Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


The Real Challenges of the Cashless Society

The cashless society is upon us; whether we like it or not. Unfortunately, few people seem to understand what the cashless society really is, even though they are living in it.

Ignorance about money is driving opposition to the cashless society. Sadly, such ignorance is most common among intellectuals; with wallets full of credit cards and Apple Pay on their iPhones, rather than peasants using Mpesa.

A typical example of this ignorance is a Foreign Policy op-ed that claims “China Can’t Afford a Cashless Society.” The piece is full of claims lack of paper cash hurts China’s poor but fails to provide a single scrap of evidence for such suffering for example.

In particular, the author Rui Zhong claims poor Chinese are being shut out of the economy by business refusing to take cash. Significantly Zhong fails to produce a single anecdote verifying the thesis.

One anecdote about a poor Chinese unable to buy food would have provided most compelling evidence for Zhong’s thesis. Yet there is no such anecdote, which casts doubt upon Zhong’s claims.

It is not a cashless society it’s a paperless society

Intellectuals like Zhong fail to understand the cashless society because they don’t understand money. For example Zhong, seems to think the only real money is paper bills.

Paper bills like the Chinese Yuan and the U.S. Dollar are not money. Instead, such bills are a representation of money or value. In reality, paper bills are a bookkeeping tool designed to make money easy to use.

Like a lot of technophobes, Zhong thinks the funds moved through digital wallets like WeChat and Alipay are not money. The People’s Bank of China (PBOC); the Middle Kingdom’s Central Bank, explicitly disagrees.

For instance, in July the PBOC ordered Tencent Holdings and Ant Financial to back all transactions in WeChat and Alipay with renminbi or Yuan. Therefore, the funds in WeChat and Alipay are “cash” just like paper notes issued by the PBOC.

Why intellectuals are afraid of the paperless society

This means the term “cashless” society is inaccurate. Conversely, there is more cash around than ever in the form of digital currency. Instead what we are moving to is a paperless society.

Ultimately, like Zhong are afraid of the paperless society. They fear what they cannot understand, and money they cannot see or touch. Notably, most of the cashless society’s greatest critics are intellectuals; usually writers, with a paper fetish.

The technophobes’ love of paper money is surprising because paper money is a technology. Like digital currency, paper money is the creation of a technological construct a printing press.

Moreover, paper cash like digital currency is an accounting tool designed to keep track of funds. Markedly, all paper-driven technophobia demonstrates is an intellectual‘s ignorance of financial and technological realities.

It is Paper Money not the Cashless Society that Hurts the Poor

Opposition to the cashless society should scare us because there is evidence that digital cash is better for the poor than paper money. For example, 17 million mostly poor people use the unencrypted digital currency Mpesa.

A point often overlooked is that paper cash requires a modern banking system for distribution. Therefore, paper cash cannot reach most people in the developing world and many poor people in the emerging and developed nations.

For instance, only 38% of the people in Colombia; which is hardly a backward nation, have back accounts. Nor are Colombians alone; only 28% of Filipinos and 29% of Peruvians have bank accounts, my friends at Rubius noted.

Paper cash is a convenient payment option for a middle-class American or Briton that lives in a safe modern city within walking distance of an ATM. For a Kenyan that lives in a remote village; or a Brazilian in a slum, paper cash is not a good payment option. The poor Kenyan, for example, might have to walk 100 kilometers to teach the ATM.

For instance, if the poor Brazilian could get paper cash from an ATM there is a good possibility the local gang members would take it before he got home. Paper cash is only a good option for people that live in a well-policed modern city.

The Cashless Society will help the Poor Enter the Middle Class

The greatest drawback to traditional cash is that there is no way to replace paper cash that is destroyed, stolen, or lost.

An inherent advantage to digital wallets like Alipay and WeChat is that they are insurable just like checking accounts. For example, insurance can replace stolen funds if hackers penetrate the digital wallet.

One of the great financial advances of the 20th Century was government-insured bank accounts for the middle and working classes. In particular, insured bank accounts enabled the working and middle class to save money without risk. That made a whole range of financial products including credit cards, mortgages, and car loans possible.

It also meant that families were not one lost paycheck away from poverty. In particular, insured bank accounts eliminated the nightmare of the family being unable to pay the rent because dad spent his salary at the bar.

Insured digital wallets can do the same for the people of the developing world and the unbanked in the United States. For instance, Pay as You Go (PAYG) solutions based on Mpesa are allowing people in Africa to purchase a wide variety of consumer goods.

 The Real Danger from the Cashless Society

The real danger is not the disappearance of paper cash that is inevitable. The danger is a bad or poorly executed transition to a paperless economy.

For instance, a real menace is the widespread use of uninsured digital wallets. Just imagine the catastrophe if something like PayPal ran out of money. Millions or tens of millions of people might find themselves with no cash.

A greater danger is solutions like cryptocurrencies and currency-conversion apps like Uphold that allow everybody to circumvent financial system controls and regulations. As an illustration the Financial Crisis of 2008 occurred because a few people; mostly investment bankers, figured out how to evade financial regulations.

What will happen when everybody; including the cab driver and the schoolteacher, can evade financial regulations at the touch of an app? Human nature guarantees that people will evade financial regulations – if they get the opportunity.

Specifically, the gravest threat from the cashless society is an unregulated financial system. Such financial anarchy will make 2008 look tame in comparison if they allow it to spiral out of control.

Accordingly, the greatest danger from paper-minded technophobia is ignorance of the true power of digital technologies. To clarify, the danger is not grandma starving to death because she cannot get cash.

The real danger is a grandma taking out unsecured high-interest loans through her phone. To put it differently, we might face something like the US mortgage meltdown of 2007-2008 on a global scale.

Obviously, we need an intelligent conversation about the cashless society and the financial technologies driving. Unfortunately, we will not get that conversation. Instead, all we will get is simple-minded hysteria that will enable intellectuals to ignore the real issues until the next financial crisis is upon us.