Updated: Nov 7, 2019
Last year I spent my summer in Shanghai. There were many things that were different from Japan, but one thing stood out from the rest. No matter if I bought something from the convenience store, rode a share bicycle or even used a laundry service – I could pay for them all just using my smartphone apps - WeChat and Alipay. If you have been paying attention you already know that this trend called “Cashless society” has already begun to set foot in Japan as well, although we still need to dig into our wallets to get that delicious bowl of ramen.
By: Tuomas Salmi
Published date: August 26th, 2019
Having experienced the convenience of flashing my smartphone for a few seconds to pay, it felt bothersome to go back to picking 1-yen coins from the depths of my purse. Going cashless also helps businesses and banks cut costs and make their operations more efficient, as they don’t need to make the effort of handling and transporting cash anymore. Despite these fantastic utilities however, there are two main concerns we should not leave out of the conversation when it comes to digital paying and cashless society.
The potential for digital dictatorship
The first is the loss of privacy due to a potential big brother type surveillance of citizens. Unlike cash transactions, digital transactions always leave a record. Think about everything you bought last month. Now imagine that a company or the government had that information to use as they please. This kind of sensitive data can be used for targeted advertising, political campaigns and in worst cases: leaked, hacked or sold to third parties. In addition to that, digital payments can be made permissioned which means that if the central authority doesn’t want you buying those plane tickets to Bali, there is nothing you can do about it. This might sound like the dystopian future from your favorite sci-fi flick, but it already is the reality for many Chinese citizens. The part I didn’t mention about my Shanghai trip was that China is already implementing a system where citizens are assigned a social credit score. Having a good score can give you access to cheaper loans, but low score can ultimately get you blacklisted. Citizens unfortunate enough to get blacklisted can’t purchase train or plane tickets among other inhibitions to their lives. Giving the ability to monitor and control our purchase data is a power too big to be trusted to any single central authority. As John Acton said, “Absolute power corrupts absolutely”.
An invisible force that eats your money – I don’t mean inflation
The second reason we should be wary of the transition to cashless society is due to negative interest rates. Since the great financial crisis of 2008-09 many countries have sunk their reserve rates into negative territory. What does this have to do with cashless society? Simple. You probably have deposited some money into a bank, and it is sitting there at this very moment. In Japan, the interest rate you get paid for “lending” your money to the bank is a whopping 0.001% annual interest. Depositing your money won’t help you buy that Lamborghini, but it is better than nothing. Now imagine the interest rates being minus 0.001 %. This means that you would have to pay the bank just for keeping your money deposited. Keeping cash under the mattress is not ideal but if the alternative is to have the principle slowly fade away, most of us would withdraw the money in a heartbeat. Now you probably see where I’m going with this. Should we have a cashless society, there is nothing stopping the banks from imposing negative interest rates on our digital wallet accounts. After all, you won’t be able to withdraw your money if it is only ones and zeros. Banks making us pay for lending them money might sound ludicrous but so did the principle of negative interest rates a few years back. Currently a third of the global markets yields negative interest, which means that we have to pay for lending our governments. The latest twist seems to be a negative interest mortgage, where I can borrow money for a house and get paid to for doing it. Considering all of this, it doesn’t seem to be such a leap to have negative interest rates on deposit accounts. Especially when the IMF (International Monetary Fund) has already made a proposal for implementing a dual currency system, where cash would depreciate at the same pace as digital cash. With this system, your purchasing power would steadily lose its value – whether you were holding cash or digital currency.
How to preserve your purchasing power
Negative interest rates are a way for countries to default on their debt and the worse the economy gets, the deeper the interest rates sink – at least until the crude awakening which will launch the interest rates to soar. In my previous article I wrote about the precarious situation of Japan’s current economic situation. As the economic situation worsens, evading negative interest rates will prove more and more difficult to do. One countermeasure that you can take today, is to acquire assets that are outside the control of central banks. One of these assets is gold, which for years has been labeled as a “dead asset” for not yielding a return. The only worse thing than no return, however, is a negative return – which suddenly makes gold look attractive. Gold has also managed to maintain its value for thousands of years, whereas every single paper currency in the history has eventually become worthless. On top of this, physical gold has liquidity all over the world and is censorship resistant, meaning individuals can transact anonymously countering the digital dictatorship scenario. The downside for gold is that you can’t divide it easily – for example to buy a cup of coffee. In addition, large amounts of gold can be problematic to store and carry – not to mention the risk of theft. For these reasons, some advocates of sound money have increasingly started to shift to cryptocurrencies such as bitcoin. In the next article I will discuss about the characteristics of sound money, and how does government currency differ from gold and bitcoin.