Society is Going Cashless: A Major Societal Change that Comes with Risks
Beggars in China with QR codes hanging around their necks and others pleading with matrix-barcoded tins have caused a stir on Chinese city streets in recent years. They shouldn’t have. These beggars are only following one of the most-rapid trends of Chinese society – going cashless.
China is not alone in moving on from paper notes, coins, and cheque. (They skipped the plastic card stage). It’s a worldwide drift. Global non-cash transactions reached US$23.1 trillion in 2016 to overtake cash payments for the first time.
People the world over are turning to payments technologies because they offer well-known advantages over cash, including that they can buy from strangers over the internet and, if fraud occurs, the payment companies bear the loss.
But a cashless society, as popular and advantageous as it is, comes with challenges. The easy access to consumer credit comes with punishing interest rates that tend to fall on low-income earners. Electronic transfers have social and political ramifications that include privacy issues. Card fraud is a bigger risk on the insecure internet. Menacingly, the cashless society has spawned stateless virtual currencies and other unregulated web-based finance that are not backed by normal safeguards. The shift to a cashless society could be rockier than expected.
Cash is a long way from disappearing, it must be said. The trend faces ideological resistance because some people view cash as a ‘public utility’ that should not be privatized for profit. Security concerns might limit the shift and criminals will defy it. Many advanced countries are slow adopters. But technological advancements and the advantages of e-payments over cash make a more cashless society inevitable. No major financial change is frictionless. Hopefully, the ripples and risks associated with the shift to paying via cards, mobiles, apps, the internet, and cryptocurrencies can be kept in check. There is no reason why they can’t be.
The Blockchain Solution
The greatest risk with the rise of cashless transactions is the advent of coded software known as cryptocurrency. While cryptocurrencies are money in an economic sense because they are a means of exchange, they aren’t in a legal sense.
A key feature of the state-backed currency systems is that when a central bank issues fiat money it incurs a liability that ultimately harks to the creditworthiness of the country. Bitcoin is a risky development because it was inspired by anarchists who wanted no state controls involved. Thus, with Bitcoin, no central authority issues this cryptocurrency. Nor does any central body incur a liability. This makes cryptocurrencies ‘assets’ like commodities, not fiat money. But cryptocurrencies are maths-based digital assets that have no intrinsic value.
Most other assets, in contrast, from property to gold to paintings, have alternative uses and scarcity that gives them some inherent worth. The system is essentially based on mathematical proof, not trust in a sovereign.
“The shift to a cashless society could be rockier than expected.”
Bitcoin’s success as a means of payments has spurred the emergence of more than 850 other digital-currency platforms. But users of and, especially, investors in cryptocurrency should be wary because the cryptocurrency world of today is opaque, borderless and operating beyond the control of national governments. The speculation surrounding virtual currencies limits their reliability as a store of value. No consumer protections exist. The backers are incurring settlement risks as they shift between crypto and state-backed currencies. The lack of central operating authority is dysfunctional.
Cryptocurrencies have worrying macro consequences too. Monetary policy might become less effective if much currency were outside the purview of central banks. Central banks would have less seignior age profits (made from issuing banknotes) to help their government’s budget. Distributed ledgers reduce a central bank’s ability to maintain a centralized register of settlements. Cryptocurrencies might enable capital flight in situations when financial controls have been installed to ensure stability or to limit crime. Cryptocurrencies hamper the ability of central banks to act as the lender of last resort. This could be ruinous during financial crises.
While the systemic risks associated with stateless cryptocurrencies are real, they are low while cryptocurrencies are not widely used. And cryptocurrencies are likely to stay a fringe option. Chinese beggars and most everyone else will be happy using state-backed currencies, crypto or otherwise, to enjoy the benefits of a cashless world.
Michael Collins, Investment Specialist, Magellan Group