More Good News for Cash in Europe, More Bad News for Digital Dollar in US

Recent developments suggest the trend away from cash and toward central bank digital currencies (CBDCs) may not be quite as smooth or seamless as some may have wished. 

Last month, as readers may recall, cash payments in the UK rose for the first time in more than a decade. This week, the findings of a survey by the market intelligence company Mintel have confirmed that the use of cash is indeed on the rise again as the British public’s priorities shift from (largely manufactured) concerns about hygiene during a global pandemic to making ends meet amid soaring inflation. Crucially, cash is regaining popularity across all age groups, with half of Britons aged 16-34 years-old reportedly now using it on a weekly basis:

During the COVID-19 pandemic, hygiene was suddenly a priority focus for most people. The idea of a pound coin or a ten pound note covered in the bacteria from all those who’ve handled it before put many people off using cash. Use fell dramatically as people opted for the more hygienic option of contactless payments. But as the pandemic fades into memory, the cost of living crisis has replaced it at the forefront of consumers’ minds.

Mintel has found that the decline in cash use has slowed as consumers navigate the ongoing economic crisis, with many finding it easier to budget and keep track of spending when using cash. This is reflected in two-thirds of people saying cash importance has increased during the cost of living crisis, while almost nine in ten say it is important to keep cash as a precautionary measure. While cash may no longer be king, it is not ready to renounce its claim to the throne just yet.

ECB Defending Cash. What Gives?

There has also been some surprising albeit welcome news for cash lovers in Frankfurt. On Monday, the European Central Bank announced that it is pushing for an explicit ban on unilateral cash exclusions by businesses in the Euro Area. The central bank is calling for a regulatory crackdown on all businesses and public bodies in the Euro Area that refuse to accept cash. This is in stark contrast with the position of the European Commission, which is calling for governments to merely monitor cash exclusion.

The move comes as concerns rise about the legal-tender status of euro banknotes and coins amid declining cash acceptance across the eurozone. From the Irish Independent:

The European Central Bank (ECB) is seeking a “clear” ban on no-cash policies in shops and public bodies, including hospitals and museums across the euro area.
The move would make it illegal for shops and other business not to accept cash.

In an opinion on a draft EU law to regulate the use of cash, the ECB said the spread of card-only policies “would seriously undermine” the status of the euro as the bloc’s legal tender.

The ECB says the draft law, which was tabled in June, should “clearly indicate that ex-ante unilateral exclusions of cash are prohibited” even if retailers put “no cash” signs at shop entrances or check-outs.

The ECB is also seeking fewer exemptions to the rules, including for public bodies such as hospitals and museums.

The news comes a month after the Irish Independent reported that Finance Minister Michael McGrath told ministerial colleagues to ensure that all public bodies continue to accept cash, following an attempt by NCT car testing operator, Applus, to block cash payments.

Card-only policies are currently allowed in Ireland if a business specifies the policy at the shop entrance or check-out area, or in standardised contracts.

The ECB wants to outlaw those practices.

Which probably comes as a bit of a surprise to many readers, just as it did to me. After all, the ECB just announced on Wednesday that it is proceeding in its digital euro project from the “investigation phase” to the “preparation phase.” This new phase is scheduled to last two years, at the end of which the ECB will decide whether to proceed to the next stage of preparation — the issuance and roll-out of a digital euro. It’s safe to assume it will.

It was only a few months ago that European Central Bank (ECB) President Christine Lagarde candidly admitted in a recorded phone conversation with one of a pair of notorious Russian pranksters, whom she thought was Ukrainian President Volodymyr Zelensky, that one of the main objectives of the digital euro is control and surveillance of people’s spending habits (something we have been warning about for the past couple of years).

Lagarde also said the following:

“Now we have in Europe this threshold. Above €1,000 you cannot pay cash. If you’re do you’re in the grey market. You take your risk. If you get caught, you get fined or you go to jail.”

This, as far as I can tell, is simply not true — at least not for most Euro Area economies (France and Spain being notable exceptions). In March this year — the same month Lagarde had her video chat with the fake Zelensky — MEPs agreed to set limits of “up to €7000 for cash payments and €1000 for crypto-asset transfers, where the customer cannot be identified.” And even a limit of €7000 is likely to face stiff opposition in Germany and Austria, two of Europe’s biggest cash-loving nations.

So, what gives? Why is the ECB, which is intensifying its development of a CBDC and whose president appears to have little fondness for physical money, determined to protect the right of Euro Area citizens to use cash in all offline retail transactions?

There are a number of possible reasons.

Cash Still King

First, cash is still the most frequently used payment method in the Euro Area. And even if, or when, the digital euro is launched, it will presumably coexist with cash for some time, at least until the digital euro gains a strong enough foothold. Yesterday, Lagarde herself said during the launch of the preparation phase of the digital euro that “cash is here to stay,” adding that European citizens “will have both options: cash and digital cash.” How long it stays that way will remain to be seen. My guess is that if the digital euro does gain a strong foothold, the ECB will begin financially incentivising its use while decentivising the use of cash.

Another possible reason for the ECB’s decision to protect cash (for now) is that a number of Euro Area member states are talking about taking matters into their own hands by enshrining the use of cash in their national constitution. Slovakia has already taken this step while Austria is talking of doing the same. In Germany, most citizens, young and old, refuse to abandon cash. In fact, so ingrained is the country’s fondness for cash that it recently prompted an exasperated article in Foreign Policy magazine titled “Germany Is Hopelessly Addicted to Cash.” The subheading: “Why Europe’s biggest economy won’t make the switch to paying with cards.”

Another possible factor behind the EU’s decision is the inherent systemic risks of going fully cashless. Over the past month alone, the following bank or payment outages have occurred:

• UK lender Barclays’ mobile and web services crashed for a number of hours;
• Singapore lender DBS and Citi Bank’s Singaporean subsidiary suffered a 12-hour outage in key financial services, prompting the Monetary Authority of Singapore (MAS) to recommend bank customers to carry cash as a contingency;
• Eleven Japanese banks suffered a record two-day outage impacting their ability to transfer funds.
• Woolworths stores across Australia experienced an electronic funds transfer at point of sale (EFTPOS) outage, leaving customers no choice but to pay in cash.
• An outage in credit and debit-processing firm Moneris caused widespread disruption in Canada’s payments system.

Just over a week ago, the Daily Telegraph published an article on the growing fears in Sweden, one of the world’s most cashless economies, about the unintended consequences of driving cash out of the economy. Even by late 2020, Sweden had less cash in circulation than just about anywhere else in the world, at around 1% of gross domestic product, according to the latest available data. That compares with 8% in the U.S. and more than 10% in the euro area. As a recent piece in Interesting Engineering notes, Sweden is already “officially cashless”:

Cash is never needed, not even for small purchases like hot chocolate at a Christmas market in Stockholm. All vendors have a mobile payment chip-and-PIN card reader like the one offered by Stockholm-based mobile payments company iZettle, or they accept payments through the mobile application Swish. Swishing is perhaps the easiest way of payment for everyone.

The Risks of Going Fully Cashless

But now the country is beginning to realise that an almost exclusively digital payments system comes with significant risks, especially at a time of heightened geopolitical tensions. In time-honoured fashion, the article in the UK Telegraph began with a spot of fearmongering about Vladimir Putin.

“People started to realise that it is very easy for Vladimir Putin to switch everything off,” Björn Eriksson, a retired police chief, former head of Interpol and leading cash advocate, told the Telegraph.  “At first we were arguing for vulnerable people, the elderly, women in abusive relationships who rely on cash… Now we are talking about national security. And it’s not only Putin, it could also be organised crime.”

In 2021, the Riksbank, Sweden’s central bank, introduced a new directive obliging the country’s six largest credit institutions to continue providing their customers with certain basic cash services.

But while that may have meant that people in Sweden can continue to access cash from their local branch, it is becoming increasingly difficult to use it as fewer and fewer retail businesses accept notes and coins.

This is partly due to the greater convenience of handling digital payments while the card processing fees are substantially lower than the US. But it is also because most Swedes, including many pensioners, prefer to use cards or mobile payments. As a baker in Stockholm told the Telegraph, “the only people who bring cash to the shop are tourists. I feel bad for them because they just take the krona home, where it is useless.”

But even that trend may be reversing. According to Eriksson, a growing number of young people are joining the pro-cash movement — and mainly over privacy concerns:

Youngsters are more worried about the possibility of combining technologies. I know, coming from the police, that they can implement all techniques possible, from camera surveillance to wiretapping. You might have a mask on, but the technology is so advanced that I could still penetrate it and register you. It is possible to create a society that is really controlling you.

Meanwhile, on the other side of the Atlantic…

Another curious trend is occurring: the growing rejection among US lawmakers, bankers and central bankers of the need for a digital dollar.

On Tuesday, Federal Reserve Governor Michelle Bowman became the latest in a growing list of lawmakers and central bankers to raise concerns about the potential risks and tradeoffs of a U.S. central bank digital currency (CBDC). Speaking at a Harvard Law School event, Bowman warned about the possible disruptions a digital dollar could cause to the banking system as well as the serious threat it could pose to consumer privacy. She also argued that no convincing case has been made that a CBDC could better facilitate everyday payments or reduce payment system frictions than pre-existing alternatives like FedNow or future innovations.

We have seen a range of arguments in the public debate about issuing a CBDC, including addressing frictions within the payment system, promoting financial inclusion, and providing the public with access to safe central bank money. I have yet to see a compelling argument that a U.S. CBDC could solve any of these problems more effectively or efficiently than alternatives, or with fewer downside risks for consumers and for the economy.

Senior Fed officials, including Chairman Jerome Powell, Vice Chairman for Supervision Michael Barr and Bowman herself have said that the central bank won’t make a move on the digital dollar without gaining approval first from the White House and authorization from Congress. But that approval may prove hard to obtain, with lawmakers, mainly but not exclusively from the Republican Party, already pushing legislation to prevent the U.S. government from taking that step.

Southern states such as Florida and Alabama have preemptively banned a federally adopted CBDC while others are thinking of doing the same. On September 12, the House of Representatives’ Majority Whip Tom Emmer reintroduced his CBDC Anti-Surveillance State Act, which aims to prevent the federal government from issuing a CBDC that would enable the authorities to monitor and track the financial activities of Americans. The bill, already with 50 co-sponsors, has received approval from the House Financial Services Committee. Now it needs to pass the House before moving on to the Senate.

Emmer summed up his bill in a press release:

Specifically, the CBDC Anti-Surveillance State Act prohibits the Federal Reserve from issuing a CBDC directly to individuals, ensuring the Fed cannot mobilize itself into a retail bank able to collect personal financial data on Americans. It prohibits the Fed from indirectly issuing a CBDC to individuals through an intermediary, preventing the Fed from launching a retail CBDC through our two-tier financial system. Finally, it prohibits the Fed from using any CBDC to implement monetary policy, ensuring the Federal Reserve cannot use a CBDC as a tool to control the American economy. The legislation protects innovation and any future development of digital cash.

Bowman is not the only senior Federal Reserve official to have expressed serious doubts about a digital dollar. Governor Christopher Waller declared himself “highly sceptical” that there is a compelling need for one. Like the former Bank of England Governor Mervyn King and a UK parliamentary report, he said that CBDCs “remain a solution in search of a problem”. Fed supervision chief Randal Quarles went further, describing CBDCs as an embarrassing fad, comparable to the parachute pants made famous in the 1980s by rapper MC Hammer.