Introduction
There is nothing inherently valuable about our currency in America. Coins and paper bills have no true use other than for payment, and their worth is only what we decide it to be. However, because we, as a nation, are in agreeance that a paper bill is worth a certain amount, our money has value and, with it, purchasing power. As we know, the barter system shifted to the use of currency backed by certain physical resources and then to paper money backed by governments, and now money is largely represented electronically and controlled by the computers of banks. Money today is evolving to become more easily transferable, safer to use, and even more decentralized from governments.
The Shift to Digital Money
Digital money can be defined as any means of payment that exists purely in electronic form, it is not tangible like dollar bills or coins. There are many forms of this type of payment from credit and debit cards to cryptocurrencies like the very popular Bitcoin. Noncash payments are on the rise as transferring funds digitally increases in popularity, as there are a multitude of ways to pay for things with a smartphone alone, and there are frequently new forms of contactless payment being introduced. Digital transactions worldwide are expected to reach an all-time high of $726 Billion by 2020. Consumers’ change in behavior across the globe could mean that the use of cash is becoming less fashionable. This seems especially true because the average USD per transaction is dropping as the number of transactions rises, meaning that cash is even becoming less popular among smaller transactions.
Figure 1. Share of Transaction Number by Payment Instrument. The State of Cash: Preliminary Findings From the 2015 Diary of Consumer Payment Choice.
Figure 1 was created from a survey from the 2015 Consumer Diary of Payment Choice, and it displays the share of transaction number by payment instrument in 2012 compared to 2015. As revealed by the green bars, Americans are using cash less frequently now than in previous years with a drop of 8% over this period. Checks are also dwindling in popularity as credit and debit cards and electronic payment methods become more commonly used.
These shifts in behavior are likely due to the many advantages that E-money has to offer over cash and even checks. Digital money is extremely convenient, as consumers have access to as much of their funds as they like without having to haul physical money with them everywhere. In addition, low transaction fees make these forms of payment very affordable and even useful for small transactions. Electronic money also provides users with records of transactions which can be very desirable for those trying to budget or take note of their purchases. Using digital money as your method of payment also provides a degree of security that is not possible with cash which is very desirable to consumers. Furthermore, digital money transactions are not affected by user location and can be made from anywhere at any time with the use of the internet. Finally, as online shopping becomes extremely common with online retail giants like Amazon as well as other stores increase their online presence, cash is being replaced by digital money as the most common form of payment.
Cryptocurrencies
Cryptocurrencies are a unique form of digital payment in that they are decentralized. This means there is no central bank monitoring and ensuring transactions are valid or adjusting the money supply. Instead, transactions are verified, and additional units of the currency are introduced using cryptography. Cryptography used in cryptocurrencies, such as Bitcoin, functions like a digital signature but is much more secure. There is no need for regulation in this system because this cryptography is so effective in ensuring legitimacy and providing a way for new currency to be created. New units of cryptocurrency are created and given to people who contribute their computing power to the verification of transactions and whose computers solve a cryptographic puzzle. These individuals are known as “miners” and anyone is allowed to become one.
The advantage of cryptocurrencies is that they are uninhibited by many of the burdens associated with the intervention of banks and governments. For instance, cryptocurrencies offer the appeal of lower transaction fees, immediate settlement, universal acceptance and access, and even protection from fraud and identity theft. Because the miners that are helping ensure the validity of transactions are being paid in units of the cryptocurrency, there aren’t usually transaction fees when using this form of payment. This is quite different from more traditional forms of payment that have associated costs that can be a significant portion of the transaction amount. Furthermore, cryptocurrencies are traded much faster than other forms of money because of the inherent validity and lack of regulation associated with them; banks can take days or longer to process transactions and can often require additional verifications, approvals, or signatures. Furthermore, Cryptocurrencies can be exchanged across the world without any problems or adjustments because they are not bound to certain interest rates, exchange rates, or transaction fees which are often encountered when using other payment methods.
Cryptocurrency is significant because it represents an unprecedented form of money, and it is quickly rising in popularity. The total market capitalization has more than tripled since 2016 and reached about $25 Billion in March of 2017. However, this form of payment is still very new, and it has some problems of its own. Specifically, the volatility of these currencies and their lack of residual value currently make them risky and less desirable to some users, but this problem is likely to fade away as the market matures and prices settle. Another problem related to the newness of cryptocurrency is its lack of scalability; the Blockchain at its full capacity can only process a minuscule amount of transactions compared to the payment giant VISA. As with all digital currencies, cybersecurity is another problem that this form of payment has to face, but with improving security infrastructure, this is becoming less of an issue. Interestingly, energy consumption is also an issue associated with cryptocurrencies, as the networks of miners who ensure the validity of this form of payment use a great deal of energy in the process. Finally, one of the biggest drawbacks to cryptocurrency is the lack of public understanding and ability to use this form of payment, as people are just beginning to see the benefits it could have.
The Fate of Cash
In contrast to what the trend of increasing digital transactions suggests, it is unlikely that paper money will disappear any time in the near future. Because of its simplicity, speed and ease of transfer, as well as its wide-spread acceptance, consumers are likely to continue using cash to a certain extent. As seen in Figure 2, the amount of cash in circulation has been steadily on the rise for some time and does not show signs of stopping any time soon.
Figure 2. Currency in Circulation. The State of Cash: Preliminary Findings From the 2015 Diary of Consumer Payment Choice.
Since the Financial Crisis of 2008, the amount of higher denomination bills in circulation (in blue) has shot upwards. This rush to hold valuable bills is the effect of a rise in consumer uncertainty and lack of trust in the American financial system since 2008. This consumer response goes to show that people are willing to change their behavior to make themselves feel more financially secure. It is possible that consumers may be rethinking their need for cash altogether as digital money becomes more secure and poses additional benefits to those of dollar bills.
Figure 3. Payment Instrument Use by Spending Category. The State of Cash: Preliminary Findings From the 2015 Diary of Consumer Payment Choice.
From Figure 3, it is clear that when it comes to transferring wealth between individuals, cash is still a prominent form of payment. Consumers clearly still value how cash is so easily transferred and widely accepted; however, they are moving towards digital payment forms when it comes to high cost or recurring payments like those for housing or financial services. One of the fundamental drawbacks of cash is that does not carry any proof of ownership which seems to be having a heavy influence on consumer behavior. People want to be sure that their money is safe, and digital payment methods are able to guarantee a degree of protection that cash simply cannot offer. For instance, if a person has cash from their wallet stolen there is no proof of ownership or any way to stop the thief from using it immediately. Whereas, credit and debit cards have owners’ names on them, and even chips or pin numbers to prevent fraudulent use; card companies also work to detect fraud and can even guarantee to pay users back if any funds are stolen. This lack of trust in cash is evident in Figure 4, as cash is only used for 9% of all transactions in terms of value. When compared to Figure 1 (which depicts the number of transactions by type of payment), it is apparent that cash is still used for a great number of transactions, but these cash transactions tend to be low in value and declining on both fronts.
Figure 4. Share of Value by Payment Instrument. The State of Cash: Preliminary Findings From the 2015 Diary of Consumer Payment Choice.
Conclusion
The future of money in the near future is likely to be characterized by the ability to pay in a multitude of forms depending on consumer preference. With internet access becoming a fundamental aspect of society, consumers and businesses alike are able to accept many forms of digital payments with almost the same degree of ease as cash. Even cryptocurrencies like Bitcoin are becoming an acceptable form of payment for many businesses, and this trend is likely to continue as companies will want to keep up with their competition and fulfill consumers’ changing desires. Checks have become outdated as digital payments are much more efficient and are widely accepted for their usability, security, and affordability. Cash is slowly moving out of popularity because of its inefficiencies and the lack of security associated with it. However, it will take a great deal of time before people who have used this form of payment their entire lives trust their savings to digital forms of money, or even cryptocurrency, but it is inevitable that money is moving away from the tangible bills and coins we once knew.
Cryptocurrency poses a unique threat to the use of cash in today’s world as it has the potential to be a very safe and accessible form of payment that is free from government oversight and thus, usable on a global scale. The use of cryptocurrency is not nearly as common as other forms of payment, but it’s only in its infancy. Like the first car, it may be slow, hard to use and hard to understand, and the world isn’t quite ready yet. However, cryptocurrency has the potential to revolutionize the way we have ever thought about or used money before.