Bitcoin, Cashless Economy and NIRP, Part I


Publications specialized in covering crypto-industry use the term ‘cashless economy’ in the context of convergence between modern-day national currencies and bitcoin. While bitcoin hasn’t been a coin or a banknote for a single day in the first place, national currencies are only starting to abandon those ‘barbarian’ forms.

Digitized national currencies require a certain degree of development in telecom and tech-awareness within the general public. This condition is similar for further propagation of private cryptocurrencies.

Chief economist of the Bank of England Andy Haldane highlighted another aspect of cashless economy: he linked it to a term ‘negative interest rate policy’ (NIRP). Economic publications mention cashless economy in this very context.

How different is bitcoin from national currencies of a cashless economy? How NIRP may influence companies’ tendency to use private cryptocurrency, with bitcoin being primus inter pares? Those questions are to be answered in the first and the second parts of present article, respectively.

Yet Another Shift to Cashless Economy

The process of shifting to cashless economy has been here before. Cashless monies are monetary units opposed to money itself, i.e. cash.

The first shift occurred when gold units represented by banknotes and state money with forced rate of exchange for gold severed any connection with the precious metal. Thanks to that disconnection, gold units ceased being cashless money and became cash. In other words, they turned into money from monetary units.

The term ‘cashless economy’ is lopsided: it stresses the shift to cashless money but omits the fact that yesterday’s cashless money thus becomes full-fledged cash.

The trend of rejecting modern-day cash in favor of money represented by records in bank ledgers (book money) is the same descending phase of cash evolution, similar to decline of gold. When we reject from coins and banknotes, the records will cease being cashless money subject to clearing with paper money or coins. They will effectively become cash, which is not subject to any clearing by definition. Banking debts will become money once again.

What’s the difference between the first and the second cycles? It’s in the fact that material carrier of cashless money that became cash is in owner’s property in the first case while in the second case it definitely isn’t. In other words, in the first case ownership of money carriers is equivalent to ownership of money itself, and in the second case, it is not. In the first case, a government or a bank cannot hinder using this money, but they surely can in the second case.

Rejection of the old cash in favor of the new isn’t possible without government forcing. Regardless of several macro and microeconomic benefits, we cannot say market subjects are daydreaming of getting rid of paper money to embrace account records instead. Several attempts to introduce digital cash, like MintChip in Canada or Mondex in the UK, have failed.

One may object that people in modern-day developed economies mostly use bank remittances instead of cash. It is true, but using monetary units knowing they may be cleared with cash anytime, and agreeing that monetary units aren’t subject to any clearing anymore isn’t the same.

In late 19th century, a lion’s share of turnover was serviced by gold units in the form of debt notes, banknotes and bank accounts instead of real gold. However, shifting from gold coins to fiat money, notwithstanding all advantages inherent therein, happened not at market’s will, but was forced by governments. For that reason, wide application of electronic bank remittances and failures of e-cash projects have no contradiction.

Shifting from gold to fiat demonstrates the fact that it takes a short time for market subjects to start perceiving new cash, recently forced by the government against their will, as something normal, essential and a matter of course. The previous incarnation of money is thus perceived as a barbarian atavism.

Bitcoin as Cashless Money


Bitcoin has always been a kind of money existing exclusively as records, and not being a unit of a currency or a commodity. This makes bitcoin a form of cash. In this regard, bitcoin is the first instance of disconnection of private money from national currencies, nearly 50 years after disconnection of national currencies from gold. As a new-generation cash, bitcoin is somewhat similar to bank account records. However, it has some important features.

Is a material carrier of bitcoin, i.e. information medium with its blockchain, in the property of an owner? Both yes, if a copy of blockchain is stored, and not, if it isn’t.

But even if the one in question stores a copy of blockchain, the blockchain itself isn’t in his or her exclusive property, as a distributed ledger implies storage by a multitude of independent individuals. Ownership of a material carrier of blockchain isn’t equivalent to ownership of bitcoins recorded therein.

Can a government block a bitcoin account? No, but miners may agree to omit transactions from the account thus effectively blocking it. A wallet provider like Coinbase may also restrict client access to an account.

Certainly, there still is an option of sending and processing transactions on your own. It’s the difference between bitcoin and national currencies. However, in practical terms, this difference entails expenses making it inaccessible to a regular user.

Bitcoin has been conceived as a unit moving through accounts of a p2p-network without any intermediaries. However, nowadays it moves through the intermediary of wallet providers and minders. Centralization is skyrocketing in cryptocurrency industry.

As opposed to miners, banks cannot mine empty blocks for a coinbase transaction. They have to process transactions to get their fees. Gradual reduction of block reward will eventually make only transaction processing profitable to miners.

Thus, as opposed to cash in the form of coins and banknotes, using both bank money and bitcoin is payable. Any intermediary services have to be paid. In a new cashless economy, using money is possible only upon approval from some third party, be in a bank, a government, a miner, or a wallet provider. Your money isn’t yours again.

by Dmitri Bondar

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