Financial Resilience in the Face of Disaster: From Buried Cheese to Digital Currencies
The Great Fire of London in 1666 saw Samuel Pepys burying his prized possessions, a stark reminder of the lengths people go to protect their assets during crises. Centuries later, the devastating wildfires in California echo this historical event, prompting reflection on the role of money in times of disaster, be it natural, man-made, or technological. While Pepys buried cheese and wine, today’s valuables often exist in digital form, raising new questions about financial security in a volatile world. The recent California wildfires highlighted the vulnerability of digital assets, with reports of individuals losing hardware wallets and cryptocurrency holdings due to the destruction of their homes. This begs the question: in a crisis, is being your own bank truly the safest option?
The allure of cryptocurrency as a safeguard against traditional financial system failures is tempered by its dependence on network connectivity. In a disaster scenario where networks are down, even if merchants accept Bitcoin, transactions become impossible. This raises the question of whether physical cash remains the most reliable option. However, a cash-based economy carries its own risks. Those most reliant on cash, often the less affluent, face higher transaction costs in normal times and potentially complete loss of funds in disasters. Examples like the Nigerian market fire, where traders lost their cash savings, or the Chinese pensioner whose buried cash was destroyed by insects, illustrate the fragility of physical currency.
Determining the optimal form of money during a crisis is complex and context-dependent. While cash might seem like the obvious answer, experiences from disasters like the 2011 tsunami in Japan tell a different story. Japan’s sophisticated electronic payment system, including offline options, proved resilient, while those who relied on cash suffered losses as their homes and safes were swept away. Similarly, during the 2022 floods in China, drone-deployed mobile base stations and satellite technology ensured the continuation of digital transactions. These examples suggest that electronic payments, when properly designed and supported, can be more resilient than cash in certain disaster scenarios.
The increasing reliance on digital identity further complicates the equation. Losing a passport or driver’s license can be far more disruptive than losing cash or cards, as it hinders access to essential services and travel. This underscores the need for resilient digital identity systems that can withstand disruptions and ensure continuity of identity verification. This adds another layer to the discussion of financial security in a digital age, highlighting the importance of considering not just monetary assets but also the digital infrastructure that underpins them.
The resurgence of geopolitical tensions, such as the potential for conflict in Europe, has reignited the debate about the role of cash in national resilience. Concerns about cyberattacks and physical disruptions have led some to advocate for holding cash reserves. However, expert opinions, such as that of Hans Liwång, a professor at the Swedish Defence University, highlight the lack of concrete evidence supporting the superiority of cash over electronic payments in modern conflicts. He points to Ukraine’s reliance on digital systems during ongoing conflict as a testament to the resilience and adaptability of digital finance in times of crisis.
The key takeaway from these diverse disaster scenarios is not to revert to a solely cash-based system but to develop robust offline payment mechanisms. A well-designed central bank digital currency (CBDC) offers a potential solution. A truly resilient CBDC must function independently of network connectivity, allowing for transactions even during outages, cyberattacks, or extended power failures. The Chinese digital currency provides a working example of this concept, enabling payments and transfers via secure microchips in devices or smart cards, even offline. This approach ensures financial access even in the most challenging circumstances. The ultimate goal is to reach a point where, in the event of a disaster, one need not bury their valuables but can simply grab their mobile phone and evacuate, knowing their financial access remains secure.
