Several pages of this issue are devoted to the future of cash. With more and more alternative methods of payment appearing, central banks are beginning to think seriously about whether or for how long they should stick to tradition and continue to issue banknotes.
In countries with a large 'black economy', the anonymity of cash is a headache for tax authorities. They would probably prefer traceable electronic payment methods only, but it is not up to them to make such a change.
However, there are important voices in central banking circles that argue for such radical measures. In September, Andy Haldane, the chief economist of the Bank of England proposed getting rid of cash altogether. The reason he advanced for such a move is that without cash, central banks could introduce negative interest rates, which is simply a charge on depositors who keep their money in the bank - instead of investing or spending it.
Negative equity is only practicable if there is no other way of storing money. Otherwise people would quickly convert bank deposits into cash. As the number of high-denomination banknotes in circulation - or perhaps better, at rest - in the Euro area and also in the UK and other countries shows, many savers already prefer to hide bundles of cash under the mattress, rather than putting them in the bank.
All this points to the inability of financial policy makers to boost spending and thus stimulate the economy. Mr Haldane said that it may be necessary to cut interest rates from their present historic low of 0.5 per cent to support UK growth and return inflation to target. He thinks that the logic of negative interest rates implies that there may be a need for a government-backed electronic wallet.
“This would preserve the social convention of a state-issued unit of account and medium of exchange, albeit with currency now held in digital rather than physical wallets.” Such an electronic wallet would also make every financial transaction traceable and, short of becoming 'honest', the money that is now swirling around the black economy would go to private virtual currencies, such as Bitcoin, where the money trail is totally untraceable.
Mr Haldane’s thoughts conflict with what the Bank of England’s Chief Cashier, Victoria Cleland, said when she promised that notes and coins are here to stay. She seems to mean it, as she announced that three of the bank’s four denominations would move to polymer, and thus last longer than paper notes.
Meanwhile central banks continue to investigate Bitcoin. The Bank of England published a paper in its Quarterly Bulletin. The European Central Bank in February released Virtual currency schemes - a further analysis. And Björn Segendorf and Cecilia Skinglsey of Sveriges Riksbank also published papers on the possible influence of virtual currencies in economic behaviour.
It is not Bitcoin itself but the underlying software that has caught the attention of government institutions worldwide. The Economist (30 Nov. 2015) wrote that the cryptographic technology whichunderlies Bitcoin, called the 'blockchain', has applications well beyond cash and currency.
It offers a way for people who do not know or trust each other to create a record of who owns what that will compel the assent of everyone concerned. It is a way of making and preserving truths.The Bank of England agreed by stating in a research note last year that distributed ledgers such as blockchains are a 'significant innovation' that could have 'far-reaching implications' in the financial industry.
We might be at the beginning of something important and we don’t know if it will turn out to be a great benefit or a disaster for our industry.