Is it time to consider cryptocurrency?

By Merav Ozair, Ph.D.

In finance parlance, we often say “Cash is King.” Cash might be a king, but it is a sick and infected king, which infects everyone who touches it, and in severe cases causes death. If only for our health, it’s time to overthrow this king and replace it with a better, healthier (literally!) and more efficient payment system

Dirty Money

In early March 2020, in a step to curb the spread of COVID-19, the World Health Organization (WHO) advised customers to avoid using banknotes and switch to contactless payment methods. This advice came after China and South Korea began isolating and disinfecting banknotes. China and South Korea are not the only countries that have been taking precaution measures to protect the public from infectious banknotes (i.e., cash). Some nations, such as Russia, Hungary, Poland, Kuwait, and Pakistan, have quarantined banknotes for weeks before distributing them again.

Cash being dirty should not come as a surprise. Research studies suggesting that cash is filthy have been piling up for many years. A 2017 study published in Frontiers in Microbiology, by researchers from the university of Hong Kong, found that 50 percent of all environmental bacteria can be found on banknotes[i]. The study also indicated that the banknotes have a high dissemination potential of the identified antibiotic-resistance genes. Combining the clinically important antibiotic-resistance genes with the high dissemination potential suggests that currency could possibly pose a health risk.

Other studies on U.S. banknotes are in line with the Hong Kong study. In a 2017 study published in the journal PLOS ONE, researchers swabbed $1 bills from a bank in New York and found hundreds of species of microorganisms living on them. In a study of $10 bills from cities across the U.S., nearly 80 percent of them had traces of cocaine. A 2014 study published in PubMed discovered banknotes and coins contain pathogens like Escherichia coli (E. coli), salmonella, and staphylococcus aureus, which can lead to serious illness.

Researchers and scientists, such as Dr. Li Jun, who led the Hong Kong study, have warned: “We recommend some routine disinfection of the currency from the bank, public service ads reminding people to pay attention to wash the hands after touching currencies and the promotion of more electronic payment services, like mobile payments.”

So, we have been warned. But, unfortunately, we tend to not pay attention to warnings until a pandemic happens and people get sick and die.

Merchants and Customers are Taking Actions

Merchants and customers have taken more drastic measures than simply “washing hands” after handling cash. Costa Coffee, a UK chain with 2,500 locations, refuses to accept cash. A chain of diners in Washington state has stopped accepting cash. Delivery services such as Grubhub, Door Dash, and others have instituted “no contact” delivery policies – either stopping cash as a payment option or actively discouraging it.

Safari.com, Kenya’s largest telecommunication provider, has implemented a fee-waiver on East Africa’s leading mobile-money product, M-PESA, to encourage the use of digital payments in response to the COVID-19 outbreak. The move came after Safari.com met with the country’s Central Bank, per a directive from Kenya’s President Uhuru Kenyatta “to explore ways of deepening mobile-money usage to reduce risk of spreading the virus through physical handling of cash."

Cash usage in the U.K. halved in just a few days during late March 2020, following the Government’s imposition of a nationwide lockdown. The drastic decline in cash usage comes as people move to contactless payments to avoid COVID-19 contamination from banknotes. As a response to customers’ change in payments habits, the U.K. has lifted the ceiling for contactless card payments from £35 to £45, enabling customers to make more payments without touching card terminals or handling cash. Other countries have adopted similar tactics include the Netherlands, Germany, Norway, Saudi Arabia, Egypt, and Turkey.

The Trend to A Cashless Economy

Countries have been trending toward a cashless economy even before COVID-19 outbreak. In 2019, Statista published a World Cash Report, investigating the trends in the usage of cash by countries. As of 2018, countries that use cash the least are: U.K. (42 percent), China (40 percent), U.S. (37 percent), Sweden (20 percent), and South Korea (14 percent). Western Europe, on the other hand, seems to still favor cash.

Sweden is on track to becoming the world’s first cashless society, thanks to the country’s embrace of technology. According to a survey by Sweden’s central bank, Riksbank, around 13 percent of its population uses cash. They mainly use debit cards and their favorite mobile payment app, Swish. Forced by its citizens’ deep aversion to cash[ix], Sweden’s Riksbank, has been working on an e-krona since late 2016. In February 2020, Sweden’s Riksbank launched testing of an e-krona. If successful, Sweden will be the first nation to create a Central Bank Digital Currency (CBDC)[iii].

The trend towards a cashless economy, worldwide, will increase as Gen Z participates more actively in the economy. Today’s teen and 20-somethings are increasingly relying on mobile payments apps such as Venmo, Zelle, or Cash apps, all of which let users move money in and out of their online bank accounts through their phones. Businesses are also increasingly willing to accept Venmo payments.

Problems with Current Cashless Payment Methods

The cashless payments methods currently used include credit cards, debit cards, PIN-free contactless payments, and cash apps. Let’s look at the issues relating to these methods.

Transactions Fees: All these payment methods charge merchant transaction fees, which range between 1.15 percent to 3.15 percent (plus, on average, 10 cents per transaction), depending upon type of merchant and the brand of company providing the payment service, with American Express being the most expensive. Even the payment methods “loved” by Gen Z, Square and Venmo, charge transaction fees of 2.6 percent and 2.9 percent, respectively. Merchants will bear these costs or choose to roll-it-over to the customer.

Bank Accounts: Most payment methods will require a user to have a bank account. Square and Venmo do not require a bank account, but they will charge a fee for withdrawal or when using a credit card.

Limits: They all have account limits, and in most cases, also transaction limits. PIN-free contactless payments have a ceiling on transactions, and other Cash apps have a ceiling as well.

Intermediaries: All of the above payment methods depend on the existing payment infrastructure, which is quite cumbersome and therefore, costly. Even Venmo, which claims to be a peer-to-peer payment method and does not charge users when transferring money between friends, uses the existing payment infrastructure and its processing fee structure. Venmo simply chooses to bear these costs, while providing a free service to users. They make up for this loss by charging merchants (transaction fees, which are higher than average), and users for certain activities like withdrawals or credit cards payments.

The average credit card transaction involves some half a dozen players, as it goes from consumer to merchant to gateway processor[iv] to network to issuing bank to merchant bank and back again. For debit cards or Cash apps, it’s not much different, as transactions still need to go through gateway processors and banks.

Thus, even if it seems to the user that the transaction has been executed “immediately,” it is not settled and cleared yet. Behind the scene, it takes a few business days to be completely cleared and finalized.

The Solution – Cryptocurrency

As we move to cashless and more digital form of payments, we should earnestly consider cryptocurrency as the ultimate solution – focusing on the benefits of cryptocurrency and looking beyond the criticism and the “bad press” that it has received. Because if cryptocurrency is widely and primarily used for its intended economic use case – a peer-to-peer payment network – then there will be no room for speculators, and it will behave more like a currency than a speculative investment instrument. So, let’s look at the benefits.

Health: We started this discussion with the health risks that cash poses, and the move to digital mode of payments during the COVID-19 outbreak. With digital currency, as with Cash apps, all payment transactions are performed via smartphones. You don’t need to use any credit/debit card terminal or have others handle your credit (or debit) card. Some may argue that a smartphone surface may also carry bacteria or viruses. This is true. However, you have more control over your smartphone, making sure that only you handle it, and that it is clean and disinfected, at all times.

No Intermediaries: A cryptocurrency utilizes cryptography, peer-to-peer networking and a decentralized (public) ledger to regulate, verify and secure the transactions without the intervention of a middleman. Hence, the cumbersome and costly payment infrastructure that exists today is replaced by an efficient and transparent network.

No Fees: Since it is a decentralized network with no controlling authority or intermediaries, there are no fees – no transactions fees, processing fees, withdrawal fees, or any other type of fees.

No Limits or Minimums: Banks and payment methods that exist today are controlled by centralized authorities. Thus, they may impose certain limits on the maximum amount transferred or transacted or minimums of the account balances. A decentralized cryptocurrency does not have any restrictions. You can transfer and transact any amount and your wallet balance can be as low as a zero balance.

Instantaneous: Because there are no intermediaries, cryptocurrency transactions are truly real-time, instantaneous transactions. There is no prolonged, and sometimes error prone, clearing and settlement process. When money is transferred to a user’s account, it is confirmed and finalized, and in the blockchain parlance, it is defined as irreversible.

Transparent: A decentralized network is fully transparent. Users are able to track and view the history of all transactions, users and users’ accounts. There are no behind the scenes activities, unrevealed to the user, like in the case of a centralized payment company.

Inclusive: Cryptocurrency is a genuine solution for the unbanked – those who either do not qualify for a bank account or do not have access to a bank. Anyone can create a cryptocurrency wallet on their smartphone and from anywhere, whether they are living in a metropolitan area or living in a secluded village or on a farm. Cryptocurrency is a compelling solution, especially to the world’s unbanked community, because this is the community that cannot afford to pay the transactions fees or abide by any minimum restrictions required by banks.

Cryptocurrency has all the features needed for a cashless, efficient, borderless, and healthier (literally!) payment solution. Some may argue that cryptocurrency is too volatile. But, if cryptocurrency is widely and massively adapted and used for its intended economic use case – a peer-to-peer payment network – and not so much, if at all, for trading, then it will behave more like a currency than a speculative investment instrument. As an option you could also consider a decentralized stable coin that is pegged to a stable asset, like the U.S. dollar, but has all the other features and benefits of a decentralized cryptocurrency. Indeed, it’s high time to purposefully consider cryptocurrency as the ultimate solution for our broken (and sickened) payment system. 

Endnotes

[i] Heshiki et al. (2017) Toward a Metagenomic Understanding on the Bacterial Composition and Resistome in Hong Kong Banknotes, Frontiers in Microbiology

[ii] In 2018, only 13 percent of Swedes reported using cash for a recent purchase, according to a nationwide survey, down from around 40 percent in 2010.

[iii] CBDCs are traditional money, but in digital form, issued and governed by a country’s central bank.

[iv] Payment gateway is a tool that securely transmit the online payment data to a processor to continue the lifecycle of the transaction. In addition, it authorizes payments for card-not-present transactions, mostly in e-commerce websites.

Merav Ozair teaches Rutgers Business School undergraduate students about digital assets, cryptocurrency and blockchain. In the fall, she will begin teaching graduate students about digital assets and the future of finance.