18 February 2016

A cashless society? Be careful what you wish for


Cash is being rapidly dethroned as increasing numbers of countries focus on digitalizing their economies. Scandinavian countries are leading the way – with Denmark seeking to be cashless by 2030. Denmark’s central bank has already stopped manufacturing physical money and around a third of the nation’s population already uses Danske Bank’s mobile payment system. Even Copenhagen’s mobile street food vendors are readily accepting contactless payments. In Sweden, 95% of the country’s retail transactions are digital, banks are ceasing to hold cash and redundant ATMs are being removed from the streets. Global tech giants such as Apple and Google are making single ‘tap’ payments ubiquitous. Whilst authorities have been quick to laud the benefits of a cashless society, this convenience is not without its dangers – constant surveillance and massive personal data collection and storage, as well as complete dependence on government imposed fiscal policy.

One benefit of digitized currencies is their relative cost effectiveness in comparison to cash, which is expensive to produce, maintain and handle. It costs twice the coins’ monetary value to produce American cents and nickels, leading a McKinsey survey to conclude digitizing the US currency would increase the nation’s GDP by almost 0.5%. Significant costs are accrued in secure transportation and handling – influencing the Danish government’s view that cash imposes too many ‘administrative and financial burdens’ on retail businesses.

Already suspicion surrounds requests for cash-in-hand payment, now associated with tax avoidance and criminality. A world without cash would see reduced tax avoidance and minimized underground markets, especially useful in countries like Greece where tax evasion is endemic. Cash has always fuelled Black Markets (although the equally anonymous yet digital Bitcoin did have its reputation tarnished following its use as the payment method for Silk Road, an online darknet platform for purchasing narcotics, which was shut down by the FBI in 2013) so the eradication of cash would reduce this type of crime. However, as one area of financial crime diminishes, significant increases in cyber crime and identity theft occur. A stolen £20 note carries no personal information, whereas breaches of digital accounts not only provide access to funds but also a host of personal details. Losing physical cash is annoying, but losing identity information could be devastating; whole accounts wiped and details used to open fraudulent bank accounts and to apply for credit. Sweden provides a good example of the crime problems faced in an almost cashless economy – in the past 10 years card fraud cases have doubled, and between 2000 and 2011 instances of digital monetary fraud increased six fold. Practically no digital server is incorruptible or immune to hacking, and it would be worryingly naive to think the reduction of physical financial crime would necessarily outweigh the dangers of digital crime.

You do not need to be in possession of aggressively Libertarian views to recognize that a cashless society requires the relinquishing of freedom. A cashless society could be almost Orwellian with regard to the control a government would possess over its population. Denmark’s goal is a central bank responsible for all current accounts, with any international bank branches drawing funds from this central bank rather than individual depositors. Whilst in stable, democratic nations it is hard to imagine a situation where this control is leveraged by the government to manipulate the population, such as limiting access to funds in the face of strikes, in corrupt and dictatorial regimes, ultimate governmental control over access to funds could be especially dangerous – whole currencies could be invalidated, payments declined, funds frozen. An electricity outage, either deliberate or unavoidable, could immobilize the funds of a whole population.

A cashless economy would also place the population’s deposits at the total mercy of fiscal policymakers. The list of nations with negative interest rates for financial institutions is ever growing – with the Bank of Japan introducing negative rates last week. This penalty for holding cash overnight will trickle down, until depositors of both high and low value are affected. With $2trn of bonds trading globally with negative interest, some investors have begun to liquidate portions of their investments – including a selection of Swiss pension funds that have moved the majority of their investments into cash. Having an entire nation’s accounts in a single, central institution would provide authorities with total control over the public’s economic behaviour. Whilst this is beneficial from an economist’s point of view – countries could more effectively control economic fluctuations – few people are wholly comfortable with the prospect of their money being subjected to negative rates as and when the government wants to stimulate spending and increase the ‘velocity of money’. When saving is preferable, negative interest would be dropped and perhaps even transaction taxes implemented. Jim Leaviss, Head of Retail Fixed Interest for M&G’s mutual fund range, and an advocate of a cashless society, claimed ‘such an approach would be a far more effective way to dampen an overheated economy than today’s blunt tool of a rise in the central bank’s official interest rate’. It may be more sensible from a purely economic view, but human populations rarely behave or think as economists do – and any implementation of this policy would, and should, be greeted with scepticism.

Ultimately we are the victims of our own demand for convenience. Digital currencies are not being forced upon us; we have an insatiable demand for quicker, more convenient payments and services. An economy untethered from physical cash would be initially beneficial for all, but is it worth allowing governments to gather startling quantities of personal data, forcefully directing our financial habits, and potentially making a nation’s bank accounts vulnerable to fraud? Does the convenience and ease of a digital currency, from the point of the public, really outweigh everything we would have to sacrifice? I suspect not.

Olivia Townsend is a graduate in History from the University of Oxford, providing fresh perspectives on current trends and issues.