Is the end of cash near?


Wednesday, March 21, 2018

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Cash has been around for about 4,000 years in one form or another but several recent developments suggest its days might be numbered.

The central banks of China, the UK and Canada, to name just a few, have been investigating the possibility of creating digital currencies. Meanwhile, the European Central Bank has decided to phase out the €500 note, leading to speculation that other high denomination notes may eventually follow.

There are certainly signs that many top policymakers are becoming more open to the idea of a cash-free society. Notes and coins won't disappear any time soon but we can definitely expect changes to monetary systems in the future.

Technological advances have been demonstrating other potential advantages to digital currencies. The rise of Bitcoin and its blockchain technology – a distributed ledger of the payment history of every unit in circulation – has impressed many policymakers. The People's Bank of China, for example, which is aiming to roll out a digital currency of its own soon, has argued that such systems can improve the efficiency of transactions and cut costs.

Issuing digital currency would be far cheaper than printing and distributing notes and coins, and would enable nations to more accurately track developments in the economy – including inflation and GDP.

At the retail level too, technology has been driving down the market share of cash. The near ubiquity of smartphones and popular financial applications – such as Google Wallet and Apple Pay has made a growing share of the population more comfortable with electronic payments. Even small retailers and sole traders can now take card payments via small devices attached to smartphones. In 2016 cash was overtaken by other payment methods for the first time in the UK according to the Payments Council.

Many other nations are far further down the road to marginalising cash.

In Sweden a growing number of businesses have stopped taking cash altogether. Bills and coins account now for only three per cent of Sweden's GDP, versus an average of nine per cent in the Eurozone and seven per cent in the US, according to data from the Bank for International Settlements.

Meanwhile in 2015 the Danish parliament proposed a law allowing stores to refuse to accept cash payments – a move supported by the nation's chamber of commerce. The Danish government has even set the goal of eliminating cash altogether by 2030.

The latest statistics in several countries have also underlined the concern that cash is mainly being used to hoard cash – or worse, in black market transactions. The main use of large denomination notes is for tax evasion or criminal enterprises such as drug dealing. It is fairly routine for plumbers or builders to offer lower prices if they are paid in cash. It is no coincidence that there was a particularly big jump in the demand for cash shortly after the last time that VAT was increased. The €500 bill was even dubbed the 'Bin Laden' note, reflecting its popularity as a medium for illicit transactions.

By contrast, a digital currency has the advantage that transactions can be traced, which could inhibit tax evasion, money laundering, corruption and terrorist financing.

There is even research showing a reduction in street crime. University of Missouri criminologist Richard Wright documented a 10 per cent reduction in the crime rate in Missouri in the late 1990s after the government started transferring social welfare benefits electronically, rather than via cashable checks.

While the case against cash is compelling for many experts, the debate has also raised several concerns. Some fear that the elderly could be inconvenienced. The Swedish National Pensioners' Organisation has pointed out that retirees are often less accustomed to using plastic or smartphones to make payments. They have urged their anti-cash government to 'take things slowly'.

A more widespread concern is that a digital currency would hand too much power to government and compromise civil liberties. Already the marginalisation of cash has made it easier for government agencies to curtail the financial activity not just of illicit activities, but also ones that the officials consider morally questionable. Supporters of cash believe that such powers, and the potential for abuse, would increase with full digitisation. Those who aren't so afraid of the government worry that their finances will be increasingly vulnerable to cyberattacks from criminals.

To enhance protection for consumers from identity theft and exploitation from hackers, banks could provide anonymous debit cards. The bank would know who you were, and so could trace you if your card was involved in any criminal activity. But the vendor and anyone who hacked their computer system would not.

A cashless society in the Caribbean would be economically challenging. Across the region there are a large numbers of people who are unbanked and underbanked who depend on cash, and would suffer.

Whilst measures to reduce cash in the Caribbean are unlikely to affect directly hotels or the formal tourism sector which tends to rely on electronic transactions -- taxi drivers, waiting staff, water sports providers, vendors and others in the economy who depend on cash would be marginalised.

In August 2017, a Deputy Governor of The Bank of Jamaica indicated in a speech that the central bank must create opportunities for the exploitation of certain technologies including cryptocurrency. He informed that such technologies should not pose undue risk to the Jamaican financial system and that an internal group has been working to build awareness of these technological developments across the world.

“They (the group) are also guiding regional efforts. In this particular development (use of cryptocurrencies), whatever we do in Jamaica will have a ripple effect across the region, certainly if the benefits are to be fully accessed,” he said

Despite the many benefits of a purely digital monetary system, it may still take a long time before cash finally fades away.

Horace Gyles is the founding partner of HBG Associates Chartered Accounts, specialising in the small and medium size business sector.

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