Central banks should issue a digital version of cash to prevent the trust in the monetary system disappearing, according to research and campaign group Positive Money.

The report suggested that a central bank digital currency (CBDC) could give policymakers more effective tools to support the economy and maintain financial stability, particularly during times of crisis such as the Coronavirus pandemic.

It proposed that a CBDC would be an electronic version of cash accessible to the general population through accounts at the central bank, representing a digital equivalent to public means of payment, such as the physical notes and coins that make up a fiat currency.

Currently notes and coins only make up three per cent of the UK’s money supply, with the remaining 97 per cent existing in the form of electronic bank deposits held by commercial banks.

As the report explained, public forms of money such as cash currently function as an ‘anchor’ which maintains trust in private bank money and the wider monetary system.

Cash usage in Britain has declined in recent years, with the latest figures from UK Finance showing notes and coins made up only 27.9 per cent of payments in 2018, a decrease of 11.8 per cent from the year before. If this trend continues, the report forecasts that cash will only make up nine per cent of transactions by 2028.

The decline of cash has accelerated during the COVID-19 pandemic, with usage dropping by around half in just a few days before lockdown measures were introduced.

If notes and coins continue to disappear, the monetary system could be left without this vital anchor, the report argued, which could have devastating effects on the economy.

The world’s major central banks, including the Bank of England, are accelerating research into CBDCs, spurred on by the development of private digital currencies such as Facebook’s Libra, which last week applied for a formal payments licence from the Swiss payments regulator FINMA.

Author of the report, economist Konstantin Bikas, said: “Money cannot exist without trust and neither can the monetary system - as a public form of money, cash provides the trusted foundation our whole economy relies on, and its rapid decline, especially in light of the COVID crisis, could lead to the whole system falling down.

“The need for a digital form of public money is heightened in times of crisis like today, as it would open the door for new ways to support the economy," he continued, adding: "A CBDC would make it much easier to help households through the pandemic directly with ‘QE for people’ or ‘helicopter money’, and would provide a more effective means of combating the looming recession.”

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