The end of the cash era

[Jayson Funke <jfunke@xxxxxxxxxx>]

The end of the cash era
Feb 15th 2007 
The Economist

Welcome the coming age of electronic money, but safeguard the anonymity of
cash

IN THE spring Adam Smith will replace Sir Edward Elgar as the face on
Britain's £20 note. The first economic thinker to be so honoured could well
be the last. Not because economists are especially undeserving, but because
cash, after millennia as one of mankind's most versatile and enduring
technologies, looks set over the next 15 years or so finally to melt away
into an electronic stream of ones and zeros. If an era is represented by its
money, the information age is at hand.

Notes and coins are already a small fraction of the money in most rich
countries. But going by the number of transactions rather than their value,
we still live firmly in a cash society. The European Payments Council
reckons that the European Union's 360 billion cash transactions cost at
least €50 billion ($65 billion) a year. Others put the bill at €200 a head.
Visa, a huge credit-card alliance, reckons cash accounts for most of the
$1.3 trillion spent a year across the world on small-ticket items. Whether
queuing to get money out and queuing again to spend it, or breaking a $100
bill with an irate cab driver one minute and having your pockets and purses
fat with coins the next, cash is plainly still king.

Yet signs of the new order are everywhere (see article). This week
mobile-phone operators announced services that will allow people to use
their handsets to remit money to those in other countries, even if both
parties do not have bank accounts. Numerous mobile-phone shopping-systems
are entering commercial use, especially in Asia. Japan has roughly 500
smart-card operators that supply “digital wallets”. Edy, the biggest,
oversees 15m transactions a month at 43,000 stores. In America MasterCard,
Visa and others have introduced plastic cards that without a signature or
pin number can settle bills under $25. Londoners will soon be offered a
credit card that doubles as a tube pass and a “wave and pay” purse. 

Nobody can be sure how fast bits and bytes will drive out metal and paper. A
hundred years ago you could still pay your taxes in Uganda in cowrie shells.
Perhaps hard cash will always find a niche, tucked away in children's
birthday cards and as money for the unbanked and phoneless. But most of the
time a phone or a smart card that can be waved over an electronic reader
will beat notes and coins hands down for convenience. The doubt—and the
remaining obstacle to digital money—concerns a third property of cash: its
anonymity. 

Gresham's law v Moore's law

Rendering cash as pure information is the final denial of the notion that
money has intrinsic value: what was once a carefully weighed piece of gold,
silver or bronze has become simply a token. That is a hard-won truth. As
John Maynard Keynes once lamented, when “it appears that value is inherent
in money as such” governments are able to con their citizens by debauching
the currency.

Yet when money is minted from silicon something remarkable happens. The
economics of handling cash—which today involves thick-necked men in
crash-helmets—is suddenly subsumed by Moore's law, which has seen the cost
of computer-processing power fall by half every 18 months or so. Electronic
information is instantaneous, weightless and exact. No longer the miserable
fumbling through coat pockets while a line of waiting customers quietly
fumes. Shopkeepers can do away with expensive cash floats and elaborate
ruses to stop cash fraud—such as charging $4.99 so that the $5 bill most
people hand over has to pass through the till for one cent change rather
than being trousered by a shop assistant. 

Information-money can be handled by any information-processing device. That
includes the mobile phone, which can add to money's utility thanks to its
display and its power at any time to link to your bank as a mobile ATM. Visa
thinks a contactless digital transaction takes less than half the time of a
cash one and that people liberated from what happens to be in their wallets
spend a fifth more.

Which is why digital cash is now solving its chicken-and-egg problem. In the
past shopkeepers would not install systems unless shoppers had electronic
cash. And shoppers would not use electronic cash unless they had something
to buy. But smart cards and readers have become cheap and consumers now
possess mobile phones in droves. The trillions of payments that are too
small to bear the fees of paying by credit card have come within reach and
almost everyone stands to gain. Some Japanese merchants have already begun
to offer discounts to people using electronic cash. Others will follow.

The buck stops here

Except there is that nagging question of anonymity. Privacy has a lot going
for it. The firms running payment systems might sell information about what
you buy and when. Prepare yourself for a barrage of e-coupons and offers
designed to fit your profile and uploaded to your phone. And there are more
serious concerns. In the cash world, anonymity can be a cloak for
wrongdoing. The suspicion clings that where you find anonymity you find
drugs, fraud, money laundering, terrorist financing and a huge amount of
humdrum tax evasion.

No wonder governments have long sought to control anonymous financial
instruments. The state is almost certain to limit the amount that can pass
through an anonymous card or phone. Eager to collect taxes from builders and
nannies, it will also be tempted to monitor electronic-cash payments.
Whether it does so is a political question, not a technological one. You can
design payment systems that protect against fraud and yet preserve
anonymity, just as you can design open systems or those that keep your
identity secret unless the authorities demand that it be revealed.
When it comes to trading convenience against privacy, most people seem to
back convenience every time. With cash, however, it might be different. The
more the state intrudes into electronic cash, the more it encourages
inefficient notes and coin. From the first slave who bought his freedom,
money has been what Dostoyevsky called “coined liberty”. As Adam Smith would
no doubt have observed, just because the state can pry into electronic cash
does not mean it should. 

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Jayson Funke

Graduate School of Geography
Clark University
950 Main Street
Worcester, MA 01610