Why we need cash
In a recent article (25th August), New Scientist magazine makes a compelling argument for the continuing importance of cash and how the idea of killing off physical money “might not be such a great idea.”
We’ve summarized some of the articles main points below:
The cash system is so central to our lives that many people hardly spare it a thought. The rise of e-commerce and card payments has raised the possibility of money fully going fully digital. The necessary technology already exists, but there are many concerns about the risks of going cashless
A fully cashless society is unchartered territory. The effects of switching to a central bank digital currency could destabilise a country’s central bank. That’s because there is a subtle difference between cash being backed by a central bank and non-physical money that sits in your bank account as a set of numbers.
When you pay using your debit or credit card, you are using money created by the commercial bank through interest on loans and by customers making deposits. Commercial banks work on the assumption that not everyone will withdraw their money at once – or bank would run out of money. This is what happened to Northern Rock in 2008.
The fear is that digital currencies could make such incidents more likely. Garrick Hileman at the Cambridge Centre for Alternative Finance in the UK says: “This is the big reason why the Bank [of England] has backed away from issuing a central bank digital currency to everyday people.”
Then there are questions of infrastructure and reliability. “Imagine there’s a completely electronic payment system, no cash. Imagine there’s a cyberattack and people can’t transact. That would be catastrophic, there would be chaos in the street,” says Hileman.
Privacy and inclusion are also concerns. Cash is a form of payment that takes place between any two parties, whereas digital payments involve third party payment facilitators. Current card facilitators such as Visa and MasterCard are private, and this gives them the option of choosing who they offer their services to. Switching to digital cash could effectively privatise the payments industry, giving the power of financial inclusion to third parties and anyone else who they franchise operations out to. It could also mean controllers of the digital currency potentially – be that a state or a company – have access to a huge amount of information about your finances and spending habits.
Victoria Cleland, the Bank of England’s executive director for banking, payments and financial resilience, confirms that although the Bank of England is monitoring digital currency, it has no plans to introduce anything.