The end of money

As nations around the world abandon cash in favour of mobile banking, we may well be witnessing the demise of physical money

The end of money
Cashless payments have overtaken the use of notes and coins in many advanced economies 

On November 8, 2016, Indian Prime Minister Narendra Modi launched the biggest financial experiment in the nation’s history. In a televised announcement, Modi gave his citizens just four hours’ notice of his controversial ruling: that virtually all the nation’s cash would be immediately taken out of circulation. All 500 and 1,000 rupee notes were instantaneously declared worthless, and the Indian population were given just 50 days to deposit their newly voided notes in their bank accounts.

In the weeks that followed, chaos flared throughout urban and rural India. Equating to around $7.50 and $15 respectively, the invalidated 500 and 1,000 rupee notes had previously accounted for approximately 86 percent of the currency in circulation in India – a nation where 90 percent of all transactions are carried out in cash.

With the main media of exchange suddenly removed, Indian consumers faced long lines at local banks, empty ATMs and a barrage of ever-changing information as they struggled to adjust to their new near-cash-free economy. Markets took a drastic hit as workers abandoned their jobs to wait in line at the bank, desperately hoping to deposit or exchange their cancelled notes.

Now, less than half a year on from Modi’s dramatic demonetisation, the long-term effects of the decision are becoming clear. The nation’s expansive informal market has borne the brunt of the surprise policy, with many small businesses folding under the prolonged financial pressure. With home and car sales plummeting and investments drying up, the IMF has slashed India’s growth rate by a full percentage point.

Although Modi’s decision appears both radical and misguided, many countries are likewise moving towards a cash-free future. From Scandinavia to sub-Saharan Africa, consumers around the world are abandoning cash en masse, opting instead for digital payments and on-the-go banking (see Fig 1).

The problem with cash
Money is fast becoming digital. In at least eight countries, including Kenya and Zimbabwe, more people have registered mobile accounts than traditional bank accounts, while cashless payments have overtaken the use of notes and coins in many advanced economies. In the eyes of some high-profile economists, this trend towards digital payments is something to be encouraged.

For all the advantages of cash – convenience, anonymity and liquidity, to name a few – paper money comes at a cost. Even as cash usage falls, today there are more high-denomination notes in circulation than ever before. In the US, 20 times more cash is floating around than just 40 years ago, with cash in circulation hitting a record $1.5trn in January 2017. Incredibly, 80 percent of all US currency is made up of $100 bills – enough for every citizen to be carrying 35 of them at any one time.

But given how infrequently the average US citizen professes to come into contact with a $100 bill, it is safe to assume the majority of these notes are feeding into a vast underground economy. From tax evasion to terrorism, the anonymity of paper money allows a global, cash-based black market to thrive.

While the use of cash may be on the decline in the legal economy, the prevalence of big bills allows criminals and corrupt individuals to hide large volumes of illicit funds. According to the UN Office on Drugs and Crime, criminal markets including drug trafficking, human smuggling and fraud are now worth an incredible $2trn a year.

Clamping down on the criminal use of cash was the driving force behind Modi’s extreme demonetisation effort. Describing the move as a “historic purification ritual”, the Indian Prime Minister has since defended his policy, insisting it will help to clean out the black market’s cash supply and eliminate counterfeit notes.

If the rise of cryptocurrencies has taught us anything, it’s
that eliminating cash doesn’t eliminate crime

Bhaskar Chakravorti, an economics scholar and Executive Director of the Fletcher School’s Institute for Business in the Global Context, said: “The initial argument made by Modi was that these bank notes were demonetised to flush out the underground economy – known as the ‘black economy’ in India – or to flush out the illegal activities carried out by underground groups and terrorist groups.”

But while combatting crime may have been Modi’s initial aim for demonetisation, in the months since the move, another target has emerged: cutting the cost of cash. In every nation across the globe, the use of cash incurs a significant cost, from the price of printing money to ATM maintenance and withdrawal fees. At every stage of the complex supply chain, paper money comes with a substantial price tag.

“In India, the cost of cash is very high”, Chakravorti told World Finance. “The logistics of moving cash in a country like India is a very costly affair, given the nation’s poor infrastructure, congested cities and low density of ATMs, particularly in its rural areas.”

Indian consumers, meanwhile, are forced to pay both the real-world cost of ATM fees and the implicit cost of time spent going to collect cash, with such losses eating into margins, particularly among the poor. What’s more, India’s cash-based economy allows between 98 and 99 percent of all citizens to avoid paying taxes, with prolific cash usage contributing to a huge loss of potential revenue for the government.

While the cost of hard currency may be higher in India than in most developing and advanced economies, the same problem exists for countries across the globe: consumers, businesses and governments are losing billions of dollars annually in cash-related costs.

A Swedish success story
More than 350 years ago, Sweden made history by becoming the first European country to print paper money. Now, the Scandinavian nation is leading the race to become the world’s first completely cash-free society.

Unlike India’s overnight transformation, Sweden’s journey towards a cashless economy has been a gradual process. The transition began as early as the mid-20th century, when banks convinced employers and workers to pay and receive salaries through digital bank transfers. Since then, Sweden has slowly fallen out of love with paper currency, while non-cash payments have been on the rise (see Fig 2).

These days, Swedish retailers are legally entitled to refuse payments in coins and notes, and it is impossible to purchase a ticket for the Stockholm metro using cash. According to the nation’s central bank, cash transactions accounted for just two percent of all payments made in Sweden in 2015, while the number of notes and coins in circulation has fallen by 40 percent since 2009. What is perhaps most unusual, however, is the rate at which the nation’s financial institutions are going cash-free.

More than 50 percent of Swedish bank branches are now cashless, meaning customers simply cannot make a deposit or withdrawal. For many Swedes, these traditional banking services have been rendered almost obsolete by the hugely popular mobile banking app Swish. Used by almost half of the population, the app is the product of a collaborative effort by six Swedish banks, and allows users to transfer money at the tap of a button.

Cash-free Kenya
Just as mobile banking has driven the cash-free revolution in Sweden, technology is having a similarly transformative effect on the Kenyan economy. According to the World Bank, half of all mobile money transactions in the world now take place in the African nation, where annual transfers have reached an impressive $10bn.

This widespread use of mobile banking can be credited to the meteoric rise of M-Pesa, a mobile phone-based finance service. When M-Pesa was first launched in 2007, few Kenyans had access to a traditional bank, and fewer still had a bank account. Since its debut, the mobile service has become ubiquitous in the daily lives of millions of Kenyans, and has leapfrogged the debit card-based path that most developed countries have for years pursued (see Fig 3).

Now, half of the nation’s total GDP is transacted through M-Pesa, and the service has extended financial inclusion to millions of customers beyond the reach of formal banks. M-Pesa’s remarkable impact on Kenya’s financial system has served to demonstrate the transformative potential of mobile money systems in the developing world.

Today, a number of M-Pesa-inspired mobile money services have sprung up throughout sub-Saharan Africa, Latin America and southeast Asia, as these nations look to leapfrog the traditional banking system. According to the World Bank’s calculations, mobile money is now available in 81 percent of low-income countries.

Although geographically and economically disparate, both Sweden and Kenya have succeeded in digitalising their financial systems, without dramatically killing off cash. This isn’t to say, however, that demonetisation never works – provided the process is sensible and, most importantly, gradual. In March 2016, for example, the European Central Bank declared it was phasing out the seldom-used €500 note – a move that has largely gone unnoticed by tax-paying participants in the legal economy.

Chakravorti said: “The €500 note used to be called the ‘Bin Laden’ note, as it used to be popular with terrorist organisations, who used it to essentially enable the cash transactions that they needed to maintain their network. In a situation like that, where you’re removing a banknote that consumers hardly ever use, it makes perfect sense to demonetise it and make it that much more difficult for illegal and underground transactions to take place.”

Bad economics
While big banknotes are being successfully scrapped everywhere from Europe to Singapore, India exemplifies the dangers of a poorly executed demonetisation drive.

“Your hardship won’t go to waste”, Prime Minister Modi promised concerned citizens shortly after the demonetisation came into effect. “The country will emerge from this like gold.” But even now, months on from Modi’s controversial move, the fallout from the decision continues to wreak havoc on India’s informal economy and vulnerable small businesses. Demonetisation opened a Pandora’s box for the nation, and the ensuing crisis has been hardest on the rural poor.

According to Chakravorti “It has had a disproportionate effect on the poor, and particularly people who make their earnings on a day-to-day basis using cash… Low income individuals tend to do virtually everything using cash.”

Despite the prime minister’s advice to embrace mobile banking in the wake of demonetisation, this option simply hasn’t been feasible for millions of rural, low-income Indians. Although the nation is home to some of the largest cities on Earth, 67 percent of the Indian population still lives in rural areas, where internet connection is patchy and unreliable at best. For these rural communities, a lack of digital infrastructure means e-payments are not a suitable alternative to cash.

Instead, the overnight cash shortage saw many rural and low-income Indians turn to goodwill and bartering in order to carry out transactions, demonstrating tremendous adaptability in the face of adversity. Yet while millions of Indians still struggle to adapt to Modi’s new cash-light economy, the prime minister insists the move is for the greater good, by working towards eliminating India’s expansive black market.

But in this endeavour, Modi has been unsuccessful. India’s black economy may well account for more than 20 percent of the nation’s GDP but, crucially, the majority of this wealth is not held in cash. According to Chakravorti: “Only about five to six percent of assets in the underground economy are held in cash, and 95 percent of those assets are held in non-cash instruments… Demonetisation means you are just getting rid of cash that is used by day-to-day citizens, and not making any significant dent in removing the underground system.”

In his attack on India’s black market, Modi has failed to observe the fact that removing a criminal’s currency does not eliminate crime itself. The causes of crime are indeed complex, and while high-denomination notes may facilitate illegal activity, crime is not explicitly tied to cash usage. From poverty to debt, the economic motivations that encourage illegality are vast and difficult to address. Similarly, as Modi pushes for money to become digitalised in India, he must be aware that crime is heading in the same direction.

Prime Minister Modi’s demonetisation of high-value banknotes wreaked havoc on India’s informal economy

The dangers of digital finance
If the rise of cryptocurrencies has taught us anything, it’s that eliminating cash doesn’t eliminate black markets. Hidden in the shadowy corners of the internet, online illegal activity is thriving thanks to the birth of bitcoin and other seemingly untraceable payment systems. In October 2013, the FBI made its biggest dark web bust to date: shutting down the Silk Road, an online anonymous marketplace used to sell illicit substances and materials. In its short, two-year lifespan, the site reportedly saw over $1.2bn in sales, arguably making it the world’s largest communal marketplace for drugs.

In other less shady corners of the web, however, an increasing number of law-abiding citizens are falling victim to a range of complex and costly cybercrimes. Today, online criminals have become sophisticated hackers, able to drain entire bank accounts in mere minutes. With cyber-attacks on the rise, the prevention and prosecution of such crimes is now an international priority. This very issue sparked the creation of the BITCRIME agency, a German-Austrian research project dedicated to investigating effective criminal prosecution of financial crime committed with virtual currencies.

Speaking to World Finance, BITCRIME researchers confirmed they have observed a sharp increase in virtual currency-related crime in recent years. “One particular type of crime that we are seeing more frequently is extortions using ransomware”, said Dr Paulina Jo Pesch, Project Coordinator at BITCRIME Germany. “Ransomware is a malware that encrypts users’ data and demands a ransom payment to regain access to the data. In these crimes, blackmailers almost always use bitcoin for the ransom payment.”


of Swedish payments were made using cash in 2015


of Swedish banks do not carry any cash


of low-income countries have access to mobile money


of the world’s mobile transactions take place in Kenya

Fraud and extortion are nothing new in the criminal world, but this means of payment certainly is. Whereas such offenses have previously been carried out using conventional paper money, bitcoin and other cryptocurrencies can now provide criminals with a fast, convenient and near-untraceable form of payment. Pesch explained: “Criminals can benefit from using bitcoin, for instance, as receiving an online payment is much less risky than a cash handover in real life. In this way, clever blackmailers are able to minimise the risk of being identified and punished.”

It is this promise of anonymity that makes virtual currencies so attractive to large-scale criminals, whose illicit transnational activities demand discretion. As many bitcoin sceptics have pointed out, law-abiding citizens simply don’t need completely anonymous, untraceable transactions. If, for some reason, the average consumer were to wish for a degree of anonymity when making a purchase, then they would still have the option of using cash, which is only affected by financial regulations in quantities greater than $10,000.

Bitcoin does, however, boast a large number of lawful users, many of whom have dabbled in the currency simply out of curiosity. This legal user base makes it difficult to calculate how many bitcoin transactions are made for criminal purposes, although researchers have made informed estimates. According to the BITCRIME agency, the darknet Silk Road marketplace represented a significant nine percent share of all bitcoin transactions at its peak, suggesting criminal activities do indeed make up a substantial portion of virtual currency usage.

However, while bitcoin was touted as an entirely anonymous system when it was launched in 2009, law enforcement officials have become more adept at following the digital trail it leaves behind. Bitcoin-tracing evidence has played a major role in two Danish trials this year, while multiple arrests have been made worldwide following the collapse of the Silk Road. Yet as tracing technology improves, bitcoin systems are also evolving to provide greater anonymity. Pesch warned: “Even with the most advanced software, investigators will not be able to successfully solve all cases.”

Committed to cash
Futurologists have long predicted cash will one day become obsolete. With the advent of blockchain technology, mobile money and similar innovations, it appears we are indeed heading towards a cashless world. Yet for all the convenience that digital payments offer, many remain reluctant to fully part with their notes and coins.

Chakravorti noted: “There are a number of reasons why people still like to have physical money – for emotional reasons as well as security reasons… Our connection with money is very different to our connection with photographs, films, books and other things that have been replaced with digital alternatives.”

Cash may have been relegated to second-class status in Scandinavia, but elsewhere in Europe paper money remains popular. Germany is one of the most cash-intensive economies in the developed world, with over 80 percent of transactions still being carried out in physical currency. In neighbouring Switzerland, the central bank has no plans to demonetise its largest bill, insisting the 1,000 franc note remains a useful tool for transactions. Even in cash-light Sweden, two thirds of citizens believe access to paper money is a human right.

This reluctance to give up cash may indeed be justified; despite significant technological advances, digital money is unlikely to ever match cash for liquidity and ubiquity. Even as the finance sector undergoes a digital transformation, cash remains king – for now.