Digital Cash - Why the Central Banks Should Start Issuing Electronic Money by Dyson and Hodgson - Article Example

ARTICLE REVIEW: DIGITAL CASH: WHY THE CENTRAL BANKS SHOULD START ISSUING ELECTRONIC MONEY Name Institution Professor Course Date Dyson, B & Hodgson, G 2016, ‘Digital cash: Why the central banks should start issuing electronic money’, Positive Money, pp.1-36. Dyson and Hodgson (2016) highlight the reasons why central banks should start issuing electronic money. The authors also accentuate ways to implement digital cash besides exploring the issues and challenges that central banks may face in their endeavour to issue digital cash. According to the authors, the death of cash along with the increase of digital currencies with an example of Bitcoin has triggered the need for issuance of digital cash by central banks. The authors describe digital cash as an electronic version of coins and notes. Although there is a need for digital cash, given the death of cash and increase of digital currencies, implementing digital cash comes with challenges. One of these challenges includes how central banks would get the novel digital cash into the economy as well as how the public would utilise the digital cash. While certain central banks such as the Bank of England have already assessed the potential of issuing digital cash, Dyson and Hodgson (2016) report that issuance of digital cash comes with both positive and negative impacts. The authors maintain that issuance of digital cash hold a great number of benefits. Issuing digital cash is beneficial in the sense that it broadens the different options for monetary policy. According to Dyson and Hodgson (2016), central banks might want to issue digital cash because physical cash forms a barrier to the use of negative interest rates. Therefore, issuance of digital cash would allow the usual monetary policy to function at negative interest rates. When a firm is slowing and almost going into recession, the conventional monetary policy reacts to lowers the base rate. The reduction in the rates of interests lowers the cost to firms. I find these sentiments credible because the authors make use of credible sources and real examples. However, the authors must understand that lowering the interest to Zero Lower Bound instigates charges to the banks whereby the central banks charge banks to hold reserves. This can make banks to translate their reserves into cash to evade the charges and to do so calls for extra investment in secure storage capacity. Digital cash can be utilised as a tool to boost the summative demand through establishment of helicopter drops of novel digital cash to the entire population thereby making it easier for central banks to attain the price stability of momentary policy target. Additionally, issuance of digital cash allows the use of novel instruments of monetary policy that includes the Helicopter money. Dyson and Hodgson (2016) affirm that helicopter money hold numerous advantages over Quantitative Easing (QE) that was implemented following the financial crisis. This argument is logical because GE has not been productive at stimulating the real economy as it functions by augmenting the prices of shares and bonds. The idea by the authors that Helicopter money could be effective in stimulating summative demand is feasible. This is because the helicopter money increases the ability of citizens to spend and repay their debts. However, executing helicopter money requires central banks to put in place a distribution channel that would ensure that new money would reach the accounts of intended recipients. To demonstrate the effectiveness of issuance of digital cash with regard to helicopter money, the authors have made their arguments logical through highlighting several examples in Europe, Sweden and Switzerland. The use of real cases makes the provision of the articles realistic and informative. Issuance of digital cash is beneficial because it makes safer the financial systems (Dyson & Hodgson 2016). This is attainable through allowing people, companies in the private sector and non-bank financial organisations to settle in central bank money an aspect that greatly lowers the concentration of credit risk and liquidity in payment systems. A change from bank deposits to electronic cash lowers the call for governmental guarantees on bank deposits thereby reducing moral hazards from the financial systems. Through establishment of digital cash, more payment services providers could directly link to the settlement systems of central banks. With digital cash provided by the central, the financial collapse or technology failure of larger banks cannot trigger failure of payments by new entrants and smaller. Therefore, permitting firms to settle on utilising digital cash accounts lowers liquidity risk and credit risk with the payment system. I find this assertion is logical because when NBFIs (Non-bank Financial Institutions) hold funds directly at central bank, liquidity problems or collapse of a single bank cannot have great impacts on every financial firm that is linked to the bank. The collapse of Lehman Brothers that set off the 2008 financial crisis is a true example of why is important for NBFIs to hold directly to the central bank. Central banks would want to issue digital cash to increase competition and promote innovation in the systems of payment. Through issuing a form of digital cash accessible to all citizens, central banks would all novel entrants to provide payment services and accounts that are not reliant on access to commercial banks balance sheets. Kalakota and Whinston (1999) who asserts that versatility of digital cash opens up a host of novel applications and markets echo the sentiments. Besides, issuing digital cash would allow central banks to augment financial stability through provision of a risk-free alternative to bank accounts. In my opinion, this assertion is feasible particularly with concern to the collapse of Lehman Brothers. Issuance of digital cash would help in the recapturing a portion of seigniorage besides tackling the reduction of physical cash. Through replacing physical cash with electronic payments, seigniorage increases. Seigniorage entails the proceeds from creating money earned by central banks and passed on to the Treasury. Issuance of digital cash would help in addressing the effects of alternative finance upon creation and distribution of money besides tackling the decline or death of physical cash. While the aggregate cash in circulation increases, its use as a payment means is on decline with the use of debit and credit cards on the rise. With the increase in mobile phone payment apps and contactless payment cards, physical cash is becoming less pertinent, hence the need to replace physical cash with digital cash. Digital cash also augment financial inclusion where a huge number of unbanked would be provided with convenience of cash and security of a bank account devoid of the bother of having to deal with high street banks. With respect to implementation of digital cash, Dyson and Hodgson (2016) assert that central banks can offer digital cash by making the digital accounts accessible to non-bank individuals and forms. This is achievable through a direct access approach where the banks provide accounts, payments cards, customer services needs and internet banking to all citizens. However, a great administrative burden and improper engagement in the private sector would be experience. The central banks can implement issuance of digital cash through indirect access approach where the banks would establish and hold the digital cash with the customer services and payment being operated through DCAs ( Digital Cash Accounts) offered by the private sector. The private sector would be tasked with offering debit cards, mobile and internet banking, customer support, account information and payment services. Any money paid through DCAs would be held electronically in the central banks to allow DCA providers to repay their customers the entire balance of their account. In my opinion, the Indirect Access approach is preferable because it is market-driven and helps in augmenting competition in payment and current account services besides lowering administrative burden on the central bank. With regard to the management of issuance of digital cash Dyson and Hodgson (2016), the central bank can issue digital cash reactively and offer the infrastructure for DCAs, and allow the public to resolve how to split their money holdings amid digital cash and bank deposits. Money issuance would be completely reactive when the public instead of the bank is allowed to make transfers from their bank deposit accounts. Alternatively, central banks can take a proactive approach to cash issuance using digital cash as a monetary policy tool to inspire summative demand and impact the economy. While issuance of digital cash comes with enormous benefits, Dyson and Hodgson (2016) claim that issuance of digital; cash would instigate competition amid bank deposits and digital cash. Both bank deposits and digital cash are linked to electronic payment system that would demonstrate major implications during financial crisis than in normal times. Although DCAs provides safety of physical cash, subsistence of digital cash may worsen bank runs. Although the authors use bank runs as a case against issuance of digital cash, I believe that this is not a reason enough to prevent issuance of digital cash because it is logical for people to shift from potentially risk bank deposits to safer digital cash. DCAs hold no immediate effect on credit demand. I support the authors claim that digital cash should not be remunerated. This is because remunerating digital cash would establish numerous significant problems such as negative impact of government finances and rates on interest paid on bank deposits. The article is informative and provides a strong argument for issuance of digital cash by central banks. It is well arranged with insightful remarks and adequate assessment of major issues relating to issuance of digital cash by central banks.. The authors provide insights and examples that are relevant and logical to support the issuance of digital cash by central banks. The benefits linked to the issuance of digital banks are feasible. This is because the authors have used credible sources of information that inform their arguments. The arguments for digital cash are logical because the modern society has adapted technologies that allows for mobile and internet banking. More so, the decline in physical cash calls for a shift to digital cash. However, issuance of digital cash comes with many challenges that include regulatory, technological and economic challenges. With regard to these challenges, the authors provide diverse perspectives that could be use to design the regulatory and infrastructure regime that would allow citizens to hold digital cash. I find the approaches provided by the authors feasible and applicable. However, these approaches have not been tested to assess their effectiveness. Hodson and (2016) asserts that, a centralised ledger instead of a distributed ledger is essential to allow people to hold digital accounts. Although a centralised ledger would allow the central bank to track digital cash transfers, in my opinion, a decentralised ledger would be more effective. A decentralised ledger has been effective particularly with Bitcoin that is neither run by a sole organisation or authority that validates, oversees and authorises controls and transactions of money. According to Morabito (2016), the distributed ledger allows payments systems to run exclusively without middlemen. In my opinion, the distributed ledger would be a better means to establish safety measures that were endemic in liquid markets. I find the arguments with respect to the advantages of digital cash feasible. The arguments imply that cash regardless of its state is a legal tender, a bearer instrument and can be held by anyone including those without a bank account. I fully support the arguments presented by the authors requiring central banks to issue digital cash. This is because digital cash is arguably more secretive, economical and faster compared to conventional payment systems. Although the authors mention scores of advantages linked to issuance of digital cash, there are significant disadvantages that include failure of technology, possible tracking of customers, loss of human interaction and fraud. Muraleedharan (2014) confirms that fraud over digital cash has been a pressing issue in the contemporary world with hacking of bank accounts and unlawful retrieval of banking records leading to extensive invasion of privacy and identity theft. There are also issue concerning the technology engaged in digital cash that include privacy questions, loss of records, undependable software and power failures. Therefore, while implementing issuance of digital cash is beneficial, central banks should access the disadvantages linked to digital cash implement measures to ensure effective and safe issuance and use of digital cash. References Dyson, B & Hodgson, G 2016, ‘ Digital cash: Why the central banks should start issuing electronic money’, Positive Money, pp.1-36. Kalakota, R & Whinston, A 1997, Electronic Commerce: A manager’s guide, USA, Addison-Wesley Professional. Mauraleedharan, D 2014, Modern banking: Theory and Practice, UK, PHL Learning Pvt.Ltd. Morabito, V 2016, The future of digital business innovation: Trends and Practices, UK, Springer. Read More