The cashless society

If you readthe Financial Times, the Wall Street Journal, the Washington Post or some ofthe world’s other heavyweight newspapers, you may have seen in recent months,articles discussing the abolition of currency.

However,little if anything has been said about the negative consequences this startlingpossibility could have for all developing economies or the myriad smallenterprises and individuals that live in them and who provide services of allkinds for cash.

A cashlesssociety is an idea that has increasing support among senior figures ininternational financial institutions, central bankers, security agencies, andmany of the governments in the world’s wealthiest nations.

They suggestthat the process should begin first by first phasing out paper currency,starting with large-denomination bills such as the Euro 500 banknote and theUS$ 100 bill.

The thinkingbehind this is that major economies should eventually replace actual currencywith electronic money in the form of card payments, electronic wallets onmobile phones, and on-line transactions.

Those whobelieve that the future is cashless do so for a number of reasons

Firstly,they believe that it will address criminality. According to the FinancialAction Task Force, the Paris based group which is deeply engaged in anti-moneylaundering issues in the Caribbean, criminals prefer high value bank notesbecause they are easier to transport across borders without detection.

Secondly,supporters of the idea believe that it will increase the ability of governmentsto halt tax evasion and will optimise their tax take and ability to providesocial services; the idea being that electronic transfers will enableend-to-end traceability of income and expenditure, information on whereindividual or business income originates and goes to, and how our money isspent or utilised.

Thirdly itis said that it would enable states to track and even destroy money being movedor used for the purposes of terrorism or by organised crime.

And fourthlyit is suggested that a cashless society would address a number of technicalfinancial management issues such as the increasing introduction of negativeinterest rates on deposits, for example in countries like Switzerland andSweden, and the consequent flight of deposits into cash.

In addition,a related approach, recently explored in an interesting if sometimes technicalspeech by the Deputy Governor of the Bank of England, Ben Broadbent, is theidea that Central Banks should consider adopting their own digital currencies.

MrBroadbent’s point is that since Central Banks issue paper money, there may be acase for them also to issue digital currencies. This would have the effect ofenabling Central Banks to provide directly through settlement technology theverification and recording of transfers with, as an option, individuals beingoffered the ability to hold some or all of their balances with their CentralBank rather than as at present, their retail bank. This would he observed havethe effect of making commercial banks safer given their deposits are to asignificant extent partially backed in illiquid assets, but could, lesshelpfully result in customers’ deposits migrating to Central Banks, makingcommercial banks more reliant on wholesale markets, possibly reducing their lendinginto the real economy.

There are ofcourse many arguments against any move to end the role of physically heldcurrency.

The mostimportant of these is that such an approach would profoundly challenge theliberty of the individual by enabling a state to know exactly where and howindividuals are obtaining their income and disposing of it. But there are alsoother more practical arguments about how individuals would react, let alone thepolitical and psychological implications of a government or Central Banktelling voters they no longer have physical control of their own money.

Althoughthese are at present just ideas, the fact that they are being explored byinfluential figures like the Deputy Governor of the Bank of England suggestthat it is an issue that over the next decade we are likely to hear much moreabout.

When itcomes to a region like the Caribbean, however, cashless transactions couldpotentially become economically challenging.

It wouldmean that in countries where large numbers are unbanked and depend on cashthrough tips, fares, purchases of food or other items, many would suffer.

Moreover,any diminution in the use of cash in the Caribbean’s less formal sectors wouldmost likely be anti-developmental reducing the sums of money that informallyenter the economy.

Although anysuch measures are unlikely to affect directly hotels or the formal tourism sectorwhich tends to rely on electronic transactions, it could, if it became the normin feeder markets in North America and Europe, marginalise those who drivetaxis, waiting staff, water sports providers, vendors and others in the greyeconomy who depend on cash.

Cashlesstransactions are in effect yet another indication of the profound ways in whicheconomic globalisation and information technology are changing the world in amanner that potentially threatens small economies especially where significant numberof citizens are unbanked.

As thiscolumn recently noted, there are already moves by the big international banksto cease correspondent banking operations with Caribbean financialinstitutions; a threat so severe in its implications that CARICOM Heads gave itpriority at their recently concluded inter-sessional meeting in Belize.

There theyagreed to establish a high-level advocacy group to express internationally howso-called ‘de-risking’ by the world’s biggest banks threatens to impactremittance transfers, international trade, and the facilitation of credit cardsettlements for clients in the region; matters that Belize’s Prime Minister,Dean Barrow, the present chair of CARICOM, described as ‘existential’ if notaddressed internationally at the highest levels.

So far,bringing the use of currency to and end is no more than an idea. But the factthat some government related agencies and financial institutions are nowputting considerable thought into how a cashless society might operate, suggeststhat the implications require consideration.

The idea ofvirtual currencies cannot be left just to developed nations to debate. The ideahas significant negative implications for all developing nations. It requiresCentral Banks in regions like the Caribbean to form a view and make clear thepractical implications on cash driven economies that for the foreseeable futurewill continue to depend to a significant extent on banknotes and coins.

David Jessopis a consultant to the Caribbean Council and can be contacted at

david.jessop@caribbean-council.org

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