculty positions at the University of Chicago and MIT, where he honed his expertise in contract theory and its application in finance.

When he's not teaching or researching, Richard writes a column for the Australian Financial Review, where he first proposed the idea of Australia becoming a fully cashless society. This seemingly radical notion sparked a year-long experiment where he lived entirely without cash, proving it was not only possible but surprisingly easy.

Despite the rapid digitization of finance, Richard warns of a looming threat: "You can imagine if Libra had gotten a foothold and controlled this reserve with hundreds of billions or trillions of dollars to allocate between U.S. treasuries, British government securities and so on. They'd be in a position to say, 'Hey Australia, you make up 5% of the Libra reserve, but we're thinking you've got some quirky government policies. We might need to reduce that allocation.'"

Read on for an in-depth discussion on the future of money, central bank digital currencies, and the potential threats posed by private digital currencies. We explore the case against cash, the looming threat of corporate-controlled money, and why governments need to act fast to maintain control of their monetary systems.

The case against cash

At first glance, the arguments for keeping cash in circulation seem compelling. Proponents often tout its anonymity and reliability during power outages or natural disasters. But Richard, armed with both economic theory and practical experience, systematically dismantles these arguments.

Richard points out that this feature disproportionately benefits bad actors. "The flip side of that is cash provides anonymity for drug dealers and child traffickers and tax evaders and stuff," he explains. "And I, to be honest, think that's much more of a problem than it is for people who are cheating on their wives or freaking out about government unnecessarily."

As for emergencies, Richard challenges the notion that cash is essential. "If there's a big blackout, if there's a tsunami, you're probably not out buying coffee, right? You are probably scrambling for higher ground." He argues that in major crises, businesses are likely to shut down regardless of payment method, rendering the cash-in-hand argument moot.

The surprising ease of cashless living

Richard's year-long experiment living cashless revealed an unexpected truth: "To be honest, it was the easiest bet ever to win. And I get it that I live in a major capital city, and I'm kind of a bit more digitally engaged than your average 80-year-old retiree, but it was the easiest thing ever." This experiment wasn't just a personal challenge; it was a response to skeptics who doubted the feasibility of a cashless life.

This ease of cashless living isn't just anecdotal. Countries like Sweden and Australia are far along the path to becoming predominantly cashless societies. The infrastructure for digital payments is already in place, from tap-to-pay cards to smartphone apps, making the transition smoother than many might expect.

The hidden costs of cash and the digital advantage

Richard argues that clinging to cash is not just unnecessary but also potentially harmful. It slows down the adoption of more efficient payment systems and hampers the development of innovative financial technologies. As he puts it, "When the system is set up well, as it is in countries like Sweden and other European countries, Australia, New Zealand, and a bunch of other countries, it's very easy to go without using cash. And that has a whole lot of benefits for consumers and for businesses themselves."

Interestingly, recent events have shown that digital payments can be more resilient than cash in certain situations. During a recent global software glitch, Richard observed that many businesses could only accept card payments, not cash, due to their reliance on digital systems.

But who will control this new financial frontier?

The looming threat: Private digital currencies

As we move away from cash, a new contender emerges in the battle for financial control: private digital currencies. These aren't your run-of-the-mill cryptocurrencies like Bitcoin or Ethereum. Instead, we're talking about digital currencies potentially issued by tech giants like Amazon, Google or Facebook. Richard argues that this scenario is a looming threat that governments need to take seriously.

Facebook's attempt to launch its digital currency, initially called Libra and later rebranded as Diem, came alarmingly close to becoming a reality. Richard recounts, "Facebook had gotten really far down the curve on getting this established. They'd got Visa and Mastercard to agree to be part of the consortium. They got a whole lot of really big vendors and kind of quasi financial institutions or financial institutions to sign up to it."

The appeal of such a currency is clear. Facebook “basically said, we're going to bank the unbanked, and we're going to make this better, and we're going to solve the problems with some of the existing digital coins where you worry about how well-backed they are," Richard explains.

The power and peril of private money

The implications of a private company controlling a global currency are profound. Richard argues that it would give these companies unprecedented leverage to negotiate with governments on issues ranging from tax treatment to regulatory policies.

The power of network effects could rapidly entrench such a currency. Richard draws a parallel with the rise of ride-sharing apps: "Think about Uber, and if you're a rider on Uber, it's good when there are lots of drivers because you don't have to wait very long to get picked up." He argues that a similar dynamic could quickly establish a private digital currency as the dominant form of money in many transactions.

The global race for digital currency dominance

This scenario presents a clear challenge to government monetary policy and economic sovereignty. "I worry a lot about a private company having that kind of leverage," Richard admits, "So it's not like I'm anti-business, but I think handing business that kind of power would be pretty troubling."

The threat isn't just from private companies. China is already far along in implementing its central bank digital currency, the e-CNY. "There are hundreds and hundreds of millions of people in China who are using a government digital currency on a daily basis, and they are very clearly moving towards eliminating cash in China and making everything digital," Richard notes.

As private companies and other nations race ahead, the question becomes: How should democratic governments respond? According to Richard, the answer lies in a proactive approach—one that could reshape the very nature of money as we know it.

The solution: A government-backed digital currency

In the face of threats from both private companies and foreign governments, Richard proposes a bold solution: the creation of a government-backed digital currency, which he dubs "Fed Coin." This isn't just a defensive move; it's an opportunity to revolutionize our financial system and unlock new economic possibilities.

What is Fed Coin?

Fed Coin, as Richard envisions it, would be a central bank digital currency (CBDC) issued and managed by the Federal Reserve. Unlike cryptocurrencies like Bitcoin, Fed Coin would use a centralized ledger, leveraging the existing trust in the Federal Reserve system.

The mechanics of Fed Coin would be surprisingly familiar to most users. "You'd basically just have an app on your phone," Richard says. "And your bank account would tell you you've got this many U.S. dollars. It will look exactly the same, but everything would transact digitally, and there'd be no paper currency sloshing around."

Richard draws an interesting parallel to illustrate the existing trust in centralized systems: "Even the crazy libertarian guys, they still trust the Fed to the degree that they're willing to hold US dollar banknotes, right? And so there is already a lot of trust in the Federal Reserve."

The benefits of Fed Coin

Fed Coin isn't just about replacing cash; it's about creating a more efficient and innovative financial system. Richard argues that it could unlock the potential of Web3 and smart contracts, areas currently hampered by the volatility and complexity of existing cryptocurrencies.

"Create a coin that's got all these programmable money features and you can smart contract with, but that doesn't have the downside of the anonymity of the blockchain," Richard proposes. This would enable a wide range of new financial products and services while maintaining regulatory oversight.

Richard elaborates on the potential of smart contracts: "I can write a computer script that's kind of self-executing. We don't need a court of law to adjudicate the contract; we don't need to adduce evidence about whether you performed your bit of it."

He gives an example: "If I want to write, for instance, an insurance contract on a weather event that's verifiable by stuff that's in the public domain. What was the wind speed of a cyclone? How much did it rain in Boise on a particular day? These contracts happen all the time for kind of risk sharing purposes and so on."

Moreover, Fed Coin could promote financial inclusion and stability. By providing a digital alternative to cash that's backed by the full faith and credit of the U.S. government, it could bring more people into the formal financial system and reduce reliance on costly alternative financial services.

Challenges and considerations

Of course, implementing Fed Coin isn't without challenges. Richard acknowledges that there would be significant political hurdles, particularly given the distrust some segments of the population have toward government institutions.

There's also the question of how Fed Coin would affect commercial banks. "Commercial banks would be in a different position here," Richard notes. While banks would still play a crucial role in financial intermediation, their ability to create money through lending would be curtailed.

Despite these challenges, Richard argues that the benefits far outweigh the costs. "I think administrations of both political persuasions have a rationale for being concerned about the threat from China, which I think is very real and, in another way, the threat from private providers."

The urgency of action

Richard emphasizes that time is of the essence. The longer democratic governments wait to implement their own digital currencies, the more ground they cede to private companies and potentially adversarial foreign powers.

"I think the answer here is to compete — not to try and negotiate," Richard asserts. He believes that U.S. leadership in this area is crucial, not just for America's economic interests, but for the global financial system as a whole.

Interestingly, Richard sees the potential for smaller countries to lead the way: "Inflation targeting came out of New Zealand, and it's probably the most important practical thing that's happened in macroeconomics in half a century." He suggests that a similar pioneering role could be played when it comes to central bank digital currencies.

As we stand at this monetary crossroads, the choices we make now will shape the future of finance for generations to come. Fed Coin, or something like it, may well be the key to ensuring that our financial system remains stable, innovative, and most importantly, under democratic control.

Digital money's watershed moment

The financial world stands on the precipice of a revolution. The call for urgent action, particularly from democratic governments, isn't merely about preserving economic sovereignty—it's about crafting a financial system that upholds democratic values and serves the public interest. While implementing a government-backed digital currency presents challenges, the potential benefits are transformative, promising a new era of financial innovation and inclusion.

The next chapter in the story of money is being written today. Our choices now will determine whether it's a tale of progress for all or profit for a few.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.