Cashless doesn’t mean Bitcoin

If the Bitcoin bubble has a redeeming feature, it’s that it has started some interesting conversations. One is about whether governments should get into the cryptocurrency business for themselves. The unsatisfying (though undoubtedly correct) answer: It depends. A cashless future is indeed on its way, and governments and central banks have no choice but to prepare for it. But a cashless future doesn’t necessarily require governmentbacked digital currency. And while the technology underlying Bitcoin and other such cryptocurrencies will almost certainly have many useful applications, replacing physical cash is unlikely to be one of them.

Blockchain technology gives Bitcoin two crucial characteristics — it can be exchanged peer-to-peer without the need for a trusted intermediary, and it lets transactions be anonymous. In both these ways, Bitcoin resembles physical cash. But whereas physical cash is the liability of a government, with a central bank controlling its value, Bitcoin is a liability of nobody. This is its fatal flaw as a currency. There’s nothing to stop its value from falling to zero.

Granted, governments could issue their own Bitcoin-like digital currency, make it legal tender and stand behind its value. The question is: Why would they want to? The anonymity that physical cash provides is a drawback, from the government’s point of view, because it cloaks tax evasion and crime. Central-bank digital currencies, if they’re ever issued, are unlikely to be anonymous.

There’d be no reason, either, for central-bank digital currencies to dispense with the trusted intermediary — because that’s what a central bank is. And as it turns out, trusted intermediaries would make it easier for digital currencies to work at scale. Lacking such intermediaries, blockchain-based systems are much more complex and require vast amounts of computing power.

So government-backed digital currencies, if they’re ever introduced, won’t work like Bitcoin. But there is an even more basic question: Will government-backed digital currencies be needed at all?

Don’t take it for granted. To be sure, physical cash does seem increasingly anachronistic. In Sweden, for instance, some stores no longer accept bills or coins. Developing countries are making increasing use of money moved from balance to balance by mobile phone. But none of this electronic-money innovation has required digital currency, much less digital currency backed by governments. Economies are happily going cashless without it.

Moreover, a widely held central-bank digital currency might have far-reaching unintended consequences. Unlike physical cash, it could be a close substitute for a checking account at a commercial bank (with no risk of the bank failing, either). This new, government-backed competition might require banks to rethink their business and governments to rethink their approach to financial regulation.

That certainly shouldn’t be out of the question. The financial system that could then take shape — one relying less on the dangerous alchemy of traditional banking, which uses short-term deposits to finance risky long-term loans — might be an improvement.

On that, as they say, more research is needed. So for now, central banks are wise to be cautious. This much is already clear, though: The future of money may or may not include digital cash — but such government-backed currency, if it’s ever issued, will be very different from Bitcoin.