Can virtual currencies replace cash?

Virtual currencies such as the Bitcoin are not a solution for the cashless society, but they can be the beginning of an evolution within our money system. This is what ECB Executive Board member Benoît Cœuré recently wrote in a piece submitted to the Financial Times. In doing so, he is anticipating a special meeting of the G20 which will be held in Argentina next week and which will be entirely dedicated to virtual currencies and the blockchain.

According to the ECB board member, the current virtual currencies are a poor imitation of money, because they are hardly used in the payment system and because they cannot be used as a unit of account or reliable means of savings due to the large exchange rate fluctuations. Despite this, the technology is a hot topic, as virtual currencies could be used to replace cash in the future.

From cash to virtual currencies?

To this day, cash is still a very popular form of payment, but it won't stay that way forever. New research from the Bank for International Settlements (BIS) shows that the number of electronic payments has doubled since the turn of the century and that more and more people are using bank cards, internet banking and mobile phones to make payments.

It is expected that the popularity of these types of electronic payment methods will increase further in the coming years, as the technology becomes more user-friendly and the costs for electronic payments decrease. In some countries, there are even plans to switch completely to electronic payments and to abolish cash.

This prospect of a "cashless society" brings new challenges for central banks. Can they leave the payment system entirely to commercial banks? Or should they offer an electronic alternative in the form of their own virtual currency? This week, the BIS released a new report on these so-called 'central bank digital currencies' (CBDC), which could eventually replace the familiar coins and banknotes.

Central bank digital currencies

According to Benoît Cœuré, these types of virtual currencies issued by central banks are worth considering, but it is still too early to take steps in this regard. He notes that it is good to have an alternative form of money on hand, to prevent trust in money from becoming completely dependent on the payment systems of a number of commercial companies. However, according to him, a virtual currency issued by the central bank should be less anonymous than cash, in order to prevent illegal use.

The fact that the G20 also has the topic of virtual currencies on the agenda makes it clear that governments and central banks are also seriously concerned about this. In the media, it is usually about banning or regulating virtual currencies, but it is of course also possible that central banks will start working with this technology themselves. A cryptocurrency issued by the central bank could be presented as a substitute for cash in the future.