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Following the Money – The Future of Cash

Categories : Cash is a contingency and fall-back solution, Cash is also a store of value, Cash is the first step of financial inclusion
September 4, 2020
Published in : Coronavirus, Financial inclusion, Future of Cash, US, War on Cash
With the coronavirus pandemic moving past the six-month mark, one of the first notable side effects was a reduction in the use of physical greenbacks. The cash-out had several drivers: Most retail stores were closed or saw their operations greatly reduced, virtually all bars and restaurants that remained open could provide takeout service only, almost everyone who was able to began working from home, and online shopping from Amazon and other home-delivery options boomed.
Michael G. Malloy

Managing Editor

American Academy of Actuaries

This article was first published in Contingencies and is reproduced with permission of the author.

 

When the pandemic broke wide open in mid-March—on the same day, March 11, the National Basketball Association put its season on hold after one player tested positive, and perhaps the world’s most famous actor, Tom Hanks, announced from Australia that he and his wife, Rita Wilson, had both contracted COVID-19—some New York City banks saw a run on $100 bills, with customers pulling out as much as $50,000, cleaning them out of biggest bills in U.S. currency, The New York Times reported.

And, in addition to more Millennials and other young people in particular upping their use of PayPal, Venmo, Apple Pay, Google Pay, and other contactless payment apps—PayPal’s stock was up more than 50% as of midyear — the move toward using less cash has evolved gradually, but steadily, this century.

“The insurance industry doesn’t really use cash anymore,” said Gareth Kennedy, the American Academy of Actuaries’ vice president, risk management and financial reporting, and managing director of insurance and actuarial advisory services with Ernst & Young in Chicago. “When I grew up in the U.K., my dad was a life insurance agent going door to door to collect premiums. The move to direct deposit payments ended that role and I think the insurance industry went cashless two decades ago.”

One international monetary expert cited many factors that converged simultaneously with the outbreak and the concurrent slide in the use of currency. “If we look at what happened during the pandemic, governments brought things to a stop and economies ground to a halt,” said Guillaume Lepecq, chair of the Paris-based think tank CashEssentials, which ran a three-part webinar series in May and June on the post-COVID-19 future of cash that drew attendees from more than 80 countries.

Lepecq cited three economic trends that began with the start of the pandemic. First, cross-border transactions dropped by 80% or 90%, which was relevant for both cash and non-cash transactions. Second, there was a shift in a way people shopped, with those who could afford to buying more online to avoid face-to-face transactions. And third, there was a debate triggered by what he called “misinformation” that banknotes and coins could be a factor in the transmission of the disease.

There was some conflicting information about the latter, and around the world many central banks said currency was not a major factor in disease transmissions. “But by that point, the damage had been done,” Lepecq said, with many stores around the world encouraging customers to use contactless payments, as did public health organizations including the U.S. Centers for Disease Control and Prevention’s restaurant guidelines.

“The real question is, will [less use of cash] stick?” he said. “If you listen to credit card companies, they’ll say yes; if you ask me, I’ll say no—the truth is no one knows. There are arguments that play in favor of both digital payments and cash.” But at the same time there’s been a “huge increase in demand for cash, whether people put it under their mattress or just hold on to it—what we call precautionary holdings,” he said. “It’s a piece of paper, but it’s backed by the Federal Reserve system and the guarantees they offer.”

More money, more uncertainty

CashEssentials noted a big increase in U.S. currency in circulation from February, with the U.S. Federal Reserve boosting the total by $150 billion (see sidebar). Lepecq said that was a 12% year-over-year increase, and was triple the $50 billion injection at the start of the global financial crisis in 2008, when banks were attempting to avoid big runs on cash.

“Cash is not simply a payment instrument—it’s a proper form of money. So you can’t really compare it with other things. It can be used for payments, as a store of value, or a unit of measuring value, whereas a credit card is solely a way to pay,” he said.

With more cash in circulation, paradoxically it has become increasingly challenged as a payment instrument, Lepecq said. If cash levels fall below certain payment thresholds, that could lead to some commercial vendors moving away from accepting it, he said, adding that at the outset of the pandemic, U.S. officials quickly determined that banks and related armored cars carrying cash were essential personnel and services.

The U.S. Cybersecurity and Infrastructure Security Agency developed an initial list of “Essential Critical Infrastructure Workers” to help state and local officials to ensure continuity of functions critical to public health and safety, as well as economic and national security. The list includes workers who are needed to provide consumer access to banking and lending services, including ATMs, and to move currency and payments, such as armored cash carriers.

Another expert in the cash business said that even with the Fed’s injection, there were more questions and uncertainty about the future of greenbacks. With more cash in circulation, “what we’re seeing is that in times of change and uncertainty, people rely even more on cash,” said Evan Wilsnack, a Connecticut-based account executive with U.K.-based Glory, which provides cash-­automation products and services.

“Whenever you have things like hurricanes or other disasters, there’s the risk that the electronic payment infrastructure fails—then what you see is people moving back to cash,” said Wilsnack, who has been in the cash-handling business for 40 years. “The current environment is slightly different. There is a widespread incorrect belief that somehow cash transmits the COVID-19 virus. It’s been proven that using cash is no more likely to transmit the virus than touching anything else like a credit card, door handle, or a shopping cart,” he said.

“There is a meaningful percentage of the population for whom cash is their only payment option and there’s another larger group who choose to pay in cash for a variety of reasons,” Wilsnack said. “In the short-term we’re likely to see an increase in cash transactions, with more than 30 million people unemployed as of midyear because of the pandemic, given paying in cash is very effective in helping people balance their household spending and avoiding running up large credit card bills.”

Keeping cash viable

The issue of accepting cash has been addressed by political leaders, with states like Massachusetts and New Jersey, and cities including San Francisco, passing laws requiring most brick-and-mortar retail businesses to accept cash—and similar legislation has been introduced at the local and federal level.

Rep. David Cicilline (D-R.I.)—who introduced the “Cash Always Should be Honored” bill in May 2019, which is aimed at retailers to accept cash as a form of payment—said in an early-July interview that the issue remains an important one.

“Businesses that refuse to accept cash—and that seems to be a growing practice—exclude a significant part of the population that does not have access to banks or have a credit card,” Cicilline said.

In unveiling the measure, he noted that according to the Federal Deposit Insurance Corporation, 8.4 million American households do not have a bank account, 32 million don’t use a credit card, and more than 50 million are ether unbanked or underbanked.

“For millions of Americans, this is an exclusion from products or services that retailers are providing or selling, and that often happens in communities of color and where people live below the poverty line,” Cicilline said.

“There’s no question that more and more young people are moving away from cash,” he acknowledged. “I think as we expand access to broadband and all the things that are required for the use of technology, the number of people using cash may decline. But until we eradicate poverty in this country, there are always going to be some who don’t have credit cards or bank accounts, and you’re essentially excluding them from participating in that part of the market.”

The bill allows for some exemptions and exclusions such as businesses like Uber that generally don’t operate with cash. “We want to be sensitive to business models that don’t permit [cash]—this is mostly aimed at retailers,” Cicilline said.

Cash Is King, By the Numbers

The history of cash goes back almost 3,000 years. The first coins were used in China around 770 B.C.—followed by paper currency less than a century later—although the first minted coins hit the streets around 600 B.C., overseen by King Alyattes of Lydia, part of modern-day Turkey. The coins were made from electrum, a mixture of silver and gold that occurs naturally, and stamped with pictures that acted as denominations, such as an owl and a snake.

In the United States, Alexander Hamilton—previously best known for his life-ending duel with Aaron Burr and, more recently, the hit Broadway musical—was the first secretary of the Treasury (1789–1795), presiding over creation of the First Bank of the United States, a forerunner of the modern Federal Reserve. Congress created the U.S. dollar in 1792, although the first colonial currency was issued in the Massachusetts Bay colony a century earlier, and later other colonies issued their own currencies.

According to the Federal Reserve, as of early June there was $1.91 trillion worth of U.S. currency notes in circulation. Most of the big bills—$100 notes, also known as “Benjamins,” for their image of Benjamin Franklin—are held abroad, according to the World Economic Forum. Nearly 80% of $100 bills—and more than 60% of all bills—are held overseas, up from roughly 30% in 1980, the forum said, citing Federal Reserve Bank of Chicago statistics.

More recently, there has been a shortage of coins due to the pandemic. Federal Reserve Chair Jerome Powell said in a June 17 hearing before the House Financial Services Committee that the Fed has been working with the U.S. Mint and reserve banks to fix the temporary issue, The Washington Post reported.

“The places where you go to give your coins, and get credit at the store and get cash—you know, folding money—those have not been working. Stores have been closed,” Powell told the committee. “So the whole system has kind of … come to a stop. We’re well aware of this. … As the economy reopens, we’re seeing coins begin to move around again.”Some notable currency facts and figures:

The issue has also been taken up in the nation’s capital, where Washington, D.C., Councilmember David Grosso has introduced similar legislation. He said in an interview that about a third of District of Columbia residents are unbanked or underbanked, limiting their retail access to places, including restaurants, that don’t accept cash.

“As we move forward in this new world order with the pandemic, it’s important to remember that the people who are hit the most by this are the most vulnerable—the poor, and people of color especially, in all jurisdictions—and we need to give them the opportunity to engage in our economy,” Grosso said. “To cut off the access to cash would be a huge mistake.”

His bill—also originally introduced last year—was the subject of a February hearing, where it received “very little opposition,” Grosso said, though its progress was put on hold when coronavirus-related public health issues moved the forefront of the city’s concerns in March.

Digital and cryptocurrencies

The rise of digital currency or so-called cryptocurrency is also a factor in cash’s near- and long-term future. With Facebook ramping up to launch its Libra digital currency, the social media giant said its goal was to help the 1.7 billion people around the world who are unbanked or underbanked, according to World Bank figures, Lepecq said.

But it’s a “mistake to think that financial inclusion is having digital money or a digital account,” he said. “They lack money. To illustrate this, financial inclusion has become one of the global development goals within the U.N. and other international organizations, and the number of unbanked people has declined steadily,” from about 50% to about 33%, he said, adding that in high-income economies, 80% of adults reported using a debit or credit card to make at least one payment in the past 12 months, while in developing economies only 22% did so.

“That could create kind of systemic issues,” he said, noting that after Sweden’s use of cash had trended downward in the past decade, it has risen in the past two years, in part because of more use of it by the underbanked.

“Cash plays an immense role here, because cash is the first step to financial inclusion,” Lepecq said. “There’s an important group of people that rely exclusively on cash. Cash is very much universal—it’s something that enables the most vulnerable to become less vulnerable.”

There are two things to think about—cryptocurrencies like Bitcoin that are issued outside of governments, and those emerging digital currencies that are backed by or tied to governments, said Eric Ervin, co-founder and CEO of San Diego-based Blockforce Capital, an asset management firm in the blockchain and cryptocurrency industry. A third, which may be the most logical or likely to happen, is a central bank digital currency, where governments move away from cash and toward digital currency, Ervin said.

“That’s where the coronavirus really popped up,” he said. “If the stimulus checks could have been issued digitally via the U.S. dollar to everyone instantaneously, whether they had a bank account or not, that would have been meaningful.”

China is already well down the path on this development of central bank digital currency, also known as CBDC or digital fiat currency, he said. Ervin offered that the rise of CBDC means “the future of cash is almost doomed because of that alone.” Facebook’s fledging Libra digital currency was going to be backed by a pool of global currencies but not by a single central bank—but “central banks got nervous about that,” he said.

“If people say ‘Well, that’s just silly digital money,’ the reality is that the technology is here. Everything in our lives is digital. … Whether it’s backed by Bitcoin or by the U.S. government is a fair question, but there will be a digital currency, period,” Ervin said.

He noted that in addition to China, Singapore, and even the United States are considering digital currencies. Late last year, Federal Reserve Chairman Jerome Powell responded to a letter from two congressmen regarding CBDC and confirmed that the Fed has analyzed whether a digital currency makes sense for the U.S. and that it was considering several options.

The largest global digital currency, Bitcoin, is by design fully decentralized and not tied to any central bank. The digital currency, which began in the wake of the global financial crisis in 2009, has a hard cap of 21 million bitcoins, which as of this summer were worth between $9,000 and $10,000 each, down from a high of over $19,000 in December 2017.

Ervin wrote in a Forbes column in May that the market capitalization of all cryptocurrencies was about $240 billion. With more than 18 million of the capped 21 million total bitcoins in circulation, Bitcoin’s market capitalization totals about $180 billion of that, given a value of about $10,000 apiece.

Bitcoin’s mysterious origins are shrouded in an anonymous paper attributed to a pseudonymous software developer under the name “Satoshi Nakamoto,” who first proposed the digital currency in 2008 as an electronic payment system based on mathematical proof.[8]

Bitcoins are divisible by 100 million—the smallest unit, known as a “Satoshi,” after its anonymous creator—and Ervin called Bitcoin “the first killer app” of the new blockchain technology, akin to how email was the Internet’s first mainstream widespread application. Blockchain is becoming widely used by big companies in supply chains and other applications.

And, like the Internet later spawned many advanced technologies and systems such as video and voice applications, “there’s lots of different protocols that will come from that original blockchain technology,” Ervin said. “Bitcoin and cryptocurrencies just happen to be the first one.”

Bitcoin advocates “don’t want to it to be backed by the dollar because they’re of the opinion that the dollar is going to continue to weaken over time,” he said. And “fiat currencies”—those issued by governments—have by their nature weakened over time. “That’s the mandate of central banks—to make sure there’s inflation. They don’t want it to be crazy, obviously, but to guarantee [enough] inflation so people just don’t hang on to their money and never spend it.”

It goes back to the days when kings and queens would shave gold off coins, devaluing currency the old-fashioned way. “For every fiat currency ever—even those that are backed by hard metals—there’s always been somebody from the central authority saying ‘Maybe we ought to see if we can print more of these,’ in order to pay taxes or create more services to make the people happy,” Ervin said.

Gaming, Gambling, and Poker

One of the biggest “cash cow” U.S. businesses is the gambling industry, where high-rollers and low-ballers alike toss dice, pull (or press) slot machines, or try not to get caught counting cards … which casinos generally frown upon.

The American Gaming Association, which represents the industry, put out a statement in June that would, among other things, allow for “advancing opportunities for digital payments” and expanding payment choices. That’s even as no states had yet allowed cashless payments on casino floors, and AGA said its research found that 59% of past-year casino visitors were less likely to use cash in their everyday lives because of the coronavirus pandemic. A month later, in early July, the group announced it had canceled its annual Global Gaming Expo, scheduled for Las Vegas in early October, due to ongoing pandemic concerns.

One notable casualty of the shutdowns was the live version of the annual World Series of Poker (WSOP), held in Las Vegas every summer for about a month each June and July, and capping off with the Main Event, a Texas Hold ’em poker tournament with a $10,000 buy-in, much of it televised on ESPN. Once the knockout tournament is down to its two final players, the winner’s share’s mound of cash is placed on the table in neat stacks of $100 bills in an elaborate ritual—last year’s winner, Hossein Ensan of Germany, took home the top prize of cool $10 million, the second-largest (behind 2006) in the Main Event’s 50-year history.

But this year, the virus forced the WSOP to shut down its live-play tournaments, shifting them to online events.

 Poker players have long been part of American culture going back to the 19th century, according to Martin Harris, a professor at the University of North Carolina—Charlotte and author of the 2019 book Poker & Pop Culture. Even as some live poker rooms began opening tentatively—with masks required and plexiglass between players—Harris said in a June interview that he wasn’t very optimistic about live poker’s future, until and unless there is a COVID-19 vaccine.

“In a lot of places cash is not the first option, and casinos, in a way, have outlasted other places insofar as insisting upon cash,” Harris said. “The virus has changed everything, and it sounds like casinos are having to adapt, and making it possible to gamble without putting cash on the table may be one of the ways.”

His book reflects American values vis-à-vis poker—including evaluating risk—and “if poker’s going to survive, it’s going to have to reflect this change toward a cashless culture. That was probably happening anyway, but now it’s being accelerated with the virus.”

With cards and chips also being potential virus carriers—in addition to the big leagues, amateur live poker home games have also moved online (including Harris’ and this writer’s). One tragic story early in the pandemic was of a group of older players in Florida who picked up the virus in their regular home game, with all eight getting the virus and three of them dying.

The plexiglass dividers popping up in casinos as they attempt to reopen “kind of make me wonder what hoops people will jump through to pretend it’s the game they were playing before,” Harris said. And while only a few states have legalized online gambling, but for those that have, “that revenue has gone up and up and up,” he said. 

“That lack of the actual cash on the table—along with other tactile, tangible things, like chips and cards sitting across from each ­other—makes it less real for many poker players,” Harris said. “Money is an element of the game. When cash goes away, poker becomes something else, because it’s such an integral part of the game.”

Brave New World

In the second of CashEssentials’ three webinars, Lepecq said “the future of cash is often portrayed as an unnatural competition between cash and digital payments, and more specifically during the pandemic, between cash and contactless payments. I think this is rather misleading. The future of cash has far-reaching societal and policy implications that are far more important than just the way we pay—financial and social inclusion, privacy, distribution of wealth, and management of data,” he said, adding that a no-cash scenario “does raise serious questions, including of liquidity and access to credit. And it becomes this kind of dystopian world where social profiles become a measure of credit worthiness.”

He said in an interview that “China’s social credit experiment is troubling, I suppose, to most people outside of China, but the Chinese government is laying the groundwork for a digital economy. Technically, a central bank digital currency would enable governments to have access to real-time data without using intermediaries.

“Financial privacy is an essential aspect of a functioning democracy. If all our behaviors and movements are tracked, it will be rather damaging for democracy in a fatal way. A bank statement says more about you than any of your social media accounts—bank statements don’t lie,” he added.

While some may say they prefer the convenience of frictionless payments, “the risk is huge,” he said. “Who is willing to tell everyone how and where and what they bought? Would you want an insurance company to know how much alcohol, or cigarettes, or Coke you’re buying? There’s a massive volume of information behind this that we don’t quite comprehend.”

He joked that “if all this became a reality, you wouldn’t even need actuaries any more, because you don’t need to model the risk if you know the exact, precise consumption patterns and cash flows of every single individual.”

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