In many areas of the world, cash is still king. But, as in other parts of the globe, it appears as if its days could be numbered in Australia, which may be preparing to ride the building global demonetization wave. The Australian divisions of financial services giants UBS and HSBC have already floated the possibility of removing high-denomination banknotes from circulation. And global banker Citi, which has a relatively small footprint in the country, has said it would no longer deal in cash, noting that physical currency constituted only 4 percent of transactions made by its customers in the past year. Now, as Australia prepares its mid-year economic update, the Australian Financial Review is reporting that Canberra will establish a task force on the country's shadow economy that will consider withdrawing the nation's biggest banknote, the AU0, which makes up nearly half of all Australian currency in circulation.
If it follows through with that idea, Australia would join a growing list of countries withdrawing some banknotes from circulation. On Nov. 8, Indian Prime Minister Narendra Modi announced that all 500- and 1,000-rupee notes — 86 percent of the cash in circulation in India — would need to be exchanged by the end of the year, when the existing stocks of bills will no longer be legal tender. In exchange for their old notes, owners will get newly printed 500- and 2,000-rupee bills. Six months earlier, the European Central Bank decided to phase out its 500-euro banknotes. And Monday, Venezuela announced that it would demonetize its 100-bolivar banknotes and replace them with higher denominations as it grapples with hyperinflation.
Monitoring both legal and illicit economic activity is a challenge for any modern state. The way that a country deals with the issue can vary radically, depending on its eventual aims. In India, a vast informal economy in which nine of every 10 transactions are conducted in cash allows buyers and sellers to avoid government scrutiny — and tax bills. Modi's demonetizing strategy aims not only to flush out cash-holders who deprive government coffers but also to foster legitimate anti-corruption goals. It fulfills a necessary step toward formalizing the underground economy to allow for improved monitoring of the entire economy. In addition, it could increase domestic access to financial services as a way to boost and maintain economic growth. In a sense, the rupee exchange is also an attempt to force Indians to use the formal financial system. Currently, only about half of the country's adult citizens have bank accounts, compared, for instance, to 80 percent of Chinese adults.
There is little doubt that Modi's swap program will have a major impact as it is being implemented. As the new notes are distributed, significant decreases in liquidity in India are expected. But the rewards of transforming the financial payment and banking system into one based less on cash can be significant in the long run, even if in order for those benefits to be realized, India will likely need to more fully develop its internal digital infrastructure.
The informal portion of the Australian economy is much smaller than that found in India — and even those in most EU countries. Still, the Australian dollar, much like high-denomination banknotes of other stable hard currencies such as the euro and the US dollar, is popular among criminals who want to move cash abroad. Stockpiles of those currencies are also a method to store long-term value.
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But overall, cash has started to fall out of favor as a form of conducting transactions. Technology and consumer preferences both are changing the way payments are made in the developed world. Some countries, such as Sweden, where more than half of the country's banks do not hold cash or accept it, are much closer than others to a virtually cashless society. While progress toward a cashless system will likely be slow, many of the drivers pushing financial evolution down that path are probably irreversible. Much as in India, the increasing complexity of economies in the developed world is making them more difficult to measure (and thus tax, monitor and shepherd). In a purely digital economy, that task is made much simpler. Ironically, the growth of the sharing economy — made possible by digital communications — has opened perhaps another avenue in which informal sectors can operate. Indeed, the sharing economy is one area that the Australian task force will examine.
Calls for removing high-denomination banknotes — or even all cash — from circulation are being driven primarily by fiscal and monetary policy reasons. Since the 2008 global financial crisis, the world's central banks have embarked on a great financial experiment, trying to bolster growth with a mixture of quantitative easing and ultra-low — and even negative — interest rates. By now, many of those policy prescriptions have run their course. In the event that the financial system takes another hit, though, a cashless society would allow for even more creative financial gymnastics. Without cash, the possibility of a bank run if interest rates plunge becomes unlikely or even impossible.
The global system of transactions — how money moves and by which means — has undergone a number of evolutions throughout history. The recent wave of demonetization — whether aimed at modernizing a financial system or adapting to a new economic reality — will only gain momentum. Growth in the volume of non-cash transactions is strongest in the emerging world, particularly in Asia. As India joins the effort to wean cash out of its system, it finds itself lagging far behind in its ability to process mobile payments and use other banking technologies. But it is likely on a long-term path to follow in the footsteps of Australia and other developed countries that are looking to replace cash in hand with electronic forms of currency.
"The Global Move Towards a Cashless Society" is republished with permission of Stratfor.