Digital currencies usage, and the one important condition

The potential benefits and challenges of using digital currency show that the role of central banks is critical. The worldwide politics are not ready yet to welcome this new era, but why is this happening?

   In modern monetary economies, the effectiveness of money in performing transactions is lowered by the volume of our needs. We cannot print banknotes and use coins on each transaction, as our payments exceed the physical borders.

   We now experience one more evolution of money. A type of money based on digital technology and issued by the institution in charge of managing public money. This is the central bank of each country, and the central bank of greater unions, such as the United States and the European Union. The multiple agents of the economy, the state authorities, households, and the firms, are connected with the central bank and the private institutions (mainly commercial banks), so all together can exchange values instantly.

   This fiat monetary system is already characterized by the use of digital mediums. We do not need to withdraw our salary from ATMs, but instead, we pay our bills through online payment systems. Therefore, we already use digital currencies. Money is not backed by a physical asset such as gold or silver. This means that we can generate more money through loans. Once we get more money, we generate more wealth, and we pay back the interest of older loans.

   This banking system creates and lends too much money already, and the gap between the money it has created (deposits), and the most liquid part of its assets (central bank reserves and government securities) widens. It is worth noting that if a large number of depositors simultaneously ask the bank to withdraw (or transfer) their deposits, the bank will find it difficult to raise reserves by selling its illiquid financial assets, or will be able to do so, but only at a price below their fair value (illiquidity risk).

   This circle of money has a huge drawback. We cannot always generate money without any limits. Hence, in the case of digitalizing everything, what will happen to those who do not have any income?