As more countries aim to become cashless societies, Sofia Lotto Persio researches what the future of money looks like.


Know before you go
When it comes to defining digital cash, a distinction has to be made between the terms digital and virtual. Digital currency is used to indicate various forms of non-physical money. The Financial Action Task Force (FATF) officially defines it as the “digital representation of either e-money (fiat currency, money that has legal tender status) or virtual currency (non-fiat), and thus is often used interchangeably with the term ‘virtual currency’”. But this may lead to confusion, rather than clarity, over what the two are.

In fact, when referring to virtual currencies, the definition becomes more complex. The FATF talks about a “digital representation of value” that can be traded digitally and has three functionalities: medium of exchange; unit of account; and store of value. Contrary to e-money, virtual currencies do not have legal tender status in any jurisdiction, nor are issued or guaranteed by any jurisdiction. Virtual currencies’ value is defined by the community of users of the virtual currency. Unlike fiat currencies, which largely work in the same way in all jurisdictions, not all virtual currencies are created equal. Some are cryptographic, some are decentralised, some are neither, some are both.

Cash is no longer king. Expensive to produce and to move around, easily counterfeited and completely anonymous, banknotes and coins are becoming ever so inconvenient. In the eurozone, the €500 banknote is often held as a symbol of financial crime and dodgy transactions, so much so that the European Central Bank has decided to phase it out by 2018. In a damning example of the untraceability of cash, the Norwegian central bank can only account for 40% of the NKr50bn in circulation, and the remaining portion could either be used for unregistered transactions, storing of wealth, or tax evasion and criminal activity.

Scandinavian countries are at the forefront of the push towards a cashless society. Norway’s biggest banks, DNB and Nordea, no longer handle cash in their branches. “Only about 5% of all transactions in Norway are made in cash. The figures for Sweden are maybe lower. The customers expect transactions to go fast, like any other exchange of data in society,” explains Ulf Bjørnhaug, Nordea’s head of cash management sales for Norway. “The picture today is that we move more towards cashless.”

Digital currency transactions are becoming increasingly interesting to various players in the financial world, from central banks to small businesses. This is not only because of stronger transparency and traceability features, but also because the transaction fees involved are lower, and saving prospects are big. “For some industries there are cost savings of up to 20-30% in abandoning cash and instead going digital,” estimates Bjørnhaug.


Going digital

Most of our money is already in digital form: unless you are paid in cash or cheques, your wage is transferred to your bank account, and you could spend it all without ever really seeing it in physical form. That’s what is referred to as electronic money, or e-money, a digital transfer mechanism for fiat currency, which has legal tender status.

As an increasing number of transactions do not involve the physical exchange of cash, there is an ever stronger need for a seamless mechanism to transfer value. Cross-border bank transfers still struggle in accomplishing worldwide real-time payment transactions, as evidenced in Swift’s difficulties in rolling out its real-time retail payments systems (RT-RPS) on a global scale. Yet, a digital, global and interconnected economy needs a global digital currency. This has created the opportunity for new players to join the payment and settlement space and propose different forms of currency.

Former NatWest banker Tim Jones is one of the people who believe in the digital future of cash. He has been looking into e-money for a long time, creating Mondex, digital cash in a smart card form, in 1990, together with his colleague, Graham Higgings. Several banks got involved and the business was even sold to MasterCard, but the digital cash experiment ultimately failed. According to Jones, they were simply too early to the game. Now that the interest in digital cash is stronger, Jones is giving it another go, and together with David Everett, a technical and security consultant and architect of Mondex, has created Tibado.

This is a digital cash product, which essentially works through a smartphone app called “pocket” (highlighting its difference to other blockchain-enabled payment systems that use “wallets”), enabling access to and use of the digital currency. “By delivering the core benefits of physical cash – in everyday currencies – in digital form, I can turn a smartphone into a digital ‘cash dispenser’,” explains Jones. “The costs in digital cash are very low, which should make the system very efficient with, for example, very low spreads on digital cash FX transactions,” he adds.


Virtual reality

Most cross-border payment propositions running parallel to banking payment infrastructures currently use virtual currencies, and most often the bitcoin blockchain, as their main validating network. One of the latest apps in this space is called Circle. Launched in Boston, it expanded to the UK in April after receiving an e-money licence from British regulators, and now processes cross-border payments in US dollars and British pounds. Goldman Sachs has invested in Circle, and Barclays, which provides it with the infrastructure to operate in the UK, is supporting it in its British operations. The app targets consumer payments, but the way that it allows users to send payment requests and payment collections to a group of connections shows potential for use in a business-to-business environment too.

In that space, platforms like Ripple or Ethereum are using a distributed shared ledgers and their own virtual currencies to process transactions.

The challenge for any competing propositions is to gain the necessary network effect, which allows a product to become more valuable as more people use it. For newcomers and challengers, creating a network effect is vital to become, and stay, relevant: “What I learned from Mondex is that the way to start a brand new payment system is for merchants to ‘pull’ consumers towards trial and adoption. I don’t think it’s possible to get consumers to ‘push’ merchants to accept a new method of payment,” says Jones.

As it stands now, bitcoin is the best-known and most-used virtual currency of the hundreds in circulation, and even then it is struggling to achieve network effect. Another challenge for the cryptocurrency is its negative image, as it keeps on being associated with dodgy or illegal business, and lately even with terrorist financing, despite the fact that cash is actually by and large the preferred means of financing criminal activities.

“It will be difficult for bitcoin to shake off the prejudice of how it is perceived, but you are starting to see banks looking into the bitcoin blockchain and that is a tough thing to do for banks, for reputational issues,” Sian Jones, virtual currency consultant, tells GTR. Jones is the founder of the European Digital Currency and Blockchain Technology Forum (EDCAB), a policy platform striving to raise awareness about virtual currencies and distributed ledgers among EU policymakers. “Our job is to make them understand the benefits and the opportunities the technology offers versus the challenges and the risks. [Virtual currencies] are different from the traditional financial and payment services, but just because they are different, it does not make them inherently riskier,” she says.

Banks have been developing their own virtual currencies, too. To mention just a few, Bank of America Merrill Lynch patented a virtual currency last year, Citibank is reportedly testing its “Citicoin”, and UBS too has been working on its own prototype. However, Bjørnhaug is puzzled by banks developing their own systems, and believes that co-ordinated projects work better. “There is no efficiency gain in having different infrastructures for different banks beyond their own core and customer interfaces. As with every other technological development over the years, sooner or later you come to a point where you create a common infrastructure and standardise processes, so as to secure a better customer experience. That goes for cards, mobile and other types of digital payments – and it goes for other industries than banks where standardisation creates efficiency,” he says.


Slowly but surely

As much as many of these products are still in an early phase of adoption and maturity, the payment scene is set to become increasingly populated with competing offers, and the adoption of different payment systems does not entail that one has to replace the other. Cash, e-money and virtual currencies are all likely to co-exist. EDCAB’s Jones points to the Austrian school of economics, and Nobel Prize winner Friedrich Hayek in particular, who supported the idea of free, competing currencies, as he argued that it created a better economic environment than the fractional reserve system.

Yet, Jones believes when it comes to virtual currencies, due to the aforementioned need for a network effect, one is bound to prevail over its competitors. “In the foreseeable future, there is likely to be one dominant and viable cryptocurrency. One currency providing the basic infrastructure with different add-ons to provide the specific use cases,” she says.

It will take time for these changes to make a significant impact. Tibado’s Jones, for one, is realistic about how long it will take for its product to become mainstream. “We are experienced enough to know that it will take a decade to get this launched, established and generally accepted as an everyday payment method.”

But according to Bjørnhaug, it is important for treasurers and cash managers alike to get ready to face the changes to come. “Other things will impact the way we work with customers and suppliers, there will be a lot of changes. Adaptation to change is one of the key competences in the era of transformation and digitisation that we are in.”