It is not uncommon for certain denominations of a currency to go out of circulation at some point of time. In fact, as someone who has a collection of old coins, paper notes and tokens, it is exciting to witness the evolution of money. From 1-pice coins with a hole (=1/64 of a rupee) to 1-anna coins (=1/16 of a rupee), 1, 25 & 50-paise coins to 1, 2, 5 & 10-rupee coins which are in use as of now. Similarly, there are paper notes whose use has since been discontinued. Imagine if in the near future physical money becomes a thing of the past all together. It’s not unfathomable, especially with all the innovations in this field like debit and credit cards, digital payment apps etc.
Apart from the fact that digitalisation provides fast and convenient means of payments, there are several other valuable benefits of going cashless. Firstly, going cashless helps do away with the cumbersome process of minting, printing, transporting, storing and sorting bills. Did you know the cost of minting ₹1 coin is ₹1.11? Although rest of the denominations have a low cost of production, operating in cash costs countries about 0.5% of their GDP every year. But cost isn’t the only incentive to move towards a cashless future. Cash transactions provide anonymity and they are difficult to track. Thus, going cashless helps put an end to cash-based criminal activities like robberies, money laundering, fake money, tax evasion and damage to physical cash. It becomes easier for governments to monitor frauds due to the transparency, with the additional advantage of increased government tax revenue.
Economists too are keen for a cashless society especially with the ongoing talks about ‘negative interest rates’, and the looming recession. Negative interest rates may occur during deflationary periods when people are inclined to hoard money, rather than spend or lend it. With negative rates, instead of receiving interest on deposits, depositors must pay to keep their money in banks. Now, when cash is around, depositors would simply withdraw their money from banks and keep it at home, zero interest is better than negative. But in the absence of cash, depositors would have to either pay the negative interest rate to keep their money with the bank or, spend their money or invest elsewhere, thus boosting demand and stimulating the economy.
As the government or an economist, negative interest rates in a cashless society may sound like a potential solution for dampening the impact of an economic downturn. However, as a common man, it raises concerns over loss of freedom and loss of privacy. Customers would be forced to spend their money in order to ‘save’ it from the rates. Also, with all the money pushed into the banking system, electronic-money trails could be maintained on virtually every rupee spent by any individual at any point of time. It will allow not only governments but also private companies to access and harvest personal data. Virtual money can tell a lot about people, their whereabouts, spending habits and can create a whole database on citizens just with the help of the credit card statements, which one has to admit, sounds scary! China has already become a global leader in surveillance on its citizens with its own digital payment system. A cashless society would entail a shift in power to governments and central banks.
The usual rationale behind restricting the use of cash is that it facilitates criminal activities. But it’s not like a cashless society would be free from frauds. If all our money were to be computerised, it would be extremely vulnerable to cyber-attacks or a system malfunction. They can happen anytime, can take any form and can lead to a huge loss within a matter of few seconds. Then there’s the issue of what would happen in the case of power outages? Also, phasing out cash is not that straightforward.
There are countries like Denmark and Norway who top the adoption of cashless payments. Sweden is on its way to become the first cashless country with only 15 per cent payments involving cash. The number of retail cash transactions per person has fallen by 80 per cent in the past decade. A move from cash has potential but the context has to right. Cash continues to play a significant role in many countries, especially where a large proportion of population is made up of low and medium-income groups with negligible or limited access to digital means. This is why demonetisation, with one of its objectives being promotion of cashless economy, was criticised in India in 2016. There was inadequate digital infrastructure, weak internet connectivity, and huge dependence on cash. A lot of people didn’t have bank accounts, many elderly people found it too complicated and not everyone knows how to use internet-banking technology.
From the looks of it, a ‘cashless economy’ doesn’t sound that great. Well, it’s not the perfect solution. Thus, Kenneth S. Rogoff’s idea of a ‘less-cash’ economy instead of a ‘cash-less’ economy provides a good balance. In his book ‘The Curse of Cash’, he concedes that there is need for some paper bills in certain situations, at least in the near future. Perhaps only the large denominations that form a huge portion of the black market could be eliminated. This way, one could still execute petty transactions in cash accommodating transactions undertaken in poor communities, and simultaneously help curb illegal activities involving larger denominations. In fact, the European Union had announced the phasing out of the 500-euro note, nicknamed the ‘Bin Laden’ note, in the aftermath of the November 2015 Paris attacks.
Thus, one thing is clear that a ‘completely’ cashless society is out of the picture. The best way forward is to let cash and digital transactions co-exist.