July 30, 2015    5 minute read

The End Of Physical Currency?

The End Of Physical Currency?

$19.28 trillion. That’s the amount of money in physical form in existence, however its only 8% of the total money in circulation within the global economy – the remainder is digital. Thus, how much longer will society continue to use notes and coins when transacting?

The concept of digital currency was introduced in 1983 by David Chaum. Seven years he formed DigiCash the first electronic cash company. Although, the business eventually failed, clearly the concept had caught on. In 1997 Coca Cola offered customers the option to buy products from vending machines using mobile phone payments and in 1998 PayPal was created, seeding the idea of digital currency into reality.

Globalisation

One major factor in the decline of physical currency is catalysed by globalisation and the ability to transfer funds internationally with little delay. Currently, World First, a company that specialise in international transfers hold the record for the fastest overseas transfer of only 6 minutes and 49 seconds, compared with the average time it takes to send a letter of 2 – 3 days. Clearly an advantage of using non-physical currency is the magnitude of time saved. Furthermore, if cash was sent in the form of a letter, it risks being tampered with. This would result in the sender losing the original amount and having to invest the time to send the money again. The receiver would also lose time as the transaction would take longer than anticipated.

Efficiency 

Physical currency can become obsolete because of the increasing number of contactless payment methods including Oyster cards and Apple Pay. With this type of payment not only is cash not needed but the amount of time a transaction takes is significantly reduced. The London Underground has noticed the benefits of electronic transactions as ticket offices are being closed due to only 3% of people buying paper tickets whilst the majority of commuters use Oyster cards. This new change is predicted to save £4.2bn by 2020. The London Underground is just one example of the efficiency and savings that can be achieved by adopting cashless methods of payments. However, there are safety risks with this method of payment as items can be bought without proof of identity. Yet, as this method is relatively new it is inevitable that there will be issues first. It is likely that over time accompanying technology could negated these issues and in the process eradicate cash too.

Government endorsement 

As of next year, the Danish government has proposed that businesses such as clothing retailers, petrol stations and restaurants should no longer be legally-bound to accept cash. This would reduce costs for businesses as they would not need as much security and employees can be more productive as they do not have to spend time on a till, dealing with physical currency. Almost 40% of the Danish population use a digital payment app called MobilePay created by Danske Bank. Not far behind Denmark are its Scandinavian peers who are also moving towards a cashless system as only 6% of all payments made are physical.

Physical currency and crime

The final reason as to why there may eventually be no more physical currency is due to crime. The number of personal robbery per 1000 people in London in 2005/2006 was 6, whereas in 2010/2011 this had dropped dramatically to 4.4 these statistics support the decline of physical currency as people feel safer without carrying cash. Online transactions are a safer option as they create a paper trail. Due to this, if someone is suspected of being involved in a crime it is much easier to track the individual’s movements as a record of all transactions is logged.

However, due to its nature, there will always be crime which will be committed using physical currency. Drug deals are a prime example because cash offers anonymity. Yet this is starting to change as virtual currency can also offer obscurity with the open source software; Bitcoin. This has led to the dramatic increase in cybercrime, which was facilitated by platforms such as the Silkroad. Aware of this, Bitcoin attempted to combat the issue by putting measures in place.

Unfortunately, these seem to have made the problem worse as more crypto-currencies were created in response. Litecoin is an example, it is but more accessible as it can be mined using standard computers rather than the powerful computing power Bitcoin requires to mine coins. Consequently, there are now more crypto-currencies to regulate. IBM is rumoured to be creating a bitcoin alternative which further supports the argument that we could be approaching a cashless system as crypto-currencies are being endorsed by large multinationals. The argument is then double sided as both physical and non-physical currency can be used to facilitate crimes.

In the past few months, with the fear of Grexit, many Greeks decided to convert their euros into bitcoins as a safe guard. This perhaps indicates into the legitimacy of cryptocurrency as a real alternative to its physical counterpart. Further support for this came on the 18th of November 2013 when the USA deemed bitcoin a legal currency adding legitimacy to the all cryptocurrencies. Following the decision on the 27th of November bitcoin broke the $1000 value.

On the basis of this article we can see that there are compelling arguments both for and against the end of physical currency. Only time will tell if physical currency will remain or if online transactions, crypto-currencies or a new payment method will make cash obsolete. Last year the Payments Council UK concluded that the use of cash fell to 48% of all transactions and the remaining 52% was made up of electronic transactions. It is predicted that over the next 10 years the cash figure will fall by 30%. Based on this evidence cash might become obsolete within the next 20 years.

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