Cash and Its Persistent Meaning

Authored by: Konstantin Vladimirovich Tserazov

In recent years, the global shift towards digital payments has been evident. More countries are witnessing a decline in cash transactions, with Gulf countries upholding this trend. By the end of this year, over half of all financial interactions in this region are expected to be cashless. Despite this tendency, cash remains in the pockets of millions of people, and this phenomenon can’t be ignored.

The Evolution of Money

Before money existed, bartering was used, but it was inefficient. As a result, mediums of exchange were created, beginning with items like shells, which later developed into metals, coins, and eventually banknotes. While this shift towards digital payments offers convenience and efficiency, it also creates challenges for certain groups in any society, such as the elderly, minors, and individuals with disabilities. Even in the face of digitalization, cash remains important for those who cannot access banking services, such as temporary migrants. Unfortunately, these groups face a risk of digital exclusion.

The Cash Dilemma

In some countries, the demand for cash increases even as cash payments decline. This can be explained by the fact that cash is used sometimes as a preferred savings method, especially during times of crisis.

The push towards cashless and digital payments is driving a reduction in physical bank branches, encouraging the transition to digital money.

However, this transition faces several obstacles:

High Cost of Smartphones: Not everyone can afford a smartphone, which is crucial for conducting digital transactions. Unreliable Internet Access: Consistent Internet connectivity is necessary for digital payments, yet it is not universally accessible. Challenges for Older Adults: Seniors may struggle to adapt to digital payment systems. Fraud Risk: Ease of transfer increases fraud risk, especially for vulnerable groups. No Local CBDCs: Many countries lack central bank digital currencies (CBDCs). Unclear Crypto Laws: Cryptocurrency laws are often unclear or restrictive. Cryptocurrency as a Potential Solution

Cryptocurrencies could potentially address some of these challenges, but it is essential to ensure that the development of CBDCs and the broader crypto ecosystem includes applications for the deaf, blind, or visually impaired, as well as individuals with developmental disabilities.

This area currently receives little attention in the crypto sphere but holds the potential for successful business models and innovative solutions for millions of people. Ultimately, these solutions will contribute to the adoption of digital means of financial interaction.

The Necessity of Digitization

The move towards digitization aligns with the Environmental, Social, and Governance (ESG) agenda for money emission. Managing cash incurs costs for the state, and a digital system should be significantly more efficient than handling physical cash, which requires transport and management. The marginal cost per transaction would be very low if the central bank provided a digital payment system.

Moreover, if CBDCs were interest-bearing, they could theoretically impact monetary policy quicker. This would make it more advantageous to hold money in CBDCs rather than cash, which does not generate income.

Digital Money as a Tool for Inflation Management

When high interest rates are necessary to curb inflation, digital money could become a silver bullet. The circulation of such financial instruments reduces business costs, allowing them to raise prices less.

In short, the distribution of CBDCs could be as effective a tool for central banks in managing inflation as increasing key interest rates and tightening reserve requirements for banking activities. Unlike cash, where it is unclear what goods are being purchased at any given moment, CBDCs provide for monetary policy makers transparency in transactions .

Why People Still Prefer Cash

Despite the advantages of digital payments, many people still prefer cash. This preference can be traced back to when dollars had guaranteed gold backing. When thinking about digital currencies and cryptocurrencies, some feel they are “somehow out of thin air,” not backed by anything.

In reality, current fiat currencies are also not backed by anything. However, cryptocurrencies like Bitcoin have a guaranteed reduction in the rate of issuance and a “cap” on the maximum number of units that can be issued, unlike any fiat currency.

The inflationary nature of fiat encourages even those who save in cash to spend it. If a person saves in Bitcoin, there are no such incentives; due to its deflationary model, there is a high likelihood of further increases in the value of such cryptocurrency relative to fiat money. This is precisely why the adoption of Bitcoin as a means of payment is stagnating — in El Salvador, for example, despite the ability to pay with Bitcoin in stores, there is no significant enthusiasm.

Another interesting point about why people prefer cash is the relative anonymity of spending. Additionally, there is the feeling of control. In some countries, there is a strong fear that hard-earned money in banks could disappear during a financial crisis. The Cypriot banking debacle of 2012-2013 serves as a chilling reminder. Billions of euros—a staggering €8 billion—were simply wiped out, leaving depositors high and dry. Fast forward a decade, and a glimmer of hope emerged: last year a Cypriot court ordered the government to make amends to one unlucky depositor. But whether this lone victory will set a precedent for broader compensation remains a major question mark.

The Convenience of Cash

There are many instances where, if you travel to another country, you can often pay with your home country’s bank card. However, the exchange rate is a significant question. Additionally, there are built-in fees. In some cases, carrying cash from your home country and exchanging it locally can be more beneficial than using a card or ATM.

Sure, digital payments are all the rage, but cash still holds its own. It’s secure and private and gives you a sense of control. If we go completely cashless, some people will get left behind. We need to embrace the new while still holding onto the old. That’s how we build a financial system that works for everyone.