Increasingly, major purchases use a system of exchange several steps removed from the direct physical exchange. Minor purchases are following suit. Is this because cash is somehow bad, or no longer equal to the challenges of being spent? No. Cash is better than ever and a victim of its own success.
As cash disappears from daily lives and business transactions, replaced by electronic transfers, there’s concern about how digital transfers will be used. Are we becoming too traceable, and too much under the influence of banks and central governments?
At the same time as the traditional banking system has moved away from cash, the parallel digital assets system has moved inexorably towards it. Tokenization of assets, including fiat currencies and even other digital assets, has created a world in which financial transactions can be as instant, anonymous and final as any swap of coins.
So what is the future of cash? Will digital assets replace it? And how well-founded are concerns that lost cash is lost freedom?
Cash: the first two thousand years
Cash money is money guaranteed by an arbiter. Gold and silver are the traditional media of exchange once barter is superceded, but they have obvious disadvantages; as we’ll encounter again and again, their very success causes problems. Gold is too valuable for most retail transactions. A Troy ounce (gold is weighed in Troy ounces, which are 31.1 grams, 3g heavier than an ordinary ounce) of gold is currently worth $1,889. A US 1¢ coin made of pure gold would be worth $150 or so — awkward when you want to buy a newspaper, pay cab fare or get lunch.
There’s another problem: how do I know how much gold you’re offering? A return to weighed precious metals is common among people who have no trusted arbiter, which is why Vikings made their exchanges by cutting silver jewelry and artworks apart with axes to create ‘hack silver’ of roughly the right size. But what if a wily merchant has his thumb on the scales, or his weights are oversize? What if his gold is mixed with copper and silver? Sure, you could inspect his weights and bite his coin (pure gold really is soft enough to mark with a thumbnail). But every time you have to check and double-check that you’ve been paid for real, it imposes a burden on you. Those burdens are referred to as ‘friction,’ and we know that everyone from businesses to consumers will literally pay to avoid them. In fact, if you have a bank account, that’s exactly what you’re doing.
Banks evolved from goldsmiths, often licensed by the state or in the employ of noble families, who stamped their approval on their pieces of gold and silver. Now there are two kinds of value: the goldsmith’s guarantee, and the metal itself.
Which one is money?
Ever since the invention of franking, we haven’t been able to decide among ourselves. But we’ve voted with our feet, and increasingly we prefer the label as money and the gold as an investment.
First, gold coins were preferred to unfranked gold. In ancient Rome, there were several economic crises caused by the adulteration of the coinage — if the real value of the coin changes, but the label stays the same, the result is to destroy confidence in the gold and the coin. If there are two types of coin, stamped the same, but one type is known to be more valuable, the valuable ones are hoarded (as an asset), and the less-valuable ones are spent (as money).
The next innovation was the promissory note. At cards, in the hunt, at the tailor’s or during marriage negotiations, a nobleman didn’t always have large quantities of gold and silver on his person. The substitute was his “note of hand” and the topic bears brief discussion.
A note of hand or promissory note is a promise to pay later. A great lord, known to be rich, could write you a promissory note which was as “good as gold”, and this was literally true: these notes were treated as money, there is case law to support the idea that they were to be regarded as literally interchangeable, and they changed hands as so much money’s worth of paper. A banknote is a promissory note from a bank or a state. If you have any cash, you can check this for yourself. In the UK, the oldest home of central banking, the new, plasticized banknotes still bear the head of the Bank of England’s signature over the monarch’s “promise to pay the bearer on demand the sum of” so many pounds in money.
States began to issue promissory notes when, inconvenienced by the nineteenth and twentieth centuries’ unprecedentedly expensive wars, they found they had insufficient gold and silver about their persons. Physical notes were issued to the populace; promises to pay were offered to other states. In the story of cash, everyone from the wealthy to the ordinary, from institutions and businesses to the state to the individual, has played their part, introducing or spreading innovations.
From the banknote to the cheque and the credit card, the trend has been long but its direction unmistakable: the separation of money’s purchasing power from a physical store of value. When a modern consumer buys a round of drinks on a credit card, the bank promises to pay the bar, and the customer promises to pay the bank — i.e., to transfer figures from one electronic record to another. No money will change hands, and if it did, it would itself comprise merely the promise of payment.
The modern bank account thus bears little resemblance to a strong-box filled with gold. From trusting the goldsmith that the coins are pure and of full weight, we moved to trusting the state that it could make good on its promissory notes. Now, there is nothing behind the “promise to pay” but more notes, and a bank account is not an account of money owned by you and held by your bank; it is the bank’s account of its debt to you.
This being the case, what value has cash? Moving to purely electronic payments acknowledges a change which has already taken place.
Goodbye to cash?
Most businesses no longer use cash between themselves. Business-to-business transactions are typically instructions to debit one bank account and credit another; making these instructions digital, and the account an encrypted digital ledger instead of a physical one, does not alter the fundamental nature of the transaction. Where cash did, until recently, continue to be used was between people, and from consumers to businesses. You might make mortgage or rent payments through bankers’ drafts; clothing and food were bought with cash.
This has begun to change, and what is interesting is that the change is happening in some locations which are very unlike each other in every other way.
In China, for example, outside observers who have experienced payments in tier-1 cities may think personal cash use has all but disappeared and might be tempted to suggest that this is a top-down effort at social cohesion on the part of the Chinese government. Except it’s not. It’s the other way around.
In tier-1 cities, where there is sufficient infrastructure, businesses and consumers are simply defaulting to convenience, paying with QR codes and mobile apps from WePay Chat and Alipay. It’s easier, faster, and solves two problems with cash which have never really left us: counterfeiting, which is common in China, and storing and managing large piles of physical money.
Nikkei Asia reporter Hiroshi Murayama says, “as cash transactions become rarer, many Chinese retailers have difficulty making change. This reporter had no choice but to pay with a credit card at a restaurant in Hangzhou, southwest of Shanghai, when the restaurant refused to take cash. On another occasion, a restaurant in Shanghai refused to accept the reporter’s credit card.” Even credit cards are falling from favor as mobile payments apps supercede them.
While there’s little doubt the Chinese government would prefer a nation-wide, government-controlled digital payments system, the reality is that merchants in rural areas have difficulty making change. In those areas, the Chinese government still has to prop up cash-based businesses to drive economic growth, because only 56% of its population is online; any rural and older people don’t have access to mobile internet-enabled devices to make payments with.
Meanwhile, in Sweden, credit cards can be used to pay restaurant bills, taxi fares, bus and train fares, bills, and make any purchase in a shop. In some, consumers have a choice of payment options: card, Swish (electronic payment service), or QR codes backed by a range of mobile payment apps. Produce money and few will take it; banks will not accept cash deposits and there are few opportunities to withdraw cash. Yet Sweden is one of the most rules-based and individualistic nations on earth — a long way from China in every way. Is it a spirit of entrepreneurship that’s driving the switch from cash?
Not really. Sweden is aggressive in its attempts to prevent money-laundering, which is much easier in untraceable cash than in auditable, searchable electronic transfers. Opening bank accounts in the country involves close scrutiny of finances. Major payments are checked. As consumers pull convenience toward them, AML regulations and banks push electronic payments for their own reasons. If money increasingly consists of a bank’s guarantee that money exists, backed by a state’s insistence that its paper is worth the sum stated, the currency’s probity and reliability must be preserved. If China’s merchants seek to combat counterfeiting using electronic payments, Sweden’s institutions seek to render the institutional equivalent impossible.
But the switch from cash would itself be impossible if there were not a large market for it.
What’s leading the change? Reduced friction. Mobile payment apps are easier and faster. Banks don’t charge businesses to process payments using them, unlike credit cards. Mobile payments have some, though not all, of the traditional benefits of cash, combined with some, though not all, of the traditional benefits of banking.
Payment apps — a cash substitute?
Payment apps continue the process we talked about earlier — separating two core features of money, the ability to spend it and the ability to store it. As these become separated, one type becomes regarded as an asset and treated as such: accessibility is sacrificed for security. When the US operated on the gold standard it kept its gold in the proverbial Fort Knox; banker’s draft and banknote undertook transactions. Money was cash (notes) backed by gold; the notes circulated freely, but the underlying asset did not.
Payment apps operate as if a user’s bank account is the underlying asset. The payment app turns the digits in your bank account into a new set of digits, which is then moved from one account to another inside the payment app. When I pay Starbuck’s, no item changes hands; instead, Apple Pay debits my Apple Pay account and credits Starbucks’ account with the same sum.
In this sense, payment apps are entirely unlike cash. Instead, they are like a bank which provides payment services only; thus they can offer these services faster and more cheaply because they do not perform all the same functions, some of which are costly and time-consuming, and they are not subject to the same regulations. Proper banks take care of your assets (money), and payment apps take care of spending (money). Money has been divided once again.
The new future of cash payments
If we use a definition of cash that amounts to a description of extant cash types, there can be no future for cash. But if we take a description of the functions of cash instead, we can see a way forward.
For something to be cash, it has to be spendable, storable, self-representing and fungible. A coin must stand for itself. If I give you a dollar bill or pound coin, it’s gone from me for good. I have no further knowledge of what you do with it and no further control. That coin could have been a part of any number of anonymous, rapid transactions without the coin itself changing — and without the knowledge or say-so of any but the parties to the transaction.
Here we come to the problem of trust, which we must talk about in more detail.
Cash is trusted to be spendable and valuable and to be anonymous. Ransom notes call for suitcases full of cash, not electronic transfers. But why do we trust cash? In theory, we trust cash precisely because cash is trustless: no trust between parties, no trust in an intermediary. A buck is a buck. In practice, as we’ve seen, that’s never been the case. We trust cash because we believe that we’ll be able to spend a dollar for a dollar’s worth of anything. After all, the government obliges every merchant to accept it, and the banks require debts to them to be paid in it. Trust in money does come from outside, but it’s either diffused through society or permanently attached to the money.
Enter digital assets.
In a non-asset-backed, first-generation digital asset like Bitcoin, trust again is both diffused through the whole system and permanently attached to the coin. A Bitcoin isn’t like a gold coin; it’s like a copy of a bank’s ledger, in which you can only read your entry. Think of a Bitcoin like a card in Trello. On the back of the card is a full replica of the whole transaction history of the entire blockchain that supports the coin. The coin’s provenance is established — a vastly more sophisticated version of a goldsmith’s stamp, or a promise to pay. Because of the cryptography used, it’s a ledger that writes itself and can’t be overwritten, deleted or defrauded.
So Bitcoins behave like cash. For instance, many digital asset investors use a hot/cold wallet system, treating some of their digital assets like money and some as a saved asset. BTC is the most invested digital asset, but BTS is the most spent, by transactions; one is an asset, the other a currency. Money is divided once again.
Will we see digital cash replacing mobile app payments? Probably not. What about making payments to businesses in non-fiat currencies? That might have to wait for the banking system and the digital assets space to integrate further. But a replacement for many of money’s core features is already here.