In Sweden, cash in circulation represents only 1% of the country’s gross domestic product, and some experts predict the nation will go “totally cashless” by 2023. In China’s largest cities, over 90% of people use WeChat Pay and Alipay as their primary payment method, with cash a distant second.
It may seem that the transition to a world without paper banknotes and metal coins is inevitable, but this week, a survey reminded us that reports of hard cash’s death may be greatly exaggerated. The study by Genesis Mining, titled “Perceptions and Understanding of Money 2020,” reports that 60% of Americans are opposed to the idea of paper money being replaced with digital-only money. “Americans are not psyched about parting with their paper money on a permanent basis,” commented Genesis CEO Marco Streng.
How does one account for this result if the march to a cashless global society (i.e., where cash is not a generally accepted means of payment) is inexorable, as some — including Jonas Hedman, a professor in the Department of Digitalization at Copenhagen Business School — have posited?
“There are several reasons for this,” Hedman told Cointelegraph, including “lack of trust in the central government and a poor payment infrastructure at the national level [in the U.S.]” Richard Holden, professor of economics at the University of New South Wales, told Cointelegraph: “The ‘greenback’ is iconic in a way that other currencies — perhaps with the exception of the British Pound — are not.”
Cash may stay around for a while
But maybe the United States is not just an outlier, and there are serious reasons why “cashlessness” might not burst forth overnight. A digital-only dollar could be perceived “as an incursion on privacy and individual freedoms,” Vinay Prabhakar, vice president of product marketing at Volante Technologies — a financial solutions provider — told Cointelegraph.
A cashless society may also discriminate against the poor, as Vlad Totia, a payments analyst at analytics and consulting firm GlobalData, told Cointelegraph: “A digital society requires people to at least have access to a device and an internet connection in order to manage their personal finances.” But many in the U.S. and other countries still don’t have this access, so eliminating cash risks further disenfranchising society’s least-well-off members — exacerbating income inequality.
There may be psychological barriers, too, Holden noted: “People have been using cash for a long time, and it has required a mindset shift to move fully away from cash. But many young people literally cannot imagine a world pre-iPhone.”
The world’s advanced economies would benefit significantly from going cashless, Holden continued. Digital payment schemes could curtail tax evasion and reduce illegal transactions that often take place using cash. Holden noted: “Cash is clumsy in many ways: it is slow during transactions, and handling cash is time-consuming and involves costly insurance for businesses.”
Usability of cash
Hedman has conducted research to show that Sweden is on course to become the world’s first cashless society by March 2023 — but that research was done before the coronavirus pandemic. Has his timeline changed? “Cashless will come much earlier,” Hedman told Cointelegraph. “Cash usage has dropped significantly during Corona.”
Totia agreed that COVID-19 has given a boost to the cashless trend. “Lockdowns, temporary closure of businesses, people not going out of their homes, ordering groceries at home. […] All of these aspects have pushed people into using online banking and payment methods more because quite simply you can’t use cash much in these times.”
There is a hygienic aspect too. A 2017 study in which researchers tested $1 bills that had been circulating in New York City concluded that “money could potentially mediate interpersonal transfer of microbes.” People don’t want to be touching bills that have circulated through many hands during a coronavirus pandemic, noted Totia, adding:
“However, the biggest bump in users have been people who were either too reluctant, comfortable, old or too used to paying by cash. These new have been basically forced to use a more convenient and easy method of paying […] and most will likely keep using these services after COVID-19 has passed.”
“Cash can be easily lost”
Prabhakar told Cointelegraph that digital payments are intrinsically more secure than cash, which can be lost and forged — and recovery is almost impossible: “Most digital transactions offer various levels of security and repudiability, e.g. the ability to dispute a credit card charge, which cash cannot compete with.”
There is also the matter of traceability: Mainstream cashless transactions carry essential information about the payment participants, including what was purchased and when the transaction occurred. “This makes money laundering and tax avoidance much harder,” Prabhakar added.
Digital payments are, possibly, more environmentally friendly. “Cash and metal coins use up precious natural resources, some of which are non-renewable and only recyclable up to a point: paper, copper, zinc, nickel, among others,” said Prabhakar. “In fact the cost of producing at two denominations — nickels and pennies — exceeds their face value. Digital transactions have in comparison zero environmental impact.”
Digital payment proponents also make the case that time is money, so faster payments should boost overall economic activity. According to Totia: “Cashless, mobile or QR code payments are a lot faster than paying by cash. For your average coffee shop or street food van, time is of essence at rush hour when serving long queues of customers. Saving even a couple of seconds for each customer results in more sales at the end of the day. Apply this to all small and medium businesses in a certain country and you have more economic activity.”
Hedman’s study of 750 Swedish retailers found that when cash transactions are less than 7% of the total payment transactions, the cost to manage cash is higher than any profit made on cash sales. “When this happens, an economically rational retail management should stop accepting cash.”
A circumstance “ripe for dystopian exploitation”?
But surely, there are disadvantages too. “Many of the drawbacks or dangers of cashless payments derive from the same source as their benefits,” Prabhakar noted. Traceability might make it more difficult for criminals to carry out their trade, but it might also be hurtful to honest citizens who have good reasons to keep transactions private, he said:
“By paying for certain types of medication — birth control [pills], say — with cash, the payer can be confident that while their pharmacy or doctor knows of the purchase, their credit card company or mobile phone provider does not. A centrally controlled digital currency would mean the government having access to every transaction made by everyone in the country, a situation ripe for dystopian exploitation.”
Also, while a digital money economy may reduce fraud in the aggregate, it could introduce new fraud risks in the short term that could cause widespread distress. “Until the bulk of people using a new technology learn the ropes of how it functions, fraudsters will target these points of least resistance that come with a new app or device,” said Totia. “Fraud will not necessarily be more common or less common, it will be different and in the short term.”
Will cashlessness really deter crime?
Many accept at face value the proposition that a cashless society would be a less crime-ridden one. Friedrich Schneider, a professor emeritus at Austria’s Johannes Kepler University, has conducted extensive research on this question. His findings have shown that anonymous cash makes tax evasion easier, especially for those who cannot afford to shift funds abroad, but it is not the main reason for tax evasion, and so, it is unlikely to eliminate it.
The same goes for crime and the shadow economy. By running simulations, Schneider found that if cash were completely eliminated, the shadow economy would only be reduced by 20.1% Regarding his research, Schneider told Cointelegraph: “The main scientific result is that cash is NOT the reason why people work in the shadow economy and/or commit crimes.”
Asked if going cashless could reduce crimes like money laundering, Bernardo Batiz-Lazo, professor of fintech history and global trade at Northumbria University, told Cointelegraph that it’s unlikely:
“As has been shown in India, it is naive to think corruption and money laundering will end through digital means. If anything libertarian-style crypto currencies such as Bitcoin are more amenable to these activities.”
Pummeling society’s most vulnerable?
Perhaps a more worrisome concern is that a cashless society might be a less equitable society. Martin Chorzempa, a research fellow at the Peterson Institute for International Economics, told Cointelegraph: “The elderly, undocumented, and other more vulnerable members of society would face immense challenges if paper money were entirely eliminated, as Sweden has discovered.” Meanwhile, Totia believes that the risk of lower classes being economically ostracized is “the only strong disadvantage I see” with eliminating cash.
Batiz-Lazo noted that “The COVID-19 pandemic might have increased the demand for cash by people in the lowest income strata and those living in rural areas,” and he sees danger in “attempts to rush the UK economy to rely solely on contactless and digital payments.” Prabhakar worries that a cashless society might exacerbate income inequality, hurting socioeconomically disadvantaged minorities, workers in service industries — who are often paid in cash — and others who “have neither the access to the banking system nor the technology tools to fully participate in a cashless economy.”
Will Sweden lead the march?
Still, the movement toward abolishing paper money appears to be accelerating, as has speculation about which country will achieve it first. Totia stated: “Sweden has a lot of political policies focused on moving the country to being cashless, and this might just make it the first.” However, he also noted that Finland has a chance as well, especially when considering it has a smaller population. Totia’s top three, in order, are Finland, Sweden and China:
“China is more complicated due to the fact that it has 1.4 billion people, However, QR code payments are extremely popular, even in more remote rural areas. Other strong candidates for going cashless within the next years are South Korea, Norway and maybe the UK.”
“China or Sweden seem the most likely alternatives to me,” opined Holden. “If Singapore wanted to do it I think they could pull it off very quickly given their advanced payments system, relatively small size, and strong central government.” Meanwhile, Prabhakar believes that: “In Asia, South Korea is a contender, with a smartphone penetration of 95% and the world’s fastest broadband facilitating adoption of digital payments.”
Government support may be needed
In sum, any global movement to abolish paper money is bound to be halting, with starts and stops. COVID-19 has accelerated the process, bringing on many new digital payment users. Still, some government intervention or support in the form of subsidies may be necessary to deal with the inequities that a cashless society might bring. “There is a big risk that people who are not tech-savvy or simply do not have the funds to buy and maintain a smartphone will essentially be kept outside of the active economy,” according to Totia.
Cointelegraph asked Hedman if he still believes global cashlessness is inevitable, as he declared before the pandemic began. “Yes over time it is inevitable,” he answered, “but in contexts where you don’t trust the government there will always be situations for decentralized solutions — cash. But fundamentally it will be a choice by consumers whether to pay with cash or not.”
Dash, ZEC and Monero reach boiling point?
On New Year’s Day, the U.S.-based crypto exchange Bittrex announced via Twitter that it was delisting three leading privacy coins: Monero (XMR), Zcash (ZEC) and Dash. A link promised further details, but those who followed it learned nothing to explain why trades in those tokens would end on Jan. 15.
Still, the news couldn’t have been entirely surprising. Regulators, both in the United States and abroad, have been casting a gimlet eye at privacy coins these days. Unlike Bitcoin (BTC) and Ether (ETH), the coins promise enhanced anonymity by hiding users’ addresses and transaction amounts, which make transactions more difficult to trace. Government agencies suspect they may be used for tax evasion, money laundering and perhaps other criminal activities.
The U.S. Treasury Department’s Financial Crimes Enforcement Network, for instance, noted in its Dec. 23 proposed rule change that anonymity-enhanced cryptocurrencies, or AECs, “have a well-documented connection to illicit activity,” having been “used to launder Bitcoins paid to the wallet used in the Wannacry ransomware attack,” for instance. Moreover:
“Several types of AEC (e.g., Monero, Zcash, Dash, Komodo, and Beam) are increasing in popularity and employ various technologies that inhibit investigators’ ability both to identify transaction activity using blockchain data and to attribute this activity to illicit activity conducted by natural persons.”
Elsewhere, the U.S. Internal Revenue Service announced in September that it would provide a bounty of up to $625,000 to anyone who could break Monero, the most widely used privacy coin — suggesting that the agency believes the coin may be used to hide taxable income.
“Bittrex’s action does not surprise me”
Timothy Massad, former chairman of the U.S. Commodity Futures Trading Commission and now a senior fellow at Harvard University’s Kennedy School, told Cointelegraph: “Bittrex’s action does not surprise me.” He went on to clarify that “the use of crypto for illegal purposes has been a top concern of law enforcement agencies and regulators in the U.S. (and elsewhere), so a focus on privacy coins is to be expected.”
The scrutiny of the coins is not confined to the United States. In 2019, the South Korean unit of OKEx delisted five privacy coins, including XMR, Dash and ZEC, citing the G20’s Financial Action Task Force’s Anti-Money Laundering rules — in particular, the need for the exchange to have an address for both the sender and recipient of a crypto transaction, which privacy coins do not provide. Japan, for its part, banned privacy coins in June 2018, referring to Monero, Zcash and Dash at that time as “three anonymous siblings.”
BTC remains “currency of choice for criminals”
But as is often the case with cryptocurrencies, things aren’t as simple as they first appear. While acknowledging that many of regulators’ concerns with privacy coins are valid, Jevans observed that “the data still shows that Bitcoin, which is more traceable than cash, remains the currency of choice for criminals because of the ubiquity of off-ramps into fiat.” Meanwhile, following the Bittrex delisting, Dash’s Twitter account unsurprisingly issued a defensive statement, noting: “Dash’s privacy functionality is no greater than Bitcoin’s, making the label of ‘privacy coin’ a misnomer for Dash.”
Others have suggested that the Bittrex action might have been an effort to get in step with the FATF’s Anti-Money Laundering guidelines, or “travel rule,” and if so, other U.S. exchanges may soon do likewise. Andrew Miller, a professor at the University of Illinois and a board member at the Zcash Foundation, had doubts about this explanation, telling Cointelegraph: “Since Kraken, Gemini and other exchanges continue listing privacy coins, I don’t think it’s because of a specific regulatory requirement.”
When Cointelegraph contacted Bittrex about its recent delistings, a spokesperson for the company said: “Bittrex does not have a comment for this story.” It should be noted that Bittrex U.S. also delisted XRP on Dec. 29, but that is likely down to the U.S. Securities and Exchange Commission filing charges against Ripple.
“Nothing inherently wrong”
Other commentators argue that there is not anything intrinsically problematic about privacy coins. Indeed, they are a useful innovation, though perhaps they need to be managed better. “There is nothing inherently wrong with privacy coins,” said Jevans, even if they make it easier to launder money than BTC.
As noted, cash is easier to launder than Bitcoin, yet no one is talking about eliminating cash, he suggested. Miller added that privacy coins, too, could be a counteragent for excessive monitoring of crypto markets on the part of authorities, including “warrantless bulk surveillance.”
Giulia Fanti, a professor at Carnegie Mellon University, told Cointelegraph: “The global economy is moving towards a digital financial system that will enable fine-grained surveillance by governments and/or corporations.” Privacy coins matter, among other reasons, as they signify innovation:
“They are helping spur the development of cutting-edge privacy technologies that could eventually be used in centralized digital financial services. So, while privacy coins can certainly be used for money laundering, they also provide an important counterweight to some concerning societal trends.”
Preston Byrne, a partner with law firm Anderson Kill, told Cointelegraph: “Privacy coins are an important innovation not just in terms of incentivizing the development of new decentralized crypto systems but also in terms of the importance to society of having a confidential means of entering into transactions generally, a role currently filled by cash.” Moreover, privacy coins may be less useful in hiding certain illicit activities than some regulators think — provided certain guardrails are in place, according to Byrne:
“Attempting to hide one’s activity through a privacy coin is also unwise due to the fact that, at least for the time being, getting from the cryptoverse into real assets requires touchpoints with regulated exchanges where KYC [Know Your Customer verification] is conducted. Pushing privacy coins off of exchanges where KYC takes place strikes me as counterproductive.”
Importance of “regulated touchpoints”
Still, Jevans believes that “we should expect more exchanges in the U.S. and globally to delist privacy coins in order to ensure compliance until they can deploy a risk-based approach to preventing money laundering.” This may not help, though, said Byrne: “In the long term, the explosive growth in so-called ‘decentralized exchanges’ will likely pick up the slack, without the benefit to the government of having coins occasionally make contact with regulated touchpoints.”
These “regulated touchpoints” could indeed prove privacy coins’ salvation. A custodial wallet operator, for instance, “can generally see the transactions a user is executing and can still require the user to provide some form of identity,” explained Fanti, adding:
“So, even if a privacy coin hides transaction contents on the public blockchain, there may still be ways to enforce regulatory requirements — at least for some important classes of transactions — with the cooperation of custodial wallet operators.”
Both Zcash and Monero also support a technology called “view keys” that give an option to disclose information about a transaction to auditors or regulators in a secure manner, as Miller added: “It’s a common misconception that privacy coins fundamentally undermine or are incompatible with the existing way regulations are applied” — a sentiment voiced on social media, suggesting that privacy coins are more about personal freedom than money laundering.
On Jan. 7, it was announced that a crypto custodian will issue wrapped Monero on the Ethereum network, suggesting that not just DEXs could be working on finding a place for the three so-called privacy coins to flourish.
Expect more KYC/AML enforcement
In the end, a kind of balancing act may be required on the part of regulators and the crypto community, where the challenge is to preserve the privacy strengths of cryptocurrencies but without making them a haven for money launderers and ransomware criminals.
“I would expect to see continued efforts to address the risk and to step up KYC/AML enforcement as the new administration comes in,” Massad told Cointelegraph, adding: “Whether privacy coins can be ‘managed better’ to satisfy both law enforcement interests and those who like the greater anonymity they provide is an interesting question. I can’t say I’ve seen that yet though.”
Heavy hitters of crypto call for users to comment on proposed FinCEN wallet rule
A number of players are encouraging individuals to speak out against FinCEN’s new crypto rules before comments close next week.
Crypto exchange Coinbase and the foundation behind Monero are the latest firms to join in calling for crypto users to share their thoughts on the U.S. Treasury’s Financial Crimes Enforcement Network’s new rules. In a blog post today, Coinbase CEO Brian Armstrong said the proposal would represent “too big of an intrusion” on users’ privacy, stating that crypto exchanges would need to collect and share names and addresses for anyone sending or receiving more than $3,000 in crypto in a single transaction. The CEO called on users to submit their thoughts to FinCEN before Jan. 4 when comments would be closed.
Monero Outreach issued a similar plea on Monday with seemingly more assertive language, specially requesting crypto users “voice their opposition” to the “dangerous new rules.” The group claimed that once FinCEN had the necessary customer information, regulators would be able to track all user transactions without a warrant, data that could be potentially compromised.
“This [rule] not been required before, and it will not only threaten the privacy of every cryptocurrency user today, but it will also impede creative future uses of cryptocurrency,” said Monero Outreach. “This is in an area that can easily go very wrong.”
FinCEN proposed the new rule on Dec. 18, giving individuals 15 days to comment with their thoughts. If implemented, the rule would require registered crypto exchanges to verify the identity of their customers under certain conditions, including using “an unhosted or otherwise covered wallet” and if the transaction exceeds $3,000.
Coinbase chief legal officer Paul Grewal later responded that the deadline to provide feedback was inadequate given the holidays and the ongoing pandemic. He requested the regulator provide a 60-day period for comments on the proposed rules. At the time of publication, the Jan. 4 deadline is still firm.
Meanwhile, non-profit crypto advocacy group Coin Center is encouraging “everyone in the cryptocurrency ecosystem” to file a comment on the FinCEN proposal. More than 920 parties have already submitted their thoughts to FinCEN, including Blockchain.com CEO Peter Smith and Compound General Counsel Jake Chervinsky. In a Twitter thread, Chervinsky claimed the rule would not “stop the flow of funds to bad actors or help law enforcement do its job.”
Smith, on the other hand, sent his comment directly to Treasury Secretary Steve Mnuchin. In a blog post last week, the Blockchain.com CEO said he believes the rule needs additional consultation and review before being considered, given the potential impact:
“Crypto is a nascent and growing industry. We have talented teams and entrepreneurs across the United States who are innovating yet would buckle under the weight of this regulation.”
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