The cost of using Money as Financial Infrastructure

Many things have served as money. The Figure below gives some examples ( from Lecture by Agustín Carstens, General Manager, Bank for International Settlements): Yap stones, gold coins, cigarettes in war times, $100,000 bills, Wissel (Wechsel), ie bills of exchange or bearer notes, such as those issued by the Bank of Amsterdam in the first half of the 17th century and Aztec hoe (or axe) money.

These days money becomes merely a computer record, moving around the globe:

Everything costs money: directly or indirectly. Money as Infrastructure is no exception.

Cost of Cash as Financial Infrastructure.

Cash — by which I mean paper currency and coins — has many benefits. It’s safe from hackers. It doesn’t require any special hardware or software. There is no fee charged to retailers who use it and no exorbitant interest rates lying in wait for consumers. It’s accepted almost everywhere and it offers anonymity. Millions of Americans keep using cash. Some lack an alternative because they don’t have a checking account (“unbanked”). Some value the privacy of cash transactions or the psychological security of knowing that cash is always accepted. For some families, using cash is cheaper than credit and helps them control their spending.

But there is a cost to using cash: a study by Tufts University, The Cost of Cash in the United States, puts that price tag at about $200 billion a year. This figure includes $55 billion in higher costs to businesses, $43 billion for U.S. households and $101 billion in missed tax revenue because of off-the-books transactions. The U.S. offers an interesting case study in what happens when only about a third of all transactions are conducted using cash payments. For businesses, paper money has to be managed: it must be stored, guarded, and accounted for. It can be difficult to transport and is inherently insecure. U.S. retail businesses lose about $40 billion annually because of the theft of cash alone. For the government, the annual value of under-reported taxes in the United States is $400 billion to $600 billion. According to the national taxpayer advocate’s estimates, 52% of this gap is because of under-reporting by self-employed taxpayers. If even half of this under-reporting is directly enabled by a cash economy, the U.S. Treasury loses at least $100 billion annually because of cash. For individuals, cash usage imposes a regressive tax with the highest impact on the unbanked. By FDIC estimates, 8.2% of U.S. households are unbanked and 20.1% of U.S. households are underbanked. The unbanked pay four times more in fees to access their money than those with bank accounts, and they pay $4 higher fees per month for cash access.

Cost of using Money using Banking Infrastructure.

Banking Infrastructure offers huge advantages over cash. But these advantages are attractive to consumers as well as criminals. The latter is responsible for the wide variety of financial crimes: including bribery and corruption; money laundering; fraud; theft; cybercrime; and slave labor/human trafficking.

Global estimate of lost turnover as a consequence of financial crime at 3.5%, giving a global estimated loss of turnover of just over $1.45 trillion.

“Financial crime causes incalculable harm around the world. The proceeds of bribery, corruption, fraud, narcotics trafficking, and other organized crime have all been implicated in the financing of terrorism, human rights abuses such as slavery and child labor, and environmental crime. This has serious economic and social costs in terms of the lost revenues to national exchequers that could be invested in social development, and in terms of the impact on individual lives” said Che Sidanius

Global Head of Financial Crime Regulation & Industry Affairs, Thomson Reuters.

It has been estimated that Global spending on fighting financial crime is ~$ 1 trillion (source: Refinitiv). Criminals re-introduce the proceeds of their activities into the financial system through money laundering.

Rapid developments in financial information, technology and communication allow money to move anywhere in the world with speed and ease. This makes the task of combating money-laundering more urgent than ever.

The deeper “dirty money” gets into the international banking system, the more difficult it is to identify its origin. Because of the clandestine nature of money-laundering, it is difficult to estimate the total amount of money that goes through the laundry cycle. The estimated amount of money laundered globally in one year is 2–5% of global GDP, or $800 billion — $2 trillion. (United Nation Office on Drugs and Crime) .There have been many developments in the international financial system during recent decades that have made the three F’s-finding, freezing and forfeiting of criminally derived income and assets-all the more difficult. These are the “dollarization” (i.e. the use of the United States dollar in transactions) of black markets, the general trend towards financial deregulation, the progress of the Euromarket and the proliferation of financial secrecy havens. Fueled by advances in technology and communications, the financial infrastructure has developed into a perpetually operating global system in which “megabyte money” (i.e. money in the form of symbols on computer screens) can move anywhere in the world with speed and ease.

Banks are spending multi-billions of dollars to protect money from an unauthorized transfer. To re-coupe, these costs — they are charging huge amounts for cross-border transactions with average global remittance cost — 7.45% and Border-less P2P payments (PayPal international remittance costs 10%). Because of a lack of trust between Transaction Parties — Banks serve as an escrow. Huge overhead is collected by middlemen companies, for example, Airbnb. If Global E-Commerce is estimated to be ~ $29 trillion in 2019 (United Nations Conference on Trade and Development)– then inefficiencies due to money transfer costs are about $1–2 trillion annually.

Summarizing- the cost of using money using Banking infrastructure is a staggering $3–4 trillion dollars or about 5–7% of Global GDP, including the costs of financial crime (misuse of money), financial crime protection (regulation-driven) and money transfer inefficiency. Year after year!

Introducing Money with Identity Infrastructure.

Identity-Bound Cryptocurrency (IBC) will greatly reduce the costs of using money using Banking infrastructure via:

Reduction of financial crime,

Reduction of costs for financial crime protection,

Reduction of costs of money transfer.