Welcome to the cashless world

3 years ago   •   5 min read

By Fernando Sanchez

A global financial revolution.

If someone asked you for a dollar to show off a magic trick, would you pull one out of your pocket or ask them if they accepted a card instead? Chances are not carrying any cash. However, it’s likely that you do have access to fiat money through a debit card, phone wallet payments, or even biometric verification. Turns out the magic trick is being done on the whole world fiat currencies are slowly disappearing.

We might just be on the cusp of a cashless society, as the world moves towards wallets full of digital dollars, instead of hard cash. Currently, in the UK only 30 percent of transactions involve cash. In Sweden, this number drops to 3 percent. As smartphone wallets take the lead as payment facilitators across major financial and technological hubs, the trend will inevitably spread globally.

But this begs the question, what’s leading to the decline of the once-mighty cash?

The evolution of value exchange: From bartering to digital payments

Cash goes back a long way. Historians and researchers generally agree that cash was first used as a method of exchanging value as far as 500 centuries back (The earliest minted coins date back to 650-600BC). Before that, communities used bartering to obtain goods and services.

Bartering - the oldest known form of commerce, first used around 6000BC - involves no money. It’s based around the simple concept of negotiating the relative value for an item (say, a kilogram of carrots), and exchanging that item for someone else’s goods, or services consistent with the value assigned to the carrots. Some items were more valuable than others, of course. Fur, spices, weapons, even salt. (In Roman times for example, salt was considered such a valuable commodity that Legionnaires were paid with it. The monthly payment was called salarium -sal is Latin for salt-, which evolved into today’s term salary.)

The introduction of cash as the main means for exchanging goods and services did not eliminate bartering completely. During the Great Depression of the 1930s, for instance, cash became scarce, so people would revert to obtaining food and services through this centuries-old method.

Bartering has its pros and cons. One does not need money to barter, only skill. Also, it allows for greater flexibility, and you do not need to use material things to barter. You can offer your mechanical skills to fix someone’s car in exchange for, say, a bike.

The downside of bartering is that it requires trust between the bartering parties, something that wasn’t always there. The possibility of getting ripped off was high, as there’s no way of determining the legitimacy or provenance of items being bartered.

Over time, cash became the de facto means of carrying out financial and commercial transactions around the world, though paper money would be introduced relatively late in the game. (The invention of bank notes is attributed to the Chinese, circa 700BC, though many parts of Europe still used coins as sole currency by the 16th century).

Cash has distinct advantages over bartering. It is portable, has a definite face value (unlike bartering items), enables reciprocity between communities, and provides instant access to funds. But cash does have its drawbacks. It can be stolen, it’s relatively easy to counterfeit (you cannot counterfeit livestock used in bartering, for example), and incurs significant security risks. Large amounts must be guarded in vaults or secure facilities, which requires staff, power to run, and so on.

These legacy financial systems and infrastructures built around cash and fiat currencies are gradually becoming increasingly inefficient, expensive, and unwieldy to operate. The rising cost of transactions, maintaining physical branch networks, and the development of 24/7 online businesses, is making traditional banking unsustainable in the long term. While digital payments are currently facilitated by banking networks, it is becoming more and more likely that a shift to cryptocurrencies will occur in the future.

Digital payments v crypto payments

It is worth taking a moment to establish the differences between digital payments, which are facilitated by banks, and cryptocurrency payments.

A digital bank payment acts as an IOU (that is, an acknowledgment of debt) between two or more banking institutions. Each transaction is simply a promise to fulfil that financial obligation. A transfer of crypto assets, on the other hand, involves the transmission of actual currency between parties. This involves no middlemen to facilitate the transaction. While this might seem a small distinction, it is a powerful value add for all participants in the cryptocurrency ecosystem.

Blockchain technology makes this revolution possible by providing a single source of truth through interconnected ledgers. Instead of storing a vast amount of currency in a vault or within a network of investments, users of cryptocurrencies can become their own banks. This shift into a cashless future opens up new possibilities for personal finance, interaction with global markets, and the creation of new methods for gaining liquidity. While this is an important shift in the developed world, it could prove revolutionary for the economically disenfranchised portion of the globe.

As digital currencies become integral parts of the global economic system, the price to transfer money internationally will drop. At present there are 1.4 billion people living on less than $1.25 a day. People in these developing countries often rely on remittances which often incur fees of up to 20 percent. More of this wealth is lost in transit due to theft, bribery, and failures of untrustworthy middlemen. Digital currencies overcome these difficulties by empowering everyone to be their own financial stewards.

Digital finance also opens the door to the creation of new forms of capital development. When combined with an identity platform such as Atala PRISM, users will be able to build their reputation in order to access credit, start businesses and own property. This financial freedom allows participants to be emancipated from the constraints of legacy systems while pooling financial resources in local communities rather than tightening the control of centralized actors. But the transition to a digital economy must be made thoughtfully.

Slow digital transition

There is a danger in moving too quickly away from fiat currencies. If economies evolve too rapidly, then a significant portion of the global population can be left behind. Inclusion must be at the forefront of the move to a cashless society. This means that individuals will have to adapt to new ways of protecting their wealth, identity, and information. On top of this, older and less tech savvy populations will be exposed to particular risks due to their inexperience with electronic payments. Data security, establishment of international standards, and constraining governmental control are all important concerns that must also be addressed. This is why the transition from fiat to digital currencies must be made with all users in mind, rather than just those in major global economies.

Bridging the gap with Atala PRISM

Atala PRISM was built with both the opportunities and challenges of digital finance in mind. Ultimately, it seeks to create a single decentralized platform through which users will be able to secure their identity, protect their wealth, and store important credentials. By establishing user identity in a decentralized system, we can ensure that an individual is who they say they are. We can also make certain that the user is the ultimate agent of their own information, which makes exploitation through hacking centralized servers much more difficult.

Some of our most recent projects include working with the Government of Ethiopia to issue the first government-endorsed digital identity solution based on Atala PRISM with the ultimate goal of enabling financial inclusion. We have also partnered with World Mobile Chain (WMC) to enable open finance in Tanzania first and then across Africa.

To learn more about Atala PRISM and discover the opportunity decentralized identity can offer your organization, contact us at business.development@iohk.io.

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