What do you keep in your wallet?
A cashless society is where financial transactions are conducted by transferring digital information or digital payment between the transacting parties (e.g., digital wallet, PayPal, Venmo, etc.). Since the COVID pandemic, people have been discouraged from using cash for hygienic reasons and explosive online transactions. The pandemic thus accelerates the transition into a cashless society. China and some European countries like Sweden and Finland are currently near cashless. The U.S. is relatively slow in the trend, but the booming financial technology (FinTech) companies continue to gear toward a completely cashless society.
Though convenient and hygienic, a cashless society challenges unbanked Americans in the U.S. As of 2019, about 7.1 million households are unbanked for various reasons: low incomes, low credit scores, distrust toward banks, privacy issues, spending control, and so on. They have no bank account or credit card to link to digital payments and thus cannot benefit from a cashless society. For example, imagine that you want to shop at the most innovative cashier-less store like AmazonGo where customers can walk in and pay as they shop. However, customers must have a membership linked to bank-authorized digital payments to entertain it, and the service does not include unbanked customers. That poses discrimination against the unbanked in the rapid digital transformation and puts an imminent challenge in making the digital world inclusive.
Several initiatives have been put forth to make digital financial services available to underserved communities. Governments mandate retail businesses to accept cash to protect cash-paying customers. Banking and financial institutions reduce required account balances or credit limits and promote the benefits of a cashless society to unbanked communities. Due to the efforts, the ratio of unbanked American households has decreased below five percent of the families. However, a fundamental issue remains unresolved. All customers and all transactions must be certified and monitored by the centralized banking and financial systems.
One way to address the challenge would be to adopt digital currencies in mainstream digital transactions. Yes, I am talking about cryptocurrencies such as Bitcoin, Litecoin, Ethereum, etc.
Cryptocurrency is a digital or virtual currency wherein individual ownership of the currency is recorded in a ledger on a blockchain network. Anyone on the blockchain network has the same ledger record, so counterfeiting the ownership records or transaction records is nearly impossible. That way, it can have equivalent security and validity to the physical form of currencies. Also, it is safer than current digital payment methods vulnerable to cyber threats and data breaches.
People begin to have cryptocurrencies in their digital wallets and use them like cash online and offline, even across the border, without paying any tariffs. Businesses, including big retailers such as Microsoft, Overstock, Homedepot, Tesla, etc., increasingly accept cryptocurrency. You can buy a caramel macchiato at Starbucks with 0.00015 Bitcoin. Well, the price is likely to be different next time. You might not care a lot about the slight value difference. However, it becomes a different story when it comes to $1000 computer, $50,000 car, or $300,000 home. For example, Tesla accepts Bitcoin as a form of payment. However, if a customer overpays accidentally, the transaction cannot be reversed in her Bitcoin digital wallet. Tesla claims that they are not responsible for the customer’s mistake. There is no way to dispute it because the transaction is conducted outside the central financial authority and cannot be protected. Also, Tesla can be opportunistic in processing a refund. When the Bitcoin value at the time of the refund is greater than the time of purchase, it will not refund it with Bitcoin.
The volatile valuation is the biggest challenge of cryptocurrencies, making them unreliable for a standard payment method, although the blockchain platform and the crypto technology are highly reliable and safer than conventional digital platforms. If you consider the volatility an attractive investment opportunity, it is entirely at your own risk. Governments and financial institutions around the globe are currently working on regulations and standards for cryptocurrencies. They start to consider issuing centralized cryptocurrencies like the U.S. Federal Reserve print dollars. However, full adoption of cryptocurrencies to mainstream financial services will need more time, and there will be several roadblocks on the road. After all, cryptocurrencies issued by central authorities, decentralized agencies, or together will replace the physical form of currencies in the not too distant future. Getting a bank account to access digital payments is a safe choice, but the digital transformation of currency is another, more universal, approach to include unbanked people in the digital society.