The problems of a cashless society are known to those who want to maintain greater financial independence and freedom, and anonymity with their purchases. But governments and central banks also have their own motives for stopping the advancement of a completely cashless society, despite the desire and push from other private banks.
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The Bank of Canada is sounding the alarm of the problem with a cashless society in a paper entitled "Is a Cashless Society Problematic?". Other countries has issued their own warning, and some have established laws to protect the existence of cash in society.
The European Central Bank has warned os chaos in a cashless society in August, citing cybersecurity concerns and the loss of cash posing a risk to the financial system itself. Complete dependence on electronic banking could cripple financial systems if there are power outages or cyber attacks. As such, the ECB has backed off on the war on cash. The People’s Bank of China has stated that all non-e-commerce business must continue to accept cash despite the advancing hype of a cashless society in China. The Washington D.C. city council also introduced a bill to ban businesses from rejecting cash payments or charing more for cash paying customers.
The Bank of Canada is joining the dismay of a cashless society as it analyses the downfalls of killing cash, regardless of individual actions to stop using cash among most of the population. If the lack of cash use would prompt the central bank to stop printing physical money to cut costs, there are negative consequences to be aware of.
Even though the BoC would not be the ones to force people to go cashless, voluntary effort to abandon cash in our modern technology age of convenient digital transactions, small segments of people would be blacked out of much economic activity. Some people prefer the anonymous nature of cash transactions, or they like how cash imposes "spending constraints". This minority of people would be worse off as the world around them would shrink in terms of where they could use their money.
With the death of cash, the private banks and credit card companies would have an even greater monopoly control over the payment systems of a nation. Canada has one debit system called Interac, and 3 credit card companies: Mastercard, Visa and American Express.
In some remote areas or for those who don't have a bank account, cutting off cash would be cutting off their ability (or right) to be able to engage in economic exchanges. Those without a bank account may only represent 2% of Canadians, but they should still have the right to interact in the economy and not be penalized for staying with cash. In other countries, the segment of the population that relies on cash is even greater. Cutting people off from participating in the economy is not just, right or fair.
Apart from the economic exclusion, there are elevated security risks to a cashless society, as the ECB has pointed out. Cash is immune "to electronic network failures, cyber attacks and power outages". With a cashless society, everything hinges on the dependence of an operational electrical infrastructure and electronic retail payments networks. Electrical grids do go down, and credit card companies are affected, as was seen in Europe this summer when people has issues paying for gas, groceries or restaurant bills.
Let's not forget how valuable cash is in an economic crisis. Iceland and Greece were hit hard in the previous global financial crisis of 2008-2009. There were runs on the bank, and people were unable to take money out of banks. There were rendered impotent in their purchasing abilities. But those who had cash, were able to buy what they needed to live, or whatever else their cash could afford them. As major banks collapse, cash use more than doubled in Iceland.
For central banks, two main issues arise for themselves:
Loss of Seigniorage.
Central banks earn profit by issuing currency from "difference between the face value of coins and notes and their production costs." Wiping out cash would mean wiping out some of their profits, and contract their balance sheet with a loss of 3/4 of the BoC's liabilities.Reduced Interventionary Powers.
Banks provide liquidity in a financial crisis by selling off their holding of government securities. They then purchase other liquid assets with that money. A contraction in the BoC's balance sheet would hurt their ability to do this.
Solutions to the above, proposed in the paper, are for the BoC to charge more for it's services to the financial industry. Expanding the balance sheet "by buying government bills and bonds with reserves", like banks do when they engage int eh flawed "quantitative easing " to try to prop up faltering economies, as has been done in recent years sine the last crash on 2009. Other measure can be to prevent the erosion of cash by imposing measures that ensure the availability of cash; regulate payment networks to prevent anti-competitive outcomes; and a central bank "digital currency" to compete with private payment networks.
The authors of the reports rightly have misgivings about the danger and threat of a cashless society. Cash is a sage store of value in an economic crisis, power outage, network failures or cyber attack. It's also a safeguard against private monopolies that exercise control over the use of financial payment systems.
Anonymity and freedom to transact is threatened in a cashless society, which can implement a social credit system with consequences for violations like China has that restricts digital transaction use. This includes preventing people from using public transportation, buying or renting a car, or sending their child to a school.
References:
- Is a Cashless Society Problematic?
- Backlash Against War on Cash Reaches the Bank of Canada
- Central bankers warn of chaos in a cashless society
- As China goes increasingly cashless, PBOC says cash payment is still alive
- Why going cashless is discriminatory – and what's being done to stop it
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