Watching megatrends form and grow is not only fascinating but for investors can be profitable. The trend towards a cashless society, or at least a cash-lite economy, is one such trend, a societal transformation that could have a profound impact. That trend is persisting and looking promising if not unstoppable. Bank research on the topic has been generally positive, touting the benefits to society and governments as well as individuals. HSBC, out with a May report, is positive on the concept and benchmarks the trend status. A recent Baker and McKenzie article in affiliation with Euromoney Institutional Investor Thought Leadership, a financial journalism organization, raises new issues and discusses the role of crypto-currencies like Bitcoin in this process.
Bitcoin? The overwhelming benefits of a cashless society
“Have we reached peak cash?” HSBC Global Economist James Pomeroy questions in the report titled “A world without cash: The impact of the rise in electronic payments.” He sees a world in which the use of cash that is “in severe decline” as he highlights nuance in adoption rates around the world.
There are several primary benefits of a cashless society touted, mostly centering around convenience, cost efficiency, better monetary control, and security.
From a consumer standpoint, a cashless society is convenient, the speed of transactions increases with efficiency. For individuals, the cashless society “is only a good thing,” Pomeroy said in a video interview.
For business, the ability to reduce the cost associated with managing cash, particularly those retail facing operations, is a significant benefit. For governments, digital cash offers the ability to more efficiently track down tax evaders and combat crime, Pomeroy points out. Banks that don’t hold cash don’t get robbed, and generally, people carrying around a traceable digital payment method are not ideal targets for physical robbery.
From one perspective, the rise of Bitcoin could be mirroring the popularity of move to a cashless society:
The continued rise in the popularity of Bitcoin may play a role too. In the extreme case where there is a complete absence of cash, anyone looking to buy things without leaving a trace through their bank account may wish to use an alternative form of currency, and crytocurrencies such as Bitcoin have risen to prominence on that mantra. However, for now, Bitcoin remains extremely volatile – in the past six years Bitcoin has lost more than 10% of its value in one day on more than 40 occasions (more than the GBP lost on 23 June 2016 after the EU referendum) – meaning that the likelihood of a broader rollout of Bitcoin may be some way off.
“Cash carries a number of risks, such as loss, damage and theft, which aren’t as prevalent with electronic money and payments,” Pomeroy wrote. “In Sweden, the poster-child of the cashless revolution, safety is oft-cited as one of the triggers.”
Another benefit comes when implementing negative interest rate policy, he points out:
The clearest impact of cashless societies on monetary policy is the potential for central banks to improve the efficacy of negative rates. The prospect of rates going negative or increasingly negative has faded given the current improvements in both growth and inflation data in most of the world. But, at some point in the future, central banks will need to cut rates again and negative policy rates will likely be back on the agenda.
Pomeroy thinks that a cashless society puts another important weapon in the central banker’s toolbox, one that could take negative interest rates to a new dimension. “With the removal of cash, the zero-yielding asset, rates could in theory be cut more negatively without some of the limitations that have previously been in place.”
In the video interview, Pomeroy was asked if digital cash is only a positive? He mentioned the potential for hacking and pointed to slow adoption by the elderly and those who can’t acquire the technology as reasons for concern.
“Socially vulnerable people, including the homeless are unlikely to have access to the technology to begin with, which poses more challenges to the transition away from cash,” he wrote. “Children too, especially young ones, are less likely to have access to electronic forms of payments at this time. So some things will need to change for a completely cashless society to come to fruition.”
A new viewpoint on the cashless society
Euromoney journalist Solomon Teague, in a May 8 report with Baker McKenzie, notes both the positive and negatives as he raises points previously out of the limelight of general discussion.
Providing the central bank enhanced tools might help them heal the economy faster, although this benefit has yet to be proven.
“Even the most powerful central banks have found their influence on markets is waning as interest rates have trended towards zero or negative,” he wrote, pointing to central bankers having a new level of influence over the economy. “With little room for further cuts, and many economies still too sickly to be subjected to significant rises, they have been left with a dwindling choice of tools with which to steer economies.”
Teague points out that little has been proven and there could be significant unintended consequences:
The introduction of central bank-issued digital currencies (CBDC) promises to be a game-changer for central banks. But if and when it happens, it will be a highly complex and disruptive process. Until a major economy actually tries it nobody can be sure to what extent those benefits will materialize, or what unintended consequences there might be.
An issue on the negative side, Teague addresses a topic little mentioned: “unprecedented control.”
Unprecedented control over society has both positives and negatives, which Teague balances in his article:
This control could be used in a number of ways. Countries like China, that are experiencing capital flight, would be better equipped to manage that problem. But governments, through their central banks, could also manipulate digital money to pursue specific social or economic policy objectives, such as discouraging certain behaviors.
In a more dystopian vision of the future, CBDC’s significant implications for individual liberty could throw up political challenges. That has already been demonstrated by India’s problems implementing the first steps towards currency digitization in the planned abolition of large rupee notes.
Imposing a “carry tax” by programming the currency to devalue over time would encourage spending, increasing the velocity of money and stimulating inflation and growth. It would also be easier for central banks to collect comprehensive information about exactly how money is spent, giving them a much better understanding of their economies and perhaps improving their ability to predict crises.
Pomeroy, for his part, notes the concerns to various degrees:
There are also a number of possible downsides to cashlessness from a social perspective. There are obviously concerns about snooping from governments which would know everything about transactions in an economy. For many this isn’t a problem, there remains a large section of the population who remain concerned about statism in this world.
Equally, a cashless world poses some new possible scenarios.