Cash Is King
I often hear the chorus of commentators proclaim that the Cashless society is here and that digital technologies will replace the need for holding cash. I like to remind them that there is good reason for saying that cash is king. There are certain characteristics of cash that cannot be replicated by traditional digital currencies such as debit, Mastercard and Visa. I think this pursuit of payment flexibility should always be tempered with need to maintain the anonymity that cash affords individuals. It certainly is true that governments and banks would like to drive consumer to use traceable payment options to better track and maintain enforcement of rule of law Know Your Client (KYC) and Anti-Money Laundering (AML) guidelines. I think we overestimate the capacity of governments to effectively do anything which can be best left to the free market of money, and crypto currencies are a testament to this. Let us focus on some of the challenges that are faced by banks related to card compliance and how crypto currencies may represent a good balance between cash and digital payments options.
The world as suggested is not exponentially turning away from cash settlements for transactions but rather the importance of cash due to its unique properties makes it continued use very likely. The World Cash Report states that “Cash demand is growing consistently, based on increasing ratio of Currency in Circulation vs. GDP and positive growth in the value of ATM withdrawals (+4.6% in 2015). The world average Currency in Circulation vs. GDP ratio is 9.6% in 2016 (up from 8.1% in 2011). Pg.129. It clear that demand of cash and cash equivalent products is on the rise, and the fear of a cashless society is largely overexaggerated. The properties of Cash preserve the freedom of individuals to purchase without a digital fingerprint which may later be used by companies and governments as profiling information which from a rights perspective is undesirable. Let us take a quick look at Mastercard and Visa and how they are navigating this brave new world of mass data and digital transactions.
The Cost of Credit Compliance
The management by Mastercard and its principle members various cards programs including data and KYC/AML requirements has not been as effective as one would assume. The idea of a grand conspiracy in which card companies are collecting and utilizing our personal spending data is largely overstated. Having over 10 years of experience with both Visa and MasterCard its principle members and affiliates has provided me with some real insight into how this industry operate and where they are focusing their compliance and data monitoring budgets. The reality is that most medium sized banks remain affiliates of a Mastercard principal member and must use these members’ compliance teams and expertise to facilitate the use of a card program for their clients. In the current regulatory environment of high data and transactional compliance costs, Visa and Mastercard are not in the issuing many new principle members agreements. Taking on new members in this environment increases the cost of MasterCard’s data, compliance and regulatory oversight structures and there is a general de-risking currently underway. Given the complexity of running a Mastercard’s principle members program, banks or payment processors utilize technologies that assist in remaining compliant with the ever-increasing demands of regulators in this area, but these technologies are far from perfect. Although they tend to flag specific criteria of activity and bring to attention of bank compliance specific problematic issues with client transactions, they require human intervention and investigation to complete assessments. The offshore banking world is even father behind on its data and payment risk management, and often clients are exposed to long compliance investigations which require documentation to be provided on activities that arise from ATM cash withdrawals done via a credit card. These compliance requirements of mainstream banks push client towards payment processing solutions which are much more flexible, and blockchain and cryptographic currencies in general have been playing a role in providing consumers with alternative options in this area.
The Cash Cow
Cash has the benefits of being Legal tender, easy to use and available, immediately transfers value, is a safe-haven and emergency fund and is anonymous. Yet cash can still be insecure as it can be counterfeited and is relatively easy to steal from another individual although losses are limited to what is on hand. I think it is reasonable to expect “that as long as these attributes (valued assets) are only fulfilled by cash and not by any other alternative, cash will fulfil a need and therefore will continue to be a widely used payment instrument”Pg.20. Can blockchain and distributed ledger provide a digital currency solution that achieves similar attributes to cash? A country could decide to have a cryptographic currency be legal tender as such a change could be mandated via the laws of this nation. Increasing the ease of use and availability of a crypto currency is a surmountable technological obstacle, and these currencies could be as easy to use as any other digital credit technology such as Visa, Mastercard and debit. Crypto Currencies certainly already provide an immediate transfer of value in an anonymous fashion and are far more effective and safe than cash in this regard. We will see bitcoin and other crypto currencies act as safe haven stores of value as national fiat currencies come under economic and budgetary pressure. You could certainly have your crypto wallet details memorized or stored on a device, but in the case of a natural disaster there will be an obstacle to using any digital currency unless there is technology which allows that currency to be available.
A Match Made in Heaven
I think we can all agree that cash has some unique properties that make it very useful in transactions. Digital payment processor such as MasterCard face substantial obstacles due to regulatory pressures to understand the source and parties involved in all transactions and this put them at a competitive cost disadvantage to cash. As crypto currencies come out of the shadows into the forefront of our economic lives they will face the same regulatory pressures, and unlike cash may not be able to resist the legal and compliance requirements of (KYC) and (AML) frameworks. If free market participants are left to choose the attributes that best serve their transactional needs, then our futures may be full of cash and cryptographic currencies. I know that our economic freedom largely depends on the free market of ideas and technology and I hope to continue to contribute to both.