Data privacy today is of greater importance and cognizance than it has ever been in the past. Among American consumers there is mounting distrust of both the government and corporations with respect to invasive data collection methods and unethical data uses. Most of the conversation thus far has revolved around the internet, social media, and giants in this realm such as Facebook and Google. And while they are well deserving of critique, why is the same skepticism not applied to Visa and Mastercard? Credit card behemoths and banks have the ability to collect, analyze, and monetize data on every purchase ever made— with the exception of cash transactions. Cash provides an essential consumer protection from the government and corporations as an inherent data opt-out. Yet, it is slowly losing relevance and in effect being phased out by newer technologies. The preservation of cash as an option to consumers is of paramount importance despite its shortcomings. Cash’s eventual disappearance will cause far-reaching and insidious consequences, which we can already witness starting to take hold abroad.
The US dollar, in both its physical and digital iterations, is the most important world currency. In recent years, as money demand has grown alongside the digitization of many transactions, the question has been raised – where is our physical currency being held? About 5% is in bank reserves, another 5% is in American households, and an unbelievable 90% of U.S. currency remains unaccounted for. Much of it is held in foreign countries; estimates range from 50% to 70% of U.S. paper currency is abroad. Most of this is kept in hundreds as a store of value by Russian oligarchs, international drug kingpins, and of course other countries’ treasury reserves. However, this ghost currency is also floating around in America’s informal economy; from illegal activity to under the table employment. Many critics argue against physical currency precisely because of its use in illegal activities. Harvard macroeconomist Kenneth Rogoff postulates that a transfer to a cashless society would hurt the economy in the short term because of a decrease in demand for illegal products and services. However, he also states that if just a fraction of the lost tax revenue from unreported activities (which could make up as much as 7-10% of overall GDP) were recovered, this would more than make up the difference. But the same reason for which cash is chosen to evade the law – anonymity – it is also essential for consumers. And the use of cash for tax avoidance is not a strong enough reason to go completely digital. In fact, other theorists believe that getting rid of cash would not necessarily solve the problem. According to the UK Treasury and Home Office, cash is only the third most popular channel for money laundering, behind banks and accounting firms. Moreover, if the desire is to stop tax evasion, governments should concentrate their energy on the use of offshore financial centers, not cash.
Governments may additionally argue that the discontinuation of cash would help economic growth in other ways too. With a cash society, the movement of money is slow and expensive. Operating in cash is claimed to cost the U.S. approximately .5% of its GDP every year. This is undoubtedly an attractive reason to switch, but in the grand scheme it is unwise to sacrifice freedom for marginal revenues and growth.
It’s not just governments that find cashless society attractive though. There are certain interest groups that also see going cashless as ultimately beneficial. Small businesses, for example, argue that going cashless makes them more secure. They feel safer without the use of cash- there is no risk of money being stolen on site. However, this neglects a serious flaw with cashless economies in general: they are much more vulnerable to cyberattacks. Cyberattacks pose a risk to the stability of the entire national and even global economy long-term, but more tangibly, an immediate theft risk to consumers. Based on existing protections from banks, consumers are often at higher risk than they may realize. In digital banking, banks generally claim any transactions conducted online with an individual’s password is of their volition, so money is not replaced or refunded.
Even more pressing is that in a cashless world, there is an entire forgotten echelon of society that would be completely disenfranchised – the low income. Low income individuals, along with the elderly, homeless, recent immigrants, minors, and other groups often cannot open bank accounts and thereby could not at all participate in a cashless economy. This has to date been recognized as a significant problem and is the reason that in many U.S. cities and states there is existing legislation that mandates businesses to accept cash. However, this is not true everywhere; many countries, particularly in Europe, allow businesses to refuse cash. This could be possible too in the United States, perhaps if the Swedish model of government subsidized bank accounts for low income individuals were introduced. Regardless, the looming issues of data privacy remain.
The Consequences of Cashlessness
The most pivotal issue with a cashless society is data privacy and the preservation of anonymity. The presence of currency in general, who holds it, and who controls it, is a statement of power in itself. Cash counteracts this and acts as a public good. Since it is held in common, the power is widely dispersed throughout the economy and between consumers. There is no central point of failure or central point of control. However, governments around the world are seeking to gain control over their currency flows and have the ability to do this very effectively through digitization. This can manifest itself in one of two ways.
One is that all money must be held in bank accounts, giving banks, credit card companies, and other financial services providers, already unruly characters, an unprecedented amount of control over an individual’s personal finances. These companies work together to record purchases, share and compile information, and exploit spending patterns for targeted marketing. Take Paypal for example: they claim they are protecting user data, but their terms and conditions outline the non-associates which they may pass data onto, including Facebook, Axium, Oracle, and more. However, this option may still be more attractive than the following because there are a number of financial service providers to choose from. The competition between them can be used to drive demand for greater transparency and consumer protections. Already growing awareness over privacy issues has lead to the new Apple Card. It is unique from Visa or Mastercard in that it only shares data with credit agencies and no further partner corporations.
The second option for digitization is the government holding everyone’s money in central bank bank accounts. This would solve the issue of unbridled corporate power, and to be fair the government is generally held to relatively higher standards of transparency. However, it presents its own issues.
Governments could use their financial power to isolate certain individuals from participating in the economy, potentially for politically or socially motivated reasons, whereas this is not possible in a cash economy. Already, the U.S. government can seize funds from an individual or company bank account without even a formal conviction. This is a power that has historically been abused. During “Operation Choke Point,” in which the U.S. government claimed that it was simply cracking down on predatory lending, it also financially went after moral opponents such as the pornography, gambling, and firearms industries. Private credit card companies do this too. Many pornography providers have switched to using crypto-currencies like Bitcoin in order to avoid the excessive fees that are charged by credit card companies. Moreover, even if many are sympathetic to these quasi-sin taxes, it’s not long before they may creep into more ambiguous areas, dictated by partisanship and special interest groups.
For example, consider a future in which the government places a charge on individuals that make donations to abortion providers such as Planned Parenthood. One’s inability to make anonymous donations would threaten the existence of certain organizations and voices, arguably violating the constitutional right to privacy. This right is not explicit in the U.S. Bill of Rights but can be reasonably implied from the fourth amendment right against unreasonable search and seizure (“to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures”) and by the fifth amendment right to avoid self incrimination (“shall be compelled in any criminal case to be a witness against himself”). An even broader interpretation, such as that favored in the U.S. Supreme Court case, Citizens United v. FEC, could cite the first amendment freedom of speech as granting freedom to make anonymous donations. Considering unchecked political donations and their implications does slightly complicate this argument. However, the aim of this article is not to comment on whether or not dollar limits should be applied in political finance, or if corporations deserve the same rights as people, but to stress the importance of anonymity for citizens. Without the preservation of anonymity, of which cash is an integral part, citizens are vulnerable to corporate and governmental abuse.
Global Digital Currencies
The disappearance of cash, while seemingly not immediately relevant to the United States, is likely not a distant future. There is an ongoing international digital currency race that will only continue to gain traction at an accelerating speed. The most malicious and determined character in this race is China. China’s central bank is set to release the first digitized domestic currency in an act of financial innovation and suffocating state control. China’s new digital currency will be unique and morally questionable in that it allows the central bank to not only track the movement of money but in some cases supervise transactions. They plan to use big data analytics to seek and find money laundering. This will supposedly help to expose corruption — if you accept the presupposition that the Chinese government is not corrupt itself. The new currency, which will initially be available in banks and on the Chinese equivalent of Apple pay, Alipay, will trigger several effects upon its highly anticipated release. First, it may push Chinese consumers to switch their money into anonymous crypto-currencies like Bitcoin. This would cause a depreciation of the Yuan, benefitting the Chinese export market but harming morale. Yet, it may be stopped by the Chinese government, which has previously criticized crypto-currencies like Facebook’s Libra, stating only governments have the right to create digital currencies. The simple fact that the government would even have the ability to stop this, and further dictate which purchases consumers can make, is inherently the issue with digital currency. Moreover, when considering the Chinese are already world leaders in artificial intelligence and facial recognition, it is not hard to see that this is a further power grab. As for the worst case scenario of increasing Chinese authoritarianism— look to the Uyghurs.
The possibility of creating state run digital currencies has also attracted the interest of North Korea, Venezuela, Russia, and Iran. North Korea, a pioneer in digital crime, has already made headway in mining, crypto-jacking, and hacking exchanges in existing digital currencies. The North Korean government has already stolen over two billion dollars worth of digital currency in order to fund its weapons program. And, its own crypto-currency would give it the power to avoid U.S. sanctions to a greater extent. Iran and Russia are similarly motivated to avoid sanctions and attempt to weaken U.S. supremacy in the global financial system. The Venezuelan case on the other hand, is unique and a testament to the government’s continued mismanagement of the economy. Maduro has released a digital currency, the “petro”, whose value is linked to the value of a barrel of oil, and is claimed to provide a solution to the country’s runaway inflation issues. However, “petro” hasn’t yet been successful- it can be found almost nowhere. Some independent crypto-currencies have made headway in Venezuela, though. The crypto-currency “Dash,” for example, is now being accepted as a form of payment at select locations of Church’s Chicken in Venezuela.
There are some democratic nations working to develop digital currencies, too. Sweden, for one, is hoping to soon release the E-Korna. But, Sweden is a special case. The country already functions on a mostly cashless basis, the EU has strong data privacy laws, and the Swedish people have an unusually high degree of trust in the government and new technology. However, even given all these positives, the most important factor is that cash will still be accepted legal tender. The Swedish government even cautions that every household sets aside cash in the event of mass power failure or hacking.
Final Thoughts – Why Data Privacy is Important The increasing surveillance of our lives limits our freedom and impacts our behaviors. The way we spend says so much about who we are and what we stand for, and our financial freedom is deeply imbedded into our constitutional and human rights. Even more than that though, the effect is insidious, the growing surveillance changes how we think and how we behave. Consider the Foucauldian idea about the connection between panopticon prison and discipline within society. The design of a panopticon prison is similar to a two way mirror. There is a central guard tower surrounded by prison cells on all sides, which guards may see into, but for prisoners it is unknown if the guards are present. Since the prisoners do not know when they are being watched they are on high alert at all times. They internalize the gaze of the guards and thereby permanently change their behavior —whether or not they are actually being watched. This is the underlying idea of the surveillance state and the government’s ability to remove anonymity from money would further enhance this effect. Of course, cash represents only one small part of the overwhelming data privacy problem. Yet, it would be foolish to take for granted the mundane and to wait until it’s explicitly threatened to start paying attention. This is not a condemnation of digital currencies, but a plea to preserve cash as an option for those who would prefer to buy and sell without surveillance.