The last few years have seen ongoing controversy over the War on Cash, the proposal to restrict the use of cash or abolish cash entirely. A common argument made by proponents of the War on Cash is that such measures are required because ‘bad guys’ like money launderers, drug smugglers and terrorists use it. The argument is, thus, that the War on Cash is a key part of the War on Crime, and who could be against the War on Crime except the criminals themselves?
Yet such proposals are both poorly conceived and curiously lacking in supportive empirical evidence.
In truth, the War on Cash is a seriously bad idea.
Now, it is true that bad guys do use cash, but then so do the rest of us. So should we all lose the considerable benefits of using cash to inconvenience the bad guys, who would presumably switch to some other payment medium instead? Perhaps not. Consider also the implications: if we should abolish cash because bad guys use it, then the same argument applies to everything else they use including digital money. There is much more criminal activity conducted through this medium than through cash, so by the logic of this argument we should abolish digital money too. But what then would we use as money? Advocates of the abolition of cash haven’t thought it through.
It also turns out that cash isn’t that convenient for illicit transactions. The ideal medium for illicit drug transactions these days is not cash but Amazon gift tokens. According to a recent article in the Toronto Globe and Mail:
The main attraction of gift cards for money launderers is their anonymity: Cash transactions to load up gift cards or prepaid credit cards do not need to be reported or logged, and the identity of someone stashing money on a gift card does not need to be recorded. …
Experts say criminals can buy a stack of gift cards from a retailer or various retailers and transfer them to an associate, who can then redeem for products (such as high-end electronics) that can also later be exchanged for cash.
“If I was a lower-level criminal, I would be paying for everything through gift cards,” said consultant Garry Clement, former national director of the RCMP’s [Royal Canadian Mounted Police’s] Proceeds of Crime program. “There is absolutely zero paper trail.” (Dyck and Gray, 2018)
Used carefully, gift tokens allow for anonymous payments and, unlike cash, which requires a face-to-face transaction, can be used to make payments all over the world.
The article goes on to point out that prepaid credit cards are even easier for criminals to use, because they can be bought almost anywhere, loaded with cash anonymously, and then used at any number of retail outlets or bank machines around the world.
For today’s modern criminal, cash is so passé.
Cash also has the disadvantage of being small-scale. For large amounts of illicit transactions, you really need to go digital. Consider the recent Danske Bank money laundering case, the largest money laundering scandal in world history. This case
involves nearly a quarter of a trillion dollars of very suspicious money from Russia and the former Soviet Union that was funneled into the western banking system right under the noses of major banks and regulators in the United States and Europe, who either facilitated it or turned a blind eye. (Kroft, 2019)
As further evidence, a 2015 UK government risk assessment of money laundering and terrorist risk financing found that the highest risks of the facilitation of illegal movement or store of funds were those posed by banks – which are already subject to extensive anti-money laundering regulations – and accounting services providers, such as Panamanian tax shelter specialists Mossack Fonseca. Cash came in at third place.
So in terms of combatting criminal activity, there is little point abolishing cash while leaving the more important channels of illicit transactions wide open.
It would seem that the abolition of cash would cause a minor inconvenience to minor criminals and a lot of inconvenience to everyone else.
Perhaps we should merely restrict the use of cash, e.g., by reducing the maximum permissible denominations of cash notes? But what useful purpose would such measures serve? Why should consumers be deprived of the benefits of making high-denomination cash purchases? There are perfectly legitimate reasons why people might want the anonymity of cash. Perhaps a man wants to surprise his wife by buying her a gift without it showing up on their joint bank account before her birthday. In Italy, jewellery sales fell by up to 30% during the last four months of 2011, following the introduction of the € 1,000 cap. Rather than use payment cards, many foreign buyers preferred to shop elsewhere. So what did the Italian € 1,000 cap actually achieve?
A number of studies have concluded that there is little or no evidence that restricting cash payments contributes to curb tax evasion or money laundering. These studies include a recent Bundesbank report, which concludes “that there is no evidence that measures to restrict cash usage – such as the elimination of high-denomination notes and the introductions of caps on payments made in cash – are effective in limiting the illegal use of cash.”
There are good reasons why people use cash. Cash is the cheapest payment instrument and provides benefits such as anonymity and reliability that other payment instruments cannot provide. People trust cash and unlike digital currencies, cash cannot be hacked and is invulnerable to power failures. According to the World Cash Report, cash was used in 79% of Point-of-Sale transactions in Europe in 2018 and worldwide the use of cash is rising.
And what about the War on Crime? Maybe we should do more to address the causes of crime. Bothered about tax evasion? Consider tax reform. War on Drugs? Repeal prohibition or at least relax it. Money laundering? We already have plenty of measures against money laundering and the Danske Bank case shows that they are not working well. So perhaps that needs a rethink as well.
But as far as cash is concerned, it’s a case of “it ain’t broke so please don’t fix it.”
By Kevin Dowd (kevin.dowd@durham.ac.uk), Professor of finance and economics at Durham University Business School in the United Kingdom.