Central bank governor says technology already exists to do it
Only 20% of Denmark’s transactions are executed using cash
There’s a growing number of central banks questioning the point of printing paper money.
In Denmark, the wardens of cash are now looking into producing a virtual currency instead, which they predict will make crime harder and oversight easier. The Danes aren’t alone. Britain and Sweden are blazing a trail in Europe. Singapore and Canada have already tested blockchain-based currency systems for Internet payments.
Governor Lars Rohde, whose job as of 2017 will no longer include overseeing a cash printing press in Copenhagen, says pros include lower transaction costs. But the risks are considerable. It’s uncharted territory, and the potential unintended consequences have the scope to upend the economy.
The Danish central bank will outsource its cash production from 2017. Finland will mint the coins but a decision has yet to be made on who will print Denmark’s bank notes. Though cash won’t completely disappear, Denmark is exploring cheaper and more efficient alternatives. The central bank estimates that the total cost to society of using paper money is at least double that of relying on credit and debit cards.
At this point, the challenges of developing an electronic currency aren’t technological.
“We’re not preoccupied with the technology, because we know that issue well,” Rohde said in a Dec. 5 interview in the Danish capital.
Cash is only used in about 20 percent of Danish transactions. What’s more, it represents less than one-third of the money supply and therefore can’t be considered a safety net should the electronic payments system stop functioning.
“We’re way past that point,” Rohde said. “Cash and notes are not an alternative to electronic payments. We went beyond that many years ago.”
The central bank says “blockchain technology, or a variety of that, for example” would be an obvious model to use for virtual currency.
Rohde says the bank is exploring whether the electronic currency it produces “should be anonymous or not.” E-kroner would have a serial number, which would make currency units traceable at all times. A blockchain — a kind of ledger that chronologically records all e-currency transactions — would allow such tracking. It’s a concept that was developed with Bitcoin, which was created in part in an effort to bypass central banks.
Having your central bank use a blockchain requires a certain level of trust between a country’s citizens and their monetary authority, meaning it’s a model better suited to transparent, developed societies, according to Lasse Birk Olesen, co-founder of fintech firm Coinify, which is developing a blockchain infrastructure for Nordic payments firm Nets A/S.
“In Denmark and the rest of Europe there’s a relatively high level of trust in the central bank. In Venezuela less so,” he said. He says many of the cost benefits to be had apply to small transactions. “The big advantage will concern small and micro payments. It’ll be cheaper, faster and easier for you and me to do electronic payments.”
But when it comes to the societal implications of switching to such a model, Rohde says the Danish central bank still has “more questions than answers.” These include whether a central bank should monitor transactions or not.
Such surveillance may be politically distasteful, especially in an age in which consumers are growing increasingly paranoid about being spied on by corporations looking for new ways to advertise and sell their products.
There’s another quirk to having a central bank produce virtual currency, according to Rohde.
“All money held by Danes will eventually end up in the central bank in the event of a financial crisis, and we will indirectly end up doing a bailout, because we become a creditor to all the banks,” he said. “That wasn’t exactly the purpose” of the post-crisis regulatory overhaul.
“This can be resolved, but first we need to answer a lot of very interesting questions,” Rohde said.