Cashlessness, Crime and Central Bank Digital Currency

Jack Dorsey agrees with me: cash diminishes net welfare.

Dateline: Woking, 8th August 2022.

No-one listens to me about this sort of thing, but Jack Dorsey is a billionaire so you should listen him. Ten years ago, he tweeted that “In general, the shift toward a cashless society appears to improve economic welfare” and I remember being excited that he was on my page, so to speak.

I can’t say whether he was basing that opinion on research or anecdotes or insight, but I can say that he was indeed correct and evidence to support his position is mounting.

Good or evil?

A detailed study by the Asian Development Bank (“Less, Cash, Less Theft? Evidence from Fintech Development in the People’s Republic of China”, August 2021) found that a one standard deviation increase in the fintech development level has a significant association with a 0.39 standard deviation decrease in thefts’ density because fintech reduces the density of thefts by reducing cash holdings (and, rather interestingly, providing more job opportunities). What’s more, a survey to estimate the cost of theft for households suggested a further unexpected source of welfare gain from the development of fintech: an improvement in public security.

(Fewer robberies and muggings does not, in of itself, mean less crime. Crimes that should grow are those that are suited to the online age and this seems to be happening as fraud is the no.1 crime by far in our United Kingdom. There must be a link, therefore, between cashlessness and other types of crime, so it is reasonable to ask if a growth in fintech use changes the types of crime that a rational decision maker chooses? Anecdotal evidence at least suggests that it does: stealing smartphones from people to effect instant credit payments or cryptocurrency transfers seems to me to be easy and profitable.)

Not all bank robberies involve shotguns, by the way. There was a robbery in London recently where the robber posed as a security guard (complete with helmet and visor), wandered into a branch of Santander, flashed a fake ID and walked out with two boxes of cash with a total of £150,000 in them!

Decisions

The question of rational decisions makers caused me to return to the subject of bank robbery that I wrote about in Forbes previously. I cited research that notes that bank robbers thought that their activity had been financially worthwhile aside from the fact that they were eventually caught and punished for their crime. So robbing a bank seems like good idea, if you exclude the possibility (in fact, the likelihood) of being caught.

While glancing back over that piece I note that the researchers said that it doesn’t seem practical to “expect financial institutions and commercial properties to reduce counter cash much more than they already have”. Now, that may have been true when the paper was written a few years ago, but it clearly isn’t true now, since both bank branches and businesses in many countries are becoming cash free. And this is a good thing, because as that Chinese study has reconfirmed there is a direct and measurable relationship between the amount of cash out there and the amount of crime.

It appears that any amount of cash is a problem. As the research on UK armed robbers said, “even when the amount of money obtained was quite small (an element often touted in support of the irrationality of economic criminals), it must be recognised that even apparently small sums may be adequate for the offender’s immediate needs. Hence, gains may be subjectively much larger than they appear”.

This tells me that so long as there is some cash in the till, there will be robberies but with the rewards from robbing banks and businesses falling so armed robbers, like everyone else, will follow the money. This is why cash-in-transit (CIT) robberies are a preferred option across Europe, where countries that have much higher usage of ATMs have commensurately higher CIT robbery rates than countries with lower ATM usage (see, for example, Sweden and Denmark).

Of course, there are other places where cash can be found, and they are similarly vulnerable. I love this recent story from Australia where three fake tradesmen, wearing hi-vis clothing, walked into an establishment and loaded the poker machine cash dispenser on to trolley and wheeled it out with A$30,000 in it.

Welfare and Net Welfare

This relationship between cash and crime is not restricted to bank heists and CIT robberies. A study of America’s Electronic Benefit Transfer (EBT) program found that it “had a negative and significant effect on the overall crime rate as well as burglary, assault, and larceny”. What they are talking about here are US programmes where benefit recipients are paid electronically and given cards that they can use in shops instead of being given cash. The authors found a 10% drop in crime correlated with the switch to EBT.

(It seems like pretty conclusive evidence, and it’s even convincing if you read the detailed paper, which notes no impact on crimes that do not involve the acquisition of cash.)

In summary, then, it seems that Mr. Dorsey was right and that cash reduction via fintech means an increase in net welfare. People who are trapped in a cash economy, the poor in particular, are the people who get robbed, who get bad deals, who get shaken down.

We should, therefore, act to reduce the amount of cash out there, but that is not to say that we should ignore the fact that there are people who are dependent on cash. The UK’s Royal Society of Arts (RSA) recent “cash census” looked in detail at the use of cash in our increasingly digital economy. It found a clear “bell curve”. Around one in five people said that they would "struggle to cope" in a cashless society and half the population said it would be problematic for them if there was no cash in society and around one in five said they were happy to go cashless.

The people who would struggle to cope should be a focus of industry attention. These are people who don’t have bank accounts, people who don’t have smartphones (and people who struggle to use them), people who have been scammed and no longer trust online payments, people who don’t have the wherewithal to interact digitally and we need to find ways to make a less cash society work for them.

Ballard’s Law

There’s a particular case study that we should pay more attention to. In the UK, the boundaries of inclusion are being explored and tested by the use of apps to replace cash and card payments for parking. This fascinates me, partly because of the interesting intersection of anthropology and technology but mainly because of the strength of feeling it generates. In J.G. Ballard’s wonderful novel Millenium People he wrote about Britain that “when the revolution comes, it will be about parking”. What vision that man had!

I have a couple of parking apps (eg, Ringo) on my phone and I love them. The ability to drive into the station car park then jump on a train and pay for the parking while sitting down is well worth the 20p or whatever the surcharge is. But I’m sure we’ve all experienced the frustration of pulling into a car park only to discover it needs a different app or there’s no signal or your phone is out of battery or whatever so there is room for improvement in how they work. But the situation for people who don’t have smartphones or have one but don’t understand app stores or who have a smartphone and understand app stores but don’t trust their phone enough to type in card details is very difficult. I read one newspaper article in which the author said that their 80 year old mother phones them to pay for the parking whenever she goes out shopping!

This is why there’s a financial inclusion discussion to be had and parking is a familiar mass market use case to measure against. Should we make the apps simpler? Move over to voice interfaces? Force councils to keep machines that take cash no matter what the cost? I’m not sure any of those solutions are worth doing, since they are interim sort-of solutions.

When you think about it, parking and payments are both pretty boring, so why would any normal person want to be in the loop. If you look further into a not-too-distant future of 5G and digital cash, then there’s no obvious reason why there should be a person, smartphone or app involved in such mundane transactions: Your in-car computer system will simply flash up “Do you want to pay for parking?” when your car pulls into a space and on your nod, wink or muttered acceptance then the car will negotiate with the meter to agree the fee and transfer the value.

British car parks may not be a universal proxy for payments in the new economy, but they are a useful example to support the view that nations need an inclusion strategy and that a well-designed central bank digital currency (CBDC) can provide some of the infrastructure needed here.

We have the technology, but we shouldn’t leave the design decisions up to the technologists. This is why I have long argued that the shift to cashless society must be planned to help groups that might be marginalised or excluded so that they share in the net welfare benefits of cashlessness.

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