What would a cashless society look like? According to the Federal Reserve, cash accounts for $1.7 trillion of total currency in the U.S alone. But as technology continues to evolve, will we shift closer to becoming a cashless society?
While the prospect of losing a national, physical currency may seem dramatic, proponents of a no-cash economy aren’t just fans of the latest cryptocurrency to flood the market. Some experts believe that cash actually assists some of the darker corners of our economy and eliminating it could help cut down on crime that relies on traceless financial transactions and improve financial regulation.
“I’ve been writing on the topic of paper currency for two decades, and when I first started looking into it, what shocked me was how much of it there was floating around—and how much of it was in large denomination notes,” says Kenneth S. Rogoff, Thomas D. Cabot Professor of Public Policy at Harvard University and former chief economist of the International Monetary Fund. According to Rogoff, this trend is fairly universal across developed economies, and much of that cash is being used to finance illegal activities including tax evasion, human trafficking, and the drug trade.
With so much of the underground economy relying on cash, it’s becoming increasingly clear that reducing the amount of physical currency in circulation could help to minimize certain types of crime and improve financial regulation. But is that feasible? Physical currency provides privacy and stability.
The Pros and Cons of Reducing Cash Circulation
“It costs nothing to print currency and we make a lot of money from it,” says Rogoff, explaining that the appeal of cash lies in its ability to be easily generated and distributed. But Rogoff emphasizes that cash may cost governments more than it benefits them. In fact, the IRS estimates that tax evasion in the U.S. costs the federal government an average of $458 billion per year, and that number is on the rise.
Regulating cash more strictly could help reduce those losses significantly, while also making it harder to conduct illegal transactions. But there are some things to keep in mind as we start to move in that direction, says Rogoff. “You don’t necessarily want to do this overnight, because it creates all sorts of chaos.”
Cash vs. Cryptocurrency: Navigating Challenges and Opportunities
While cryptocurrencies like bitcoin may seem like a good alternative, they present similar challenges, along with some new issues too. Designed with privacy in mind, these currencies are not beholden to any specific country and are therefore trickier to regulate. When new regulations are implemented, they can be subject to increased volatility which can — at least temporarily — make them a lot riskier than cash.
But while cash may offer a safer alternative to cryptocurrency, it generally ranks low when it comes to many day-to-day transactions. “For transactions of $50 or $100, cash is fifth behind debit cards, credit cards, checks and electronic transfers,” Rogoff says, explaining that only small transactions and illicit transactions generally rely on cash as a go-to option.
Cash Use in the Age of Technology
While cutting down on the amount of cash in circulation may help to stem some of the current regulation problems, we’re still far away from becoming a cashless society. “I think we need to have physical currency around forever for reasons of privacy and robustness,” Rogoff says, emphasizing that we should focus on becoming less reliant on cash rather than being completely cashless. “It may not always be paper—it may someday be something else—but I think we need a physical currency.” Even as technology continues to reshape our relationship with money, it seems like cash is here to stay.
The Bottom Line
Minimizing cash transactions has the potential of reducing criminal activities and tax evasion, but there are challenges, such as the need for a gradual transition to avoid chaos. The role of cryptocurrencies is an alternative, but they're volatility and they present regulatory difficulties. It's important to maintain some form of physical currency for privacy and stability reasons.
A potential solution might be to decrease cash dependency rather than eliminate physical currency entirely.
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