Could this be the death of cash?

When the World Health Organisation warned the public of the transmission risks associated with touching cash, organizations such as the European Banking Authority followed with swift instructions that contactless payments should be stepped up.

Both a lock-down induced surge in e-commerce activity and a lasting residue of germ-concern, means this deadly virus could be hastening the death of cash.

The benefits to society of going cashless

Most governments, particularly in the developed West, appear quietly ambivalent on the matter of ‘going cashless’. Neither blocking it, nor actively owning the innovation strategy to make it a reality.

While some bricks and mortar stores have long opined the benefits of going digital—namely no risks or costs of holding cash on premises—the benefits to governments include:  

• saving money and time in the real economy
• reducing the laundering of notes for organized crime and terrorism
• cutting the cost of cash infrastructure
• driving up tax takings lost in the cash-in-hand economy

Tax losses were estimated to be as much as  £8 billion to the UK Treasury in 2012. So we might imagine more governments would be in a greater hurry to phase out cash. Particularly given the rapid evolution of technology which would allow for it.

Some economists also argue that governments will be able to manage monetary policy more effectively during periods of economic stress without also having to manage physical cash flow—and the risk of bank runs—in tough times.

But as Professor of politics, culture and consumption, history department at Indiana University, Rebecca Spang points out, money, and the form it takes, is as much a matter of political constraints as it is of technological possibility or technocratic desire.

And politics—whether geo or domestic—complicates the picture. For example only a month before the UK went into lockdown, Chancellor of The Exchequer, Rishi Sunak, was reported to have said that the treasury was looking into laws which would prevent the ‘death of cash’ in order to protect vulnerable pockets of UK society who depended on it.

The Access to Cash Review UK from 2019, suggests that 25 million people in the UK would struggle without the ability to use notes and coins. Then there are those who’d rather not give up their tax-free exchanges.

The digital currency disruptors

We don’t need to go back into the far reaches of history to see how pandemics affect the way societies live, eat, pay.

The SARs outbreak in 2003 was a clear catalyst for the emergence of China’s now world-leading digital payments and e-commerce players, according to the World Economic Forum and the Peterson Institute for International Economics. Taobao, JD.com and Alipay, to name only a few, started up then. At the time China responded as effectively as it did thanks to its ‘Golden Projects’ (China’s systematic approach to accelerate the state’s IT infrastructure).

Once more China looks to be on the frontfoot. Now, like Sweden, China is piloting its own digital sovereign currency. The roll-out of the e-renminbi (RMB) stepped-up pace recently when it was formally adopted by the monetary systems of Chinese cities including Shenzhen, Suzhou, Chengdu (a new area south of Beijing) and Xiong’an, involving global brands such as McDonalds, Subway and Starbucks.

In Europe, the year-long pilot of Sweden’s e-krona uses distributed ledger technology designed by the Riksbank and Accenture.

Compare that with the findings of the International Journal of Central Banking survey in February 2020 which revealed that "46 countries were considering creating a CBDC" but there were no plans from any to forge ahead.

What a difference a few months makes. There is now a palpable shift in the mindset of sovereign states and central banks.

The US Congress met recently for their first hearing devoted solely to the digital dollar, in which they began discussions around possible infrastructure and potential benefits. A big step for the US. With China forging ahead with its own e-currency, the US knows it needs to take steps to innovate. Whether the digital dollar becomes the bedrock of its financial transformation, only time will tell.

How the rise of digital currencies could affect political and financial stability

However precarious both political and financial stability may have felt before the Coronavirus took hold, particularly in a Brexit-beleaguered Europe, the rules have changed. Paradoxically it is perhaps a worsening of instability which will spur the leap into widespread cashlessness. That and the sheer force of necessity.

Examining how COVID-19 may accelerate the arrival of digital sovereign currencies, The Fintech Times states:

"The financial stability concerns related to CBDC (mainly substitution from bank deposits into CBDC) will therefore be even more pressing. At the same time, so will be calls to insulate payment systems from pressures in the lending parts of the financial system"

The Fintech Times also suggest that due to the very comprehensive crisis-management needed as a result of the virus, the role of government is likely to increase. The freest of free market economies are seeing a sudden growth in the state. This, they argue, may make it easier for central banks to obtain the necessary political mandate to introduce a digital currency.

The Digital Currency Conundrum

There’s no doubt that a move away from cash risks undermining sovereign currencies. A world of digital transactions could see a shift to privately owned cryptocurrency, especially when central banks do not provide an e-alternative. It could also see fiat money become unstable for central banks.

The Bank for International Settlements emphasised in April 2020 that ‘to bolster trust in cash, central banks are actively urging continued acceptance of cash and, in some instances, sterilising or quarantining banknotes.’

Eradicating cash entirely has felt like an unhelpful scenario for nervous governments. "One reason why Libra has taken so much flack in Washington DC is the fear that it would one day dethrone the dollar," stated The Economist’s World in 2020.

Governments know that savvy businesses and individuals will seek out speedy and frictionless digital payment methods, while the settlement and transfer of fiat currency looks increasingly time-consuming and expensive.

Meanwhile, the obvious hedge—to forge ahead with creating Central Bank Digital Currencies (CBDCs)—has been viewed as risky for financial stability.

CBDCs and public trust

Governments moving towards cashless societies, while introducing CBDCs and citizen e-wallets, will also need to consider the ‘big brother’ arguments and how they can avoid a loss of public trust.

While the pandemic period seems to have seen a relaxing of public standards on issues such as data privacy, those core principles of liberal democracies should and will return. This means that fears expressed by the financial media—which centre around the punitive control that authoritarian governments might have over their digital wallet-holding citizens—will have to be addressed head on.

A purposeful and planned shift can benefit vulnerable communities

Standard & Poors (S&P) propose several ways in which COVID-19 is swiftly strengthening the case for CBDCs, including:

• the ability to distribute money to unbanked populations
• future proofing communities against the pandemic waves

Pointing to the slow clunkiness of government initiatives which promised the distribution of money to struggling individuals or companies during the pandemic, S&P present CBDCs as a way for governments to ensure they do a better job next time.

In 2019 the Access to Cash Review UK shone a spotlight on Sweden as an example of the dangers of ‘sleepwalking into a cashless society’. While we tend to hold Sweden's every move up as a shining example of scandinavian utopianism, the report warns that Sweden still falls short in providing effective means for rural communities who lack the necessary digital infrastructure. Or for victims of domestic abuse who can more easily hide physical cash than digital when a partner has taken control of all passwords and accounts.

However, once the necessary tech and infrastructure are in place, digital money has been proven to work in poor and isolated communities. Alternative mobile banking service M-Pesa, launched in Kenya in 2007, being a case in point of financial inclusion.

The faster the pace, the greater the need for a future-proofed plan

“We’ve seen a multi-year acceleration of the world going digital over the course of a few weeks” said Visa Senior Vice President and Global Head of FinTech, Terry Angelos, in a recent PYMNTS interview.Yet the creation of digital sovereign currencies takes time and involves many complex decisions, as recently cautioned by the Bank of England. It is estimated that a ‘quick turnaround’ would take no less than three years. Alex Axelrod, CEO of Aximetria, writing in Finextra, frames the challenges beyond questions of pure monetary policy: "Central banks should become technology companies. This is a serious challenge."

But the opportunity for head of governments to ride the wave of change is now. Confronting the lived reality for merchants and citizens alike under the influences of COVID-culture, they can lay the groundwork for what happens next, planning for a cashless society with socially and technologically visionary, progressive and innovative thinking.

Discover how we can help you with your digital payments across the world