According to the legend, when contacted by a reporter to comment on rumours of his demise, Samuel Clemens – more popularly known by his pen name Mark Twain – said, “The reports of my death are greatly exaggerated.”
The same could be said of cash, which has long been the subject of rumours predicting its demise. Those expecting a cashless society – where alternative digital currencies are the norm – however, may have to wait a little longer. As a recent report from the Bank of Canada illustrates, those reports of the death of cash may also have been greatly exaggerated.
The recently-released discussion paper, entitled ‘Cash, COVID-19 and the Prospects for a Canadian Digital Dollar’ authored by Walter Engert and Kim P. Huynh, shows that cash usage is still strong, and the conditions necessary for the Canadian central bank to issue its own digital currency are still a long way off.
The use of physical cash has been robust, particularly through the COVID-19 pandemic. Although there were warnings and concerns that using banknotes could transmit the virus, cash usage has remained – and hasn’t died as many predicted.
The Bank of Canada report shows that during the pandemic, the value of notes in circulation increased significantly, and was 16% higher at the end of 2020 than it was the year before.
Another measure – the ratio of notes in circulation to the gross domestic product (GDP) – also shows how demand for cash increased in Canada during the pandemic. Since the 1970s, the report notes, the rate has remained stable at around 3% to 4%. And in 2020 it increased to 5%, which is partly due to the growth in the notes in circulation and also the decline in GDP from the impact of the pandemic on economic growth. This increased demand for cash also continued into 2021. In fact, 80% of Canadians reported they have no plans to go cashless in the near future.
In the context of increasing attention on digital currencies, the Bank of Canada notes there need to be two conditions for the central bank to consider issuing its own central bank digital currency (CBDC). These scenarios were referred to in a February 2020 speech by the Bank of Canada Deputy Governor Timothy Lane, who said they were a) the emergence of a cashless society and b) the widespread use of alternative digital currencies.
So far, neither condition seems to have materialised. Cash usage is strong, and also there are concerns about financial inclusion and competition in the payments market if it is removed as an option. Cash still serves as a backup in a crisis, and the Swedish government, for example – even though it has pushed for a digital economy – recommends its citizens hold a reserve of cash at home to prepare for disasters.
And the use of digital currencies is also relatively low, which means the second condition is also far from reality. The report notes that with bitcoin – by far the most popular of alternative currencies – is only held by up to 5% of the Canadian population, and this was primarily as an investment, not as a means of payment.
The report updated the comments of Deputy Governor Lane, and states that the central bank’s view remains unchanged: “A digital currency is by no means a foregone conclusion”. The central bank, however, has stated that given the digitisation of the economy that was spurred by the pandemic, it has decided it is prudent to accelerate its work to prepare for the possibility of issuing a CBDC.
In the meantime, it seems that a Canadian CBDC is not on the horizon in the near future. And that any reports about the death of cash are greatly exaggerated.