The coronavirus pandemic has cast a spotlight into the archaic nature of physical cash, while nudging the world towards digital currencies, one way or another.
Dwayne Jackson tried his best not to look irritated. “If only that ATM hadn’t issued hundreds,” he cursed under his breath, as the cashier at his neighborhood Kohl’s took his hundred-dollar bill and repeatedly ran it through the counterfeit cash-checking machine.
Under any other circumstances, Jackson would have given the cashier a piece of his mind, but she was black as well, with a name tag that said “Hi I’m Shaniqua and it’s my pleasure to serve you today.”
Jackson sighed and Shaniqua, noticing his impatience, said,
“Sorry, company policy.”
But Jackson’s cash was being checked, not because he was black, but because at thousands of stores across America, even twenty-dollar bills are being run through scanners.
It’s estimated by the U.S. Treasury Department that as many as 1 in every 4,000 greenbacks is counterfeit, or approximately US$200 million, yet American’s love for the cotton notes that are famous the world over, has never waned.
Cash Is King
As recently as 2018, a report from the U.S. Federal Reserve found that paper money (although it’s really made from cotton) continued to beat out digital spending, with cash still making up 30% of all transactions and over 50% of sales under US$10.
And despite the growth of online shopping, a whopping 77% of all payments in the United States are still made in person.
In America, cash is still very much king.
However, the coronavirus pandemic may fundamentally change our relationship with the green stuff.
With evidence from top Chinese scientists that the coronavirus will never be completely eradicated, our lives will be changed forever, including the places we go, the people we see, how we see them, how we travel and importantly, how we pay for it all.
Despite there being scant evidence that physical cash notes can act as vectors to spread the coronavirus, in the early days of the pandemic, Chinese authorities ordered banks to disinfect cash before issuing it to the public.
And Chinese banks across the country were instructed to withdraw potentially infected cash from circulation, disinfecting it using either ultraviolet light, or heat treatments.
In a country where Alibaba Pay and WeChat Pay are the dominant digital payment processors, using ubiquitous smartphone apps, cash still plays a major role in the Chinese economy.
But all that may change as the People’s Bank of China begins gradually rolling out its own central bank-issued digital currency.
Coronavirus Cash
Whether founded or not, the coronavirus pandemic has raised genuine concern that cash, which is already covered in germs and other bacteria, could help further spread Covid-19.
Even Valdis Dombrovskis, the vice president for financial services with the European Commission suggested as much in a recent tweet,
Given that our obsession with physical money dates back some 7,000 years to ancient Mesopotamia, are we really ready to abandon our physical friend?
To be sure, money today is vastly different from what it was over 7 millennia ago.
The Evolution Of Money
Physical money has evolved from tokens that represented goods in warehouses, to precious metals, to coins and paper or plastic notes and now even digital currencies, including decentralized private currencies such as Bitcoin and Ethereum.
Even if the threat of spreading coronavirus via cash is more perceived than actual, our love affair for physical money may forever be altered even by the simple risk that cash may not just be king, it may be a highly contagious king.
The technology to pay and transact digitally is already accessible — shifting to digital currencies would require more of an ideological shift than a technological one.
In Sweden, some 87% of transactions already occur digitally through private payment companies.
And even though the Federal Reserve has been icy towards the issuance of its own digital currency, with chairman Jerome Powell suggesting not too long ago that central bank-issued digital currencies were a “problem in search of a solution,” that sentiment may have changed somewhat.
In early drafts of the coronavirus stimulus bill, Democratic Senator Sherrod Brown, who has been a strong opponent of Facebook’s Libra cryptocurrency, sought to include digital wallets and a Fed-issued digital currency as part of the language of the bill.
The stimulus bill ultimately excluded such provision, but clearly, Washington may be more open than ever before to the idea of a Fed-issued digital currency.
For the estimated 1.7 billion people worldwide who do not have access to bank accounts or basic financial services, a government-issued digital wallet could be a godsend.
Besides liberating the unbanked from predatory payday lenders and check-encashment services, a central bank-issued digital wallet would also give them access to the liquidity that they need — whether through direct loans from the central bank to start a business, or a wallet to receive payment for online or other business activities.
And because a digital wallet also serves as a ledger, it would provide every business, in particular small businesses, a digital ledger of its cash flow and sales, making it difficult for employees or middlemen to pilfer because customers would pay into the seller’s digital wallet directly.
There would also be less friction in payments.
Whereas credit card companies charge merchants a princely sum for the privilege of using their facilities, a digital wallet allows businesses to transact directly with their customers.
And a reduction in cash, could also provide a reduction in the cost of doing business.
The time spent, the risk taken by transporting the cash, and the risk of holding cash at a small business, which could always be harassed by organized crime or robbed, means that cash in and of itself, puts an unseen cost on businesses.
And given the unprecedented amounts of debt that governments have issued to weather the coronavirus pandemic, a digital wallet with central banks would also make the collection of taxes far more effective.
For instance, in California, a 15% excise tax on licensed marijuana sellers is estimated to capture only one-third of all activity, while the cash-based black market for marijuana avoids most of the tax.
Digital wallets could change all that because as consumers demand to pay in digital dollars, sellers would find it much harder to avoid tax as there would be an immutable ledger of transactions — something that would be particularly helpful in developing countries where tax collection remains an intractable problem.
Digital wallets would also make it much simpler for individuals to calculate and file their income taxes and for governments to ensure that they collect on those taxes
And it’s not just a one-way street.
In the United States, the existence of a digital wallet would have greatly improved the government’s ability to help individuals and small businesses during the pandemic.
Americans who signed up for a direct deposit received stimulus payments far in advance of those waiting for physical checks to arrive in the mail.
And the federal government is still building out its ability to send prepaid debit cards to the millions of Americans who remain unbanked.
If all Americans had digital wallet accounts with the Federal Reserve, these disbursements would happen far more rapidly.
And if digital wallets for Federal Reserve currency catches steam, could it set the stage for more widespread acceptance of other digital currencies including cryptocurrencies?
Quite possibly.
Cashing In On Cryptocurrencies
Because when money starts to lose its physical representation, ideologically, people can become more open to other forms of value.
Take for instance how digital skins (graphical representation of game items such as weapons and armor) are traded in popular online games such as CS:GO and Fortnite, an industry valued at an estimated US$50 billion, and it’s not difficult to see how what represents “value” can change as society itself changes.
And given how social distancing and self-isolation have fundamentally upended the human experience, people, hungry for greater interaction may instead turn to digital representations — because you can’t catch coronavirus through a screen.
Against this backdrop, as more central banks consider issuing their own digital currencies, there is the potential, albeit somewhat speculative, for cryptocurrencies such as Bitcoin and Ethereum to make the leap into the mainstream.
Because when the physical manifestation of what is considered “money” starts to fade, when we shrug off our obsession with being able to “feel” and “touch” money, then technically we become more open to accepting new forms of money.
In that sense, cryptocurrencies could become a form of “private currency,” freely traded with government-issued central bank digital currencies and having their own exchange rates very much the same way a sovereign country has its own exchange rate.
And unlike a nationally-issued currency, cryptocurrencies, especially Bitcoin, which are not centrally-controlled, would have far more free-floating properties than say a national currency, subject to the whims and vagaries of the government of the day.
To be sure, that transition is some time away.
Sweden’s Riksbank is doing early testing on an e-krona, and the Marshall Islands announced last fall that it would be building out its own digital currency.
Facebook’s plans to issue its own digital currency — Libra, have since been watered down tremendously.
Had the coronavirus pandemic never occurred, it is entirely possible that the shift towards digital currencies and by extension cryptocurrencies, may have taken far longer or may never have happened.
But the slow rise of digital currencies in general has been given a significant boost from the pandemic, which in the greater good, is a shift in the right direction.
