Politicians left and right have begun calling for a ban on large-denomination banknotes and restrictions on cash payments as a means of fighting crime, money laundering and terrorism. Their argument is flawed, writes Guillaume Lepecq.
Guillaume Lepecq is a consultant in payment systems and the author of “Cash Essentials- Beyond Payments” a recent study on the uses and benefits of banknotes and coins.
A ban on €500 banknotes or on $100 bills is unlikely to have any effect on serious crime or on the financing of terrorist groups.
If anything, such a move will push criminal finances even deeper into the dark and away from government control and interception. And honest citizens will see their liberties and privacy restricted and their hard-won savings at risk. The cost and complication of doing business – or just buying stuff – will increase.
Cash is for honest citizens. Serious criminals avoid it as something as unwieldy as it is risky.
Banknotes have serious drawbacks for the serious criminal. They are numbered and traceable. Their use and transportation is regulated by government and intergovernmental regulations. And they are bulky and heavy. The technology and the processing of banknotes mean that it’s difficult to get any significant quantity of cash back into the legitimate financial system without running the risk of getting caught.
A banknote is a highly efficient payment instrument. It’s mobile; it’s interoperable; it works in real-time; it’s secure; it’s always on; it cannot be hacked; it’s accepted everywhere, at no cost. Banknote usage is growing, alongside that of competing electronic payment instruments. But cash is much more than a payment instrument.
A banknote is a store of value – just like gold, stocks and bonds or real estate. It’s a prudent store of value if issued by a responsible government authority: a banknote won’t fluctuate unpredictably in value and it’s totally liquid.
This is why a significant share of the cash issued by European Central Bank in Frankfurt and the Federal Reserve in Washington is hoarded in bank safes and mattresses or held abroad. Take the euro: only one third of the €1 trillion in banknotes currently in circulation are used for payments in the euro-area, while 40% is held as a store of value. The remainder is held overseas.
The euro is used as a stable store of value in Africa, Russia and the Middle East. The dollar is a traditional safe haven in Latin America and Asia. The United Arab Emirates and China are major international trans-shipment centres for goods; African retailers and consumers make purchases there – often paid for in reputable foreign currencies. Merchants worldwide value the euro and dollar as stable, internationally accepted means of payment.
Money laundering involves injecting criminal proceeds back into the legitimate financial system by buying real estate, stocks and bonds or other assets. It’s of little use to a criminal to be sitting on a mattress stuffed with cash. Any ordinary oligarch or “ultra-high-net-worth” individual worth his or her salt knows that sophisticated legal constructions, shell companies and complacent legal systems are the best way to launder dirty money or hide untaxed gains.
Terrorists likewise avoid using cash. The Islamic State terrorists last November in Paris knew enough to use prepaid bankcards to cover their tracks while preparing their deadly attacks. African warlords use so-called blood diamonds to finance their activities.
Cash isn’t the cause of terror or criminal behaviour. Criminals use mobile phones, but no one pretends that telephones are a cause of crime.
Critics will point out that cash is anonymous. Cash indeed provides a certain level of anonymity – but the anonymity is actually quite limited, much more limited than with largely unregulated assets such as gold, diamonds, bitcoin and prepaid cards.
Criminals avoid cash for the same reason they avoid unencrypted phone calls and messaging: they don’t want to get caught.
There has been no formal decision in Frankfurt or Washington about large banknotes. But all the talk is sending a powerful message in the market and among the public that these notes may at some point be removed from circulation.
Although cash is ubiquitous, its role in society and in the economy is often misunderstood – particularly by politicians looking for easy talking points. The euro and the dollar are reserve currencies; they are trusted globally as a safe store of value. It is a matter of public concern if politicians are undermining such hard-earned trust with foolish talk.