Is COVID-19 Bringing Us Closer to a Cashless Future?

With many businesses accepting card-only, contactless payments, is there a chance this move away from cash be permanent?

By Joshua Moore

In the wake of a global pandemic, the use of banknotes is once again in the spotlight—this time for much more dire reasons. The virus COVID-19 can latch onto just about any surface, including coins and paper banknotes. What sets cash apart, however, from other surfaces is one of its core features: circulation. Just last month, the Chinese financial news outlet, Caixin, reported that the People’s Bank of China (PBOC) had started the process of retrieving notes in circulation in the geographic hot zones for destruction, and other notes are being quarantined and disinfected for a standard 14 days before recirculation i. South Korea has also adopted a similar policy. On March 6, the Bank of Korea (BOK) told Reuters that BOK would be quarantining all banknotes coming into the central bank for two weeks, and even burning some of them in a bid to curb the spread of the virus through money ii. The US Federal Reserve also began to quarantine hard dollars it repatriates from Asia before recirculating them in the United Statesiii.

“We know that money changes hands frequently and can pick up all sorts of bacteria and viruses and things like that,” a WHO spokesman told The Telegraph in March. “We would advise people to wash their hands after handling banknotes and avoid touching their faces. When possible, it’s a good idea to use contactless payments.”iv

Before now, what we had was a global society continually drifting towards a cashless economy. Many experts favour this trend, but mostly for reasons other than cash being a courier of germs for a contagious disease. There have always been concerns that cash helps fuel a hidden economy for tax evasion, money laundering, and illegal employment because cash is untraceable. Cash-in-hand also exposes people to crimes like robbery and fraud. Visa reported that Canada has one of the highest adoptions of card-based payments in the world, and over 70 percent of personal purchases in Canada are made with card transactions. Over 25 percent of retail e-commerce transactions are now being made on mobile devices v. However, many Canadians still use cash notes or coins for small purchases. People that want to take caution with money can utilize the means of contactless payment – including contactless cards and mobile phone technology like Apple pay, Android pay, and Google wallet. Digital currencies such as Bitcoin are an emerging means of cashless transactions. However, Bitcoin represents more of an investment interest than a means of exchange at this point. A key criticism of Bitcoin and other cryptocurrencies is that they do not fulfill the functions of money. Apart from being a unit of account, money is expected to be a universal medium of exchange, but cryptocurrency is not there yet. Also, their high volatility means they are not a suitable store of value in the short-term. As a result, cryptocurrencies have been operating in a parallel world without having any meaningful impact on the central formal economy. However, a new theme seems to be growing, especially after Facebook announced its Libra project in May 2019, which has gained cryptocurrency the attention of regulators and Central Banks more than ever before.

The Libra Project is Facebook’s ongoing attempts at the launch of a cryptocurrency with the aim of making payments easier on its social platforms, on the internet, and in the real world. This, however, led to a backlash from the United States Congress and internal regulators. In early July, the tech giants were being called for hearings on data practices. In the past, cryptocurrencies have got the cold shoulder from many governments due to concerns over limited regulation ability over such open-source design. They also fear the digital currencies could compete with their fiat currencies, which will impact their financial and banking systems.

In response to the movements of the private sector in the digital currency market, many central banks are now considering the adoption of Central Bank Digital Currencies (CBDCs). CBDCs can be viewed as a new form of Central Bank money denominated in an existing unit of account. Most notable is China’s announcement in August 2019 that its CBCD is ready to pilot after a five-year development period. vii

Cashless technology can find a greater purpose in a time like this. Many retailers in Canadian have been requesting that customers pay with cards if possible in order to limit contact—some places have even stopped accepted cash altogether during the pandemic. As many people may have the need to self-isolate or distance themselves from all forms of gathering, they may also be looking to avoid bank branches, and online banking serves as a viable alternative. But is the move to a totally cashless society practical? We preview some of the challenges that could come with a transition into a cashless society and also the investment interests in digital currency like Bitcoin.

If we are to go full-on cashless, it would have to be done in an all-inclusive way so that everyone could easily adjust to the new system. But a significant portion of the population is at risk of exclusion: those who are unbanked, those who are technologically naïve or without digital devices, and those who are less able to adapt to new technological trends. About three percent of all Canadians (about 1 million people) are unbanked, meaning they have no association whatsoever with a mainstream financial institution. Also, 15 percent (about five million) Canadians are underbanked; that is, they may have a bank account, but their engagement with the mainstream financial sector remains limited viii. This is despite the high availability of banking services in Canada. We may not be ready to have a genuinely cashless society unless this portion of the population can participate.

There remains an issue with the economics of money in a cashless society. Electronic transactions are expensive for businesses due to the cost of IT requirements. For example, card readers require card terminals and reliable internet connections; other devices are required for other payment methods. If we remove the option of cash payments, businesses would have to provide more payment methods or risk turning some of their customers away. Small-scale businesses may lack the robustness to adjust to a move like that. Cash is typically perceived as a free public commodity, in the sense that the cost of having cash is limited to its value. Still, there is the cost of handling cash to businesses, which include the cost of personnel that collect, count, and transport cash, and also the cost of security and time lost on moving cash. Hence, cashless payments are usually preferred for higher volume transactions, where the cost of handling money is more significant. However, cash transactions are free, and only inflation erodes the value of cash. The cost of digital transactions and banking fees erode the value of money with every transaction. The cost of banking means that cash remains the cheapest payment method for small-scale traders. Many Governments and Central Banks are now implementing policies and strategies to reduce transaction fees. In fact, the requirement for money as a free commodity is one of the main reasons why Central Banks are contemplating the launch of CBDCs.

The issue of data and privacy also comes into play. We already live in a world where security and big data are issues. Electronic transactions do not afford the anonymity that cash gives, and any move towards a cashless regime will make even more data available and more security questions to consider. The growing involvement of giant tech companies like Google, Apple, Facebook, and Amazon in financial services has raised eyebrows. These companies have the potential for abuse of personal transaction data for commercial purposes. In countries where there is little trust between the populace and their Government, there is the likelihood of resistance to complete digitalization of money. An entirely cashless state can facilitate a totalitarian regime where the Government not only has absolute power but also has access to private data. In some third world countries, there have been cases of Governments shutting down the internet to end dissent; in a cashless society, this would be very effective. A stronger legislature and regulatory framework are likely to bring more trust in a cashless regime. Much has been said about how unsafe it is to carry cash around, but the use of electronic money is not entirely safe either. There are cases of hackers taking control of other people’s phones and wallets in SIM-swapping frauds. Thefts in contactless payments are now regarded as a real problem in the card industry. Standard security updates are now a necessity for card service providers to curb card thefts and limits bypass. Extra security is promised by cryptocurrencies, but as we’ve seen recently, they have other problems.

Bitcoin has seen turbulent times due to the COVID-19 outbreak. The price of the cryptocurrency currently sits just over the $6,000 mark, down from $10,000 in February 2020—and this rate is changing all the time. The crash saw the price go as low as $3,600 between March 12 – 13, 2020, which is the biggest daily drop we have seen in seven years. ix BitMex, the second-largest crypto exchange in the world, tagged the price cash as Bitcoin’s biggest test yet. The cryptocurrency market has been showing much semblance to the stock market during the COVID-19 crisis. Investors have been showing unwillingness to buy assets due to uncertainties, while even more are seeking to liquidate their assets. This crash is significant for Bitcoin because many experts and Cryptocurrency champions have touted it as a safe-haven asset in times of global financial crisis. Historically, precious metals like silver and gold were the main safe-haven assets, and investors would scramble to acquire them during times of economic recession to protect themselves from inflation, devaluation, and fluctuations in the international market. Despite the high volatility of prices, Bitcoin has charted an assured increase in value over the years, leading many people to tag it as a safe-haven asset – some have called it the “digital gold.”

Bitcoin now appears to be failing on the promise of a safe-haven asset as the recent COVID-19 pandemic has sparked massive sell-off and, consequently, a crash in the price of Bitcoin. The widespread panic has seen more and more investors prefer to liquidate their assets in case the virus spreads further. In the past, events that cause a strain on the financial market has mostly caused cryptocurrencies to rise in value. This time, however, many investors seem to think it is better to liquidate to cash rather than hold onto a speculative currency like Bitcoin. However, some industry experts believe Bitcoin would recover most of the losses in time. A new market cycle has started as many investors are now demanding more cryptocurrency assets to take advantage of the low prices.

While discussions are on the rise about the need to attain a cashless economy sooner rather than later, it is essential to note that our society still has more to do in the way of being ready for it. The COVID-19 pandemic, however, brings a sense of urgency, and the future of money might depend so much on how it plays out. It is also apparent that many people are ready as individuals to do without cash during this crisis, and it is advisable to adhere to that.

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