Cashless but Not Lawless

Pundits have been predicting the cashless society for a long time, perhaps even longer than the paperless office. Nonetheless the evidence is mounting that we are getting closer (at least to the former). The Section of Business Law of the American Bar Association ran a program at its spring meeting in Montreal this year on the possible disappearance of cash and the legal consequences.

Here are some of the highlights of presentations by Ed Morse of Creighton University, who presided, Denis Rice of Arnold and Porter, Jillian Friedman of the National Bank of Canada, and Erin Fonté of Dykema in Austin.

New methods of transferring value without cash are springing up all the time. This chart was presented by Erin Fonté. Not all of these systems or apps may be available in Canada, and a notable omission is the Interac email transfer that has become very popular here.

[Click the image to view the full-scale version of this picture.]

By 2013, 93% of the U.S. money supply was in electronic form. The U.S. government created 162 electronic dollars for every paper dollar. Forty percent of U.S. consumers used a mobile application to access bank accounts in 2014, and 52% of mobile banking customers deposited a cheque by pohne in that year.

People are buying increasingly valuable goods online, and forty percent of customers say they are willing to consider buying any kind of item electronically. PayPal processed payments of nearly $70 billion in the last quarter of 2015. Debit cards are now the most popular payment system in the U.S., with over a trillion dollars spent in 2013.

The Nordic countries seem even further advanced to getting rid of cash. Swedish retailers have the right to refuse cash, and a draft Danish law would give the same right in Denmark except for some purchases considered essential, like groceries, pharmaceuticals and medical care. Even homeless street vendors in Sweden often take card payments. Hundreds of Swedish bank branches no longer dispense cash, and thousands of ATMs have been permanently removed. Bills and coins account for only 2% of the Swedish economy. Norway’s two biggest banks have stopped providing cash at their branches.

In countries with less developed retail banking systems, mobile devices have more than filled the gap. China and Kenya are well-known examples.

Meanwhile, digital currencies – best known for Bitcoin – are undermining cash from a different direction. They are based on an algorithm that allows unbreakable, permanently traceable but pseudonymous transactions of all sizes. No intermediary is needed for the transaction, though businesses are offering to host the “digital wallets” that may contain Bitcoins and the like, and to facilitate the conversions between digital and government- sponsored currencies. As of September 2015, there were over eleven million digital wallets in existence and over 100,000 merchants who accepted payment by such methods. That said, one wonders if digital currencies can replace fiat currencies before their conversion rate into the latter beomes reliably stable.

Some Motives

What is driving these trends?

For consumers, the speed and convenience of e-payments is attractive. Records are kept automatically, balances can be reconciled in real time, and transactions can be done from anywhere with little apparent formality. Given that mobile phones are much more numerous than bank branches, and some economically vulnerable people have difficulty accessing bank services (U.S. estimates are about 30 million in that country; would the Canadian proportion be lower?), moving to mobile processes may be helpful, as it has proved to be in other countries. The ABA meeting suggested that the digital divide was becoming very small, both as to income levels and as to age brackets.

The drawback for consumers may be the loss of privacy. Digital transactions leave traces that can be used by marketers, governments – including law enforcement authorities – and sometimes criminals. Digital currencies may avoid this problem, as transactions can remain pseudonymous – provable but not readily attributable to anyone who does not want attribution.

For businesses that develop the payment systems, there are of course profits if the systems are widely adopted – and often the systems facilitate transactions with other businesses of the developer itself.

Governments find e-money cheaper than paper – it does not have the production and distribution costs. The U.S. government spends $26 million a year on transportation of currency, and $20 million on avoiding counterfeiting (not counting law enforcement costs). (The costs to the private sector of handling cash are far larger.)

Cash payments are an important way of evading tax. It is estimated that only about one percent of tax evasion relates to wages paid by regular employers. Money-laundering is also a cash business, a way of hiding profits from illegal activities. France and Italy have banned the use of cash in transactions for more than 1000 euros. A former Secretary of the U.S. Treasury, Larry Summers, has recently advocated banning $100 bills, which make up over 75% of the over $1.2 trillion of US currency in circulation (large amounts of it outside the country.)

Apparently anyone who buys an airplane ticket in the U.S. in cash is likely to be met on arrival by drug enforcement authorities.

An interesting benefit to government in having paper money in circulation was pointed out at the meeting: seigniorage – money earned from putting money into circulation. The Bank of Canada estimates that it earns annual net revenue of about 45 cents for every $20 bill in circulation. Estimating an annual interest of 2.5% and costs of production, amortized over the life of a bill (about seven years) of perhaps 2.5 cents a year and distribution costs of a bit less, the government earns up to $2 billion a year on the currency. (That benefit may pale compared to the amount of tax evaded through the use of cash, however.)

Some Law

Much existing law about payments will remain in force, as many mobile apps will use the existing “rails” or channels of moving money: wire transfers, debit/credit cards/stored-value cards, financial institution clearing houses, and cheque clearing systems. (Cash is the other rail, but the mobile apps by definition don’t use it.)

That said, the system rules at a level below legislation have had to adapt, and have not stopped adapting. The Canadian Payments Association has done a lot of work to ensure that new payment systems can operate. The traditional “huge but bounded” closed contractual universe of credit card companies, banks and merchants is not easily replicable for competing and technologically incompatible payment mechanisms launched by telecoms, device manufacturers, social media giants, innovative merchants and garage-based startups. New contractual arrangements, or new legislation in place of them, are not obvious.

The U.S. situation is complicated by widespread – but not necessarily consistent – state laws on money service businesses. App developers are sometimes surprised and dismayed to find the array of laws that attend a payment method.

The new apps raise new challenges as well for existing legal regimes set up to protect private rather than public interest, such as those governing privacy, security and the prevention of fraud.

These comments require a potentially major exception for digital currencies. They transfer value directly, not through any institutional or legislative framework. They eliminate the need for trusted intermediaries. Whether Bitcoin and its ilk will replace cash for some of its remaining benefits – not all of them licit – or can be subjected to regulation, remains to be seen. Regulators have taken diverse approaches to it, for diverse purposes: securities regulation, control of the money supply and the prevention of criminal activities have dominated the regulatory discussions, rather than more consumer-based concerns.

Meanwhile the use of the blockchain principles, or “distributed ledger technology”, a more descriptive label, is spreading beyond the world of payments and offers, or threatens, a new wave of disintermediation of trust services that underlie our payment systems, among other activities.

Some Conclusions

A totally cashless society is hard for some people to imagine, but touchless small payments by mobile device – the Starbucks app, for example – and the economies of data processing, now that money is essentially data, may take us there. Here as elswhere, objects in our future may be closer than they appear. And once again, there will be plenty of work for policy developers and lawyers – even if they turn out to be robots.