Whispers

[Dave Birch] I think I've spotted a meme. The second serious story in a month talking about the economic benefits of getting rid of cash. First Willem Buiter, a former chief economist of the European Bank for Reconstruction and Development and former external member of the Bank of England's Monetary Policy Committee said that we should

Abolish currency. This is easy and would have many other benefits. The main drawbacks would be the loss of seigniorage income to the central bank... Advanced industrial countries can move to electronic and bank-account-based means of payment and media of exchange without like problem. [From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

I discussed Willem's article in more detail over at Kashklash, but suffice to say that it seems a plausible strategy. And now I read in The Times that

Japan may start mulling the most radical monetary policy of all — the abolition of cash... Several MPs in the ruling Liberal Democratic Party believe the abolition of cash, though politically radioactive, might be technically feasible.

[From To fight deflation, abolish cash.]

I agree with both sets of commentators that new technology means that we could move whollly to e-payments without a problem, because of technological advances made in the last couple of decades. I've written before about the situation in Japan, where the introduction of contactless payments and phones had led to a decline in the use of coins, but it's also important to point out that cash use in Japan remains high. Nevertheless...

A significant milestone in the penetration of electronic cash within Japanese society has been reached, with this survey conducted by goo Research and reported on by japan.internet.com into electronic cash showing that now over half the population (of internet users) carry some form of credit-card form-factor electronic cash.

[From e-money » 世論 What Japan Thinks]

Let's imagine that Willem's version of the future of money is adopted. What would the retail payments landscape look like? Well, not entirely unfamiliar, because he suggests not getting rid of all cash entirely.

As a concession to the poor, we could keep a limited number of 1$ and 5$ bills (1€ and 2€ coins and 5€ bills) in circulation.

[From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

I don't think I agree with him here, as cash isn't a concession to the poor: it forces them to pay higher transaction costs than their better off neighbours. And if the amount of cash falls, then the cost of the whole infrastructure of ATMs and cash registers, armoured vans and night safes will fall on the poor, thus further raising their transaction costs. Surely it makes more sense to simply switch off cash. Willem summarises thus:

Do we really want to retain cash just because it (1) allows us to hide some of our legitimate financial transactions from the government (as insurance against government abuse of the information), and (2) is a source of revenue to the central bank? These arguments pro are surely dominated by the two arguments against currency, (1) that, as currently construed [...] currency imposes a zero lower bound on nominal interest rates and (2) that it subsidises the grey and black economies and makes life easier for the global criminal and terrorist fraternity.[From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

Do we really want to retain cash?

These ideas being floated by economists in the UK and Japan are not pipe dreams or speculative fiction. On the contrary, it is entirely possible to set out a ten year strategy to get rid of cash if so desired. Why? Well there are, to my my mind, two key ways in which recent technological developments put us in a position to be able to take implement these ideas.

The first is the mobile phone. We are already seeing the launch of mobile phones that can replace payment cards (there are 40 million of them in Japan already) and provide prepaid "e-money" accounts (M-PESA in Kenya, provided by mobile operator Safaricom, has over six million users already and is currently attracting 11,000 new customers every day). But the strategic impact of mobile phones in the payment space is yet to come. Yes, mobile phones can be payment cards and that's great. But mobile phones can be also be payment terminals. Or to put it another way, you can use a chip and PIN card to pay, but you can use a mobile phone to both pay and get paid. Since we live in a country where, essentially, everyone has a mobile phone this means that it is absolutely feasible to eliminate cash altogether. In this coming world, if I want to pay you a pound, I will do it by text message or mobile Internet and you will know immediately that you have the cash.

The second is cryptography, because many people think that anonymity is an important characteristic of cash. I used to think that this was true, but now I'm not so sure.

Thinking about anonymity again, my experience back in the day was that, for different reasons, neither the consumers, nor the banks, nor the retailers, nor anyone else actually valued anonymity at all. So if you put it in a tick-box, some people will tick it, but that's because they haven't really thought about it. Once they had though about it, their interest in anonymity plummeted.

[From Digital Money Forum: Nymity vs. anonymity]

It doesn't matter whether I'm right or wrong about this because advances in cryptography mean that the paradox of security and anonymity for e-money is easily resolved using a body of work going back to the days of DigiCash. Cryptographic blinding and virtual identities allow us to choose implementations of digital money anywhere on spectrum from unconditional anonymity to fill disclosure. This is better than notes and coins. Digital money can do things that notes and coins can't.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

cashless, future, notes and coins

Comments

[Steven Murdoch]

Regarding payment privacy, one quirk is that for anyone to have anonymity, almost everyone must have anonymity. If only the paranoid crazies adopt an anonymous payment scheme, then the very fact that you are using one is a violation of your privacy. This property is discussed here:

http://freehaven.net/anonbib/cache/usability:weis2006.pdf

So while I agree that anonymous payments are required for a small proportion of payments (as illustrated by the large use of non-anonymous payments), that does not mean anonymity is unnecessary. I would imagine that a small number of people need anonymous payments for a lot of their transactions, and a fairly large number need them for a small proportion of their payments.

Some of these needs will be fairly minor (e.g. buying surprise presents for someone), but others are more important. For example, political organizations worried about surveillance may be very interested in preventing a totalitarian government tracking their behaviour. Although there are a very small number of people in this position, their ability to operate is very important for the rest of the population.