Currency markets have been roiled by the debt crisis in several European countries, leading many to think that one or more country could leave the Euro-zone within the next few years. This has led many to wonder how to print new currency but there may be a way to handle such a change without printing a single currency piece: by going down the route of a digital currency, some of the countries which are thinking about leaving the Euro could find themselves pioneers in the next evolution of currency.

What is digital currency?

At its core, digital currency is a type of currency that only exists electronically. It is not traded as coins or paper but rather as electronic exchanges on computers and computer networks.

Since the early 1990s, a wide mix of libertarian and cypherpunk thinkers have been trying to figure out a way to make an electronic version of cash, complete with its anonymity and liquidity features available. While the anonymity part had, for the most part, been resolved by the early 1990s (cryptographer David Chaum, who founded Digicash, the pioneer in the field, had research papers on those aspects as early as the late 1980s and had implemented the core basis of an anonymous currency by the very early 1990s), the challenge for digital currency has been one of transaction volume.

With some small changes, systems that were originally planned for all-digital currencies were eventually adapted to support existing legacy currencies like dollars and euros, leading to the rise of companies like Paypal, with a centralized clearing system not dissimilar to those in more traditional payment systems like Honk Kong’s Felica-based Octopus smart card payment system, which is probably the most successful implementation of a store-and-forward payment system in the world.

Similarly, in the US and Europe, recent deployment of store-value cards and NFC technologies have established a potential infrastructure for building out a possible way to eliminate physical cash over the long run. Over the last decade, the rise of internet payments, electronic deposits, and electronic debits has lowered the reliance individuals and corporations have had on paper checks, leading to a substantial drop in the amount of business done around check-related product lines. It is assumed by many in the financial industry that checks are on their last legs.

So what about cash?

Cash has a very long history and seems to have gone from one technological revolution to the other without being drastically impacted. In fact, a history of cash seems to point to cash being closer to a concept that can attach itself like a remora to the latest technology. So while coins used to be the only way to transact cash prior to the invention of the printing press, cash eventually came through the first information revolution stronger as currency became something printed on bills and thus became easier to carry around.

With the advent of the telegraph system, cash started being delivered more as a concept, using a store and forward approach whereas one could go to a telegraph office and send a promissory note over the air. The sender would pay the telegraph operator and the telegraph operator would then work out credits and debits between the different offices, only moving physical cash when actually needed. The same concept basically moved from telegraph to telephone to fax machines to the internet and now to mobile phones. Different modes of distributions but fundamentally the same concept.

The introduction prepaid cards (also known as stored-value cards) in the last decade has made it possible to move cash into a fairly anonymous plastic container that can then be used to make payments wherever the currency it has been filled with is accepted. With players like Visa and Mastercard in the game, it is easy to find networks that support such offerings.

Back to the Euro crisis

For countries in the Euro-zone, there is now a choice: either agree to a more centralized management of their economy from the European Union or decide to strike out on their own.

The former would lead those countries to become more like states in the United States, where they have some level of autonomy but also must ensure alignment with a larger federal entity. The net result, in the long run, for the countries that decide to go down that route, is that they will help forge a United States of Europe, with closer cooperation and eventually a concept similar to federation making its way through that union (I’d put the probability of this happening as fairly high within the next 25 years)

The latter is a more interesting case, from a technological standpoint, because it would mean figuring out how to fill the gap and this is where a digital currency makes sense. If you look at the USA, which came of age in a time when paper currency had become common-place, the vast majority of the cash being trafficked is through bills in denominations as low as $1 (there are $1 coins but they are not very commonly used.) By comparisons, Euros and other European currencies do not have a bill for a single unit of currency and still hang on to coins for that purpose: this is due to the psychological concept of money of more tangible and since the lower end of currency is handled more often, people may want to feel it in their hands.

So what if a country that decided on building (or rebuilding) a currency from the ground up were to do so in today’s day and age?

First of all, we are dealing with a world where electronic payment systems have become more common, with ATM and credit card readers reaching near ubiquity in everyday commerce. At the same time, we are dealing with a world where mobile phones are becoming something that everyone carries. Looking at those factors, is it too much of a leap to imagine a world where a currency could be added and subtracted from phones or pre-paid cards. Why would one need physical cash in today’s world? Are there use cases where the legal transfer of money from an individual to a company and vice-versa could not exist in an all-electronic world?

I’d warrant that no. There is no reason why cash needs to remain a physical component. For starters, the government could distribute e-wallets to any of its constituents relatively cheaply (today, the cost of a pre-paid card with no value on it would be measure in cents in the US) through bank networks. Some ATM might have to be retrofitted reloading of cards but that would be about it (they can already read the cards today). And with just such a move, a whole country would have moved from a physical currency to a digital one.

So the question now remains as to which country will be bold enough to make that first move. To go electronic would probably be substantially cheaper than any other alternatives a country would have to consider if it decides to create or relaunch a currency… and that’s why this option should be the top on the implemetation table for countries that are leaning in that direction.

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