New form of payment faster, more convenient

Digital currency, especially that issued by central banks, is poised to challenge existing payment methods by offering faster and more convenient ways to settle transactions.

Banknotes, coins and even electronic payment systems could be consigned to the history books at some stage.

In ancient times, when goldsmiths issued the first banknotes fully backed by their reserves, making payments became far more convenient, as the artisans no longer needed to carry gold around with them.

Years later, when they issued banknotes or deposit certificates that were not 100 percent backed by their gold reserves, credit money－or that not backed by physical means－was generated.

Now, with the emergence of digital currency, the big question is whether traditional currency will coexist with it, or simply disappear.

An official at the People's Bank of China, the country's central bank, said the institution's digital currency will not replace banknotes and coins, at least not in the short term. Based on a principle known as "financial inclusion", many people will be able to use the new form of payment.

Mu Changchun, head of the PBOC's digital currency research institution, said that central bankers worldwide agree that people should have the right to choose the type of currency－physical or digital－they use.

"Even when the digital renminbi is officially introduced to the public, the PBOC will continue to provide banknotes and coins. We will also facilitate the further development of an integrated, innovative and competitive market for retail payment solutions," Mu said.

He added that a decision to replace cash with digital renminbi should be a market choice, rather than the result of an order issued by the government.

In April, a meeting of the PBOC chaired by Fan Yifei, the bank's vice governor, discussed ways to improve the ability to assess cash supply, in order to satisfy various demands when the digital economy is fully developed.

With research and development of the bank's digital currency continuing, the meeting called for improved reforms to the nation's cash issuance and withdrawal system amid declining use of physical money.

According to a PBOC report, in the first quarter of this year, commercial banks in China recorded mobile payments totaling 90.81 trillion yuan ($13.59 trillion), a year-on-year rise of 4.84 percent.

Meanwhile, as of the end of March, the number of automated teller machines, or ATMs, in China had fallen to 1.08 million, down by 14,700 from the previous quarter, indicating reduced demand for cash withdrawals from such terminals, the report said.

According to financial experts, the trend toward a cashless society is gaining ground through smartphone-enabled digital payment solutions and mobile wallets, along with the use of credit cards, online transfers and settlement by direct debit.

The number and value of noncash transactions in China have risen steadily in recent years. Last year, the country's financial institutions processed 331.02 billion non-cash payments, up by 50.25 percent year-on-year. These transactions were worth 3779.49 trillion yuan, a rise by 0.29 percent from a year earlier, according to the PBOC.

A digital currency designer from the PBOC said that with bank branches being closed, in tandem with a decline in the use of ATMs and point-of-sale terminals, it is important to ensure that people, especially those living in remote and poor villages, have an equal opportunity to use the new form of currency.

These people, who rarely use electronic payments, still rely on physical cash and are known as the "disadvantaged group of digitalization", the designer said, adding that any mandatory order to force this group to use innovative digital payment solutions would be unfair.

It will be possible to exchange digital renminbi for cash at qualified commercial banks or through ATMs, he added. The PBOC has said no fee will be charged for such transactions.

Yves Mersch, a member of the European Central Bank's executive board, said: "To write off the role of banknotes and coins would be a mistake. The public's commitment to cash remains strong and is getting stronger."

A survey by the ECB found that most people in the eurozone do not want a cashless society. Nearly 80 percent of point-of-sale transactions in the currency zone are conducted in cash, along with more than 50 percent of payments.

According to financial analysts, central banks worldwide should have a good mix of paper notes and digital currency, and should also expect cash to remain in circulation. Security is the major consideration, as cash is viewed as being safer in areas where digital technology is less-developed, they said.

Encik Abdul Rasheed Ghaffour, deputy governor of the Central Bank of Malaysia, said, "In addition to facilitating payments, cash has been a powerful instrument for central banks to build trust and credibility with the public.

"Notes issued by central banks provide us with a direct and tangible link to the people. If we were to go completely cashless, central banks might lose this traditional means of maintaining a strong brand."

However, the PBOC's Mu said the situation in China may be different. Although the central bank has not yet disclosed statistics, use of cash has fallen significantly. In view of potential retail sales growth, the amount of digitalized money in circulation should be sufficient to act as backup to electronic payment systems in case they encounter financial or operational risks, Mu said.

He added that the bank will continue to supply notes and coins. As a public commodity, digital currency will also be used in smarter ways, such as through eyeglasses or other intelligent wearable devices, not just smartphones.

Analysts said the COVID-19 pandemic has changed financial habits, with physical contact yielding to contactless solutions. This could further fuel the rush toward a cashless society. However, just like physical banknotes, digital currency also faces the problem of counterfeiting.

Wang Yongli, former vice-president of the Bank of China, said retaining physical money may save costs for the central bank to some extent.

But the issuance and operational systems required for the digital renminbi will definitely change the currency structure of the payment service sector, having an influence on bank card issuers and non-bank payment institutions in particular, Wang said.