Tue | Oct 17, 2017

David Jessop | The cashless society

Published:Sunday | March 6, 2016 | 12:00 AM
The JCUES mobile payment app was launched on August 14, 2013 as Jamaica's first mobile payment platform. It has since been rebranded as Conec.

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.

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 euro500 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.

ADDRESS CRIMINALITY

First, they believe that it will address criminality. According to the Financial Action Task Force, the Paris-based group which 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.

Second, 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.

Third, 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 fourth, 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.

influential figures

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.

economic globalisation

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 numbers 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 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 and 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. david.jessop@caribbean-council.org