The monetary system has changed drastically over the last ten years due to technological advancement and innovation. This article will look at digital currencies and how they fit into the entire monetary system. By definition digital cash can best be defined as real cash, except that it’s not on paper. Money in your bank account is converted to a digital code.
This digital code may then be stored on a microchip, a Smart Card, or your computer’s hard drive. Example of digital currencies is Bitcoins, Ethereum and Monero and Zcash. While the monetary system can be defined as the system by which a government provides money into a country’s economy. Monetary systems are well-oiled systems made up of different players. In a modern monetary system, the below are the key main players ;
- The National treasury
- The Mint
- The Central banks
- The Commercial banks
The role of the National treasury is to strengthen financial and fiscal relations between the National Government and County Governments and encourage support for county governments in performing their functions, while the Mint’s role is to be the primary producer of a country’s coin currency. The central banks carry out a nation’s Monetary Policy and control its money supply. Finally, the commercial bank’s role is to accept deposits, lend money, process payments, and issue bank drafts, loans and checks.
So, where does digital cash fit in this whole picture? Central banks should then issue digital currencies. This will ensure that the Central bank will still have control of the supply of money in the economy and will still ensure that there are the right policies to control the use of digital currencies. Digital currencies are the future of money and the future of monetary systems. Digital currencies are credits that are stored in E-wallets and used when needed. In the future, monetary systems will require innovation and technology to go hand in hand with the existing monetary structure without changing the value of money.
Technological innovators have already developed platforms and payment methods fostering mobile money. The current trend is that the use of physical money is declining. Most people require flexibility and money at the touch of a button; with this, innovators have come up with solutions of having money in mobile form and different payment methods on platforms that work seamlessly and ensure customers can carry trade within the shortest timelines.
Since very few countries have licensed and regulated virtual currencies, the platforms are working well and can carry out local and cross-border transactions seamlessly. Central bank licensing the use of digital cash will ensure more and more apps are delivered that are easy to use. Digital currencies also offer any type of virtual coins. Virtual coins make it impossible to steal or even deteriorate in quality.
Virtual coins come with different options whereby a person can transact, trade or even withdraw as physical cash. A digital currency has many pros to any monetary system; Lower cost; this means that the cost of using digital cash is lower than physical cash. The transaction costs are lower due to the low cost of infrastructure. Digital cash eliminates the need to have high operating costs for commercial banks, i.e. cost of running branches, employing tellers, and expensive banking electronic systems.
Secondly, Long distance transactions are made easy and cheap compared to sending physical cash. By adding digital cash into the monetary systems, all players reap big rewards. Commercial banks will lower their operating costs by not having to increase the number of branches, tellers and banking systems as the clients will access the money and be able to transact directly. There will be no cost incurred by the Mint as the digital money will virtual. Central banks will continue to ensure that the supply of money is done, and some policies govern the use of cash. Lastly, the treasury will ensure that digital money reaches the county government.
Why is it important for banks to issue electronic money; firstly, digital money widens the options for monetary policies by ensuring low-interest rates in banks and price stability. Secondly, introducing digital cash will foster innovation and technological advancements as new payment methods will be introduced. At the same time, new payment platforms will also be invented. Thirdly, digital cash will improve financial inclusion. Fourthly, digital cash offers quick solutions for E-commerce, especially in international transactions where traders and buyers rely on fast and ready cash to allow them to buy goods and services.
However, it should be noted that the introduction of digital currencies also comes with numerous challenges. First of all, most countries, especially in 3rd world countries and developing economies, are not technologically advanced, so introducing digital cash will not bring about financial inclusion. The central bank must create parallel systems to ensure all citizens access money.
Secondly, digital cash is prone to forgery and hacking, and this is because digital cash is actual codes that are stored in E-wallets. The codes can be forged, duplicated and E-wallets hacked into. Another challenge is people are prone to forgetting passwords; this might lead to blocking out entire systems or even critical digital systems. Thirdly, Digital cash is not traceable, and the system provides anonymity. This means that the government cannot protect its citizens from internet hackers.
Lastly, Digital cash is complicated and hard to understand. The government will have to invest a lot to ensure that all its citizens understand and can use it without hitches. In conclusion, a Digital currency is the “money” of the future; hence, governments should redefine ways of including digital cash in the monetary systems or structures.