Hashing Cash: Will Cryptocurrencies Replace Banknotes?


Earlier this February, German ministry of finance came up with a proposal to limit cash transactions to 5,000 Euros. While the move has launched yet another set of indignation ripples across local society, it can hardly be perceived as something new.

Most European countries have already imposed some restrictions on amounts transferred in cash. Thus, France has lowered the limit value to 1,000 Euros last September, while in Italy cash transactions are currently restrained at 2,999.99 Euro.

The vocal purpose of such limitation is to oppose money laundering and terrorism financing. For similar reasons, the European Union considers removing 500 Euro bank notes from the turnover, as large denomination banknotes might facilitate some illegal activities while providing minor advantages for everyday use.

In Sweden, however, the government seriously considers rejecting cash altogether to replace it with some cashless systems. Developed economies are evidently moving towards eliminating cash in some point in future. However, while the move might cause some joy in the cryptocurrency community, the problem of cash and cashless is a bit deeper than it may initially seem. Even omitting any political or ethical issues for the sake of clarity, the problem considered from economic perspective is still a bit complex.

Disadvantages of Physical Money and Emergence of Cashless Systems

Cash as it is bears some advantages and disadvantages inherent in its very nature. Being a completely anonymous method of payment, it is still a physical object, actual movement of which requires some energy and money. Paper money or coins are also prone to destruction, deterioration beyond repair, or simple losing. For that reason, any regulation of physical money is expensive and troubled. No regulator may know how much money there is in the turnover; the only thing it might know is how many bank notes it had issued. Paper money also may act as a store of value in some cases, or just as a treasure, if it is an investment coin. Physical money may be effectively counterfeited. Finally, there are expenses related to actual printing, denominating, adopting and eliminating, and so on. No remote payments are possible with physical money.

In fact there is no cashless form of money, there are only cashless settlements. Most of fiat currencies in existence are so-called fiduciary money, or, to put it plain terms, just pieces of paper without any substantial backing. This makes cash-based and cashless systems mostly similar.

Any government would probably prefer cashless systems to those cash-based. Running a cashless system is simply more convenient and advantageous from the regulation point of view. However, initial investment in transition to cashless systems may be beyond any imagination, as introduction of a cash-free society requires overdeveloped infrastructure for 100% of a country in question.

In a word, a cashless system is completely the same as a cash-based system, exclusive of the cash itself. It implies removal of physical bearers of value, while retaining their whole functionality.

Advantages of Cryptocurrency over Predecessor Cashless Systems

Firstly, cryptocurrency may grant anonymity or pseudonymity to a user, thus fulfilling one of the most prominent advantages of physical cash that cashless systems desperately lack. Any cashless system is controlled by a bank, which in turn is controlled by government regulation or the state itself, as a case may be, and therefore all AML and KYC requirements shine brightly in their full-fledged applicability.

Secondly, again contrary to cashless remittances, cryptocurrency may be transferred across borders with ease and grace.

Thirdly, fees of current payment systems are too high for most users to handle, and they are more or less the same for cash-based and cashless remittances. Cryptocurrency is known for its disgustingly low transaction fees, and thus turns out to be a method of choice for most people who care to use it.

Fourthly, traditional cashless systems are efficient in developed economies with stable political situations. In countries often referred to as ‘unbanked’ or ‘underbanked’, where a political turmoil may easily make local financial system paraplegic, and most everyday users stil rely on good old cash, such systems would be rare and expensive. Cryptocurrency-based systems, however, may thrive in the same conditions, as they do not rely on any political situation in a particular country, and are pretty affordable for those who cannot have a bank account.

Cryptocurrencies and Governments

However, there are some disadvantages derived from the very essence of cryptocurrencies.

Again, the lack of any administrators for cryptocurrency means that it cannot be effectively regulated. This may seem a good thing, however, regulation is not just an oppressive tool for governments, it is also an insurance against fraudulent actions by market players. The instance of Mt.Gox is a perfect example of what may happen in a completely unregulated ecosystem. Other cases of failed exchanges prove the same point.

Still, if, however unlikely, someone had managed to regulate cryptocurrency ecosystem, the requirements would have been pretty much the same as in case of a regular system. Yup, say hi to AML, KYC, and god knows what else again. All those measures require time, and therefore money, so cryptocurrency would lose one of its most important points of attraction, namely, reasonable pricing.

However, unless cryptocurrencies are regulated, no government would adopt them in their current form. Money is legally a governmental prerogative, and a government-free economy, still based on a fiduciary system, is something between a nightmare and a nonsense for any regulator.

Still, on everyday level, cryptocurrency manages to retain the most of advantages of cash (anonymity / pseudonymity and storage of value) and cashless systems (remote access and operations).

In fine, all advantages of cryptocurrency make it pretty attractive to average users, but at the same time make it unacceptable for regulators. In addition, the decentralized essence of the whole system and almost complete lack of any effective regulation make it prone to fraudulent actions, endless hacks of exchanges, and theft of funds.

There is little doubt that cashless societies will eventually emerge and thrive, as the demand for elimination of cash continues growing. However, considering the conflict between postmodernist payment systems and government regulation on several fundamental levels, with both of them having their own pros and cons, the most likely outcome will not be a triumph for one of the adversaries, but merger of the two systems into one. Seeing what actually happens, however, is a matter of some time.

by Jenny Aysgarth

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