VBV In our last post on Demonetization in India, we dealt in details as to how demonetization of 86% of Indian currency is likely to transform India and the challenges that could arise in the path of this change. However with the passage of time within few weeks to cover for the shortage of currency owing to printing logistics the narrative of demonetization is being slowly turned towards a cashless economy. Indian Prime Minister Narendra Modi in his latest Mann Ki Baat address championed the vision of the transformation of India from a majority cash driven economy to a more digitized and less cash economy ultimately leading to a cashless state over time. The goal of a cashless economy has its own merits and demerits which cannot be isolated from the global war on cash and the push towards a digital economy. As India pushes towards digitization of economy in the form of a cashless state, it is imperative to take a deeper look on the contours of the same and what future holds for the global populace with regard to it.

India has been traditionally a cash-dominant economy with 78% payments being made through cash and only 13% through digital means and mere 7% payments are made through cards as of the year 2015 according to the Boston Global Survey of Digital markets. In comparison, developed countries like the US has 49% transactions through cards while 15% of transactions through other digital means. Similarly, even the UK has 59% of transactions through cards and 14% through other digital means while the proportion of cash as the mode of payment is still 25% & 24% respectively. Comparatively, even in countries like China 47% payments are made through cash while the share of cards & digital payments is 25% & 27% respectively. While India has been predominantly a cash driven economy to a size of 16 trillion dollars yet the digital mode of payments has been relatively low due to lower penetration of digital platforms and basic infrastructure such as internet connectivity and smart phones which are the key drivers in a move towards a more digital economy. With growing penetration of smartphones and internet revolution in India, the adoption of digital mode of payments is bound to accelerate as is also forecasted in Boston Global-Google Survey 2015 which shows that value of payments in digital mode would increase from 22% in 2015 to 40% in 2020 and overtaking the share of cash transactions by 2023 reaching a level of 59% in 2025 with Cash volume coming down to 41%.

The push towards a cashless economy has been in the making in India for quite some time. In July 2016, the RBI (Reserve Bank of India) under Governor Raghuram Rajan came up with a Vision Statement 2018 for a less cash economy promoting the digital mode of payments. The report running in 15 pages put forward the roadmap or the blueprint to encourage electronic payment system in India and making India a less-cash society. The report put out various measures the Indian establishment ought to take to promote digital payment options like RTGS, NEFT, Installing more ATMs, making digital payments through POS and APPS like UPI, promoting mobile banking etc. The Vision Statement 2018 of RBI among other things specifically promoted UPI (Unified Payment Interface) to make e-commerce transaction easier and promote micro-payments or person to person payments. Consumers can now make payments with UPI by virtually entering MPIN (Mobile Pin or Virtual IDs). As recommended by RBI Vision 2018, the Indian Government and its Niti Ayog are now planning to launch a Digital APP with Aadhar Enabled Payment System (AEPS) through which consumers would be able to link their bank accounts, transfer and withdraw money as well make payments for goods & services. Aadhar is biometric database by Govt of India which has the biometric record of more than 100 Cr Indian citizens. This, however, raises a critical question of security of Biometric enabled Payment System.

Post demonetization, RBI data has already reported substantial growth in adoption of a digital mode of payments. As per the data available, the number of transactions in RuPay cards jumped from 30,00,000 between 1st and 8th November 2016 to 65,60,000 between 9th & 15th November 2016 showing a huge jump of nearly 118.6%. Similarly, ECOM & POS mode of payment also took a quantum jump of 31% and 200% respectively. Large no of customers including street side vendors, small retailers took to other 3rd Party apps like Pay TM which is 40% owned by Chinese company Alibaba. There was a similar spike in the usage of Credit Cards and Debit Cards showing an aggregate jump of around 70% among two payment platforms (Master card & VISA). Post demonetization on 08th November 2016, a large of retailers and small scale businesses took to digital platforms to buy their essential stuff mainly due to cash crunch caused by currency replacement. However, such a transition to digital platforms can be temporary unless the government and the central bank i.e. RBI promote secured e-commerce gateways and reduced the surcharges on such transactions. Already the RBI has made OTP not mandatory for transactions below Rs 2000 and the Govt of India has waived service tax on debit cards on transactions less than Rs 2000 to promote the digital economy drive.

The drive for a less cash economy in India also faces another hurdle in form of penetration of internet and smartphones making the effort towards cashless economy less viable. A recent PEW Report says that only 22% of Indians use the internet occasionally and 17% have smartphones. It has also been estimated that smartphone users in India could in future multiply from 184 million in 2015 to 381.5 million in 2020 which is still some distance to cover. It has to be stated that India has been able to more than halve the unbanked population from 557 million in 2011 to 233 million in 2015 due to the Pradhanmantri Jan Dhan Yojna which has till date added 25.78 core accounts and issued 19.36 crore RuPay cards. That despite this financial inclusion drive there is much more to be done before India can truly reap the benefits of digital economy, the latest World Bank report shows that India has only 18 ATMs per 1,00,000 people which only goes to show that India still has miles to travel on the path towards a digital economy

Global War on Cash

While the drive towards cashless or less cash economy as we have seen above has its own merits from fast, seamless transactions to more transparency yet the very idea has another side to it which is the global war on cash. The push towards cashless society has a natural negative consequence i.e. the global war on cash. Many countries across the world have been in the favour of limiting or regulating the supply of cash altogether or in some places high-value denomination currency. In Sweden, 95% of all retail transactions are already cashless making hundreds of ATM machines as redundant. While in Denmark, the Danish government has put up a target of eradicating cash totally by the year 2030 and in Norway’s biggest bank has called for complete elimination of cash. Apart from Scandinavia, many other European countries like Spain have banned cash transactions of more than 2,500 Euros, while France & Italy have both banned cash transactions of more than 1000 Euros for French nationals. In India, too there have been calls by various social activists to ban high currency notes to stop the flow of black money amid rumors that Rs 2000 note recently introduced could ultimately be phased out. In June 2016 the SIT on Black Money headed by Retd Justice MB Shah submitted its 5th report to the Supreme Court of India on ways to curb black money in the economy. SIT recommended banning high-value Cash transactions above 3 Lakhs and limiting maximum cash holding per person to 15 lakhs. It is not only in India but similar demands have make noise in developed countries as well.

The push towards Cashless economy has a natural corollary of the global war on cash or eliminating the use of cash as a prevalent mode of payment. It has to be understood that the world since the cusp of industrialization has been using fiat currency as a matter for trade and transactions among countries and people. As the global war on cash unfolds across the world there are many questions which remain unanswered about the push for the digital economy. The questions pertaining to the economic freedom and privacy of the citizen in respect of the choices he has in hand. Let us examine this aspect, with liquid cash in hand as legal tender citizens across the world in respective countries are free to use their legitimate money in choice and manner as they feel like. With the elimination of cash or regulation of same in some cases, the choice of the citizen to spend the way he feels like is curtailed and the push towards digital platforms makes him more susceptible to repeated taxation in form or surcharges, service charges for every transaction irrespective of any amount unlike in cash transactions. The repeated transaction tax is not only windfall for the government but also makes every transaction trackable over an electronic mode of payments compromising the privacy of the consumer in form of his financial data and limits his economic freedom of choosing the mode of payment without being repeatedly taxed.

These aspects of the global war on cash in respect to the citizen right to privacy and economic freedom has also been pointed out by Bundesbank’s CEO Carl Ludwig Thiele. The Bundesbank (German Central Bank) CEO Thiele in a passionate address ‘The Future of Cash’ as reported on 14th April 2016 has openly advocated for keeping cash as a mode of payment amid this global war on cash. Some excerpt of the Bundesbank CEO Carl Ludwig Thiele’s speech are as follows:

“Federal Finance Minister Wolfgang Schäuble, for example, only took a position in Berlin two days ago. For a long time, however, we have a discussion about the cash. Various motifs are superimposed. Some are concerned with curbing transactions with a criminal background, others want to suppress the shadow economy or make tax avoidance more difficult. However, some scientists have formulated even more extensive goals. They demand that the cash be completely abolished. This is intended to give central banks the opportunity to implement negative interest rates for all. Dodging in cash was then no longer possible…

Ladies and Gentlemen when the money to which it in cash discussion, in the discussion is about the abolition of the 500 euro banknote or near the upper limit for cash payments, it’s not about the money of banks, financial institutions or people – and Raiffeisenbanken, it is about the money of the citizen. Every citizen has the right to deal with his money as he wishes. If the freedom of the citizen is taken into account, this must be well-founded. And so the question arises: How has a cash limit in other countries restricted crime? I do not know that in countries with a cash ceiling, such as in Italy or France, crime would be correspondingly lower than in countries without an upper limit.

Every currency lives by the trust. They all know how hard it is to achieve trust. But you also know that it is relatively fast to lose your acquired confidence again. The same is true in politics. Again, it is not easy to acquire trust. Trust can also be lost quickly. Trust in politics is reciprocal. The citizen should trust in politics, but the state should also trust its citizens. Because criminal acts can be carried out not only with cash but also with non-cash means of payment, not every citizen should be put under general suspicion. The state should thereby proceed from the legal disposition of its citizens. If, however, criminal activities are carried out, these offenses must be prosecuted and the perpetrators be held responsible…

The arguments presented against cash and cash are not convincing. But what exactly does it mean to continue paying for banknotes and coins? A whole lot – and these reasons are often neglected. On the one hand, cash payments protect the privacy of the population. The fact that less legal persons benefit from it is no reason to make the honest citizens more and more transparent. The right to informational self-determination and respect for private life is a high good which should not be weakened or discounted. “Cash is Coined Freedom” – this modified Dostoevsky quote has not lost its validity.

Furthermore, cash payments allow for a good control of the expenditure – many households like to fall back, especially the less well-off. Cash can also be used without a technical infrastructure and is therefore, a popular means of payment between private individuals and a default payment for non-cash payments. Finally, especially in emergency and crisis situations, cash is heavily in demand – whether as a means of payment, for example, when the technical infrastructure is destroyed in the event of natural disasters, or as a preserve of value.

The renowned economist Friedrich Schneider from the University of Linz, who is intensively analyzing the field of shadow economy, expressed skepticism. The ban on large amounts of banknotes or high bar transactions has minimal effects on black-work or crime. This was a sham. For example, criminals could turn to alternatives such as cyber currency Bitcoin, or they use high banknote denominations in other countries.

It would be fatal if the current discussion about the abolition of the 500 euro banknotes or cash surpluses would give the impression that the population would be gradually deprived of their cash. One has to keep in mind that freedom often dies in a slice-like way.”

After extensively raising issues from privacy of the citizen to economic freedom to taxation to black money, crime; the Bundesbank CEO vociferously defended the use of cash as mode of currency in Germany where nearly 80% of transactions as per Bundesbank Survey 2014 were conducted in cash despite it being one of the world’s most advanced nation.

As we have elaborated above the global war on cash in the forced push towards a cashless economy is bound to have huge ramifications on the rights and freedoms of citizens across the world. It is now the case of governments across the world with Central Banks regulating the amount of currency which a citizen can hold or how he can spend the same. The power of state is being further enhanced as it can now monitor every transaction, impose and alter taxes, surcharges as it feels like and monitor as to where a citizen is spending, his preferences in goods and services thereby giving it more Orwellian look. It is no one case’s that digitization of economies across the world in less cash or cashless be junked totally, while the push for more use of technology is good for seamless transactions yet there needs to be ample safeguards put in place to protect the rights of citizens and his privacy. We have already elucidated in our book “The New Global Order” as to how citizens and states were being spied by NSA using Internet and espionage programs like PRISM which were confirmed by the Snowden leaks.

The Patriot Act in the USA and the recent law passed in the UK giving ample powers to state to peep into citizen’s life don’t inspire much confidence in the right to privacy. Insofar as India is concerned we are still debating before courts as to whether Right to Privacy is a fundamental right or not under Article 21 of the Constitution of India. In India, there is no law to define what Rights of Privacy is whether economic or social which a citizen has, also who will indemnify the citizen in case of breach of his Privacy? What is the dispute redressal mechanism in event of any such breach? What are the legal guarantees of financial data that government receives in a biometric-based system and under what circumstances can it be shared with third parties? All these are very pertinent questions which need to be answered before the citizen voluntarily switches to safe and secure digital mode of payments. There has also been recent case of hackings like Mass hacking of debit cards in India in October 2016 which raises the question mark on the security and encryption of our digital platforms for e-commerce. It is estimated nearly 32 lakh debit cards were hacked of some of the prime banks in India like SBI, HDFC, ICICI and Yes Bank with an estimated Rs 1.3 crore being whisked off by hackers. This also raises the question about the security of E-Wallets & Apps like PayTM. In a more shocking case, hackers hacked into Bangladesh Bank’s computers and siphoned off $ 81 million from its account in New York Federal Reserve as revealed by the FBI in May 2016. Hence the concerns of Privacy and Security of digital platforms, payment industry platforms like Visa, Master card, PayPal, PayTM, Apple Pay and other cloud-based data services are valid for the citizens in India.

Digital Cash: The Future of Cashless Economy

We have seen the times changing from Gold & silver minting of coins to Fiat Currency. The world now stands at the cusp of another digital revolution which could totally transform as to how people conduct commercial transactions and do business in daily lives. This is the revolution of digital currency which we have already seen evolve in the form of Bit Coins. Bit Coins are essentially the form of digital currency which can be transacted directly between parties over servers without any intermediary due to which this has been outlawed in many countries as this has become one of the prime routes of criminals to launder their money. However with time concept of digital currency as in Blockchain algorithms has long been toyed around by the Central Banks, corporates and financial institutions around the world. It was recently put out in Bloomberg that, in a secret meeting, the Wall Street representatives from Nasdaq, Citi Group Inc, Visa, Pfizer, Fidelity, Fiserv Inc etc gathered to test the concept of digital cash or currency. The testing of Blockchain technology was touted as a revolutionary idea by Wall Street financial executives as this will lessen the time of transactions and shifting of monetary assets in a click compared to present clearing system. Not only Western democracies but even China is hiring experts in Blockchain technology to move away from cash which as Chinese Central Bank chief Zhou recently remarked, ‘Paper money is last generation currency’. Even cashless economies like Sweden and other advanced economies like Singapore are now contemplating switching to digital currency as an alternative.

The adoption of Blockchain Technology in distant future by Central Banks across the world will totally revolutionize the world financial system. The central banks across the world will become depositors and directly hold accounts on behalf of citizens and businesses on central bank’s blockchain, a secured and encrypted digital ledger. The central banks, would in turn pay interest electronically by adjusting balances in the depositor’s accounts as the parallel system of fiat currency in physical notes slowly wind downs over time. This would help the government save approximately billion of dollars to print, transport and safeguard the physical currency. This would also enhance transparency in the system as modes of tax evasions, compliances and money laundering would become even more difficult. People need not rely on commercial banks to hold their accounts and the commercial banks would be able to raise long-term capital in debt and equity markets ending the mismatch between demand deposits and long term loans. Central banks would also be able to directly control the monetary system without intermediaries like commercial banks and requirements like cash reserve ratios. The central banks will also be able to use monetary policy effectively to target economically depressed or deprived sections of society directly through blockchain concept.

With every giant leap in technology comes its side effects and blockchain concept is no different. While Blockchain technology offers a lot of benefits in a more centralized and transparent system which is free of mal-practices yet it is not free of flaws primarily being the omnipresent nature of the state or its central bank to monitor each and every financial transaction of the citizen throwing to winds the concept of privacy and freedom. An effective and judicious choice will have to be made between more centralization and surveillance of financial architecture viz-a-viz privacy and freedom of the citizen. It has already come to fore, how criminal elements are using Crypto-currencies and Blockchains to establish Dark Markets in illegal trade and transaction bypassing official channels. Hence, to count on a cashless or digital economy as a solution to illegal, crime and tax evasion activity would be over-estimating the flaws the of digital currency concepts. As India and the world pivots towards cashless or less cash economy, citizens across the world would do well to hold their state accountable by putting in safeguards to protect and indemnify the privacy and freedom coz once freedom is lost bit by bit, life will become listless. As John Adams once said, “Liberty Once lost is lost forever”