This article was first published in Cash and Payment News and is republished with the permission of the author. 

It was mid-June and Luxembourg was just emerging from a three-month lockdown to halt the spread of Covid-19. Sat three seats apart, an audience of a dozen gathered in the European Court of Justice’s (ECJ) Grand Chamber to hear the oral arguments of a legal case with potential major implications for the future of cashMoney in physical form such as banknotes and coins. More.

The hearings relate to a legal challenge against the Hessischer Rundfunk, the German public broadcaster, which is accused of not accepting payments for an obligatory fee in euroThe name of the European single currency adopted by the European Council at the meeting held in Madrid on 15-16 December 1995. See ECU. More cash. The plaintiffs argue that this refusal is in violation of the status of euro banknotes and coins as legal tenderMoney that is legally valid for the payment of debts and must be accepted for that purpose when offered. Each jurisdiction determines what is legal tender, but essentially it is anything which when offered (“tendered”) in payment of a debt extinguishes the debt. There is no obligation on the creditor to accept the tendered payment, but the act of tendering the payment in legal tender discharges the debt. More.

The argument for the challenge is led by Norbert Haering, a Handelsblatt journalist and pro-cash activist, whose lawyer opened with a plea, ‘save the euro, preserve the banknoteA banknote (or ‘bill’ as it is often referred to in the US) is a type of negotiable promissory note, issued by a bank or other licensed authority, payable to the bearer on demand. More ’.

On the side of the plaintiffs were the European Central Bank (ECB) and the European Commission, while the defendant was joined by representatives of the German and French government.

The case was brought to the ECJ by a referral from the Bundesverwaltungsgericht (BVerwG), the German Federal Administrative Court. The BVerwG found that ‘the exclusion of the possibility of paying broadcasting fees with euro banknotes violates the federal law (Bundesbank Act) and that German public authorities are obliged to accept euro banknotes.’

The BVerwG further found that ‘exceptions cannot be based on practical administrative reasons or cost savings, and require an authorisation by a federal law.’

Legal tender and mandatory acceptance of banknotes

However, the BVerwG deferred a ruling on the case pending receipt of a preliminary ruling from the ECJ, on the three questions:

1. Given the EU’s exclusive competence for monetary policy, is a euro member state entitled to oblige national public authorities to accept euro banknotes in the fulfilment of mandatory paymentA transfer of funds which discharges an obligation on the part of a payer vis-à-vis a payee. More obligations?
2. Does the legal tender status of euro banknotes make it mandatory for member states’ public authorities to accept euro banknotes as a discharge of obligatory payments? Or can a member state’s public authority, under certain conditions, refrain from accepting euro cash for such payment obligations?
3. If, as a consequence of the legal tender status of euro banknotes, member states’ public authorities have to accept euro banknotes as a discharge of mandatory payment obligations, can a Eurozone member state nevertheless apply national law as long as the EU has not made use of its transferred competence?

The subsequent discussions and arguments evolved around two key questions which, based on the ECJ’s ruling to be made on 29 September, could set significant precedents for the future of cash.

Firstly, what is the legal meaning of the term ‘legal tender’ and does it impose a binding obligation on public authorities in the euro member states to accept cash?

Secondly, does the authorisation to issue euro cash constitute a part of the ECB’s monetary policy?

Diverging opinions on the definition of legal tender

Let’s tackle the first question. Divergences of opinion as to what is meant by ‘legal tender’ in large part stem from differences in how European and German national law define euro currencyThe money used in a particular country at a particular time, like dollar, yen, euro, etc., consisting of banknotes and coins, that does not require endorsement as a medium of exchange. More banknotes.

The Hessischer Rundfunk, the German and the French governments argue that the term legal tender, as defined by the Treaty on the Functioning of the European Union (TFEU), simply stipulates that the euro is the only accepted currency within the Eurozone, without specifying its implication on cash acceptance. Art. 128 Paragraph 1 of the Treaty: ‘The European Central Bank shall have the exclusive right to authorise the issue of banknotes within the Union. […] The banknotes issued by the European Central Bank and the national central banksIn general, the expression refers to the central banks of different countries. More shall be the only such notes to have the status of legal tender within the Union.’

The defendant argues that because the TFEU does not refer to the euro in the form of physical moneyFrom the Latin word moneta, nickname that was given by Romans to the goddess Juno because there was a minting workshop next to her temple. Money is any item that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular region, country or socio-economic context. Its onset dates back to the origins of humanity and its physical representation has taken on very varied forms until the appearance of metal coins. The banknote, a typical representati... More, it is therefore not the only legal means of payment.

In contrast, German law on legal tender explicitly defines euro banknotes as a method of payment: ‘Euro banknotes are the sole unrestricted legal means of payment’ and hence the need of the BVewG to refer for judgment to the ECJ.

The ability to pay cash is a fundamental right

The European Commission representative in the case has argued that legal tender implies an obligation to accept cash for debt payments, adding that the ability to pay cash is a fundamental right and economic freedom of citizens to have the ability to pay cash. Citizens can choose to opt out via private contracted agreements. The Hessischer Rundfunk, as a public authority, however, cannot refuse mandatory payments in cash.

The ECB also struck a defiant tone on the integrity of cash as legal tender. In a 2018 speech, Yves Mersch, Member of the Executive Board of the ECB, likewise stressed that ‘the ECB is also responsible in particular for protecting the status of euro cash as the sole legal tender. This includes guaranteeing the existence of euro cash and its usability as legal tender. In fulfilling these tasks, the ECB ultimately ensures that people can go about their lives, with their fundamental rights protected, using euro banknotes and coins.’

In their oral arguments, both representatives of the European Commission and the ECB explained that restrictions and limits on cash usage can be imposed, for instance to protect against money launderingThe operation of attempting to disguise a set of fraudulently or criminally obtained funds as legal, in operations undeclared to tax authorities, and therefore not subjected to taxation. Money laundering activities are strongly pursued by authorities and in most countries, there are strict rules for credit institutions to cooperate in the fight against money laundering operations, to declare and report any transactions that could be considered suspicious. More. These must however have a legitimate purpose and, to that end, be proportionate, suitable, necessary and adequate in regards to achieving public objectives. Eurozone member states are expected to request the ECB’s opinion on any legislative proposals on limits to cash.

There is currently legal uncertainty at the euro area level with regards to a common interpretation and definition of legal tender, what it means and if and how it must be protected. What is clear is that past definitions of legal tender – written at a time when the potential demise of cash and the all-encompassing rise of electronic payments made for a good sci-fi script – have not adapted to the present set of challenges.

In this vein, Sveriges Riksbank, Sweden’s central bank, has seen a decline of cash usage for transactions, as well as the overall demand for currency, since 2007 (although this trend has been reversed since 2018). The central bank is also calling on Swedish legislators to amend the term legal tender, requesting that it ‘be strengthened further, also under normal circumstances, and mandatory requirements to be placed on at least some business operators.’

Cash as part of monetary policy

In regards to monetary policy, the German and French governments have argued that euro issuance was not part of the ECB’s monetary policy mandate, as it is not necessary to achieve price stability and is not a listed monetary policy instrument as such. France tried to reason that euro cash has no impact on liquidityDescribes the extent to which assets or rights can be converted into cash without causing a significant decrease in the asset’s price. Accordingly, liquidity is often inversely proportional to the profitability of the asset and involves the trade-off between the selling price and the time needed to convert it to cash. In finance, cash is considered the most liquid asset and cash is sometimes used as a synonym for liquidity (e.g. cash reserves; cash pooling…). More in the Eurozone and hence no effect on monetary policy given it makes up a marginal proportion of the overall money supply.

The ECB corrected the French representative that euro cash in circulationThe value (or number of units) of the banknotes and coins in circulation within an economy. Cash in circulation is included in the M1 monetary aggregate and comprises only the banknotes and coins in circulation outside the Monetary Financial Institutions (MFI), as stated in the consolidated balance sheet of the MFIs, which means that the cash issued and held by the MFIs has been subtracted (“cash reserves”). Cash in circulation does not include the balance of the central bank’s own banknot... More is in fact part of money aggregates and is, therefore, far from irrelevant for monetary policy.

Furthermore, citizens’ trust in the euro is crucial for monetary policy and the ECB’s ability to deliver its price stability mandate. Trust in the euro is an ECB goal in itself and euro banknotes are ‘the printed trust in the euro.’ It is the only payment means settled instantaneously, at face valueThe figure or amount written on the banknote or coin which indicates the amount of its economic value. It is usually written in letters and numbers. More and the only central bank moneyA liability of a central bank, including banknotes in circulation and banks’ deposits with the central bank. More available to all citizens. The ECB goes to great lengths and logistical efforts to secure cash provisions and to make euro cash available for citizens ‘in all circumstances.’

The trust achieved in the euro by Eurozone citizens is clearly shown in the ‘record high demand rise’ during the Covid-19 crisis, despite the rise of contactless payments. The ‘practical usability’ of the euro, its acceptance and availability, ‘underpins and embodies’ this trust. Why would citizens hoard cash as a store of valueOne of the functions of money or more generally of any asset that can be saved and exchanged at a later time without loss of its purchasing power. See also Precautionary Holdings. More if they didn’t trust that they can also use it? The ECB is here to guarantee this.

The threat of transmission of Covid-19 via banknotes: ‘fake news’

In his remarks on cash restrictions for public interest purposes, the European Commission representative jokingly called the threat of transmission of Covid-19 via banknotes ‘fake news’, much to the amusement of those sat in the Grand Chamber.

In their rebuttal, the Hessischer Rundfunk argued that the decision not to accept cash payments is based on practical administrative and economically cost-effective considerations.

Cash is highly Cost-Efficient

Both the European Commission and the ECB stressed, however, that a public authority cannot limit the use of cash on the basis of cost efficiency. Furthermore, the ECB added that, according to its studies and statistics, euro cash is in fact a highly cost-efficient payment methodSee Payment instrument. More. Indeed, it would be an interesting exercise should the ECJ judges request the Hessischer Rundfunk to present their cost calculations of various means of payments.

The European Commission representative argued that legal tender implies that no additional cost can be incurred by the payee. However, for those who do not own a bank account, Rundfunk’s insistence on non-cash payments makes bank transfers very costly. In fact, this represents an imposed tax for those who do not own a bank account and are forced by the public authority to incur the cost.

One of the judges asked the ECB what impact the term ‘legal tender’, as defined by the Treaty, would have on the ‘development’ of the ECB’s central bank digital currency (CBDC)A digital payment instrument, denominated in the national unit of account, and a direct liability of the central bank, like banknotes. A general purpose CBDC can be used by the public for day-to-day payments like cash. More. The ECB representative clarified that the central bank is currently only ‘brainstorming’ the ‘possibility’ of introducing a digital currency and no decision has been made. The research is looking at various technical solutions and it isn’t even clear, at this stage, whether the ECB would even issue a retail CBDC.

In a follow-up question about a cashless society, the ECB confirmed that cash is crucial for vulnerable groups in society and is fundamental for their inclusion in a functioning society. The ECB representative further wondered about who actually wants ‘this transition to cashless society’, questioning whether they are lobby groups of electronic payments start-ups who collect transaction fees, or simply a lower demand for cash payments by citizens? The jury is out on this question.

In his above-mentioned speech, Yves Mersch further elaborated on the crucial role of cash for equality. ‘Alternative payment methods cannot replace euro cash; they can only complement it. The EurosystemThe Eurosystem comprises the European Central Bank and the national central banks of those countries that have adopted the euro. More must therefore continue to ensure the existence of euro cash. This is the only way we can safeguard the role that euro banknotes and coins play in protecting the fundamental rights and freedoms of the people of Europe.’

Watch this space

A final ruling on the case is expected in the autumn. Depending on the outcome, Eurozone member states and their public authorities may find themselves collecting taxes in cash, giving the cash network system a much-welcomed boost.

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