Antonis Polemitis is Managing Director of Ledra Capital. He has written a series of blog posts about bitcoin which can be found here. In this article, he casts a satirical eye over how a new currency ‘cash’ would be described by the press if invented today.
Breaking News: Bizarre, Shadowy, Paper-Based Payment System Being Rolled Out Worldwide!
World governments announced a plan today to allow citizens to anonymously carry parts of their wealth on their person and exchange it with others using small pieces of colourful paper.The paper is printed with nationalistic and Masonic imagery, along with numbers that purportedly represent the amount of wealth each piece of paper represents (if the paper is not a counterfeit).
Each of these pieces of paper is formally a ‘note’ from each nation’s central bank, but they are also attracting the term ‘cash’. This is a technical matter that is too complex to cover in our basic primer. Suffice it to say, that it is representative of the complexity and user-unfriendliness of this new system.
Are ‘bills’ too complex?
These pieces of papers (also known as ‘bills’, ‘dollar bills’, ‘George Washingtons’ or ‘Dead Presidents’ among the shadowy community of anti-banking libertarians who have been the primary users of cash to date) will differ from country to country and are not redeemable outside national borders.
In
what will come as a surprise to generations who have grown up with
calculators and computers, bills only come in fixed denominations,
requiring users to maintain a large number of these pieces of paper that
must be aggregated to execute a transaction and then re-aggregated to
‘make change’.
The latter is a complex process of returning to the
payee the excess of the payment using yet other bills. (Don’t worry if
this sounds complex, we had trouble understanding it ourselves at first
and it is certainly not ready for the average consumer in its current
form.)
Mike Smith, VP of Employee Training at Sears has said:
“I cannot imagine training tens of thousands of our employees to use cash, verify that it is genuine, and learn to ‘make change’ without making errors. This is going to require a wholesale installation of special change-making hardware – so-called ‘cash registers’ – and millions of dollars of employee training, while creating long lines and delays for consumers. Furthermore, we would need to adopt new security procedures and armed guards to avoid theft of the physical bills while in the store or during transport to our bank. We cannot see ourselves adopting cash under these conditions.”
Perfect tool for criminals
The
launch of cash has provoked an immediate reaction from law-enforcement
agencies worldwide that universally condemned the development.
Mike Smith, the recently confirmed FBI Director, had this to say:“‘Cash’ is a 100% anonymous and untraceable payments technology. It is like a weapon of mass destruction launched against law enforcement. It is the perfect payment mechanism for criminals, drug cartels, terrorists, prostitution rings and money launderers. We don’t know how we will be able to combat such a technology and we fully expect that a new generation of super-criminals will emerge, working in the shadows of a world where they can conduct their illicit affairs without leaving a trace.”
Even officials within the banking system have their doubts about the new plan.
Banking
Superintendent of New York State Mike Smith said: “I can’t think of any
reason that a law-abiding individual would want to use ‘cash’. At a
bare minimum, we believe there should be a licensing procedure for
individuals or businesses that plan to use cash – a ‘cash license’, as
it were.”This license would limit cash to trustworthy individuals who keep detailed, auditable records of all their cash transactions in order to keep New York safe from criminals, he added.
Others have concerns about forgery and counterfeiting.
“Ultimately,
even with all the fancy inks, ‘cash’ is just a piece of paper. We fully
expect criminal groups and rogue nation states to print fake cash in
order to profit or to disrupt the economies of their enemies,” said Mike
Smith, an analyst at Stratfor.“In the interim, we are certain that cash will trade a discount in the real world, given the risk to a counterparty of accepting a forged piece of paper; no doubt cash is a huge step back from the modern cryptography in place throughout our current financial system.”
Consumers unprotected
Though
hard to imagine, cash operates with no consumer protection at all. If
your ‘bills’ are stolen or lost, they are gone forever.
“I
just don’t understand why there is nobody that I can call to reinstate
my ‘cash’ if I lose it,” says Mike Smith, a businessman from Toledo.
“What type of idiotic wealth and payment system doesn’t maintain
transaction and ownership records?”
Moreover,
there appears to be no authentication mechanism associated with cash
payments or transfers, let alone one that matches modern security
standards. Once someone has gained physical control of your ‘bills’,
they are free to spend or use them as they wish and there is no way to
reverse the transaction, stop them or even identify who has stolen them.
Even
simple destruction of a bill, which, as you recall, is just a piece of
paper, could result in losses. According to the Director of the newly
founded Bureau of Engraving and Printing, mutilated bills that are more
than 51% destroyed must be mailed in for a special investigation that
will determine if they should be replaced or not.‘Physical wallets’ reveal security flaw
Proponents
of cash have dismissed these concerns saying that various hardware
manufacturers, such as Coach and Gucci, will shortly be releasing ‘hardware wallets’ in leather and suede. These wallets are meant to hold the bills and fit into a pocket or purse.
“Once
your bills are safely ensconced in your Gucci wallet and securely
placed in your pants pocket [the front pocket is recommended as a ‘best
practice’ for security], it is almost impossible for them to be stolen,
lost or destroyed,” said Mike Smith, VP of Communications for Gucci NA.
Some early adopters, however, have reported that the hardware wallets have security flaws.
“I
was out in Bangkok two weeks ago, at a bar, and I forgot my Gucci
wallet there,” said Mike Smith, a visiting tourist. “When I returned the
next morning, my wallet was there but my cash was gone!”We contacted Gucci regarding this hacking attack, but a spokesperson would not comment “about confidential customer financial matters”.
Even criminals have not been immune to the risks of cash. The notorious ‘Silk Road’
drug-dealing marketplace mysteriously closed last week, after vendors
and customers left envelopes full of cash (on which they had very
clearly written their names) in an anonymous drop-box managed by the
exchange.
“Theft of the cash due to a bug in the envelope-sealing process,” was cited as the cause.While technical experts believe that it might be possible that the glue on the envelope was not correctly applied, they also warn that a ‘bill’ is basically a private and public key at the same time, and note that there might be dangers involved in letting anonymous criminals hold the private keys to your wealth.
Physical presence required
In what might be most unusual limitation on cash, it only works for payments within 26 inches or less (the so-called ‘arm’s length transaction’,
as hackers in the community have colourfully dubbed it), because it has
to be handed from one (human) party to another to execute the
transaction.
This requirement for the exchange of cash is widely thought to be a fatal flaw by traditionalists.
Mike Smith, VP of Retail Banking at Chase said:
“A form of payment that cannot be used at a distance, cannot be used for e-commerce, cannot be used by mobile devices, cannot be used for machine-based transactions, or cannot be scripted or programmed, cannot be thought of as a payment system. I will admit, as a form of performance art, ‘cash’ transactions are an amusing experiment, but this has no applicability in the real world of banking, finance or commerce.”He added: “Furthermore, given cash’s association with criminal activities, we will be refusing to offer banking services and terminating the accounts of any customer that uses cash in a business or personal capacity. It is the only way we can ensure we remain compliant with our regulatory obligations.”
Remarkably, if you attempt to use cash in a different country from the one that issued it, it will categorically be rejected.
In
order to use cash abroad, you will have to go to designated points,
usually in airports or certain banks, with limited hours of operation,
that will ‘exchange’ your bills for others printed by the country that you are visiting.These ‘exchanges’ have high fees – usually 2-3% for each exchange, meaning that tourist will lose 5% of their cash or more on a typical trip just in these exchange costs. This seems extraordinarily high for what is, ultimately, an exercise in multiplication or division.
A step backward for economics
Economists
are flabbergasted that lawmakers have allowed cash to be adopted
despite their strong objections. A key policy tool of central banks has
been the use of positive and negative interest rates to manage economic
growth. It appears that this will not be possible with cash.
Mike Smith, a leading economics blogger for the New York Times
said: “This is a sad day for macro-economics. If cash ever catches on
in any meaningful sense, it will reduce our control over the levers of
the economy significantly, by providing a mechanism for depositors to
opt out of negative interest rates. Given the fact that it might keep us
from preventing the next depression and will definitely reduce tax
collections, one could even consider it ‘evil’.”
Environmental and health impacts
Environmentalists expressed concerns about the impact of cash on the environment.
Mike
Smith, recently appointed Executive Director of the Sierra Club
said: “You would have thought that in 2014, we would have moved beyond
pesticide- and water-intensive cotton farming [retracted:
cutting down trees], treating the cotton with dangerous inks, and
transporting it with fossil fuels, only to represent a value, such as ‘20’, that can be represented electronically at effectively no cost to the environment. When will we ever learn?”
Public health officials also warned that cash could be an excellent vector for disease transmission.
“We
tested several ‘bills’ in our labs recently and discovered that the
average bill has 20 times more bacteria than a toilet seat,” said Mike
Smith, Director of Research at the Mayo Clinic. “Our advice is that
people should avoid cash in general and only handle it if absolutely
necessary.““Children, the elderly and immuno-compromised individuals should not handle cash under any circumstances.”
What comes next?
Proponents
of cash think it will ultimately be a widely adopted technology that
will spread around the world, enabling in-person, mid-tier transactions
(not micro-payments, but not mega-payments either) in a manner that is
invulnerable to electric or Internet outages and that will usher in a
new era of more ‘human’ commerce.
We
try to keep an open mind at this publication toward new technology,
but, to date, we have a hard time seeing the positive case for cash.
Certainly
criminal groups will take advantage of cash’s perfect anonymity to
wreak havoc on law enforcement and tax collection, something that is
deeply undesirable.Among law-abiding citizens, we can envision some possible adoption in dense urban hipster communities like Williamsburg, where ‘wallets’, ‘cash’ and ‘making change’ could be yet another reflection of their tongue-in-cheek view of modern societal systems.
Other than that, it would be hard to recommend that the average consumer or merchant becomes involved in what is still today a very buggy system, filled with risk, inconvenience, high transaction costs, and possible disease transmission.
Even if handled perfectly, cash will certainly tar your business and personal life with the seedy reputation of the drug dealers, terrorists, money launderers and anti-establishment anarchists who use it today, threatening business and banking relationships, and raising eyebrows among law enforcement and your community.
Originally part of Ledra’s bitcoin series, and published here with permission: ledracapital.com/bitcoin
Ledra bitcoin digest newsletter: ledracapital.com/subscribe
On Twitter: @polemitis and @ledracapital
Empty wallet, environmental damage and criminal images via Shutterstock
Ledra bitcoin digest newsletter: ledracapital.com/subscribe
On Twitter: @polemitis and @ledracapital
