With multiple options for digital payments and a growing interest in cryptocurrency, the world seems to be moving away from cash, but moving to a cashless society presents some problems.
Key Details
- Americans are increasingly moving away from using cash in daily transactions and instead opting for card payment or touchless systems like Apple Pay or Google Pay.
- An October 2022 Pew Research report found that 41% of respondents said none of their weekly purchases were made with cash.
- The growing prominence of cryptocurrencies adds another threat to the current cash system, as some argue that crypto presents a better monetary system than current standards.
- While cashless systems bring convenience and security to users, the untested system also presents potential problems if implemented nationally.
Why it’s news
As Americans move further away from cash transactions, some have started to raise the possibility of doing away with cash altogether and moving to a Central Banking Digital Currency (CBDC) system.
Cryptocurrencies are another option when transitioning to a fully digital system, but the volatility of current cryptos like Bitcoin make many investors and consumers hesitant to fully adopt the approach, according to a Moody’s Investor Services report. Cryptos will likely play an important function in the transition to cashless economies, but Moody’s report suggests they will not be the main form of payment.
CBDCs are more likely to see adoption. However, these government-backed systems come with some drawbacks, too. In the U.S., these systems are highly debated among government officials. On one side, Treasury Secretary Janet Yellen made comments in support of a CBDC system. Republican officials have pushed back against the suggestion and introduced legislation that would prevent the Federal Reserve from developing a CBDC.
Digital monetary systems offer benefits such as security and convenience. Unlike cash, a user cannot lose his digital currency. CBDC systems would also allow users to transfer money nearly instantaneously between buyer and seller, and a digital system would allow for convenient payment automation that would make major purchases—like automobiles—simpler and faster.
However, since a CBDC system would involve more government control, it also raises privacy concerns among citizens. University of Chicago economics professor Harald Uhlig points out that right now, cash transactions are private, but the government would log any transactions made in a CBDC system, whether the consumer was buying tomatoes or purchasing a house. While some monitoring of transactions may be necessary for national security, Uhlig argues that citizens have a right to privacy in their transactions.
In addition to privacy concerns, Uhlig also points out that no one is sure how transitioning to a cashless system would affect the banks.
“Why would people still need a bank account? Right now, they could maybe get all the payments through a CBDC account, and that means that the banking system would all of the sudden be sidelined,” Uhlig tells Leaders Media. “People would do their transactions: we are the central bank. There would no longer be deposit savings accounts.”
With fewer account holders at the bank, commercial banks would have less money available to them to issue lines of credit to customers. A 2022 Federal Reserve report acknowledged this issue, saying a CBDC system “could reduce the aggregate amount of deposits in the banking system, which could in turn increase bank funding expenses, and reduce credit availability or raise credit costs for households and businesses.”
While larger banks can have other methods of generating funding for loans, at least some banks would be affected by mass migration to CBDC and away from traditional banking.
Uhlig emphasized caution when transitioning to a cashless system, pointing out that some want to test this new method because it sounds “cool,” something he agrees with. However, he also understands the dangers of the unknown.
“You’re letting the genie on the bottle when you do that. You have to really start thinking about these privacy issues, these banking issues,” Uhlig says.
Overall, Uhlig thinks there are still some technical issues to be worked out before CBDC is a reliable monetary system, and though he is cautious about it, he looks forward to seeing it implemented one day.
“The question is, how long will it take?” Uhlig says. “I could easily see us in two generations not using cash anymore. Maybe one generation.”