Tokyo FinTech
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Tokyo FinTech

The Dark Side of Cashless

Cashless is exciting. Cash is the first — and many would argue only — killer application for blockchain. The transition to a cashless society will be fascinating to watch in Japan. There are a few immediate consequences, however, that should get some attention:

  • Tax receipts will increase
  • Your money can get “switched off”
  • Cash trades at a premium

Tax receipts will increase

By now, we all understand that the Japanese government’s target is to increase the cashless payment rate from around 20 percent in 2017 to 40 percent by 2025 (as first reported in our “The Curious Case of Cash in Japan” from June 2018). Handling cash is costly, so there are hard savings that accrue to the business owners by moving to electronic payments, in particular during this initial phase of “cashless payment wars”, when the likes of PayPay offer their service for free until at least the end of 2020. With the incentive scheme that the government established, retail consumers are also entitled to five percent (individual shops) or two percent (franchises) discounts when paying cashless until the end of June 2020.

The biggest gain for the government will come from making tax avoidance much more difficult. Electronic cash leaves a trail, and must be recorded on the books. All the small shops that have so far refused to take credit cards, they certainly do not declare all their revenue (if you want to counter that with the “Japanese are too honest to cheat”, I recommend you google the recent history of corporate accounting scandals). The laughing that you hear in the distance is that of the tax man. Now, arguably this will lead to a fairer tax system, because more people will pay their fair share, so I have a hard time seeing this consequence as “dark”.

Your money can get switched off

Even today, your bank account can obviously be confiscated, or it can be blocked for withdrawals — the latter happens for example, if you are delayed in paying your Japanese taxes. When we are moving to crypto-currencies, however, whether they are central bank-issued or not, the currency itself or specific wallets can literally be switched off with the push of a button. This whole decentralization fantasy that many crypto enthusiasts take as gospel is unfortunately a fairy tale.

Lots of excitement over the last few weeks about China announcing a massive number of enterprise blockchain projects, and also their own central bank digital currency (CBDC for those who love acronyms). Of course, the Chinese government would never switch off this currency for individuals, right? Think again.

“According to the National Public Credit Information Centre, Chinese courts banned would-be travellers from buying flights 17.5 million times by the end of 2018. Citizens placed on black lists for social credit offences were prevented from buying train tickets 5.5 million times. The report released last week said: ‘Once discredited, limited everywhere’.” as reported in the Guardian. And for Uyghurs currently detained in Xinjiang on the basis of their ethnicity, seeing their money switched off is just another step in the repression.

Surprisingly, however, we just have to take a look at recently issued stablecoins in the US, to find the same characteristics. Paxos (PAX), at the time of writing listed at Coinmarketcap with a capitalization of USD 250m, has disclosed a “backdoor” in their code in their legal documentation. The company said this was required to obtain regulatory approval.

“We may freeze, temporarily or permanently, your use of, and access to, PAX or the US dollars backing your PAX, with or without advance notice if we are required to do so by law, including by court order or other legal process.”

Oops.

Cash trades at a premium

The only form of money that is untraceable is cash (ignoring some privacy cryptocurrencies like Zcash, Dash and Monero for a moment, all of which have been banned in Japan by the regulator). It is just inconvenient to carry around millions of USD in cash — one million USD equal just over 10 liters in volume. So if you want to be untraceable or do not have access to international transfers due to currency controls like in China, there is an underground banking network that you can use, referred to as the “Vancouver Model”, which has been well-documented in Peter German’s appropriately titled report “Dirty Money”. German is the Royal Canadian Mounted Police deputy commissioner.

Chinese citizens wish to relocate some of their wealth from China to Canada. To do so, they agree to accept cash in Canada from a lender. At that point, a settling of accounts occurs, app to app, between the person making the loan and an underground banker in China. The catch is that the provenance of the cash loaned in Canada is unclear. It generally comes in the form of stacks of $20 bills, wrapped in a fashion that more closely resembles drug proceeds than it does cash originating at a financial institution. The Chinese individual will then buy-in at a casino with the cash, gamble, and either receive higher denomination bills or a cheque upon leaving the casino. The lender is both servicing a drug trafficking organization by laundering its money, and the Chinese gambler by providing him or her with Canadian cash.

Indeed, there is at least one well-documented case of a company in the Richmond suburb of Vancouver specializing in buying — at a premium — bundles of cash from street-level drug traffickers.

It is a market economy out there. If there is sufficient demand for untraceable cash, but that is becoming a scarce resource, it will naturally trade at a premium.

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Norbert Gehrke

Norbert Gehrke

Passionate about strategy & innovation across Asia. At home in Japan. Connector of people & ideas.