Cash can play a role in criminal activities such as money laundering and allow for tax evasion. Digital transactions or electronic money create an audit trail for law enforcement and financial institutions and can aid governments in economic policymaking. Transactions using digital money reduce costs and create transparency in an individual’s spending and savings habits.
Cash can play a role in criminal activities such as money laundering and allow for tax evasion.
Using digital money prevents the transfer of physical money and all transactions are handled by computers and the internet.
In the United States, any financial institution that receives a cash deposit of more than $10,000 must report it to the IRS, making tracking and tracing illegal activity easier.
The Federal Reserve has been exploring the use of a Central Bank Digital Currency (CBDC).
The “War on Cash”
In 2016, the European Central Bank (ECB) eliminated minting €500 notes to curb fraud and money laundering. The note was the second-largest denomination across the euro currency zone, and the ECB claimed that it was the banknote of choice among criminals. At the time of the ECB’s announcement, 500 euro bills in circulation represented one-third of all the euro-denominated cash outstanding.
Since 2016, global policies have been implemented to thwart the use of cash in favor of digital currency transactions. In the United States, any financial institution that receives a cash deposit of more than $10,000 must report it to the IRS, making tracing illegal activity easier.
Promoting and tracking digital transactions amounts to a war on cash. The use of digital money avoids the use of cash as transactions are handled by computers and the internet. Critics argue that limiting the use of cash and forcing individuals to pay through banks or credit card companies compromise financial privacy, prevent interest accumulation on saved cash, and limit profits of small business owners who often rely on cash sales.
Limiting Cash Savings
Because it is easy to hoard cash using large valued notes, a central bank may implement a monetary policy such as a negative interest rate policy (NIRP). A negative interest rate policy (NIRP) occurs when a central bank sets its target nominal interest rate at less than zero percent to discourage cash savings and promote spending. Limiting cash savings may also reduce bank runs during financial turmoil, such as the 2007-2008 financial crisis.
CBDC and Cryptocurrency
In the United States, Federal Reserve notes or physical currency is the money available to the general public. The Fed has been exploring a Central Bank Digital Currency (CBDC). Managed by the Federal Reserve, a CBDC would allow for digital payments and tracking of transactions and provide the safest digital asset available to citizens with no associated credit or liquidity risk.
In 2022, over 100 countries explored the use of a Central Bank Digital Currency.
Governments that introduce a CBDC enable a war on cash and cryptocurrency. Cryptocurrencies are virtual currencies and individual monetary units, convertible into paper money at a variable rate determined by supply and demand, but their use and value are not monitored or guaranteed by any agency.
Is a CBDC Safer than Cryptocurrency?
The International Monetary Fund claims that if CBDCs are designed prudently, they offer resilience and safety with greater availability, and lower costs than private forms of digital money. Crypto assets are inherently volatile, rely on supply and demand, and are not backed by any government or agency.
What Paper Currency Is Printed In the United States?
The Bureau of Engraving & Printing currently prints $1, $2, $5, $10, $20, $50, and $100 notes. In 1969, the Department of the Treasury and the Federal Reserve System discontinued the use of currency notes in denominations of $500, $1,000, $5,000, and $10,000 due to lack of use.
How Did the COVID-19 Pandemic Affect the Use of Cash?
Critics argue that the use of digital currency was boosted by the COVID-19 pandemic during the lockdown and by the fear that the use of physical cash could spread the virus.
The Bottom Line
A “war on cash” is defined as the use and promotion of digital currency. Cash is often traced to criminal activities such as money laundering and tax evasion. Using digital money creates a data trail as all transactions are handled by computers and the internet. As of 2022, many countries, including the United States, have been exploring the use of a Central Bank Digital Currency (CBDC).