The View from Europe: The cashless society – By David Jessop

The View from Europe: The cashless society
By David Jessop -Published on March 5, 2016

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

david_jessop.jpg
David Jessop

However, little if anything has been said about the negative consequences this startling possibility could have for all developing economies or the myriad small enterprises and individuals that live in them and who provide services of all kinds for cash.
A cashless society is an idea that has increasing support among senior figures in international financial institutions, central bankers, security agencies, and many of the governments in the world’s wealthiest nations.

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

The thinking behind this is that major economies should eventually replace actual currency with electronic money in the form of card payments, electronic wallets on mobile phones, and online transactions.

Those who believe that the future is cashless do so for a number of reasons.

Firstly, they believe that it will address criminality. According to the Financial Action Task Force, the Paris based group that is deeply engaged in anti-money laundering issues in the Caribbean, criminals prefer high value bank notes because they are easier to transport across borders without detection.

Secondly, supporters of the idea believe that it will increase the ability of governments to halt tax evasion and will optimise their tax take and ability to provide social services; the idea being that electronic transfers will enable end-to-end traceability of income and expenditure, information on where individual or business income originates and goes to, and how our money is spent or utilised.

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

And fourthly it is suggested that a cashless society would address a number of technical financial management issues such as the increasing introduction of negative interest rates on deposits, for example in countries like Switzerland and Sweden, and the consequent flight of deposits into cash.

In addition, a related approach, recently explored in an interesting if sometimes technical speech by the deputy governor of the Bank of England, Ben Broadbent, is the idea that central banks should consider adopting their own digital currencies.

Mr Broadbent’s point is that since central banks issue paper money, there may be a case for them also to issue digital currencies. This would have the effect of enabling central banks to provide directly through settlement technology the verification and recording of transfers with, as an option, individuals being offered the ability to hold some or all of their balances with their central bank rather than, as at present, their retail bank.

This would, he observed, have the effect of making commercial banks safer given their deposits are to a significant extent partially backed in illiquid assets, but could, less helpfully, result in customers’ deposits migrating to central banks, making commercial banks more reliant on wholesale markets, possibly reducing their lending into the real economy.

There are of course many arguments against any move to end the role of physically held currency.

The most important of these is that such an approach would profoundly challenge the liberty of the individual by enabling a state to know exactly where and how individuals are obtaining their income and disposing of it. But there are also other more practical arguments about how individuals would react, let alone the political and psychological implications of a government or central bank telling voters they no longer have physical control of their own money.

Although these are at present just ideas, the fact that they are being explored by influential figures like the deputy governor of the Bank of England suggest that it is an issue that over the next decade we are likely to hear much more about.

When it comes to a region like the Caribbean, however, cashless transactions could potentially become economically challenging.

It would mean that in countries where large numbers are unbanked and depend on cash through 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 would most likely be anti-developmental, reducing the sums of money that informally enter the economy.

Although any such measures are unlikely to affect directly hotels or the formal tourism sector, which tends to rely on electronic transactions, it could, if it became the norm in feeder markets in North America and Europe, marginalise those who drive taxis, waiting staff, water sports providers, vendors and others in the grey economy who depend on cash.

Cashless transactions are in effect yet another indication of the profound ways in which economic globalisation and information technology are changing the world in a manner that potentially threatens small economies, especially where significant number of citizens are unbanked.

As this column recently noted, there are already moves by the big international banks to cease correspondent banking operations with Caribbean financial institutions; a threat so severe in its implications that Caribbean Community (CARICOM) heads gave it priority at their recently concluded inter-sessional meeting in Belize.

There they agreed to establish a high-level advocacy group to express internationally how so-called ‘de-risking’ by the world’s biggest banks threatens to impact remittance transfers, international trade, and the facilitation of credit card settlements for clients in the region; matters that Belize’s prime minister, Dean Barrow, the present chair of CARICOM, described as ‘existential’ if not addressed internationally at the highest levels.

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

The idea of virtual currencies cannot be left just to developed nations to debate. The idea has significant negative implications for all developing nations. It requires central banks in regions like the Caribbean to form a view and make clear the practical implications on cash driven economies that for the foreseeable future will continue to depend to a significant extent on banknotes and coins.

David Jessop is a consultant to the Caribbean Council and can be contacted at
david.jessop@caribbean-council.org. Previous columns can be found atwww.caribbean-council.org

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Comments

  • De castro  On March 9, 2016 at 4:19 am

    Surprise surprise…
    Reads a bit of ‘the nanny state’
    intervention via its central banks.
    Electronic banking is now so ‘instant’
    that tracing movements of money is
    almost if not impossible to monitor.
    Even when traced it is too late to
    do anything about it. Horse already
    bolted. It is an excuse to implement
    nanny state control.
    My spin
    The criminal elements in society are not
    as naive as the political Cl-asses with
    their hidden agendas.
    Cynically yours
    Lord Kamtan of cherin

  • Rosaliene Bacchus  On March 9, 2016 at 1:25 pm

    Yet another way for Too-Big-to-Fail Banks to rob us. They try to fool us that it’s for our own convenience, security, curbing money-laundering (that’s a good one), and who knows what else. Then, when they go bottoms-up again, all they have to do is seize the funds in our bank accounts.

  • Albert Fraser  On March 9, 2016 at 2:32 pm

    ‘Electronic banking is now so ‘instant’
    that tracing movements of money is
    almost if not impossible to monitor’

    Not so clear cut. Movement in may ways will be easier to trace. Either Norway or Sweden is already far ahead on this procedure. What the writer did not state is that hackers and criminal activities have become more sophisticated under a cashless society in the countries starting it.

    • De castro  On March 10, 2016 at 10:17 am

      Agree
      But even when traced to source…
      sender / receiver… it is too little too
      late…it may have transgressed the globe several times….changing hands.

      Instant transfers does however speed
      up the processing…for both criminals
      and individuals/businesses.
      Catch 22

  • Gigi  On March 11, 2016 at 7:20 pm

    The move to a cashless society might have the unintended/intended consequences of turning to another from of barter/acceptable “currency” within smaller societies of the larger society. The system may very well end up returning gold and other precious metals as THE tangible currency.

    When it was announced that Euro 500 would be phased out, there was a sudden increase in demand for it. I doubt that people who went out on a buying spree stocking up on this currency have any intentions of seeing it lose its value. This means that it will continue to be used and accepted. The same will likely happen with other currencies.

    In Japan, when the govt announced it was going to a cashless society, the country sold out of personal safes as people decided to withdraw their money from the banks to store in personal safes at home. I think that all this talking is to test of people’s reaction to gauge if/how this would play out. I personally dislike carrying around cash, but I also dislike putting purchases under $20.00 on my debit or credit card. However, I do like having solid cash that I can get my hands on instantly. One time when we were on a family road trip, we forgot to get cash out to take on the trip. My husband shrugged it off and said he’d get cash at one of the ATMs when we make a rest stop; but the ATM we ran into was out of cash. That feeling was like being robbed! He was stupefied. It completely threw us for a loop and served as a wake-up call to never repeat that mistake.

    • De castro  On March 12, 2016 at 5:00 am

      Gigi
      Experiences shared ‘educate’ as it
      is usually factual.
      At 72 am still learning from my grandchildren.
      On my travels am usually ‘cash’
      covered for my stay…but for longer
      periods must use plastic of banks.
      However have finally decided to have
      a bank account in EU (Spain) PERU CANADA and of course UK my base
      camp.HUB🌎🌍🌏
      These accounts hold funds that
      are available for my stay and I
      receive interest if kept above
      £500…. Three currencies matter
      most in the banking fraternity🇺🇸🇬🇧🇪🇸
      £€$ ….
      While in UK I buy €$ for my travels
      EU PERU. This insures that I am in
      control of ‘exchange rate’ fluctuations.
      When £ is strong I buy my € $.
      Banking in my Bank on my arrival.

      Eg before my visit to Spain I bought
      Euros at £=€1.42….
      Today here in Spain its £=€1.29.
      a saving of 12% points….get the
      drift. Legally I can travel with as much
      as £10.000 in Euros out UK into
      EU…..not sur of £ in USD but could
      be equivalent.
      Any ‘cash’ over the £10.000 threshold
      must notify authorities …. for obvious
      reasons….money laundering.
      Many decades ago UK had currency/control
      restrictions in place.’history’
      Sorry about the lengthy comment
      above but hindsight teaches fools.
      Enjoyed reading of your experiences.

      Kamtan

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