Why Governments Seek to Eliminate Cash

Why Eliminate Cash?

Cash can be used in criminal activities such as money laundering and tax evasion because it is difficult to trace. 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.

The "War on Cash"

In 2016, the European Central Bank (ECB) eliminated the production of its €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, the €500 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. Digital money is instead promoted because it keeps cash from being used. Transactions are handled by computers via the internet rather than passing through anyone's hands. 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 hoarding cash using large valued notes is easy, 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. However, to keep up with advancements in blockchain and cryptocurrency, 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.

Governments that introduce a CBDC enable a war on cash and cryptocurrency. Cryptocurrencies are virtual currencies and individual monetary units, convertible into fiat currency at a variable rate determined by supply and demand, but their use and value are not monitored or guaranteed by any agency.

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 using computers and the internet. As of April 2024, many countries, including the United States, have been exploring the use of Central Bank Digital Currency (CBDC).