Will society give up paper money, in what way is cash worse than cryptocurrency, and in what case will it lose to the digital yuan?
Not shortly, but within 10–15 years, the digital currency will completely replace paper money.
In the long term, with profound changes in trade and finance, the cashless society will come very quickly. Digital currencies like the DC / EP of the Central Bank of China will completely replace cash.
Is giving up cash real?
Digital payment systems are being developed not only in China. For example, in November 2020, the Vice President of the European Commission Valdis Dombrovskis announced that the European Union plans to launch a unified digital system by the end of 2021. It will help solve the problem of EU citizens’ refusal of cash.
It is unlikely to completely replace paper money in such a short time. Digital currencies will take a dominant position in major cities globally, and countries with a developed IT infrastructure. But the penetration of new technologies will not have time to cover the whole world, especially the rural population, which even today sometimes resorts to natural exchange.
The forecast can still be called realistic when it comes to moving away from paper cash. Already today, during self-isolation due to rumors about the epidemic danger of banknotes, many have almost given up cash, using cards and online transfers. However, so far, we can only talk about the displacement of cash fiat by non-cash fiat.
Many say that the complete displacement of cash will only happen if anonymous digital alternatives with a relatively stable exchange rate are available. While there are difficulties with this: most cryptocurrencies are volatile, and even among them, only a few maintain anonymity. As for stablecoins, they are usually centralized, non-anonymous corporate projects.
They say the first countries to move away from the traditional fiat money system in the future will be the countries of the African continent. They suffer from galloping inflation: a cluster has already emerged in Africa. Residents are switching to digital loans and non-cash payments, even despite outdated mobile technologies and weak financial infrastructure.
Digital currencies issued by central banks have advantages over bitcoin and other coins. Firstly, national cryptocurrencies have a more stable exchange rate. Secondly, they are regulated by the state, while the release of Bitcoin and Ethereum is determined by “algorithms and miners.”
There are other opinions as well. Digital national currencies have a significant drawback — it is absolute control of all state’s financial transactions. However, this can also help defeat corruption.
The disadvantage of cryptocurrencies is the presence of criminal schemes. With the digitalization of money, there are more ways to cheat and steal.
Cryptocurrencies are also, in most cases, less convenient for retail users than fiat currencies. Fiat currencies, in addition to a more stable exchange rate, have high legal protection.
Cryptocurrencies, however, offer good opportunities for capital accumulation due to the multi-year price increase as the number of users increases. Another feature is seamless cross-border payments.
Banks digital currencies against Bitcoin
National digital currencies can be called a competitor to bitcoin and other coins. Cryptocurrencies still have significant drawbacks. For example, high risks due to exchange rate volatility, high commissions for deposits and withdrawals, involvement in criminal schemes, low prevalence in the world, etc. For these reasons, ordinary users may opt for digital payment systems developed by central banks.
If people prefer reliability, they will use government currencies if government intervention seems undesirable — distributed cryptocurrencies. However, for their full-fledged world acceptance as means of payment, it is desirable to combine anonymity, exchange rate stability, and decentralization.
Digitalization will take place gradually
Experts have agreed that digital money will gradually replace traditional ones. However, it is too early to talk about the complete displacement of paper currency within 10–15 years. Most likely, it will affect only large, developed cities and countries. At the same time, digitalization of the payment system may occur in developing African countries suffering from inflation. Moreover, Bitcoin is in great demand now.
Digital currencies issued by the Central Bank are unlikely to compete with Bitcoin only if they offer a new, competitive product. Otherwise, the demand for cryptocurrencies will continue as they provide some independence from the state. They still have several disadvantages, such as high price volatility, weak legal protection for users, low prevalence, etc.
This is an opinion piece. Views or statements in this blog do not represent LATOKEN. Kindly do not take any statement as an investment advice.