The rise of digital payments and the move towards a cashless society are often seen as the same, but there is an important difference between them.
Digital payments like Paypal, Venmo, domestic-, and international bank transfers are convenient for people and businesses to transact with. They represent fintech innovation to consumers by the market. Faster, cheaper, and more efficient forms of digital payments are uncontroversial and largely an engineering and marketing challenge.
They don’t, however, remove every need for cash. Cash has unique properties that digital payments have not. As physical coins and notes, it can be exchanged peer-to-peer without a middleman. Its ownership is transferred simply by handing it over. The absence of an intermediary ensures that transfers are permissionless, censorship-resistant and, most importantly, private.
Digital payments solutions do not utilize physical cash but also do not prevent anyone from continuing to use cash if they want. It is an alternative payment method to cash but is not antithetical to it. Indeed, in almost all modern societies, there coexists both a large digital economy and a large cash economy.
We will argue that the elimination of cash, even if most payments are already digital, will make society more vulnerable to surveillance, financial control, and authoritarianism.
Why do countries go cashless?
In a cashless society, the government seeks to discourage or even criminalize the holding and using of cash itself. In Sweden, it happened largely without coercion. In India, the government demonetized the 500 and 1,000 Rupee denominations of notes.
Different countries can have different incentives to push for a cashless society. In China, digital payments are primarily a tool of social control and serve as a backbone for China’s social credit system. And they are making progress on it: 96% of cash payments in 2012 have turned into only 15% in 2019.
Over in Europe, central bankers are enthralled by the idea of negative interest rates. A recent IMF report states that:
“Severe recessions have historically required 3–6 percentage points cut in policy rates. If another crisis happens, few countries would have that kind of room for monetary policy to respond.”
Negative interest rates were traditionally hard to implement because cash served as a lower bound. In a cashless society, this lower bound would disappear. In a severe recession, the CB could drop the policy rate to, say, -4% to make consumption and investment more attractive relative to saving.
Recently, central banks have started to brush everyone who prefers cash with the label of a criminal. They do that by separating the uses of cash into legitimate and illegitimate. People “abroad” can hold cash “legitimately” to replace an unstable or inflationary currency. Now domestically, the only beneficiaries of an anonymity-providing currency are
“those engaged in tax evasion, money laundering and the financing of terrorism, and those wishing to store the proceeds from crime and the means to commit further crimes.”
Indeed, the use of cash in larger denominations has become so stigmatized in the US and Europe that withdrawing or carrying above a certain amount requires explicit government permission.
Problems of the cashless society
A society without cash has no ability to transact value without the omnipresence of government actors. By going cashless, societies double down on the properties of digital payments but lose all access to the unique properties of cash.
If every payment is intermediated, it becomes impossible to pay someone for anything without there being a record somewhere. It eliminates privacy and places the government as the third party in every financial event.
Governments claim that a cashless society enables them to protect citizens from criminals. The specters of terrorism and organized crime are often cited at this point. But this makes the naive assumption that governments itself can never become evil.
Because all transactions require the consent of an intermediary, they can easily be censored and funds confiscated. It might not be happening right now, but a good monetary system should be robust to changes in political moods. A cashless monetary system is less resistant to both the tyranny of the majority and shifts towards authoritarianism.
Cash may not be the right tool for the majority of transactions, but the elimination of it removes an important choice, and safeguard against government abuse, for the people.
Bitcoin as a hedge against the cashless society
If we cannot count on governments to provide society with cash, then people will organically turn to something else to use as cash. Metals such as gold are valuable and saleable, but the difficulty of using them in P2P transactions are well explored. If there came to be a digital gold, we could use that as digital cash as well because it solves the problems of physical metals.
Bitcoin, through its fixed monetary policy, is often seen as a hedge against high inflation. However, equally importantly, it is a hedge against a cashless society. It does not compete with digital payments solutions nor does it compete with fiat. Rather, it is a new breed: digital cash, that combines the benefits of physical cash with the benefits of digital payments.
By Su Zhu and Hasu