This article is a part of a series in which the Financial Times asks leading commentators and policymakers what to expect from a post-Covid-19 future
The writer is a former director of the US National Economic Council
Many parts of our lives will change after Covid-19, including the places we go, the people we see, how we travel and how we pay for it all. For the past five weeks I have not touched a single coin or banknote, instead relying exclusively on electronic payments systems and credit cards that only I touch.
I am not alone. Online merchants such as Alibaba and Amazon are thriving, and more and more brick-and-mortar stores have shifted to systems where you order ahead, pay on the phone, and pick up kerbside. Even businesses that have resisted credit cards for decades — cash-only Frankfurt bakeries and cheque-based New York psychotherapists — are welcoming or even requiring digital payment.
Valdis Dombrovskis, European Commission vice-president for financial services, is trying to help the process along. He recently tweeted “Time to swap your coins for payment cards — safer for containing coronavirus.”
Are we about to abandon a practice that dates back some 7,000 years to Mesopotamia? Over the centuries, physical money has evolved from tokens that represented goods in warehouses, then precious metals, and now our system uses coins and paper and plastic notes based on faith of the central banks.
The coronavirus pandemic, and our efforts to cut disease transmission, is forcing us to ask whether we have outgrown the need to carry and move money in physical form. We already have the technology to pay and transact in a purely digital fashion and use highly secure biometric authentication at the point of transaction. (I am invested in a biometrically-encrypted digital wallet and serve as an adviser to two other fintechs in this area.) If we shifted to digital, no one would carry dirty cash or coins or deal with a cheque again.
It is eminently possible: 87 per cent of transactions in Sweden occur digitally through private payment companies. They tend to commingle clients’ money in a few bank accounts, giving individuals access to funds through apps.
If central banks around the world created digital currencies, each person could have a segregated account. This idea is gathering steam. US Democratic Senator Sherrod Brown initially sought to include digital banking as part of the coronavirus response. He wants the US Federal Reserve to create digital dollar accounts and wallets for all citizens.
If that happened, all banking would happen through a digital backbone and wallet. ATMs and bank branches, which are already closing at a rapid rate, would become obsolete. Earnings would deposit directly into an individual’s wallet and be spent directly out of it.
For the estimated 1.7bn people worldwide who do not have bank accounts, government wallets would give them broader access to online services and markets and help them avoid payday lenders and cheque-cashing services.
The benefits of this go way beyond those of health and safety. Every business, especially small ones, would have a digital ledger of its cash flow and sales. This would make it more difficult for employees or middlemen to skim off cash because customers would pay the seller’s digital wallet directly.
Many illicit enterprises would effectively be put out of business or at least be far more visible and subject to sales tax and income tax on their activity. Think of the state of California which imposes a 15 per cent excise tax on licensed cannabis sellers while the cash-based black market avoids tax. The state estimates the regulated market has captured less than one-third of activity.
Digitising payments would also make it much simpler for individuals to calculate and file their income taxes and for governments to make sure they are being paid. There are privacy implications to the government having access to individual and corporate wallets that would have to be considered, but think about how much quicker and efficient the tax process could be.
For the US, digital wallets would have radically improved the government’s ability to help individuals and small businesses in this pandemic. Americans who signed up for direct deposit received stimulus payments much more quickly than those waiting for paper cheques and the government is still building up its capacity to send prepaid debit cards to those without bank accounts. In a cashless economy with individual digital accounts these distributions would happen far faster.
The shift will not happen instantly Sweden’s Riksbank is doing early testing on an e-krona, and the Marshall Islands announced plans last autumn to build a digital currency. But Facebook’s effort to create a private digital currency has run into a regulatory power saw.
The rise of digital wallets could also threaten banks’ access to the deposits they need for loan origination and servicing. But lenders could adapt by serving as custodians for digital currency in wallets and paying interest on balances.
Either way, the slow rise of digital currency has been given a gigantic boost by the pandemic. The shift will be disruptive but is clearly a leap in the right direction.