In recent years, the emergence of cryptocurrencies has highlighted a trend that had been developing for some time. Society is using less and less cash, and it’s no longer the preferred means of payment for consumers. Therefore, we will conduct a retrospective analysis to examine how we arrived at this situation and what scenarios may await us in the future.
History of Money
Money, as we know it, dates back over 5,000 years of history, when silver was used as a medium of exchange in ancient Mesopotamia. It was used to measure the value of various goods and was a part of most transactions. As transactions grew in size over time, there arose a need for something of greater value. Around 1,000 A.D., in China, the so-called “paper money” (what we know today as banknotes) was introduced.
At this point, money was already beginning to serve its three basic functions:
- A store of value that allows for saving and preserving wealth.
- A unit of account in which the price of goods, services, debts, etc., is expressed.
- A widely accepted medium of exchange.
Later, after the two World Wars that devastated Europe, European countries signed the Bretton Woods agreements with the United States, replacing the gold standard with the dollar standard. These agreements made the U.S. dollar the reference currency for international transfers and trade.
However, in 1971, when the United States could not meet the gold repayments demanded from Europe, the Bretton Woods agreements fell apart. Since then, the vast majority of developed countries have adopted a system of floating exchange rates. In this system, no currency is tied to another asset. Central Banks decide the amount of currency issued, and governments support it in any transaction.
In the end, the only money that guarantees its three natural functions is cash. Let’s explore its advantages and disadvantages.
Cash has been, for a very long time, the preferred method of payment for the population. Although it now faces significant competition, it maintains some unique properties.
- Anonymity and Privacy – cash is, by definition, anonymous and private. Ownership of cash is not recorded in any database, nor are its transactions. It is, therefore, the preferred means for activities like money laundering and tax evasion.
- Legal Tender and Store of Value – all businesses within a given economic area are required to accept cash as a form of payment. Moreover, in a crisis, cash is the only thing that retains the value of our savings (excluding inflation).
- Speed and Security – transactions involving cash payments are typically immediate, with no waiting times or intermediaries. Additionally, as a physical medium, it is exempt from risks such as cybercrime, computer fraud, etc. The counterfeiting of coins and banknotes is technically possible, though increasingly challenging.
- Universality and Inclusion – cash is a very simple means of payment that anyone, regardless of their level of education, can understand and use. It has no technological barriers and does not require any specific device. Therefore, it is a universal means of payment that contributes to financial inclusion for any population.
Despite its numerous advantages, cash presents inherent disadvantages that it cannot resolve. The most significant ones include:
- Inconvenient for multiple transactions – cash is, by definition, an ideal means of payment for everyday transactions. However, for larger transactions or those involving physical distance, cash becomes problematic. In such cases, money transfers or alternatives like cryptocurrencies have a significant advantage.
- Costly and unhygienic – Central Banks spend a significant amount of money on issuing coins and banknotes, as well as on systems to prevent counterfeiting. Additionally, being a physical medium, it takes up space, which can become problematic in large quantities. Finally, while the hygiene of money had never been a problem, global situations like the Covid-19 pandemic have highlighted its importance.
- Insecure and prone to misuse – while cash is secure against cybercrime, it is less secure against traditional theft. Since it is not tied to any particular owner, losing cash means having no recourse for recovery. Moreover, because it is a preferred means for tax evasion, governments closely monitor its usage.
- Incompatible with the digitization of society – as a physical means of payment, cash requires interaction with ATMs and the necessity of carrying it around for use. This makes it less practical in the context of global digitization.
All these disadvantages, along with the digitization of society, have led to the emergence of alternatives in recent years.
Current State of Cash in the World
Are we really as close to the disappearance of cash as it may seem? The truth is, it depends on the country we’re analyzing. There’s no doubt that cash has multiple disadvantages, and the emergence of alternatives has only highlighted them. However, in many developed countries, cash remains the preferred means of payment for many segments of the population. Groups such as the elderly or those living in more rural areas don’t have as much access to digital payment methods. Furthermore, the fact that cash is guaranteed by the state makes it valid for any type of transaction.
In Spain, according to a study by the Bank of Spain in 2022, 60% of payments are made in cash. In second place are credit cards, with a usage rate of 35%. Other payment methods like mobile devices, transfers, etc., have a lesser importance. Thus, we can see that in Spain, the use of cash is far from disappearing. Obviously, the data varies when analyzing different age groups, store sizes, and so on. However, current levels indicate that cash remains the preferred payment method for the population.
In other countries like Norway, Sweden, or Australia, the distribution of payment methods is quite different. In these countries, the use of cash is almost negligible (between 5% and 15%). These countries have made significant efforts to move away from cash, although the transition is slow. Not only do private alternatives like credit cards matter, but other methods such as Central Bank Digital Currencies (CBDCs) can also have a significant impact.
Given this scenario, let’s analyze what real alternatives can replace cash.
Alternatives to cash money
While not all alternatives have the same level of acceptance, several universal options are available:
- Credit and debit cards: These are the most widely used retail payment methods globally. Their speed, security, and simplicity make them the preferred choice for low to medium-value purchases. Furthermore, their integration with online shopping has increased their usage.
- Bank transfers: For business and high-value transactions, bank transfers remain the preferred method. In fact, controls on payments through mobile devices, cash, etc., have created a sort of monopoly for bank transfers in certain types of transactions.
- Electronic payments: The development of fintech has led to the creation of platforms like PayPal, designed for e-commerce and remote payments. These types of payment methods are becoming increasingly popular.
- Mobile device and app payments: Hand in hand with electronic payments is mobile device payments. The use of apps like Bizum or the development of NFC technology for contactless payments has turned watches, mobile phones, and other devices into real payment methods that are increasingly used.
- Cryptocurrencies: Last but not least, we have cryptocurrencies. While they have been part of the global financial ecosystem for several years, they are not yet firmly established as means of payment. Their use is primarily associated with financial investments, although countries like El Salvador have equated them with traditional currencies.
These are the most well-known alternatives, but new possibilities may emerge in the near future. Let’s now explore how these alternatives relate to the digitization of the economy.
Digitization of the economy
We can define the digitization of the economy as the incorporation of new digital technologies and tools into the world of financial services. This process, which has been ongoing for the past few years and is still evolving, affects society as a whole. However, the financial sector has experienced the most significant impact. Let’s examine the key indicators of this transformation:
- Emergence of Fintech
- Growth of e-commerce
- Advancements in mobile devices (phones, TVs, watches, etc.)
- Improvements in technology and telecommunications
These indicators are just samples of the progress observed in recent years. New forms of consumption and payment methods have been developed. Regulation in the sector has not been a barrier to innovation, and the consequences are evident.
In today’s society, access to digital payment methods is easier. They are fast, cost-effective, and secure, enabling greater social inclusion. However, not all segments of the population have fully embraced this change. Consequently, payment methods like cash still hold significant weight in certain contexts.
As part of the financial sector’s innovations, the arrival of cryptocurrencies and CBDCs (Central Bank Digital Currencies) needs special mention. Let’s explore how they have impacted the global financial ecosystem.
The arrival of cryptocurrencies
Cryptocurrencies emerged in 2008 with the introduction of Bitcoin. Since then, their differentiating features compared to other payment methods have been decentralization and the use of blockchain technology. In fact, the growth of blockchain technology is closely tied to these assets. Their emergence not only signifies a completely digital means of payment but also breaks with certain traditional standards. This includes the ownership and issuance policy of money, which used to be entirely under the control of Central Banks. Cryptocurrencies represent a new governance model in which users have a say.
However, while this has been a conceptual revolution, it hasn’t fully transitioned into the real economy. Issues such as scalability, numerous frauds, and the lack of regulation have hindered their adoption. As a result, cryptocurrencies have not become a widely accepted means of payment in practice. In some countries, their adoption has been more significant, but they remain distant from traditional alternatives.
Despite this, the impact of blockchain technology and cryptocurrencies on the global financial ecosystem is undeniable. Their development has paved the way for new forms of money and has raised serious debates on privacy, governance, and more. One of the most significant consequences of blockchain technology has been the emergence of Central Bank Digital Currencies (CBDCs).
The Emergence of CBDCs
Central Bank Digital Currencies (CBDCs) are the equivalent of a publicly-issued cryptocurrency. They are issued by Central Banks and operate on blockchain technology. In this way, they aim to be a digital substitute for physical cash. However, due to their digital nature, aspects like privacy need to be carefully considered.
The introduction of this form of money is still far from being a practical option. While many countries are studying it (including the EU and the US), no one has officially implemented it yet. There are many aspects to consider with this form of money, but it does seem to be the future. The decreasing use of physical cash, combined with the digitization of the economy, necessitates an adaptation of the traditional definition of money.
This is likely to change not only how we consume and carry out transactions but even how Central Banks implement their monetary policies. Therefore, the emergence of technologies like blockchain has triggered a revolution far beyond cryptocurrencies.
The way we spend money has evolved significantly over the centuries. The size of transactions, the rise of large corporations, and globalization have all played a role. In terms of technology, the advent of the internet marked the beginning of the digitization of society. Today, it’s possible to carry out transactions with nothing more than a mobile phone or smartwatch.
As a result, payment methods have also evolved. Central Banks have continued to secure the value of issued money, while private forms of money have infiltrated the financial system. With the emergence of blockchain and cryptocurrencies, these new forms of money have reached their peak. So much so that Central Banks are exploring the introduction of public cryptocurrencies to retain their influence in the global financial ecosystem.
Undoubtedly, these changes take time, but if we look back, we can see that many things have already changed. In the coming years, these changes are likely to accelerate, and it will be interesting to examine how they shape our approach to managing money.