Are We Heading Towards A Cash-Free World?
This is not about change for the sake of change. It’s a necessary and fundamental shift in the way we think about and use money
How often do you use cash? If you’re like most of us at Luno, there’s a good chance the answer is: only when you have to.
Between direct debits, online shopping, contactless cards, and systems like PayPal, it’s easy to go days or even weeks without handling physical money.
You might receive your salary via bank transfer, and never see a penny of it in the form of coins or banknotes.
Cash still makes up the majority of transactions worldwide. But it’s going out of fashion at a rapid rate. As the digital payments ecosystem matures, the idea of a cash-free future is starting to seem both feasible and inevitable.
As we talk about upgrading the world to a better financial system, it’s important to consider the forces that currently control our money, and the pros and cons of the current system.
So we’re taking you on a tour of the Evolution of Money: where it comes from, why we use it, the secret forces that dictate its behaviour, and what it all means for you.
This week we’re looking at the concept of a cash-free world.
Think about the way you might use money on an average day
You wake up in the morning and your rent was paid by direct debit while you slept. Noticing you’re running low on toothpaste, you open your local online shopping app and order some using the remaining balance of a gift card from your birthday. While you’re on your phone, you see a friend sent you cash via EFT or PayPal to repay their share of last night’s dinner. On the way to the station, you stop to buy a coffee and pay by scanning a QR code with your phone at the till. Then you hop on public transport, having scanned your contactless card at the gates.
Lunchtime rolls around and you choose a meal from your favourite local restaurant on an app, then tap ‘Pay.’ While you wait for it to arrive, a message pops up from your brother. He’s travelling overseas and is running low on money . Sighing, you open your Luno wallet and send him some Bitcoin. He uses it to book a hostel that accepts cryptocurrency at a discounted rate and without exchange fees. While you’re at it, you send a small Ethereum donation to the writer of that excellent article you just read.
In the span of a few hours, you’ve made multiple transactions using different systems — all effortless and taking mere seconds.
Contrast this with the hassle of traditional payment systems and it’s clear why the volume of digital payments worldwide went from 282 billion in 2010 to an estimated 577 billion in 2018. These are big numbers signalling big change.
The remarkable is the new normal
Across every area of our lives, digital systems are making things easier, faster, and cheaper. We’re seeing this happen with entertainment, transport and travel, shopping, and meeting new Now our money is catching up.
In the UK, the Treasury expects cash to fall to just 21% of payment volumes by 2026. Some parts of the world are already on the way to phasing it out. Sweden, for example, is believed to use the least cash of any country. Many Swedish banks don’t hold any, few shops accept it, and Swedes can go months without handling it. Even churches, street vendors, and public toilets accept digital payments.
We believe that decentralised cryptocurrencies are the next step in the evolution of money. But to understand why, it’s helpful to fit this shift within the broader context of the move away from cash.
But what is money, really?
At its core, money is a way of communicating value. It’s information. That’s why the form or material is irrelevant — gold, silver, shell, paper, salt, stone, or nothing at all in the case of digital money.
A fantastic illustration of this is the currency of a small island in the Pacific Ocean called Yap. Its inhabitants, the Yapese, use stone discs as money.
Known as Rai stones, they measure up to 4 m in diameter and can weigh several tonnes. Quarrying the material on other islands, then transporting and crafting it is time-consuming and dangerous. This keeps the supply low and gives Rai stones their value. But they’re also far too bulky to move around and the Yapese don’t keep records of who owns which stone. Instead, people just remember and agree by consensus.
The cost of cash
The biggest disadvantage of cash is its cost. We spend an enormous amount of money, resources, and time dealing with it.
Making money
For a start, the downside of physical money is that it’s…physical. Here are some key facts about the cost of producing money:
- The US Federal Reserve listed their 2018 budget for currency production at over 860 million USD
- Printing dollar notes costs between 5 and 13 cents apiece
- A 1 cent coin costs 1.5 cents to make
- The Royal Mint produces over 500 million small coins each year
- 60% of 1 and 2 pence coins are used just once before being lost, thrown away, or otherwise removed from circulation
Producing physical money is only the beginning. We also need to think about transport costs, expensive security systems for storage, distribution costs, and monitoring for counterfeits.
This doesn’t even begin to take into account the environmental costs, or the fees we all pay as individuals.
Because here’s the thing: Cash doesn’t last forever. Coins and notes that don’t get lost or thrown away eventually need collecting, transporting and destroying. This carries a heavy cost in resources and causes serious environmental damage.
Cash: the perfect partner in crime
We’ve all seen it in countless films and TV shows: a man (usually) with a briefcase full of banknotes on the run. It’s almost always the same aluminium model. Although the briefcase full of cash is now a cliche, it’s still a compelling image.
Cash and crime are a match made in heaven. No other payment method comes close to the sheer popularity of physical money for crimes like:
- Money laundering
- Tax evasion
- Dealing illicit goods (particularly drugs)
- Bribery and corruption
- Human trafficking and modern slavery
- Muggings, carjackings and other forms of theft
But it’s not quite as smooth as Hollywood implies: that briefcase full of $100 bills would hold 1.3 million USD and weigh almost 30 lb (12.5 kg).
So it’s not enough to live out a luxurious retirement on a private island, and it would be a pain to carry through customs. Replace 100 USD bills with a smaller denomination or another currency and it’s a lot less.
But cash is still attractive to criminals because it’s:
- Light and easy to transport — compared to other physical stores of value, like gold
- Difficult to trace — it’s hard to tell where it came from or who held it
- Anonymous — no need to give up personal information to spend small amounts of it
- Can be spent directly — doesn’t need converting or depositing to use
- Exchangeable for foreign currencies — therefore usable almost anywhere
- Sometimes available in large denominations — however, this is increasingly rare.
And of course, not all cash transactions are illegal. Yes, criminals do use other methods. Yet it’s believed going cash-free would reduce or even eliminate some forms of crime by adding a little more friction.
(By the way, it’s a common misconception that cryptocurrencies offer the same benefits to criminals — but they don’t.)
Take tax evasion, for example. Although it’s often associated with wealthy people with Swiss bank accounts, small amounts of cash-based income make up a big chunk of the hundreds of billions governments lose each year. The individual amounts may not seem to be much, but they add up. Without cash, governments could expect increased tax revenue.
Although few governments are talking about banning cash altogether, many are phasing out larger banknotes such as the 500 EUR and the 10,000 USD (some of which are still in circulation.) Other countries are banning large cash transactions. For example, in Spain and France, the limit is 1000 EUR, with Greece dropping theirs to 500.
The challenges of a cash-free world
That’s not to say it would be a smooth transition. There are some big challenges to consider, including:
Habits
If you’ve ever tried to break a bad habit you’re used to doing multiple times per day (such as drinking coffee or checking email too often) you’ll know it’s not easy. Habits quickly become an ingrained part of our lives that we barely notice — until we try to break them. Then we discover that changing even the simplest habit is a slow, frustrating process.
We all have habits surrounding the way we use money. If we’re used to using it in a particular way, it can be tough to adjust that. This is especially true for adopting a new payment system as we have to change our behaviour AND be able to trust it.
One argument against going cash-free is that it would be challenging for senior people who may have used cash all their lives. They’re also less likely to own a smartphone or have internet access, both of which are requirements for most digital payment systems. Likewise, countries with a strong cultural preference for cash (such as Italy) may get left behind.
We need to make sure no one gets left behind by changes like this. Everyone deserves access to services that meet their needs and practical guidance. So far, the transition away from cash has been slow enough to let us adapt and innovative new products are helping to fill the gaps. For example, a few charities have switched donation tins for contactless card payments as fewer people carry cash to give. In Sweden, churches and street vendors accept mobile payments.
Trust
This is related to the need to change our habits — it’s just not easy to trust something unfamiliar. But cryptocurrencies have the potential to succeed where other digital payment methods are failing because they’re decentralised. Users don’t need to trust a single company or a central authority. They don’t need to worry about the network taking their money, or raising the fees without warning.
Privacy
As we saw earlier in this post, digital payment systems can help reduce crime by making transactions traceable. While that might be a good thing, it also means less privacy. Our day to day transactions are an unintentional diary of our lives. With digital payments, it’s possible to have a complete record of every time someone spends money, including how much, where, and when.
Regardless of whether we as individuals have anything to hide or not, we have to consider the implications and the ways this information could be used. We may prefer to make some transactions in cash even if they’re legal.
Small businesses
Many small companies are still cash-only or charge a fee for card payments under a certain amount, often 5 GBP. Processing and chargeback fees can be expensive, especially for small transactions. If people don’t have cash on them or prefer not to use it, they’ll just go elsewhere.
But small businesses stand to benefit a lot from going cash-free. Handling money makes them vulnerable to crime, especially if they’re isolated (such as a gas station) or lack strong security (such as a small family-run business.) Storing, accounting, then transporting cash to the bank is time-consuming. Small companies also lose out on income from people who don’t carry cash, theft by employees, and counterfeit money given as payments.
At the moment, a number of new initiatives are making it easier to accept low-value digital payments. However, cryptocurrencies have the potential to take this further by lowering processing fees and eliminating chargeback fees.
The pain of paying
Dan Ariely, Professor of Psychology and Behavioural Economics at Duke University, uses a simple exercise to teach his students about what he calls ‘the pain of paying.’ He organises a pizza lunch where they’re charged 25 cents for each bite they eat.
Unsurprisingly, this changes the way the students approach the meal. Ariely’s students take huge bites, eat less than they might otherwise, and find it uncomfortable. The way we pay for something influences both how much we’re willing to pay and how we view the experience.
We tend to spend more using digital payment methods than cash — hence why only using cash can be an effective budgeting technique. One concern is that moving away from physical money will make it easier to spend too much and harder to save money.
Yet it’s silly to suggest that going cash-free will turn us all into reckless, out of control spenders. In some ways, digital payment systems make it easier to manage our spending. We can see at a glance how much money we have left, rather than needing to count up coins and cash (which might get lost too.) New budgeting apps let us organise our expenses by category, set savings plans for the future, and analyse areas where we’re spending too much. Going cash-free may mean reframing how we use our money, but it’s possible to adjust.
Banking the Unbanked
The percentage of transactions carried out in cash tends to reflect the state of a nation’s economy. More developed countries use little cash, whereas emerging economies use a lot. This is logical. Cashless transactions require a high level of financial inclusion and well-developed infrastructure.
Over 2 billion people remain unbanked worldwide, including an estimated 1.5 million in the UK alone. The lower their income, the more people rely on cash to avoid fees or because they can’t make minimum balances. The barrier to entry for banks in countries without existing infrastructure is high. Banks won’t, for obvious reasons, set up in areas a very low population density, political unrest, or ongoing conflict.
Although it’s sometimes assumed that going cash-free would further exclude unbanked people from accessing financial services. But that’s not the case — a cash-free world could be far more inclusive.
Banking the unbanked isn’t necessarily a matter of setting up more traditional banks. Digital systems can be made available to anyone with internet access (and bring cheap WiFi to remote areas is not as difficult as it sounds.)
People in developing countries are already adopting and adapting digital systems with transparent fees, lower barriers to entry, and quick transfers. So we shouldn’t assume that it’s cash or nothing.
Interoperability
Many digital payment systems are not interoperable. The people on both sides of a transaction need to use the same system and it can be complicated to transfer money from one to the other.
For example, you can only buy something using PayPal if the seller also has an account. Seeing as these companies are in competition, they have little incentive to be compatible with each other.
We began this post with a remarkable statement: money is information.
It’s not the material or the colour or the look that matters. Money can exist in any medium, as long as it preserves the original message.
For that reason, it doesn’t need to survive in a physical form. Now that we have systems capable of doing that, we’re transitioning away from notes and coins. This is more efficient, saves resources, may reduce crime, and makes our lives easier.
Remember the Yapese people with their heavy stone money we looked at earlier? Over time, they switched to using more efficient and portable US Dollars. The stones do remain an important part of their culture. But their main use is for symbolic purposes, such as dowries and apologies. If we go back in time, the Yapese first bought the stones with pearl shells as currency.
Stories like these are meaningful because they remind us that money is always evolving.
When there’s a more efficient option (like dollars versus stone), we take it. It’s changing again now because we have alternatives that make sense.
At Luno, we call this upgrading your money. We believe cryptocurrencies are the best option for an empowering cash-free world.
This is not about change for the sake of change. Nor is it about making it a little bit faster for someone in a wealthy country to pay for a latte. It’s a necessary and fundamental shift in the way we think about and use money.
Cryptocurrencies have benefits beyond those offered by payment cards and systems. They can help overcome the challenges of a cash-free world: trust, costs, privacy, access.
Cryptocurrencies simply rely on people having access to a wallet, whether it’s on a platform like Luno, or a paper or hardware wallet. Anyone can send money to anyone else, anywhere in the world with no need for intermediaries. But they do rely on both sides of a transaction using cryptocurrencies and having a means of storing them.
In fact, the island of Yap has already had its own version of going cash-free for over a century.
According to lore, a crew returning from a mining trip dropped one of the stone discs from their boat. The Yapese have no formal ownership records and rarely move stones. So they decided it still counted.
Even today, that stone at the bottom of the ocean has an owner and counts as a payment method.
That shows us the nature of money is far more malleable than we imagine. If an unseen stone can pass information between parties, the question is: why do we need the physical one at all?
This story is published in The Startup, Medium’s largest entrepreneurship publication followed by + 370,107 people.
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