The Cambridge Security Initiative jointly led by Sir Richard
Dearlove, former chief of the Secret Intelligence Service, and professor
Christopher Andrew, a former official historian of MI5, is a think tank
specialising in security and intelligence.
The initiative has released a report on cashless society, authored by Alfred Rolington and the verdict is… cash is still king, and don’t expect to see it disappear any time soon.
This, however, runs contrary to the rhetoric of some central bankers these days, among them Andy Haldane, the BoE’s chief economist who has floated the idea of having the central bank issue its own digital cash as a means of combatting the zero lower bound. Haldane has also said central bank–issued digital currencies form a core part of the Bank’s research agenda as a result.
In more recent weeks, the ECB has ruled it will stop issuing the €500 note, on concerns it was being abused by criminals and used by militants to finance their activities — though some suspect the note was also compromising the central bank’s ability to institute negative interest rates, with large notes making it easier to hold vaulted cash for the purpose of dodging interest rate charges.
Separately, the Danish and Swedish governments have announced their intention to go entirely cashless in the years to come.
But despite the general push towards a fully digital and data-traceable monetary universe by those in monetary authority, the CSI study finds it’s unlikely the endeavours will be successful. For one thing the security challenges in going entirely cashless — as recent hacks on the Swift network emphasise — are significant.
The scale of recent cyber-attacks is such and the improvements in physical note protections and forgery detection are big enough to suggest transferring cash digitally may have become more dangerous than transferring it physically.
CSI’s Rolington further argues the cyber hacking of ATM machines and electronic bank accounts remains a growing but largely silent problem, often unrecorded by police and crime agencies. The skills gap with respect to protecting digital value (IT skills) over physical value (muscle), meanwhile, further exacerbates the problem.
Ironically, says Rolington, many central banks are printing physical money faster than ever, and employing sophisticated anti-counterfeiting printing security making it far more difficult to replicate or corrupt than electronic currency. From the report:
Ultimately, says Rolington, it’s also about consumer choice, as well as the preservation of national identity in the sovereign money supply.
Then there’s the uncomfortable reality for digital advocates that the average person still trusts in the physicality, privacy and convenience of cash more than they do the digital variety.
So, even as the buzz about digital payments is getting louder and louder, the number of transactions using cash remains on a rising trajectory, and not just in the emerging market. From the report:
Our enduring attachment to the physicality of cash is further corroborated by the continuing growth in the value of banknotes in circulation. The Eurozone, the US, Brazil and South Africa have all seen the value of their banknotes in circulation grow between 2002 and 2012 at 10.6 per cent, 5.5 per cent, 14 per cent and 9.5 per cent respectively.
Rolington says this proves money is more than information, and cites the continued production of physical stamps as proof that physicality often trumps convenience.
Indeed, what the sudden central bank penchant for digitising official cash really indicates, argues Rolington, is that central banks have “at last woken up to the fact that their wholesale interbank clearing and settlement systems can be bypassed by mobile-to-mobile payments. In which case, Bitcoin and the electronic platforms effecting the payments will have the capacity to create money.”
Thus far, their response to the unofficial money creation threat — which can also be summarised as the shadow banking threat — has been the inclination to ban cash. The irony is, physical cash is the one thing they can still control and the one thing that society still has a demonstrable yearning for on account of its true settlement capacity and its privacy features.
The FT’s own Chris Giles has suggested previously Andy Haldane’s call to get rid of cash had an unfortunate echo of Maoist China. Abolish cash, he says, and you invite tyranny:
Related links:
In cash we trust — abolish it and you invite tyranny – FT
How low can you go? – speech by Andrew Haldane – BoE
A digital solution for the repo squeeze? – FT Alphaville (April 2013)
Negative interest in cash, or goodbye banknotes – FT Alphaville (May, 2009)
Should We Subsidize the Use of Currency? – Richmond Fed
Cyberhacking as the next systemic banking risk – FT Alphaville
The initiative has released a report on cashless society, authored by Alfred Rolington and the verdict is… cash is still king, and don’t expect to see it disappear any time soon.
This, however, runs contrary to the rhetoric of some central bankers these days, among them Andy Haldane, the BoE’s chief economist who has floated the idea of having the central bank issue its own digital cash as a means of combatting the zero lower bound. Haldane has also said central bank–issued digital currencies form a core part of the Bank’s research agenda as a result.
In more recent weeks, the ECB has ruled it will stop issuing the €500 note, on concerns it was being abused by criminals and used by militants to finance their activities — though some suspect the note was also compromising the central bank’s ability to institute negative interest rates, with large notes making it easier to hold vaulted cash for the purpose of dodging interest rate charges.
Separately, the Danish and Swedish governments have announced their intention to go entirely cashless in the years to come.
But despite the general push towards a fully digital and data-traceable monetary universe by those in monetary authority, the CSI study finds it’s unlikely the endeavours will be successful. For one thing the security challenges in going entirely cashless — as recent hacks on the Swift network emphasise — are significant.
The scale of recent cyber-attacks is such and the improvements in physical note protections and forgery detection are big enough to suggest transferring cash digitally may have become more dangerous than transferring it physically.
CSI’s Rolington further argues the cyber hacking of ATM machines and electronic bank accounts remains a growing but largely silent problem, often unrecorded by police and crime agencies. The skills gap with respect to protecting digital value (IT skills) over physical value (muscle), meanwhile, further exacerbates the problem.
Ironically, says Rolington, many central banks are printing physical money faster than ever, and employing sophisticated anti-counterfeiting printing security making it far more difficult to replicate or corrupt than electronic currency. From the report:
This turbulent environment highlights the strength of bank notes and suggests that they will not disappear anytime soon. In fact a recent Euromonitor International report found that $14.4 trillion in consumer payments were made with cash worldwide, compared to a consumer payment card transaction value of $9.6 trillion. This in turn tells us that, despite the rise of plastic cards and electronic money transfers, globally, cash remains the principal means of payment.It is CSI’s view as a consequence that “paper and coin currency still has a very long-term future, and will not, and certainly should not, be made to disappear.”
Ultimately, says Rolington, it’s also about consumer choice, as well as the preservation of national identity in the sovereign money supply.
Government should continue to develop effective systems of control over electronic, printed and minted cash currency. They must ensure the right mix of the means of exchange within national economic and financial systems so that stability, control and sovereignty can be maintained.With respect to more recent payments innovations such as the growing popularity of Google wallets and mobile payments, Rolington warns that while the trend is self-evidently based on strong commercial influences, market monitoring, functionality and global interconnectedness, those advocating the systems don’t necessarily take account of potential weaknesses, security issues and unintended consequences produced by the digital revolution.
Our research suggests that the use of cash is fixed into the transaction processes of much of the world and is embedded into our societal culture
Then there’s the uncomfortable reality for digital advocates that the average person still trusts in the physicality, privacy and convenience of cash more than they do the digital variety.
So, even as the buzz about digital payments is getting louder and louder, the number of transactions using cash remains on a rising trajectory, and not just in the emerging market. From the report:
For example, cash transactions in the US totalled $1.2 trillion in 2010, and at least 20 percent of US citizens remain exclusively tied to cash. Looking at the wider world these numbers increase substantially. In the UK, for instance, ever since the financial crisis of 2008, demand for the £50 note has greatly increased. And so, despite the invention of electronic currency, cash in circulation has still been growing at exceptional rates in markets covered by this research; Australia, Canada, the Euro-Zone, Japan, and the United States. In some countries this process has been driven primarily by transactional cash, which is fuelled by sustained growth of GDP and consumer expenditure. The amount of people still using cash as an asset is large and increasing.Fundamentally, says Rolington, the identity and tangibility of cash gives cannot be digitised. The tangibility of cash is important not just as a symbol of the reality of money but as part of its role as a household budgeting tool.
Our enduring attachment to the physicality of cash is further corroborated by the continuing growth in the value of banknotes in circulation. The Eurozone, the US, Brazil and South Africa have all seen the value of their banknotes in circulation grow between 2002 and 2012 at 10.6 per cent, 5.5 per cent, 14 per cent and 9.5 per cent respectively.
Rolington says this proves money is more than information, and cites the continued production of physical stamps as proof that physicality often trumps convenience.
Indeed, what the sudden central bank penchant for digitising official cash really indicates, argues Rolington, is that central banks have “at last woken up to the fact that their wholesale interbank clearing and settlement systems can be bypassed by mobile-to-mobile payments. In which case, Bitcoin and the electronic platforms effecting the payments will have the capacity to create money.”
Thus far, their response to the unofficial money creation threat — which can also be summarised as the shadow banking threat — has been the inclination to ban cash. The irony is, physical cash is the one thing they can still control and the one thing that society still has a demonstrable yearning for on account of its true settlement capacity and its privacy features.
The FT’s own Chris Giles has suggested previously Andy Haldane’s call to get rid of cash had an unfortunate echo of Maoist China. Abolish cash, he says, and you invite tyranny:
The anonymity of cash helps to free people from their governments and some criminality is a price worth paying for liberty, as professors Stephen Cecchetti and Kermit Schoenholtz observe. It is better if the government creates trusted, anonymous notes and coins rather than some private agent.If you’re wondering what Andy Haldane’s response to that might be, we’ve engineered the perfect opportunity to find out. Haldane will be debating Chris Giles on cashless society at Camp Alphaville on July 1. If you feel passionately about the cash question — and want your opinions heard — we’d argue you can’t afford to miss this particular interaction.
Related links:
In cash we trust — abolish it and you invite tyranny – FT
How low can you go? – speech by Andrew Haldane – BoE
A digital solution for the repo squeeze? – FT Alphaville (April 2013)
Negative interest in cash, or goodbye banknotes – FT Alphaville (May, 2009)
Should We Subsidize the Use of Currency? – Richmond Fed
Cyberhacking as the next systemic banking risk – FT Alphaville
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