19 The Future of Money

Consider this

 

Advocates tell us machines like this, where you can buy and sell cryptocurrency, will soon be common all over the world.  Have you ever seen a Bitcoin ATM?

 

We’ve been talking about money as something issued by country that performs three major functions:  it’s a medium of exchange,  a unit of account and a store of value.  And although we’ve discussed how our Federal Reserve controls the money supply and the amount you pay to borrow money (the interest rate), you may be wondering, what about the new kinds of money that people are talking about–cryptocurrency?  Or, if you live somewhere like Kenya or Egypt, what about M-Pesa?  Are these money?  Are they safe?  Are they the future?

Mobile money:  what it is and why it’s spread

In many parts of the world–including the United States–there are large areas with no banks or banking-type services.  In the U.S. this may be a result of big banks closing down rural services, but on the African continent, for example, many areas have never had banks.  When colonial powers ruled many countries, they established banks in the capital cities for the convenience of their diplomats, but saw no reason to establish banking services countrywide.  In the modern era, this has meant that someone working in the big city, like Nairobi, for example, might have sent money home to their family by bringing it to their village in person.  Being unable to do something as basic as safely sending earnings home, was a real problem.  But in the 21st century, with more and more people owning cheap cellphones, people started using cellphone minutes as a way of transferring money from one person to the next.  Before long, an African cellphone division of Vodafone, Safaricom, picked up on this practice and in 2002 introduced their own form of mobile money–M-Pesa.  In the most basic money transfer, a person enters their password on their phone, indicates whether they are depositing or withdrawing funds, then goes to a Safaricom kiosk where a person will accept or dispense funds, as ordered.  It’s like a human ATM.  And if you are thinking ‘Venmo’–well, it’s similar, except Venmo is tied to a bank/credit card, and M-Pesa is not.  M-Pesa has become incredibly popular in a number of (mostly) African countries.  Another company,  Wave, has been introducing mobile money in Senegal and other countries.  Economists are generally impressed with the impact of mobile money systems on development– they not only allow individuals to save and transfer money safely, for a low fee,  they allow businesses to handle money transactions outside of limited banking hours.  That said, such systems require mass adoption–everyone has to be using it, or it’s not convenient.  And the regulatory environment has to be friendly–which may be the reason why there’s no Safaricom kiosk in the typical American mall.  Keep in mind, it’s estimated that from 14-20% of Americans are ‘unbanked’ or ‘underbanked.’

Americans don’t have M-Pesa, so what do we do?

Some 20 million Americans either don’t have a bank account or can’t access the range of banking services they need.   Some live in remote areas that banks have abandoned.  Others lack the documents banks require to open an account.  Others can’t afford the minimum deposit a bank might require to open the most basic type of account.  What do people do?

Sometimes they use payday loan businesses, auto title loans and rent-to-own services.  Most typically, they pay a check cashing business to cash their paychecks and pay their bills.  Not only are the fees high, but a lot of time can be wasted waiting in lines.  Lacking a bank account, people sometimes park their cash with a ‘money guard,’ a person they trust to hold their money safely.  This workaround means that even though they might have very responsible money habits, they are not generating any credit history in the formal banking system.  If they ever want to borrow money from a bank to buy a car or house, their reliability in the informal sector wouldn’t count.  People with roots in the Caribbean or West Africa sometimes form savings clubs (susu) where they put a fixed amount of money in the pot every week, and one member takes a turn each time taking home the whole pot, until every member has had their turn.  These savings clubs serve people with no access to banks and don’t charge anyone fees, but they, too, don’t help a person build up a good credit history.

You might be thinking, well, let them use a credit card or Venmo–but without a bank account, there’s no credit card.  One solution that could work, is returning to post office banking.  Many countries use their post offices for limited banking services.  In the United States, we had post office banking from 1911 to 1967, offering ordinary people readily accessible savings accounts.  In modern times, the only banking service most post offices offer is the sale of money orders, mostly used for bill paying.  Advocates for rejuvenating postal banking point out that small towns across America may have lost their banks, but they still have their post office, making it the logical place to restart basic banking services.  Powerful lobbies from the banking industry are blocking this, so it’s probably never happening.

Others have proposed that cryptocurrency–Bitcoin, for example–might be the answer, since (as we shall see) cryptocurrencies are not tied to bank accounts.  While this solution might sound reasonable, there may be a cultural-fit problem.  The people who line up in the check-cashing storefront because they don’t have a bank account, may not be computer-savvy enough to go to a crypto-exchange and open up a virtual wallet.  The kind of bills they need to pay–the landlord, the electricity–may not accept crypto payments. With more and more know-your-customer regulation of the cryptocurrency marketplace, a person without the paperwork to open a bank account, might not have the documentation to open a crypto account either.  It’s an open question, especially as some countries like El Salvador make cryptocurrency legal and encourage everyone to open a wallet.

Some countries are moving away from high denomination bills

There are movements in both wealthy countries and developing countries to either eliminate the use of cash or to eliminate high denomination bills. India, in 2016,  declared that 500 and 1000 rupee notes would no longer be legal tender.  After 1969, the U.S. stopped printing anything larger than $100 notes.  In 2016, the European Union stopped printing the 500 € note, so the 200€ is the highest being issued now.   What is going on here?

Stop printing high denomination currency and reduce (some) crime

In the Eurozone,  the argument to eliminate the 500€ note was based on its use in criminal activity–primarily terrorism, money laundering and tax evasion.  After all, ordinary shops and businesses wouldn’t accept a 500€ note for routine goods and services.  Some 300 billion euros worth of those 500€s have been put in circulation–with an estimated half  of them remaining in the Eurozone and the other half in Russia and the Balkans.  Is anyone there  using them for legit economic activity?  In the U.S., our $100 bill isn’t as valuable as the 500€, it’s still useful in criminal activity.  In 2014, the Fed estimated there were, on average, about 30 $100 bills for every American –but only 2% of Americans have even one $100 bill in their wallet.

While the anonymity of cash is makes it perfect for criminal activity, low denominations can be awkward.  One million dollars in $20s weighs about 110 pounds, requiring four briefcases. One million dollars in $100 bills would weigh about 22 pounds and could fit in one briefcase.  So the argument for discontinuing the big denominations is made almost exclusively from a crime prevention point of view.

Or, cancel the value of the high denomination bills you’ve already printed!

It’s one thing to stop printing a certain bill, but if the banking system still accepts these bills as legal tender, then it’s mostly aimed at future financial crimes.  But what about India’s move, in 2016, to cancel the value of all 500 and 1000 rupee notes (their highest denominations)?  People were given a deadline to take those notes to the banking system and prove they’d paid taxes when they got that money, that these funds were completely legitimate.  Anyone who had high denomination rupees  stashed at home from illegal or untaxed transactions–they’d have to explain their money or see it become worthless.  A big crime purge and a big windfall for the Indian government!  Not so fast!  Although full research isn’t complete, it seems that stashing ill-gotten gains in big rupee notes was not a ‘thing.’   Stashes of dollars and gold and other shiny objects were more typical, particularly offshore.

Or, eliminate cash altogether!

Norway’s Conservative Party has pledged to eliminate paper money completely by 2030.   Cash accounts for less than 1% of all transactions in Sweden, where most transactions are debit/credit or on Swish, the national payments platform.  It’s been argued that developing countries could add a good 3% to their growth rates if they’d just go cashless.  In the case of Bangladesh’s BKash, for example, the savings from transferring funds digitally has been huge.  Eliminating cash might also reduce the routine bribery of public officials, since the digital trail would lead right to the corrupt official’s bank account.

Digital money transfers may be safer and more efficient, but they have their opponents.  In New York City, the ice cream chain Van Leeuwen, among other retail stores, declared their shops cash-free (only credit cards accepted)–in defiance of New York law (and those little words on our money that declare it ‘legal tender’).  While banks and credit card companies love the profits to be made from a cashless world, the ice cream shop could also argue that a cashless shop enhanced the customer experience and cut down on cash register crime.  Since there’s not a lot of armed robbery of ice cream shops, it might occur to you that Van Leeuwen was trying to keep people out of their stores who didn’t carry a credit card–which are more likely people earning under $30,000/year, teens, and minorities.  Another group that’s unhappy about a cashless future are folks whose pay is largely in tips, like strippers, although some workplaces report that digital tipping averages out higher than the ‘cash jar’ take.

Or, stop using the national currency (whether cash or plastic) and go crypto!

For many people, the future of money is not plastic, but cryptocurrency.  We need to talk about what crypto is and how it works, before we can have an opinion about its future.  Put simply, cryptocurrency is a decentralized digital currency.  Decentralization means there’s no government constantly issuing more of it when they want to pump up an economy, for example.  (This matters a lot to people who think ‘the government’ is devaluing the currency  by running the money printing presses all night.) The record-keeping for the currency–what account has owned  and traded each digital coin–is not in one single party’s hands (unlike the records of your bank account, which are only in your and the bank’s hands).  Instead, there is a public record of every transaction, a so-called ‘distributed ledger.’  This ensures that every digital coin (or fraction thereof) can only belong to one person, one wallet, at a time.

Let’s use the example of Bitcoin, one of the most established cryptocurrencies, to see how things work. When a person initiates a transaction–paying another person Bitcoin, for example–someone will have to verify that the transaction is legit and enter it into the system.  Since the verifier (aka “miner”) who wins will be paid in more Bitcoin, there’s  competition to verify.  The contest will involve solving a complex mathematical problem, and  the person running the high-speed computer that solves it first, gets the job.  The original transaction will be given a unique identifier and be entered into the ledger, the blockchain. Done!

You may be wondering what’s so special about all this?  A couple things.  In the beginning, crypto was the best way for people to pay anonymously for illegal goods–drugs, guns, porn– over the internet.  In modern times, it’s the preferred payment vehicle for ransomware attacks–you want control back of your hospital’s record systems, send x amount of Bitcoin to this wallet number.  But law enforcement has become more sophisticated at following that publicly-available blockchain and identifying wallets receiving transfers of a matching size.  Forensic accounting has made a lot of progress in recent years.  Since another special feature of crypto is the absence of government, either in issuing the crypto or guaranteeing its value, there’s also no government helping out people who accidentally lose access to their crypto wallets.

Benefits and drawbacks of cryptocurrencies

The benefits of crypto include extremely low transaction costs and faster speeds, compared to credit cards, and the  relative anonymity of buyers and sellers.  People who are anti-government enjoy being able to do business without any government involvement.  The downsides of crypto include its lack of regulation and the environmental damage done by most crypto  transaction verifications.  Some crypto  schemes, like OneCoin, have been multi-billion dollar scams.  (To avoid scams, start by finding out if a crypto has a visible blockchain and can be bought and sold on the open market.)  The environmental cost of the verification of transactions by super-computers burning through electricity  (so-called Bitcoin ‘mining’) is terrible. In any given year, Bitcoin mining consumes more electricity than the whole country of Norway uses.  China, no environmental star, banned Bitcoin mining in 2021.  The businesses have simply migrated around the globe, landing in areas with cheaper electricity or with corrupt politicians who will offer them utility rate or tax breaks.   Eco-friendly cryptocurrencies do exist, although they’re not the industry big names.

The future of cryptocurrency:  regulation?

As crypto moves out of the shadows and into the mainstream–which means into more investors’ portfolios–its regulation becomes a big question.  In the United States, we make a distinction between money and investments.  If something is an investment–a stock, let’s say–the  U.S. Securities and Exchange Commission (SEC) will regulate its issuance and its trading.  So is Bitcoin, for example, a money or an investment?  When we defined money earlier, we said it had three main functions:  a medium of exchange, a unit of account, and a store of value.  At this point in history, very few businesses accept Bitcoin as a medium of exchange and it fluctuates in value so much, it could hardly be called a store of value.  This might imply that it functions poorly as a unit of account as well.  If we listen to people buying crypto, they talk about buying it because it will appreciate in value–the way they talk about buying various stocks.  The more it seems like an investment, the more likely the SEC will increase its regulatory role vis a vis crypto.  Furthermore, since American buyers use crypto exchanges to buy and sell their holdings, these exchanges have been brought under the governance of the Bank Secrecy Act, with its various ‘know your customer’ regulations. It’s not the Wild West out there anymore!

The future of cryptocurrency:  governments creating their own Digital money?

While cryptocurrencies began by avoiding governments, governments have been watching certain aspects of crypto with great interest.  Central banks around the world are developing their own central bank digital currencies (CBDCs) as a more secure means of transferring monies to and from households and businesses in the future.  China, for instance, has already rolled out an experimental digital wallet to citizens with a free starting balance.  Privacy advocates find these CBDCs dangerous–not only could the government know what you were buying with your social security check, but if they decided you shouldn’t be buying alcohol or sugary drinks, they’d have the technical capacity to ‘turn off’ the use of the CBDC for those goods (in the same way that SNAP cannot be spent on certain goods).

In September 2021, El Salvador took a completely different approach to crypto, when newly-elected President Bukele declared Bitcoin to be legal tender throughout the country.  It seemed like a crazy move–many common people had no experience with computers or electronic payments systems.  The value of Bitcoin constantly fluctuated–which would mean your rent and wages and bills would also fluctuate.  And if there were really wild swings in Bitcoin value, a person’s savings could be wiped out.  Bukele, a big Bitcoin believer, saw advantages.   Many ordinary Salvadorans receive significant transfer payments from relatives working abroad–reduced by huge Western Union fees, for example.  Bitcoin’s tiny transaction fees and quicker delivery would be great.  Bitcoin might also attract tourism…of a special kind:  tax evasion tourism.  Bukele’s government plans to build what they’ve called “Bitcoin City,” a tax-free crypto haven.  They’re also floating a plan to give away  a passport to anyone investing over $1 million in crypto in El Salvador.  A bargain, right?

Some Useful Materials

Watch a video on China’s introduction of digital currency, and its risks.

Watch a video on El Salvador’s gamble on Bitcoin.

Watch a video on how cryptocurrencies work.

Read about the environmental costs of cryptocurrencies.

Read about stores that won’t accept cash!

Read about what happened when India adopted digital payments, even for small stuff.

Did you believe it when they said crypto would advance financial inclusion by helping unbanked people? Read this report!

Watch a video on why investors go for crypto even knowing it’s risky.

Central banks around the world are preparing to issue national digital currencies. Read about what’s at stake.