Central banks unlikely to issue digital money, argues author

It is no secret that the use of cash as a form of payment is falling in many countries. In the last decade, the percentage of payments carried out electronically has increased dramatically.

This change has been accompanied by the development of cryptocurrencies, digital forms of payment used beyond the purview of financial regulation. David Birch’s new book, Before Babylon, Beyond Bitcoin: From Money that We Understand to Money that Understands Us, explores the history and future of money, looking at the social, political and technological aspects.

Birch says cash will eventually dwindle away, becoming nothing more than a ceremonial token of the past. But what instrument will replace cash, and who will regulate and distribute it, remains to be seen.

For Birch, smartphones are the future. Turning away from debit cards and contactless payments, Birch sees mobile payments revolutionising the payments landscape for years to come. In Kenya, this is already becoming a reality, with more than two-thirds of the nation’s adult population using the M-Pesa service.

“Mobile phones will be the future, not cards. Phones allow you to be paid as well authorise payments. That changes everything,” Birch said at the launch of his book at the Netherlands Bank on September 6.

Birch has no doubt that these “frictionless” forms of payment will become the norm in years to come. But who will control this electronic money?

The book starts off by looking at the origins of money, and how trust was one of the instrument’s foundations. As economies expanded and trade crossed borders, mediums of exchange were needed to carry out transactions. The ancient Romans used silver. Today, we use banknotes and coins.

Currently, central banks act as the issuer and regulator of such currency. But in Birch’s futuristic model of the financial system, just like silver, they too become redundant.

According to Birch, communities – rather than countries – will be the natural currency issuers in the new world order.

Financial hubs

Taking London as an example, he considers how the UK’s financial hub could issue its own currency separate from the rest of the country. “Why shouldn’t London have its own currency?” Birch asked the audience of payment industry leaders. Given the city’s vastly different economy from the rest of the country, it would be able to pursue its own agreement with the rest of the global financial system.

“In today’s economic landscape, there is no such thing as a national economy. Communities will be the heart of this next generation of money,” said Birch at the book launch, adding that city states would replace nation states as the “basis for society and commerce”.

In Birch’s model, these communities – which could be based on cities or larger regional groups – abandon central banks and state-defined money.

There was a time when central banks did not exist… and there will come a time where they do not exist again

“There was a time when central banks did not exist… and there will come a time where they do not exist again,” said Birch. “The way things are now… is a very temporary arrangement.”

Birch’s book does consider a scenario where central banks are charged with issuing the electronic currency. As the Bank of England concluded, there would be a number of macroeconomic benefits to such an arrangement, including a boost to GDP. But, as Birch muses, commercial banks would then become dispensable.

“Is it plausible central banks could be digital currency issuers? Yes. Do I think it is likely to happen? Probably not,” he said at the event.

For Birch, this model of electronic money is the future – as he argues in his book, money is simply a way of tracking who owes what to whom, and therefore it would make sense for it to be generated by the communities in which those debts are incurred.