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Marius Jurgilas, Member of the Board of the Bank of Lithuania. Article in the Eurofi Magazine / Tallinn 2017

Despite advances in financial digitalization the most important instrument in retail payments still is cash. As the 2015-2016 ECB cash usage survey showed, three quarters of all payments at points-of-sale in the euro area are made in cash.

Cash is king, as it is the only option for an ordinary person to hold onto the ultimate settlement asset – central bank liabilities. Only the members of the gentlemen club of banks have direct access to the central bank reserve accounts. But this is changing. With this change we are changing the paradigm of cash.

In the absence of trust we demand immediate settlement in something we trust more than the counterparty we are dealing with. Thus there is a structural demand for a central entity of trust to intermediate economic transactions. Money is that medium of exchange and cash is its ultimate-trust form.

Commercial bank money is a near substitute of cash in most of the times and general public usually is ignorant of the notion of settlement finality or other legal discrepancies that make commercial bank money fundamentally different from central bank liabilities. But those differences become quite obvious and the ultimate-trust feature of cash and benefits of settlement in central bank liabilities becomes apparent during episodes of financial institution distress. And that is one of the reason why public prefers to hold onto the banknotes.

Despite advances in financial digitalization the most important instrument in retail payments still is cash.

Cash is what the public wants, thus it should be provided. But nobody said that cash must be tangible. The recent developments in technology make feasible broad provision and access to the central bank liabilities in electronic form. Cash can be digital. But that is no small development of the financial system. It would immediately reduce demand for commercial bank money. Such a change would have fundamental implications on credit growth, financial intermediation, transmission of monetary policy, and role of (central) banks in general.

The foreseeable benefits of such a change in the paradigm of cash are tempting. No need for transaction balances at credit institutions, no need for deposit insurance, no more moral hazard, and maybe finally … financial institutions that are not important enough to bail out. We should give it a try.