Cashless Society â Risks Posed By The War On Cash
by Jan Skoyles, Editor Mark O’Byrne
Cash is the new âbarbarous relicâ according to many central banks, regulators, and some economists and there is a strong, concerted push forÂ the ‘cashless society’.
Developments in recent days and weeks have highlighted the risks posed by the war on cash and the cashless society.
The Presidential campaign has been dominated for months and again this week by the power of information that has been gathered through unconventional means â whether due to email hacks, leaked microphone tapes or even late-night twitter rants.
Both presidential candidates have got things to say when it comes to the gathering of information and both are for it. Hillary Clinton sees a thin line between national security and your personal privacy. Donald Trump has openly said that he is open to mass surveillance and as he puts it, putting the country before personal liberty.
Neither candidate is afraid to say that they support information snooping and gathering for the sake of national security. In the ‘punch and judy’ show that has been the U.S. election, important financial and economic matters have been eschewed in favour of salacious allegations regarding alleged sexual advances etc.
Access to your information is one thing, it is how it is read and what is done with it that is pertinent. In a cashless society information replaces cash. How that information is interpreted is entirely subjective and the chances of any recourse when someone has misread your cash transaction seem to be increasingly slim.
This information gives more power to unaccountable banks and corporations. It removes power and liberty from individuals and small to medium enterprises.
Opinion is divided among economists and there are many economists who share our concerns about the risks of the cashless society.
One such economist is Doctor Constantin Gurdgiev. Â Dr. Gurdgiev is the Professor of Finance (Visiting) at Middlebury Institute of International Studies in California. HeÂ was previously Adjunct Professor of Finance with Trinity College, Dublin, worked as editor of Ireland’s Business and Finance magazine and was a non-executive member of the Investment Committees of GoldCore. Here is his view regarding the risks of a cashless society:
âCentral banks, Governments and regulatory authorities are too often keen to highlight the benefits of the cashless society, e.g. efficiency and speed of transactions, ease of compliance and reporting, etc. However, the same agencies promoting cashless society evolution never mention the downsides or costs associated with creating a market structure in which private transactions become fully public through electronicÂ trace-abilityÂ and centralised storage of information.
In most basic terms, cashless society removes anonymity of using cash in private transactions, such as gifts, small transfers and small private payments in transactions not involving use of public resources, e.g. tips. Other key drawbacks of cashless payments systems is that they de facto undermine the key role of money as a store of value. Electronic accounts can and will be bailed in (expropriated) by the Governments.
Cash and monetary assets, such as gold, cannot be expropriated or bailed-in as long as they are held in physical form and under proper storage. Cashless accounts amplify the importance of monetary assets, such as gold, in fulfilling the function of being safe havens against systemic risks â risks that are associated with high probability of Government expropriation.
Finally, cashless / electronic accounts represent a significant, and ever expanding in scope and size threat of cyber attacks and cyber crime. Here too, monetary assets, such as physical gold, offer both hedge and a safe haven opportunities to protect wealth.
Governments’ push toward electronic accounts and transactions is ultimately driven by the desire of the modern States to exert maximum control over private wealth and incomes. The only forms of protection against such policies that individual investors and savers have today are gold, silver and platinum held as a part of well-diversified and legally protected portfolios.â
How Close Are We To the Cashless Society?
There is little denying it, we are edging closer and closer every year. Here are some key facts
- In the UK over half of all payments in 2015 were cashless
- Many EUÂ countries have capped the amount that can be legally paid in cash
- In India a radio address from Prime Minister Modhi urged citizens to stop using cash
- In Kenya about a quarter of it’s GNP is through mobile payments app M-Pesa
- In the U.S. the economist Kenneth Rogoff’s latest book ‘The Curse of Cash’ has put the quest to reduce cash firmly on the agenda of many central banks and governments.
Why the sudden strive to eliminate coins and more importantly paper money or cash? Is it environmental? Of course not. There environmental benefit of eliminating cash use is absolutely minimal.
Rather, it is to do with government control and distrust of markets and individual freedom and it is to do with uber Keynesian economics and corporatism which supports banks and large corporations at the expense of the individuals, small and medium size enterprises and the wider society.
However, it is presented under the guise of efficiencies and crime-fighting. Central bankers and governments state a cashless society, or even just currency controls, will help to drive out criminal activity, money laundering and tax evasion, all whilst saving the economy time and money.
But really, as you’ll see, there’s little real benefit to society in reducing the physical cash we have available. Aside from the cash management and cyber security aspect, you need to ask what’s in it for the banks and governments and to also consider how it’s dangerous and creates unappreciated risks when you don’t get to choose how you spend and hold your wealth.
How is the cashless society coming about?
Right now a number of governments, fintech entrepreneurs and economists have declared that we should move to a cashless society. Being told how we can spend our money is always an emotive topic, but now that going cashless is actually happening in the background of a struggling financial system, it is proving to be a real threat to our very sovereignty and freedom.
Cashless has been legitimised in the minds of the electorate by the rise of the trendy industry of ‘fintech’, an industry that I am normally proud to be associated with. Like all new technological movements the intention is to improve systems, economies and the standard of living, but at the same time they can be misused, creating suspicion and undesirable consequences.
New technology that changes the status quo is something that will always be met with some resistance and a belief that more harm than good will come from it.
In 1858 people said the transatlantic telegraph was ‘too fast for the truth.’ In 1904 The Times accused the telephone of creating a ‘race of left-eared people-that is, of people who hear better with the left than with the right ear’! In 1994 the same paper asked if the internet had been ‘overhyped’.
Prior to fintech, which has expanded the means in which we can spend money day-to-day, it was not practical (either physically or financially) to suggest society no longer use physical cash when spending. But in a world seeking financial efficiencies and where there are officially more mobile devices in the world than people, it is not surprising that there are devices and apps to make your money easier to manage, spend and invest popping up throughout the world.
The cashless society is unlikely to become an official thing i.e. cash is unlikely to be suddenly outlawed overnight. More likely, is that cash will be made so inconvenient that people will first live with less cash. But slowly but surely we may find ourselves (and the societies we live in) cashless â like a frog in a pot of cold water slowly coming to the boil.
Efficient to be cashless?
Like all technological developments, we are encouraged to adopt them as it will vastly improve our lives/save money/protect our grandchildren/cure cancer etc. So, is this the case with going cashless?
Cash does obviously cost money. In 2015 the Danish government ruled that businesses were no longer obligated to accept cash payments. The ‘aim’ was to reduce costs of managing and securing money whilst on the premises.Â Whether you assess the time you spend waiting at the ATM, the cost of transporting the money between banks and businesses or even the cost to count it.
According to a 2014 study commissioned by PayPal the cost of cash, in terms of counting and depositing, to small businesses in the UK, is Â£2.5 billion per year and about a fortnight in terms of time lost.
And we’re already savvy to the efficiencies of going cashless as it is estimated that there is approximately Â£800m in lost sales due to businesses not accepting cards.
But do these efficiencies stack up against the true cost of going cashless?
One of the many arguments for going cashless is that the removal of cash from society will help to prevent criminal activity and money laundering. According to Europol ‘the use of cash is the main reason triggering suspicious transaction reports, accounting for more than 30% of all reports.’
Money laundering is big deal. According to Diane Francis, between 2002 and 2011, ‘some $880.96 billion was spirited out of Russia, $461.86 billion left Mexico, $370.38 billion left Malaysia, $343.93 billion left India, $266.43 billion left Saudi Arabia, and $192.69 billion left Brazil. The total outflow, among 20 emerging economies, was $5.9 trillion, equivalent to $49 billion a month.’
Following the Charlie Hebdo attacks France’s Finance Minister Michel Sapin declared war on cash, placing the terrorists’ ability to buy dangerous goods with cash as one of the main reasons for the murders. There is now a â¬1000 cap on cash payments, down from â¬3000 previously.
But it’s not just money-laundering thanks to big drugs cartels (as facilitated by some banks) or terrorism that is a risk when dealing with financial crime. Going cashless is a concern for individuals who will be forced to use cards as a means of payment, a growing target for cybercriminals.
Some rightly believe that the concerted push by banks to end the use of cash is to boost profits.
In ‘Card on the Table’ Bjorn Eriksson presents the move to a cashless society as a moneymaking move by the banks who are benefitting from the low incident of bank robberies, whilst their client details are hacked by cybercriminals.
In 2015 the UK contributed 43% of the total card losses seen across Europe. Losses through card fraud totalled Â£88.5 million, attributed to the ‘growth in online spend and the digital revolution’ . Credit card fraud and attacks on food and beverage transactions climbed by 116% (yoy) in the last quarter, according to the Global Fraud Attack Index.
This can happen in a number of ways: skimming, when your card is physically scanned by the thief; if your card is contactless enabled then a close-range scanning device will do the trick; and, do you think you’re so techie because you pay on your mobile? Well, look out for the near-field communication (NFC) devices that are an easy target to hack by criminals.
It’s not only a money-making move by banks. The nascent cyber security industry will also hugely benefit. Cybercrime will benefit the Fraud Detection and Prevention market which is estimated to grow from $14.36 bn in 2016 to $33.19 bn by 2021. Within this, the retail sector is the highest growing area, i.e. you and I using our innovative cashless payments as a way to spend, spend, spend.
Yet as much as economists and governments would like to blame cash-based money-laundering as a reason to go cashless, in the UK it is not as big a problem as cyber money laundering. The Treasury and Home Office believe that they ‘know about most cash-based money laundering’ but the big problem lies in ‘high-end’ money laundering, such as from bank accounts:
âThe size and complexity of the UK financial sector means it is more exposed to criminality than financial sectors in many other countries, including abuse enabled by professional enablers in the legal and accountancy sector.â It is here that the intelligence agencies see ‘significant gaps’ in their knowledge.
The digital sector is by no means more secure for the average citizen and, if anything, puts your money more at risk of criminal activity than previously.
In April 2016, SWIFT – the Society for Worldwide Interbank Financial Telecommunication â the vital global financial network that western and most international financial services companies, institutions and banks use for all payments and transfer billions of dollars every day, warned its customers that it was aware of cyber fraud and a number of recent âcyber incidentsâ where attackers had sent fraudulent messages over its system andÂ $81 million was stolen from a central bank.
SWIFT acknowledged that it wasn’t just the $81 million stolen from Bangladesh’s central bank that alerted them to cybersecurity issues, these attacks have been attempted on several other institutions as well. SWIFT acknowledged that theÂ cyber-attack on the New York Federal Reserve Bank was not an isolated incident but one of several recent criminal schemes that aimed to take advantage of the global payments platform used by some 11,000 financial institutions and all of us.
This in itself shows the vulnerability of our modern online and digital international payments system.
Banks and governments will try force you to be cashlessÂ
And how are we being persuaded to ‘go cashless’? Not by whipping out the debit card, but instead through our mobiles. There is no doubt that the ability to turn mobile phones into both your bank branch and your wallet will empower a huge number of people but this does not mean it is safer than carrying cash. There was a three-fold increase in mobile malware in the last year, according to the FT, as hackers target mobile-banking applications and payment apps.
In Sweden, the bastion of the cashless society, banks have done such a great job in making cash appear so suspicious that:
âIn general, the rule of thumb in Scandinavia is: ‘If you have to pay in cash, something is wrong,’â writes Mikael Krogerus for Credit Suisse. Arvidsson explains that âAt the offices which do handle banknotes and coins, the customer must explain where the cash comes from, according to the regulations aimed at money laundering and terrorist financing,â The hassle, for the depositor, is enough to make them go cashless.
Surely the risks of holding cash are for you, the individual, to manage. And the risks of criminal activity, if facilitated by cash or even diamonds, is for the police to manage. Why are the two conflated?
How much does cash matter?
Despite the joy of spending on a mobile app or whipping your contactless card out to pay for public transport, the attachment to cash in society, even if it is becoming decreasingly obvious each day, has been under appreciated.
According to David Wolman, author of The End of Money: Counterfeiters, Preachers, Techies, Dreamers-and the Coming Cashless Society, those of us who have access to both physical cash and the electronic banking system truly believe that having some cash is a good thing.
The demand for cash is still very real. Whilst cash transactions might be falling the demand for banknotes is climbing. The Telegraph reports, ‘the demand for banknotes has risen faster than the total amount of spending in the economy, a trend that has only become more pronounced since the mid-1990s.’Â and in the last decade the number of ATMs has increased by 20%, in the UK.
In the UK, the Bank of England found that 18% of people hoard cash mainly âto provide comfort against potential emergenciesâ. Around Â£3bn- Â£5bn is thought to be being âhoardedâ or prudently saved to be less pejorative.
This cash is under the proverbial âmattressâ meaning hidden in a safe place in a house â possibly a home safe or up in the attic. Burglars rarely go up in the attic. Alternatively the cash is stored in safety deposit boxes or in vaults.
The world’s largest insurance company, Munich Re, has opted to store some of their cash reserves in vaults â and a little bit of gold for good measure. Indeed, even banks including Commerzbank in Germany are considering holding actual bank notes in their vaults again.
As interest rates turn negative and the risk of bail-ins grows closer by the day, holding cash appears increasingly attractive
As calls to remove high denomination bills from circulation sweep across both Europe and the US, two Swiss politicians have called for the opposite to happen.
Philip Brunner and Manuel Brandberg are asking for the creation of a 5,000 Swiss franc note, in order to protect both the currency and the liberty of the citizens. In their motion to parliament they argue that âcash is comparable to the service firearm kept by Swiss citizen soldiers.â Indeed the pair go as far as to argue that they both âguarantee freedomâ.
Guarantee might be a strong word in this regard but most would accept that they protect personal privacy, property rights and by extension our freedom. Totalitarian regimes of all colours and especially communist regimes are quick to confiscate wealth, including gold and property.
Chairman Mao confiscated gold and then banned gold ownership in China. In Stalin’s Russia, merely owning gold coins or bars would result in being sent to jail or worse the Gulag. We digress but you get the point.
Interestingly in Sweden, the first country that will seemingly go completely cashless, sees only 40-60% of its circulating cash in regular circulation with the remainder believed to be being saved by citizens outside the banking system â âunder the mattressâ, in home safes and in safety deposit boxes.
In Germany 79% of transactions are cash based, also for liberty reasons. As the WSJ reported, ‘Germany’s love of cash is driven largely by its anonymity. One legacy of the Nazis and East Germany’s Stasi secret police is a fear of government snooping, and many Germans are spooked by proposals of banning cash transactions that exceed â¬5,000. Many Germans think the ECB’s plan to phase out the â¬500 bill is only the beginning of getting rid of cash altogether.’
Even in Sweden there is still an appreciation for holding cash. Niklas Arvidsson points to a survey he recently carried out where he found that ‘two-thirds of Swedes think carrying cash is a human-right’.
The problem is, if the government and banks are able to push through an infrastructure that doesn’t support cash then it doesn’t really matter what people think. If their cash is suddenly null and void then their concerns about human rights have become a bigger matter entirely.
What’s it all for then?
In Niklas Arvidsson’s study ‘The Cashless Society’ he states that security and efficiency is the external sales pitch from banks, as it allows banks to ‘avoid complex cash handling and eliminate bank robberies, theft, and dirty money.’ However internally it helps with their main target: individual clients. The fully digitised payment system gives the bank a wealth of information about their clients in terms of what they spend, what they buy, when they shop etc. For advertising purposes this is effectively free market research.
Big data is now very bug business indeed. If the data is used for market research, who else can take advantage of knowing what you’re spending your money on? Even if you live in a politically stable country, with ethical laws you’re still at risk of losing out â that car boot sale you did at the weekend? Get ready for the taxman to benefit. That cheeky McDonalds you had last week? Get ready for your health insurance provider to put up your premium.
Never mind those who still enjoy the occasional cigarette and cigar of God forbid a few glasses of wine of an evening or a few drinks down the local boozer!
It seems logical and quite obvious to most that one of the primary reasons that some central banks are striving for a cashless society is to pave the way for deepening negative interest rates. Once all of your money is in the digital banking system you can get ready for it to be frozen, taken to fund a bail-in and even taxed. And in the meantime, enjoy governments, banks and possibly large corporations knowing what you’re spending your money on.
Negative interest rates
Negative interest rates are seemingly accepted as a way to preserve capital in a banking system. Ostensibly, they are put in place to prevent destabilising movements of money at times of financial crisis and to encourage spending and investment.
Negative interest rates in the UK seem to be an ever-present threat that no-one really believes will happen. But it is very real in the global economy, according to the WSJ, more than a fifth of global GDP is produced in countries with negative interest rates imposed by central banks.
Since 2012, seven countries have experimented with negative interest rates: Hungary being the most recent, Germany, Denmark, Sweden, Switzerland, Bulgaria and of course, Japan. Not all of them have hit depositors, yet. However this does not mean that customers are ready to be charged for lending their money to a bank.
Negative rates are there in part to stimulate spending, but the more negative the nominal rate the greater the chance cash will be hoarded and resulting in a reduced velocity of money. But, how much impact can negative interest rates have when savers and depositors can escape the NIRP environment?
As the Financial Times wrote last month, âAs long as people have access to cash, they may be able to avoid negative interest rates, limiting the scope for central banks to cut interest rates much further.â
But, in a cashless society if banks decide to impose negative interest rates account holders will not be able to access their money and this is hugely advantageous, to the banks. When a bank gets into difficulty, a cashless society helps protect the bank from a bank run. However, as negative interest rates become widespread and the risk of bail-ins more widely appreciated, we will likely see even more runs of the banks and the scene of ATM queues around the block.
However if cash is no long common in society how will depositors be able to protect their money? They won’t.
This is common thinking; in a recent report by the ICMB entitled, ‘What else can Central Banks Do?’ ‘If cash ceases to exist, so there is no riskless