What if the world ran on new classes of digital currency that are inflation resistant, create price stability, discourage bubbles and deflationary spirals? What if they could protect citizen’s savings without reducing liquidity when they save rather than spend?
This blog series examines issues and possibilities in the changing banking and monetary systems. Rapid change could occur in the near future due to the ongoing digital transformation. What are the possible outcomes? Which future will happen? How are you prepared?
How can we create a system where using cash is not a burden? Futures-backed currency, introduced in the first of this series of blog posts, is a type of currency that can pay interest direct to people holding the currency. This type of currency could correct the issues with fiat currency backed by a central bank.
The seigniorage fees that facilitate the functioning of the Bank of Canada (BOC) are typically paid by the businesses and people who can least afford them.
Rich people typically hold their wealth in shares or ownership of property, avoiding both seigniorage and inflation through ownership of assets. Although the middle class too avoids seigniorage by keeping most of its wealth outside of cash, it still needs to hold a balance in interest-bearing accounts to cover rent or mortgage payments. The middle class gains an interest income but suffers the pirating of this money through inflation. Ideally this would be a positive balance, but in some cases inflation does more than cancel out interest.
The poor, that section of the population that needs to carry cash and can only deal in cash, will never receive any interest payments from holding currency. This interest goes to the BOC when it prints and issues cash to banks. The people on the edges of financial inclusion who deal only in cash can be looked at as forced supporters of the BOC. The cash tax on poverty extends beyond the loss of interest when the poor are unbanked, but also extends to the inflation target that increases the cost of living without ever compensating for this with interest payments.
Although the total sums of cash held by the rich and middle classes are greater than that carried by the poor, it is the proportion that should be looked at. The poor who carry only cash must pay the seigniorage fees to the BOC, while the others have options to protect their wealth by depositing it in accounts or purchasing shares or other assets.
Similarly, businesses that end up affected by seigniorage the most are those that must deal in cash. The commercial banks – the direct customers of BOC cash printing – pass on fees and charges to their customers so they don’t lose money on the cash services they offer. Major industries, manufacturers and corporations avoid cash, and many finance departments have a person dedicated to managing bonds to prevent any balances from earning less than a peak rate of return.
Chain retail outlets have cash management plans to optimize their speed of deposits. Smaller retail outlets, restaurants and corner stores handle a larger proportion of their transactions in cash and typically hold it for longer outside a bank account. Large retailers that can manage economies of scale and keep float balances to a minimum are at an advantage over the small restaurants and corner stores. Again, the seigniorage is paid by those least able to afford it.
The concept put forth in the BOC paper that looked at an interest bearing central bank digital currency would certainly address some of these shortcomings in financial inclusion and the population that bears the seigniorage. Unfortunately, the viability analysis is clear in the paper and the risk of a negative interest rate directly being applied to the population holding cash would be problematic. This was an interesting area to explore but would be difficult to implement.
The authors of the paper are clear in their analysis that cash in the present form would not disappear any time soon. The bearer certificate use case for begging, gifting, and tipping will always be effortless; a physical token with no intervening technology. At a wedding or event where the envelope is passed around and people are asked to contribute to a cause, gift or event, a banknote is easier and quicker.
Cash will always have a use case as tips left at the side of your plate and tossed into a collection cup. The BOC realizes these cases will ensure that physical cash will not be easily displaced by digital cash. Digital cash will have separate use cases but it will not address the core issues of the unbanked. The beggar and the waiter are the people most distant from a central bank, yet they seem to be paying the highest portion of their wealth in seigniorage fees to the BOC. Addressing these issues may not be material to the central banks, but should not be ignored.
The paper linked below takes a different approach to interest and helping people maintain their wealth even if they are unbanked and forced to use cash. Stay tuned for additional examples of how this theory can help.
This blog series will be a forum to discuss different concepts and areas where these theories can be applied. Subscribe to stay informed.
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The SAP Canada Ideation Centre’s mission is to help Canadian leaders of business, academia, government and non-government organizations develop a deeper understanding of the digital forces driving the economy today. Ideation Centre members strive to bring forward made-in-Canada fact-based arguments that challenge decision makers to think about the potential of organizational shifts that were not possible in the past. The Ideation Centre is fueled by thought leaders from the Industry Value Engineering team at SAP Canada. This diverse team of industry and value advisors helps organizations of all sizes and industries take advantage of technological innovations to create incremental economic value by adopting new business models and optimizing business processes, from the back office to the boardroom, farm to storefront, mine to operating room, etc.
Over his decades-long career in the high tech industry, James Zdralek has concentrated on usability, user research and design thinking while building a reputation as a visionary innovator. Merging his expertise in product design, human behavior, and economics, and through his focus on improving accounting tools, James envisions ideas that can drive tectonic shifts in financial and monetary systems. He holds a bachelor’s degree in Industrial Design, a masters in Psychology, and a diploma in Professional Accounting.