In the last few years, a new concept, “Expiring money”, has spread across the digital asset industry. It all started when Shenzhen’s Luohu district announced the distribution of 10 million digital yuan – 200 digital yuan ( USD 30) to around 50,000 people, and lucky winners could spend this amount at the designated shops in Luohu between Oct 12 and 18, 2020. A similar announcement happened in Shenzhen, where registered citizens would receive their money on Jan 11, 2021, and must spend it before Jan 17, 2021; otherwise, the funds will expire. Many experts started visualising a dystopian future with expiring currencies when this concept became famous worldwide as it had a lot of drawbacks. In this post, we will learn more about this concept and how it can impact the crypto industry.
What exactly is “Expiring Money”?
Expiring money is referred to an amount whose values become zero after a specific date or time. It is a potential monetary policy tool which can be made possible by digitalisation and can help accelerate people’s decision to spend money, making it a very effective means for stimulating consumption.
This monetary policy can also benefit the government and central banks while distributing aid to people during recession or events like calamities, or pandemics, where people tend to spend less.
Programmable money can be the new future
If you are even a little bit in the crypto or digital industry, you may know that features of programmable money are beyond expiration. Deutsche Bundesbank and 2021 US Federal Reserve’s Alexander Lee explained that digital assets or money could be easily programmed for a pre-defined purpose, including transfer, ownership and many more things at specific dates or times or during certain situations.
Due to the advancement of technology in recent years, it has become possible to program all the digital cash available on the internet for any purpose, such as to pay or charge interest on cash, set conditions for the transfer of money, automate purchases and many more things. It can also facilitate pay-per-use, for example, automated payment for rented items, and allow your smart machines to put orders and authorise payments when required, for instance, refrigerator ordering milk when running low.
Digital money can also be programmed to settle payments between systems that are exchanging currency. However, these types of payments would be executed based on the present condition handled under “smart contracts.” In other words, programmable money can allow you to reach many unexpected scenarios like the government applying fees on the use of electricity based on their usage.
Expiring digital money using programs
All the use cases or features of programmable money given above were interesting. However, the most fantastic quality of programmable money is its expiration. Yes, it is now possible to program digital money so that they expire under certain conditions.
Introducing the concept of expiring money correctly in the market would increase both the velocity of money and overall economic activity, similar to applying a negative interest rate on digital cash. If the case is of expiring money, the penalty for holding it for a long time will also be even more radical as it will keep its total value for a predetermined interval after issuance and would start to fall from then onwards.
For this type of money to come into action, the expiration mechanism should be designed so that the expiration time is the same for each holder, and the clock is set back to zero every time it is passed to new hands. This would give the new holders the full time to spend before it expires. An automated alert system will also be required to advise holders of the upcoming expiring dates.
Expiring money will also act differently than quantitative easing and indirectly on aggregate demand via portfolio rebalancing, as discussed by the Bank of England’s Gertjan Vlieghe. It would also greatly impact spending decisions directly by generating positive wealth effects. However, many experts can see a dystopian future with expiring currencies as this policy has certain drawbacks.
Drawbacks of expiring money
Every new technology has certain drawbacks which lead to its failure or downfall. The same is the case with the expiring money. One of the biggest problems with expiring money is its unacceptability in the exchange process, which would damage its status as legal tender and disempower it all together. However, it can be acceptable in some instances, like the lottery distribution where people don’t need to pay for the ticket, as seen in the China example above.
Another major drawback of expiring money is it will lose a critical function of money, i.e., storing value. It means that this money can only be used as a payment method. To be more precise, individuals would not be able to store value using it, but society can until there is a constant circulation of expiring money in the economy.
Lastly, as you know, expiring money will have an obligation for the issuer to spend it before the expiration date for any purpose. This will lead many people to lose value because they forget to spend their holding or check the expiration date. This would create a huge problem for those who lack financial knowledge or are not use-to to this type of instrument.
Pros of expiring money
As we learnt, without proper planning, a dystopian future with expiring currencies will be near. However, it can be beneficial if the government can solve all these issues and govern the instrument under stringent rules to prevent its misuse and abuse. One important thing it will do is to create more purchasing power and also transfer it to a particular person. This would increase the velocity of money and positively impact the market. Yet, adopting and using such an instrument should be limited to specific situations, like supporting the economy during a severe crisis.
What are your thoughts on programming expirable money? How will it impact society when used during an economic crisis? Let us know in the comments below. And if you found our content informative, share it with your family and friends.
Also Read: EU’s crypto rules are not sufficient for regulation.
