Digital Financial Transactions & the Bitcoin Network: Physical Cash Bound to Disappear?
Is Physical Cash Bound to Dissapear Sooner than Later?
Digital transactions are out-pacing cash payments globally in terms of growth. Especially the western world is starting to favor a society where physical cash payments have seen better days. This is evident when we take a look at Europe, North-America and Canada where, by far, most payments occur in non-cash transactions. The same does not necessarily hold for non-western societies, like India and most parts of Africa. In these countries, cash is still ‘king’ and is used for most of the transactions.
Having said that, access to electricity and digital systems such as computers or smartphones in these regions are not as plentiful as opposed to the west. Access to smartphones in particular has an extraordinary impact on the growth of digital transactions, as stated in a report published by Capgemini & BNP Paribas. According to statista, 85% of the Swedish population had access to a smartphone in 2016, while for India these numbers were close to 30% during the same year. This correlates well with the amount of digital transactions a certain region exhibits, as can be seen in the figure below. The extent to which a society has direct access to such digital systems is a huge factor in moving from cash to non-cash transactions. Given that smartphones are becoming more affordable and electricity becomes more accessible over time, it would not be surprising that lagging regions will catch up soon with digital payments.
In countries such as Sweden, Australia and Canada at least 97% of adult citizens engage in digital transactions. This means that it will not take long before these countries become societies that are entirely dependent on digital payment systems. In fact, in Sweden (and similar facts across other Scandinavian countries) it has become rare to find stores that still accept cash. In such a future, we will only be able to pay with debit and credit cards or through digital payment systems such as PayPal. For some people this may seem highly convenient, since it no longer is a necessity to carry around paper prints and metal coins, while you only have to swipe your card or click a button to initiate a payment.
Digital transactions in numbers
According to the World Payments Report published by Capgemini and BNP Paribas (2018), the growth rate for global digital payments has been in the double digits for years and is expected to even accelerate in the future. This will mostly be caused by the non-western countries that are starting to adopt smartphones as they become cheaper. For western regions such as Europe and North-America the growth of digital transactions should slowly level out, which is not surprising as most countries within these regions already exhibit a near cashless economy.
The report estimates that the number of worldwide digital transactions will roughly be 600 Billion, where the numbers for 2017 were close to 535 Billion. Notably, these are individual transactions, not the value of the combined transactions. The numbers are expected to skyrocket to ~670 Billion and even surpass 750 Billion within two years. The majority of the increase will be caused by massive growth in countries within Emerging Asia, with China at the front line.
It is only logical that these numbers are increasing and expected to accelerate in the following years. Technology is becoming increasingly important for our societies and it is starting to affect the financial aspects of life as well. In order to keep up with the pace of technological advancements and their incorporation into society, financial transactions and instruments are required to be reinvented so that they can move at a faster rate. However, together with the numbers, this suggests that cash is rapidly dissapearing, along with its many traits.
What are the benefits of digital transactions over cash and what does it cost us?
The benefits of digital transactions are quite straight forward and plentiful. Among many other examples:
- No longer do you have to carry around a bulky wallet with heavy coins and easily torn paper bills.
- Risk of losing your money by theft is mitigated. Plastic cards can easily be blocked and lost money can be refunded.
- The lines in the supermarket will move much more quickly as complicated change calculations are not required anymore. In fact, we are even seeing systems where customers can scan their own products and simply swipe their card upon reaching the exit.
- Where with cash payments you would have to save the receipts to track your spending, digital payments are automatically traceable trough digital systems.
- Better for the environment, as transferring bits and digits costs less energy to transport and does not require trees to be cut down as opposed to paper and metal money.
However, do the benefits and comfort of digital transactions cover its costs? Whenever we pay digitally through traditional banking systems, via credit cards or through PayPal, every transaction we make is recorded and 100% traceable. For ourselves, but also for the systems we use to help us transact to one another. This means that banks and governments can track your spending behavior whenever they want to, which might be more often than you think.
The effects this might have to your own life are not directly visible and/or noticeable. However, your traceable spending behavior can ultimately impact things such as insurance costs, approval for a mortgage or can even be used for personal advertising purposes. These are just a few examples. Moreover, centralized authorities at the top of traditional digital transaction services have the power and freedom to deny payments or freeze entire accounts if deemed necessary. Moving from cash to cashless, using traditional systems for digital transactions, costs us our financial freedom and privacy.
What about non-centrally governed payment systems?
Many of the costs of moving to a cashless society can be mitigated if central authority in digital payment systems is taken away. Instead, it should be replaced by a more robust alternative that is less prone to corruption or abuse by design. An alternative that validates transactions democratically, while ensuring no double-spending occurs and a degree of cash-like financial privacy and freedom can exist.
An example of such a payment system is the Bitcoin network, which is not to be confused with the digital cryptographic currency that bears the same name. Where digital euros and dollars do not define the transaction services, that are traditionally used, the Bitcoin currency does not define its payment network either. Both the dollar and Bitcoin are a means of transacting through payment systems. The Bitcoin network and its native currency, bearing the identical name, should therefore rather be viewed as separates.
Without getting in too much detail, systems like the Bitcoin network initiated in early 2009 use a consensus algorithm in conjunction with a blockchain. The combination of the two provides an autonomous and decentralized payment system that offers users to initiate end-to-end digital transactions with cash-like traits. End-to-end meaning there is no extra channel (intermediary) necessary for implementing trust or validation when transacting from peer to peer. Its consensus algorithm solves for double-spending problems through mathematics, where traditional systems need approval and governance from a central authority. Moreover, such autonomous and decentralized systems eliminate discrimination of participants and transactions cannot be rolled back.
The use of peer-to-peer payment systems
Decentralized payment networks are still very young and unknown to many. The Bitcoin network, which is first of its kind, will have only been up and running for 10 years as of January 3rd 2019. However, it is increasingly being acknowledged and used for digital transactions since its inception. According to data from Blockchain.com, transactions made through this payment network have risen exponentially to the point where it is currently estimated to reach ~80–100 Million individual transactions this year alone. This is still a significantly small number compared to the estimates for traditional digital systems as mentioned above, but it does indicate considerate interest and usage nonetheless.
It is not necessarily unusual for newly introduced payment methods to be seemingly insignificant in the early stages. Take credit cards, for example. Modern credit cards were first introduced in 1946. The idea itself wasn’t very novel as credit coins and charge plates were used in the 1800s to extend credit to farmers and ranchers. It wasn’t until American Express introduced its first plastic card in 1959 that it started getting real traction. Within five years, it was visible that this new method had merit. A total of one million cards were in use across 85,000 merchants. Fast forward to 2017, the average American had two to three credit cards.
Peer-to-peer payment systems are still in their early stages, as were modern credit cards during the period 1946–1959. However, as transactions are increasingly becoming more digital, we will see these decentralized networks progressively being acknowledged as a payment option. Especially when considering the demise of cash-like traits if cashless societies rely on traditional payment systems.
The future of transactions is evident and seems to have only one outcome. The question is not if your society will become cashless, but when. However, we do still have the freedom to choose which methods we will use in such a society. Therefore, choose wisely.
Some food for thought:
What would you do if you were declined a mortgage because of your spending behavior? How would you feel if your insurance costs were increased due to your historical spending? Where would you go if you were exempt from economic activity by traditional systems due to a stupid decision that you regret? Are you willing to give up your freedom and privacy of spending?
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