About the advantages of using digital money for risk reduction

With the rise of the use of digital money and currencies such as that of Bitcoin, there seems to be the impending demise of cash. Even if there are discussions for more governments to have their central bank issue digital cash, which is the electronic version of coins and banknotes, there are still hindrances to making digital cash the primary form of money that is used all over the world.


Advantages of using digital money

Though for some it may be obvious that there are advantages to using digital money, there are still many people who have questions about having money that they cannot touch and hold. There are many who are accustomed to using cash that do not see the need for them to use digital money nor make online payments. Though there are positive impacts to the economy, there is also the question that arises about the stability and reliability of the financial services that are used for people to make an online payment.

Questions about digital money

Certain central banks had posed questions regarding the digital cash, which was prompted due to the ongoing rise of payment by electronic means and the rapid emergence of the alternative currencies like Bitcoin. Included in the key questions was the concern about the stability of digital cash from a financial point of view and the benefits and costs of making this new form of bank money to be accessible to their clients.

Benefits of using digital money

There are significant benefits for issuing this new form of money to include that digital cash widens the monetary policy range of options. The implementation of digital cash will allow new policy tools to be placed in use. If digitized money is used and will completely no longer put in use physical cash, it could even allow the lowering of interest rates below this zero lower bound, even though it is not a monetary policy that would be advocated. Alternatively, this new form of money of digital cash is a tool that will increase the aggregate demand in the manner of ‘helicopter drops’ of this newly created digitized money to citizens, thus making it much easier for the monetary policy of the central banks to reach their price stability target.

Reducing the risks

The financial system becomes a lot safer due to digital cash. It allows those individuals, companies in the private sector companies, and even non-bank financial institutions to be able to directly settle directly the bank money with an online payment instead of bank deposits, which significantly does reduce the risks and concentration of liquidity in payment systems. In turn, it also reduces the dependence of the systemic importance of the large banking institutions. In addition to these reasons, by providing digital cash with is a genuinely risk-free alternative payment solution to bank deposits, there will be a positive shift from the traditional bank deposits to online payments made using digital cash that will reduce the need for the government guarantees on bank deposits, thus eliminating a known source of hazard of the system.