A society without paper money could be a less equitable society. Those without digital connectivity would suffer.
In Sweden, cash in circulation accounts for only 1% of the country’s gross domestic product, and some experts predict that the nation will be „completely out of cash“ by 2023. In China’s largest cities, more than 90% of the population uses WeChat Pay and Alipay as their main method of payment, with cash a distant second.
It may seem that the transition to a world without paper notes and metal coins is inevitable, but this week a survey reminded us that reports of the death of cash can be greatly exaggerated. Genesis Mining’s study, entitled „Perceptions and Understanding of Money 2020“, reports that 60% of Americans oppose the idea of paper money being replaced by digital money. „Americans are not enthusiastic about the idea of stopping using paper money permanently,“ said Genesis CEO Marco Streng.
How do you explain this outcome if the march towards a cashless global society (i.e. where cash is not a generally accepted means of payment) is inexorable, as some – including Jonas Hedman, a professor in the Digitization Department of the Copenhagen Business School – have postulated?
„There are several reasons for this,“ Hedman told Cointelegraph, including „lack of confidence in central government and poor payment infrastructure at the national level [in the US].“ Richard Holden, professor of economics at the University of New South Wales, told Cointelegraph: „The ‚dollar‘ is an icon in a way that other currencies – perhaps with the exception of sterling – are not.
Cash can stay for a while
But perhaps the United States is not just an outlier, and there are serious reasons why „cash shortages“ may not explode overnight. A digital-only dollar could be perceived „as a foray into individual privacy and freedoms,“ Vinay Prabhakar, vice president of product marketing for Volante Technologies, a provider of financial solutions, told Cointelegraph.
A cashless society can also discriminate against the poor, as Vlad Totia, a payment analyst with the analysis and consulting firm GlobalData, told Cointelegraph: „A digital society requires that people have at least one device and an internet connection to manage their personal finances. But many in the US and other countries still don’t have this access, so eliminating cash risks further disenfranchises less advantaged members of society, exacerbating income inequality.
There can also be psychological barriers, Holden said: „People have been using cash for a long time, and it has taken a change in mentality to move away from cash altogether. But many young people literally cannot imagine a pre-iPhone world.
The advanced economies of the world would benefit significantly if they ran out of cash, Holden continued. Digital payment plans could reduce tax evasion and the illegal transactions that often take place in cash. Holden said: „Cash is clumsy in many ways: it is slow during transactions, and handling cash is time-consuming and expensive for businesses.
Hedman has conducted research to show that Sweden is on track to become the first cashless society by March 2023, but that research was done before the coronavirus pandemic. Has your timeline changed? „The disappearance of cash will come much sooner,“ Hedman told Cointelegraph. „Cash use has declined significantly over the life of the Crown.
Totia agreed that the COVID-19 has given a boost to the „Cashless“ trend. „Closures, temporary business closures, people not leaving their homes, ordering groceries from home. […] All these aspects have pushed people to use more online banking and payment methods because you simply can’t use much cash these days.“
There is also a hygiene aspect. A 2017 study in which researchers analyzed $1 notes that had been circulating in New York City concluded that „money could potentially mediate the interpersonal transfer of microbes. People don’t want to be touching notes that have been circulating in many hands during a coronavirus pandemic, Totia said, adding
„He added, „However, the biggest increase in users has been people who were too reluctant, comfortable, old or too used to paying in cash. These newcomers have basically been forced to use a more convenient and easy payment method … and they will most likely continue to use these services after the COVID-19 has passed.
„Cash can easily be lost“.
Prabhakar told Cointelegraph that digital payments are inherently more secure than cash, which can be lost and counterfeited, and that recovery is almost impossible: „Most digital transactions offer several levels of security and repudiability, for example, the ability to contest a credit card charge, with which cash cannot compete.
There is also the issue of traceability: major cashless transactions carry essential information about the participants in the payment, including what was purchased and when the transaction took place. „This makes money laundering and tax evasion much more difficult,“ Prabhakar added.
Digital payments are possibly more environmentally friendly. „Cash and metal coins consume precious natural resources, some of which are non-renewable and only to a certain extent recyclable: paper, copper, zinc, nickel, among others,“ Prabhakar said. „In fact, the cost of production in two denominations – nickel and pennies – exceeds their face value. Digital transactions have comparatively no environmental impact.
Advocates of digital payments also argue that time is money, so faster payments should boost overall economic activity. According to Totia: „Cashless, mobile or QR code payments are much faster than cash payments. For a cafe or a street food van, time is of the essence during rush hour when long queues of customers are served. Saving even a couple of seconds per customer results in more sales at the end of the day. Apply this to all small and medium sized businesses in a given country and you will have more economic activity.
Hedman’s study of 750 Swedish retailers found that when cash transactions are less than 7% of total payment transactions, the cost of managing cash is greater than any profit made on cash sales. „When this happens, economically rational retail management should stop accepting cash.
A circumstance „conducive to dystopian exploitation“?
But surely there are also disadvantages. „Many of the disadvantages or dangers of cashless payments derive from the same source as their benefits,“ Prabhakar said. Traceability can make it harder for criminals to conduct their business, but it can also be detrimental to honest citizens who have good reasons for keeping transactions private, he said:
„By paying for certain types of drugs – for example, birth control pills – with cash, the payer can be sure that even though his pharmacy or doctor knows about the purchase, his credit card company or mobile phone provider does not. A centrally controlled digital currency would mean that the government would have access to all transactions made by everyone in the country, a situation conducive to dystopian exploitation.
In addition, while a digital money economy can reduce fraud as a whole, it could introduce new risks of fraud in the short term that could cause widespread unrest. „Until the bulk of people using a new technology learn about how it works, fraudsters will focus on the weakest points that come with a new application or device,“ said Totia. „Fraud will not necessarily be more common or less common, it will be different and in the short term.
Will a lack of cash really deter crime?
Many accept at first glance the proposition that a cashless society would be a less criminal society. Friedrich Schneider, Professor Emeritus at the Johannes Kepler University in Austria, has done extensive research on this issue. His findings have shown that anonymous cash facilitates tax evasion, especially for those who cannot afford to move funds abroad, but is not the main reason for tax evasion and is therefore unlikely to eliminate it.
The same applies to crime and the black market economy. In making simulations, Schneider found that if cash were completely eliminated, the black market economy would only be reduced by 20.1%. Regarding his research, Schneider told Cointelegraph: „The main scientific result is that cash is NOT the reason why people work on the black market and/or commit crimes.
Asked whether not having cash could reduce crimes such as money laundering, Bernardo Batiz-Lazo, professor of the history of technology and global commerce at the University of Northumbria, told Cointelegraph that it was unlikely:
„As has been demonstrated in India, it is naive to think that corruption and money laundering will end through digital media. If anything, libertarian-style crypto-currencies like Bitcoin Investor are more susceptible to these activities.
Hitting the most vulnerable in society?
Perhaps a more worrying concern is that a society without cash could be a less equitable society. Martin Chorzempa, a researcher at the Peterson Institute for International Economics, told Cointelegraph: „The elderly, the undocumented and other more vulnerable members of society would face immense challenges if paper money were to be completely eliminated, as Sweden has discovered. Meanwhile, Totia believes that the risk of the lower classes being economically excluded is „the only big disadvantage I see“ with the elimination of cash.
Batiz-Lazo noted that „the COVID-19 pandemic could have increased demand for cash by people in the lower income brackets and those living in rural areas,“ and sees the danger in „attempts to rush the UK economy to rely solely on contactless and digital payments. Prabhakar is concerned that a cashless society could exacerbate income inequality, harming socio-economically disadvantaged minorities, workers in service industries – who are often paid in cash – and others who „have neither access to the banking system nor the technological tools to participate fully in a cashless economy.
Will Sweden lead the way?
Even so, the movement towards the abolition of paper money seems to be accelerating, as well as speculation about which country will achieve it first. Totia stated: „Sweden has many policies focused on moving the country to a cashless economy, and this could make it the first. However, he also pointed out that Finland also has a chance, especially considering that it has a smaller population. Totia’s top three, in order, are Finland, Sweden and China:
„China is more complicated due to the fact that it has 1.4 billion people, yet QR code payments are very popular, even in the most remote rural areas. Other strong candidates to go cashless in the coming years are South Korea, Norway and perhaps the UK“.
„China or Sweden seem to me the most likely alternatives,“ Holden said. „If Singapore wanted to do it, I believe they could do it very quickly given their advanced payment system, relatively small size and strong central government. Meanwhile, Prabhakar believes that: „In Asia, South Korea is a competitor, with 95% smartphone penetration and the fastest broadband in the world facilitating the adoption of digital payments.
Government support may be needed
In short, any global movement to abolish paper money is bound to stop, with starts and stops. The COVID-19 has accelerated the process, attracting many new users of digital payments. Still, some government intervention or support in the form of subsidies may be needed to address the inequalities that a cashless society can bring. „There is a great risk that people who are not technology experts or who simply do not have the funds to buy and maintain a smartphone will remain essentially outside the active economy,“ according to Totia.
Cointelegraph asked Hedman if he still believes that a global cash shortage is inevitable, as he stated before the pandemic began. „Yes, in time it is inevitable,“ he responded, „but in contexts where government is not trusted there will always be situations for decentralised solutions – cash. But fundamentally it will be a consumer choice whether to pay with cash or not.