Preempting the implications of the abandonment of the use of cash in a cashless future, the Bank of Canada has published a paper examining some of the general impacts on central banks and financial stability.
The most troubling aspects of a cashless future, according to the Bank of Canada, would be surrounding retail payments and the loss of the most secure store of value in an extreme financial crisis. In 2013 a MasterCard study ranked Canada as one of the most cashless countries in the world, because of the high percentage of the population that has access to electronic payment methods, prompting the central bank to consdier the likelihood and outcomes of a cashless future.
The paper concludes that the decline in cash payments may lead to a cashless society as a result of voluntary, individual choices, there could be adverse collective consequences, and in turn, public policy responses.
Despite the likelihood of a continuing demand for cash, as a matter of prudence the rest of this paper considers the emergence of a cashless society. The focus is on how a cashless society could affect the key concerns of a central bank: seigniorage, monetary policy, payments and financial stability.
'For clarity, the premise in this paper is that the vast majority of individuals and firms would choose to abandon cash—not that a cashless economy would be imposed.'
In other words, the premise here is that the vast majority of individuals and firms (but perhaps not all) choose to abandon cash, and in response, the central bank stops printing it because of the large fixed costs inherent in supplying bank notes. Even though individuals and firms themselves choose to abandon cash, there could nevertheless be adverse collective outcomes.
...The disappearance of cash would lead to a contraction of the central bank’s balance sheet, since cash is one of the principal liabilities of a central bank. Currently, bank notes represent around three-quarters of the Bank of Canada’s liabilities, generally matched by asset holdings of Government of Canada securities.
'Such a balance sheet contraction would have a significant adverse impact on central bank seigniorage, which underpins central bank autonomy and is otherwise a material source of government revenue.'
But this revenue impact could be offset by other central bank actions, as discussed in Engert and Fung (2017) and Fung, Molico and Stuber (2014). Such steps could include charging more for the services provided by the Bank to the financial industry...
The problem with a cashless society, according to central banks
Cybersecurity concerns are rising at an alarming rate. Central bankers warn that a cashless future would leave individuals and institutions vulnerable to hacker attacks as well as network failures.
Decentralised currency tempts central banks
Countries experiencing dramatic drops in cash use are becoming targets for centralised crypto-currency trials. Central banks like Riksbank are seeing the shift to digital payment as an opportunity to introduce centralised digital currency that utilises blockchain technology.
Financial Times video: 'Cybercrime's threat in a cashless world'
Claims that going cashless would reduce crime are once again put to bed by none other than the Financial Times' chief economics commentator Martin Wolf in an insightful video. The two-minute video, titled 'Cybercrime's Threat in a Cashless World' looks at some of the new ways hackers and governments can exploit consumers in a cashless world.