Snippings

Cash is, statistically, not being used to buy things. It is no longer primarily a means of exchange. Figures from the Bundesbank show that nine out of every ten euro banknotes issued in Germany are never used in payments but hoarded at home and abroad as a store of value. Not “rarely”. Not “infrequently”. Never. The notes are not in circulation at all but are stuffed under mattresses.

Similarly, down under, the Reserve Bank of Australia (RBA) Bulletin for September 2017 notes that the value of notes “in circulation” has gone up 6% per annum for the past decade while the use for payments has collapsed (from two-thirds of consumers payments down to one-third) over the same period. It goes on to note that higher cash usage may be concentrated in “groups not included in the survey of consumers (who may well use cash more often than the average consumer)” as well as the shadow economy.

The shadow economy certainly seems to include some big fans of traditional cash. Take, for example, this woman from Leeds in England who just got three years porridge for trying to smuggle almost £2 million out of the UK in her suitcases. My first thought on reading this was “don’t they have Bitcoin in Leeds” and my second thought was three years clink seems a bit rough for juggling two million.

(In the UK, money laundering is an offence under the Proceeds of Crime Act 2002 and carries a jail sentence of up to 14 years or a large fine. The sentence depends on the amount of money involved as well as the purpose — laundering drug money will get a tougher sentence. The progression appears logarithmic: Laundering £25 million will get you 11 years, whereas laundering £2.5 million will get you half as much.)

In the USA, money laundering drug cash is similarly frowned upon. Despite this, there ear more $100 bills in circulation than $1 bills and something heading toward three-quarters of all US bills are held abroad. Across the globe the story is the same. Australia sees the same dynamics and New Zealand has is the same “cash paradox” where, while the amount of cash used for transactions continued to fall, the amount of cash in the hands of the public continued to rise.  But, anyway, my point is: There is a use for cash and that cannot be displaced by central bank digital currency (CBDC) since no sane government will allow anonymous CBDC wallets.

So what should be done? Well, on the one hand, you could argue that printing $100 bills is a decent business and the government should be encouraged to supplement its income in this way. But, as the The Economist points out, that’s so long as the Treasury doesn’t think about how much organised crime and tax evasion costs the exchequer. In fact they go to estimate that maybe half of all cash in circulation is helping criminals evade governments’ “increasingly intrusive surveillance” of the financial system.

I think this may be an underestimate. When thinking about how cash is used, I tend to use the Bank of England’s four-way categorisation of the demand for cash, which is that cash is required for:

1. Transactions. Here the trends are clear. Technology is a driver for change but that the impact is weak. In other words, new technology does reduce the amount of cash in circulation, but very slowly. Even the Bank of England says that at most a quarter of the cash out there is for transactions.

2. Hoards. These are stores of money legally acquired but held outside of the banking system, like the 300 grand that Ken Dodd used to keep in his loft. If the amount of cash that is being hoarded has been growing then that would tend to indicate that people have lost confidence in formal financial services or are happy to have loss, theft and inflation eat away their store of value while forgoing the safety and security of bank deposits irrespective of the value of the interest paid. A detailed examination of the impact of negative interest rates seems to show that this is not true, so I suspect hoards are declining.

3. Stashes. These are stores of money illegally acquired or held outside the banking system to facilitate criminal behaviour. My personal feeling is that stashes have grown at the expense of hoards and I think we are seeing more evidence to back this up.

   In a fascinating paper by Prof. Charles Goodhart (London School of Economics) and Jonathan Ashworth (UK economist at Morgan Stanley), they note that the ratio of currency to GDP in the UK has been rising and argue that the rapid growth in the shadow economy has been a key cause. If you look at the detailed figures, you can see that there was a jump in cash held outside of banks around about the time of the crash, but as public confidence in the banks was restored fairly quickly and the impact of low interest rates on hoarding behaviour seems pretty marginal, there must be some other explanation as to why the amount of cash out there kept rising.

   Two rather obvious factors seemed to support the shape of the curve in the UK are the increase in VAT to 20% and the continuing rise the gig economy and self-employment, both of which serve to reinforce the contribution of cash to the shadow economy.

4. Exports. The amount of British cash that is being exported is hard to calculate, although the Bank of England does comment that the £50 note (which makes up a fifth of the cash out there by value) is “primarily demanded by foreign exchange wholesalers abroad”. I suppose some of this may be transactional use for tourists and business people coming to the UK, and I suppose some of it may be hoarded, but surely the strong suspicion must be that at lot of these notes are going into stashes.

If, as I suspect, the amount of cash being stashed has been growing then the Bank of England is facilitating an increasing tax gap that the rest of us are having to pay for, as are other central banks around the world.

In summary, then, cash makes the government (i.e. us) considerably worse off. It is the shadow economy that is fuelling the growth of cash “in circulation” so government should be looking at the introduction of digital currencies as part of a wider strategy towards ceaselessness that helps the otherwise marginalised and excluded with the revenues obtained by closing the tax gap.

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“The American payment system has evolved into a reverse Robin Hood whereby middle-class and working-class Americans who pay with a debit card, prepaid card, or cash are subsidizing the wealthy, who pay less for everything,” said Aaron Klein, a senior fellow in economic studies at the Brookings Institution who has studied and written about this issue extensively.

The catch on credit card rewards and points is that for the richest consumers, there might not be one. Instead, the catch is for everyone else.

From Credit card rewards, points, and miles are paid for by America’s poor – Vox:

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A centralized ledger provided by a CBDC for retail use would therefore be largely redundant (though, some redundancy made be desired). There is the question of why fintech firms must be forced to operate through incumbent banks. One option would be to grant such firms the ability to open accounts directly with the Bank of Canada and to participate in the large value transfer system (LVTS) through a “narrow bank” charter. Doing so would be tantamount to offering a wholesale version of a CBDC.

From Does Canada need a central bank digital currency? FON Commentaries. Vol. 2, No. 12– Finances of the Nation.

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The two explanations were elegantly connected, and no doubt persuasive to anyone who spends their life thinking about inflation and interest rates. In the real world, however, they are a bit bizarre.

From Billions of banknotes are missing. Why does nobody care? | The Economist.

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Tara Hanlon’s adventures are a case in point. She was paid £3,000 for carrying those five suitcases to Dubai,

From Billions of banknotes are missing. Why does nobody care? | The Economist.

£3,000 for carrying £2,000,000 that’s 20 bp if my maths is correct, which is not a lot.

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Britain’s National Crime Agency has analysed how many banknotes are printed, how many are used in recorded transactions and the size of the local criminal economy. It has concluded that so much cash is leaving the country each year that it must be being moved by trucks.

From Billions of banknotes are missing. Why does nobody care? | The Economist.

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The number of digital identity verification checks conducted globally on an annual basis will more than triple from 1.1 billion in 2021 to 3.8 billion in 2026 according to a new report from Goode Intelligence, bringing in $17.2 billion for identity verification vendors and service providers.

From Digital identity verification market set to surpass $17B by 2026, providers partner up | Biometric Update.

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A software flaw exposed the personal data of every eligible voter in Israel — including full names, addresses and identity card numbers for 6.5 million people — raising concerns about identity theft and electoral manipulation, three weeks before the country’s national election.

From Israeli Voters: Data of All 6.5 Million Voters Leaked – The New York Times.

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Techpoint Africa’s conversation with Adedeji Olowe, Trium Networks CEO, revealed, they serve to insulate traditional banks from the competition MMOs and PSBs would otherwise have provided

From Why Nigerian SMEs, Fintechs Should Be Bothered About The New Mobile Money Regulations • Techpoint Africa.

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Trade ministers from the G7 reached agreement at a meeting in London on Friday.

The deal sets out a middle ground between highly regulated data protection regimes used in European countries and the more open approach of the United States.

“We oppose digital protectionism and authoritarianism and today we have adopted the G7 Digital Trade Principles that will guide the G7’s approach to digital trade,” the communique published by Britain said.

From G7 countries reach breakthrough on digital trade and data | Reuters:

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