The Decline of Cash and the Battle for the Future of Currency

This article is from Daniel Jeffries' Medium blog, authored by Daniel Jeffries and compiled by Alyson and Echo.

As central bank digital currencies and cryptocurrencies move into mainstream society, the utility of cash is significantly diminished. In this article, crypto developer and futurist Daniel Jeffries argues that the demise of cash is inevitable, and that the West has already fallen far behind China in the competition for digital currencies. He harshly criticizes the conservative strategies of Western countries and expresses extreme concern about the future of public privacy. In the future, we will have private, anonymous cash alternatives. But in the dystopian future depicted in the TV series "Black Mirror," the money in your pocket knows everything about you.

Cash is dying.

But with the demise of cash, the future of privacy becomes extremely uncertain. In previous articles, I stated that governments would make cash disappear within twenty years. But now, I believe it won't take that long.

China is relentlessly promoting and establishing state-backed digital currencies, and the global economic disasters along with the astonishing rise of decentralized cryptocurrencies like Bitcoin and Ethereum have accelerated the timeline for the demise of cash.

The only question now is what will replace it? Is decentralized cryptocurrency or state-driven digital currency more advantageous?

The early open-source community was very powerful, releasing Bitcoin and privacy-based cash alternatives like Zcash and Monero before centralized powers realized who was impacting them. Various countries and regions are closely monitoring this and have quickly learned to adapt; almost every central bank in the world is rapidly formulating its own digital currency plans.

This means there could be two radically different visions for the future. One is that cash is eliminated, and state digital currencies become the primary form of currency, linked to your identity verification and location data, with everything you do recorded by powerful government computers that know more about you than you know about yourself, making decentralized currency illegal.

The second scenario is that the national currency system eliminates cash, but we can see a parallel, open, privacy-based digital currency system that retains the same anonymity attributes as cash.

Note that in both cases, physical cash will cease to exist. But this will lead to two starkly different futures: in one, you can better control your money; in the other, your money will control you.

1. The Battle for the Future

Undoubtedly, the battle for the future of currency is a struggle for control. Who has control now? Who will lose control? Who can gain more control?

Whenever there is a change in social structure, power shifts accordingly. When control changes hands, some gain more power while others lose it. We have seen this power swing back and forth throughout the arc of history.

The face of a long-reigning ruler is engraved on a Roman coin.

In ancient Greece, decentralized states were replaced by the centralization of the Roman Empire, but then the empire began to disintegrate, giving way to a collection of nation-states loosely formed from Christian and ancient Greek artistic, architectural, and mathematical ideals. Power has cycled from centralization to decentralization, a pattern that runs through the entire history of humanity.

The evolution of currency reflects the progress of human history. When people sought a way to replace barter, currency evolved over time into credit, which could be used to trade anything from horses to cheese.

When state power is unstable, currency tends to be more localized. The development of universal currency allows those engaged in international trade to later exchange it back into local currency.

The rise of nation-states reflects the rise of currency. As small tribes gradually fell into feudal territories, raids and wars pushed borders into more stable states, and currency evolved into a more universally accepted standard. We increasingly saw precious metals like gold and silver dominate what people considered currency. Eventually, precious medals were minted into coins with fixed values.

After using coins, we began to use small pieces of paper backed by precious metals. Ultimately, as countries moved away from the gold standard, we severed ties with precious metals. At this point, the evolution of physical currency reached its peak.

2. The War on Cash

Just as we saw chemical film develop for over a century only to be suddenly replaced by digital cameras, paper money will face the same fate. It will be replaced by liquid, easily transferable digital currencies.

The shift to a cashless society began several years ago. Now China is essentially a cashless society, a huge change from when I visited China in 2014, when cash was still mainstream. In just seven years, 86% of people in China use mobile payments instead of cash, skipping over the old Visa and Mastercard POS systems.

At the end of 2016, Indian Prime Minister Modi issued a document banning most of the country's currency circulation to reduce corruption and encourage tax compliance, but it was halted a year later; Australia attempted to ban cash purchases over $10,000, but this measure also failed. These early failures do not signify a victory for cash; they are merely attempts.

These examples clearly show that governments view cash as a threat.

Because cash is nearly impossible for the state to control, the government cannot easily monitor the flow of cash, including who possesses it and what it is used to purchase.

As nation-states become the ultimate power on Earth, they seize the right to print money and outlaw anyone else from creating currency through law and force. The state has become accustomed to this control.

Initially, physical currency emblazoned with the symbols of the nation-state was the ultimate source of prestige; possessing currency meant possessing independent power.

But all of this began to change as currency became increasingly virtual. As the degree of virtualization increases, currency loses anonymity and becomes easier to track. With the rise of credit cards in the 1950s and 1960s, the flow of currency became increasingly transparent, detailed in physical distributed ledgers held by private companies like Diner's Club and Visa. As computers and networks swept the globe in the 1980s and 1990s, all these distributed ledgers became digital and more transparent, making control over the flow of money more important than the act of printing money itself.

Now, governments have become accustomed to viewing every transaction and its destination; they do not want to lose control. Eliminating cash would permanently erase anonymity.

Today, there is only one question: they still struggle to eliminate cash.

As we saw in India, people refuse to relinquish cash and spend it. A year later, India had to reintroduce those banknotes into circulation because their digital systems were not ready to handle them. In Australia, the pandemic shattered any illusion that Australia had a digital payment system robust enough to replace cash.

To ultimately abolish cash, the state needs more than just laws. A new technology must possess almost all the characteristics of the old technology and a host of new irreplaceable features before the once-dominant old technology will disappear, and this is where digital currency comes into play. True digital currency does not come from a nation; innovation began with Bitcoin.

3. The Nation-State Counterattack

Most nation-states fear the internationalized, decentralized nature of Bitcoin; governments have long enjoyed control over the money supply to the extent that they can no longer imagine international currencies like silk or salt.

Nation-states feel fear and anger towards cryptocurrencies. When Facebook attempted to launch Libra, Congress and other governments around the world followed suit; when Telegram tried to build a fully scalable digital currency, the U.S. government crushed them, even though they had raised all their funds from accredited investors.

However, while the U.S. and other governments react in fear, China is closely monitoring blockchain technology, understanding its power better than any other country in the world. While other superpowers are skeptical of blockchain and Bitcoin or are in blind fear, China has begun to vigorously build its blockchain.

China's digital yuan has ignited the fuse to "kill cash," accelerating the global demise of cash. China's digital payment system has shocked countries around the world. They are years ahead of Western powers.

China has begun testing the digital yuan, conducting airdrops to allow citizens to buy things with free money. From the videos and comments I've seen, it's a great platform. It allows users to exchange cash by simply touching their phones, whether online or offline, and then synchronizes the transactions.

China is smart. They did not foolishly criticize the enormous price volatility of Bitcoin like Western economists such as Dr. Doom; instead, they saw a way to distort Bitcoin's original libertarian design—by establishing a centrally controlled digital management center.

They view this as a way to create a state-supported system that can easily cross borders and break through international sanctions, ultimately even shattering the U.S.-dominated international monetary system. They leverage the underlying technology of blockchain and then discard it, replacing those idealistic features with centralized control tools. A permissioned, oral "consensus" model places those original utopian ideals in jeopardy.

The Chinese also see that a decentralized currency controlled by immutable algorithmic rules means the government can no longer devalue or inflate currency by canceling some currency circulation or printing more money; they will lose the ability to impose currency controls, telling people how much they can withdraw at a time or how much they can send to others. Privacy-centric cryptocurrencies are even worse because they mean that everyone is backed by ironclad encryption protocols, but investigators want shortcuts instead of doing real surveillance work.

China sees everything and hopes to get ahead before cryptocurrencies take over the world. Thus, China quickly took action, banning domestic Bitcoin trading. Then, they established a centralized digital cash system to swiftly crush decentralized currency.

Through the "Belt and Road" initiative, they will have Chinese people invest heavily in developing economies, building roads, bridges, and infrastructure, or providing loans, thereby sowing the seeds for the renminbi. Soon, they will expect developing countries to repay these loans with digital yuan.

At first, they may face some resistance, but ultimately those small countries that do not have large-scale payment and banking infrastructure will see how simple, easy, and harmless it is, and they will begin to use digital yuan more and more. They will also see the outdated, archaic, and ridiculous banking systems still in use in the U.S. and Europe and will completely ignore them.

Want to send money through the Western system? Write a note, sign it, scan it, and then fax it to someone. Maybe a day later, someone receives it. If you want to do business with Americans, unless a person from a third-world country can get a bank account from the start, or a business from a small country can comply with all FACTA requirements.

Thus, when they struggle against the rigid international banking system, they may choose to launch their digital yuan wallet on their smartphones or use a nice digital dashboard on their desktops, then use China's system to gain benefits worldwide in seconds.

Guess which one they chose?

As the U.S. abandons its leadership and investment in other countries, turning inward with a ridiculous "America First" nationalist populist worldview, the Chinese are investing in the future. While Americans are fighting a meaningless destructive culture war, the Chinese are investing in over 70 countries worldwide, where governments are unstable and infrastructure is lacking; China is buying the future by building roads and bridges, while America is building walls.

Of course, the Western world does not want to see a Chinese currency dominate the third world; central banks in other countries are racing to establish their own digital currencies to counter this threat, but the West is already far behind. Italy aims for complete cashlessness, and Europe is similarly strengthening its research into a digital euro. But Western powers face the dilemma of being too far behind China.

However, the Western powers will eventually catch up, and soon we will see a full-scale arms race for national digital currencies, vying for dominance. Some will be hindered by terrible IT and programmers, some will have dark designs, some will undermine security protocols and be hacked, but some will achieve good results, and failing nations will simply replicate the successes of others.

With new central bank digital currencies, nations will have the right to monitor your wallet comprehensively, tracking every transaction you make, every place you go, all of which can access your identity, history, and location data.

Ten years from now, you will no longer file taxes; every time you buy a second-hand toaster at a garage sale, it will be automatically deducted. If something goes wrong, you can call to contest it or have an accountant help you get a refund. And the government will lend you money for free for a year; this money will not even transfer from the central bank to private banking institutions; it will go directly into your pocket, and your money will know everything you have done.

Central bank digital currencies will arrive rapidly. Despite the original regulations in the crypto community opposing them, people will absolutely use these central bank digital currencies. In fact, they may even take pride in it.

4. The Nature of Trust and the Shortcomings of Decentralized Currency

Of course, people will only feel pride and happiness when the government operates well.

When things are going smoothly, the flaws in the system will not affect enough people to enter the public eye; only "bad people" will pay the price, but they may not be anyone ordinary citizens come into contact with. Thus, this system will mainly apply to the majority, who will not care about privacy because they are just buying diapers for their kids, books on Amazon, or coffee at the local store.

However, when the government has problems, as we saw in the Capitol riot in the U.S., their thoughts will change rapidly. A state-backed currency is only as trustworthy as the government that controls it; you must trust it, and to trust it, you must trust the people behind it.

You cannot view the system as a fixed concept.

America is not fixed. Behind every government agency is a group of people who have been operating it. IBM is a company, but companies are always changing because the people behind them are changing. Trust is based on who is in power and how they use that power.

Trust is constantly changing. Trust is often broken; just one instance of betrayal can shatter it forever. A man may be loyal to his wife for ten years, but in a moment of betrayal, trust is gone.

"The crux of traditional currency lies in the total trust required to make it work; you must trust that the central bank will not devalue the currency, but the history of fiat currency is filled with breaches of trust," wrote Satoshi Nakamoto in 2009.

When governments go mad, they now have the power to infect you with that madness. Want to move your hard-earned money to another country where someone less crazy is in charge? But you can't, because of currency controls; your money will be frozen, so spend it domestically or elsewhere.

Perhaps you think this is a good thing; shouldn't a nation-state have the power to control the flow of money in and out of the country? They are just trying to protect their citizens and economy from impact.

If you live in Iceland, the feeling may be different. Iceland implemented strict currency controls after the 2008 financial crisis, which lasted until 2017. This meant that everyone living there was merely fantasizing about owning their money, which they never truly possessed.

You couldn't buy property overseas, couldn't invest in Tesla stocks, and could only invest in local businesses, which were suffering, yielding minimal or even negative returns.

Of course, many in the crypto space believe that no rational person would choose a state-backed, surveilled currency over a decentralized privacy-preserving system.

The average person does not care about privacy; they do not know what privacy means. They have not considered living in a world completely exposed to the government.

They have never lived in East Berlin, where the Stasi could show up at your home at any moment and take you away for any reason; they have never lived in Venezuela, where the economy suddenly collapses, and buying bread costs a year's salary.

This is why they will quickly adopt any centralized digital currency imposed by their country; if the government simplifies it or mandates its use, or both, it will accelerate the digitization process.

In "Five Keys to the Development of Cryptographic Technology," I wrote that for decentralized cryptocurrencies to take off, not only is funding needed, but a complete ecosystem must be formed that allocates currency, automatically exchanges currency, and provides goods and services with that currency without needing to convert back to fiat. No one can create a super trading system that halts all currency transactions like a centralized trading system.

But instead, what the crypto community is doing today is merely making small iterations on Satoshi's vision, using newer, faster blockchains to make cryptocurrencies move faster. They have created privacy coins like Zcash and Monero. They have proposed new ways to upgrade blockchains without needing to fork.

But other than that, they are still the same.

Currently, there is not a single killer app that can only be purchased with cryptocurrency. Aside from airdrops, miners, and centralized exchanges, there are still no better ways to distribute tokens. These merely transplant the centralized distribution mechanisms of the old world into the new world. While decentralized trading platforms exist, you need cryptocurrency to use them and cannot exchange fiat currency there. The distribution mechanisms of cryptocurrencies reflect the top-down distribution mechanisms of central banks, with miners and exchanges replacing central banks and commercial banks.

We need a revolution in distribution, economics, and commerce to truly make decentralized currency take off. Currently, cryptocurrencies are at best a speculative asset that makes some people rich, and that's it. The experience remains frightening and confusing, with almost nothing usable, merely a test of the future of currency.

Centralized digital currencies have become a reality, and if we want to see privacy-preserving decentralized currencies, we must accelerate our pace and enhance our creativity; CBDCs are coming faster, and our time is running out.

5. This is the End of Everything

The death of a good friend this year made me reflect on the crypto user experience and what it means for all of us.

We entered the cryptocurrency space together many years ago; it was one of the foundations of our long-standing friendship. We agreed that if one of us died, the other would help their family find and sell all their cryptocurrencies.

As I sat down to authenticate with two keys associated with his soon-to-be-obsolete smartphone, I thought, "Who can do this for me? My money will disappear with me."

I completely trusted my friend. I would ensure his family received every cryptocurrency, and he would do the same for me. But it is not hard to imagine that some people are not careful with their cryptocurrencies. Fortunately, my friend made wise choices; others may not be so lucky. The terrible user experience is here; the pace of cryptocurrency development is not fast enough to connect with ordinary people.

For cryptocurrencies to truly become popular, they must be easy to use and easy to get started with. I mean "three clicks"; it should take just three clicks to set up a wallet for three weeks of remittances, then go to an exchange for KYC, and ensure you remember your password securely. That way, you won't lose all your money without customer service to help, like someone who may have permanently lost 7,002 bitcoins worth $220 million just because he forgot where he put the password paper.

While decentralized currency struggles to get off the ground, China is conducting shocking tests of its central bank digital currency platform. As Western countries lag behind, they are beginning to attack decentralized currencies, making privacy-preserving currencies harder to gain traction.

The U.S. Financial Crimes Enforcement Network is trying to rush through a new set of rules before handing the government over to new leadership. This regulation forces exchanges to retain names, phone numbers, and addresses every time someone makes a remittance over $3,000. Therefore, if a mother sends money to her daughter, the exchange must keep both their names in a highly secure government database that will never be hacked.

Even if Western countries lag behind China, they will catch up; they cannot afford not to chase because money is power, and this is not just the power of those who hold it. A millionaire or billionaire wields a lot of power, but their economic strength pales in comparison to that of a large economy.

Those who print money hold real power in the world; the power to mint coins rivals the power of gods, and nation-states know this better than anyone.

They now possess this power and do not want to lose it. To maintain this status, they must eliminate cash and remove the threat of decentralized currency.

Unfortunately, Satoshi may have given them the weapons they need to do so. Satoshi dreamed of creating a system that was uncontrollable, decentralized, and trustless, but in creating blockchain, he/she may have inadvertently endowed centralized powers with chains that bind us all together forever.