Last month, the U.K. government put out a "national risk assessment of money laundering and terrorist financing." The document ranked payment media by the level of risk they represent. Cash was rated a "high" risk for terrorist financing, the traditional banking system a "medium" one, and e-money and virtual currencies a "low" one. "Digital currencies are currently not a method by which terrorists raise or move money out of the U.K. (though they remain a viable method for doing so)," the report said.
Governments are aware that the circulation of cash -- anonymous, untraceable, universally accepted -- poses the greatest danger in feeding all sorts of underground activities, including terrorism. The Bank of England estimates that only about a quarter of the cash in circulation is used to buy things; the rest is hoarded or used in the shadow economy. In France, it's been illegal since September to make cash payments of more than 1,000 euros ($1,070), though the limit is higher for foreign visitors, 10,000 euros. Cash deposits and withdrawals of 10,000 or more are reported to the country's anti-money laundering agency. That, however, is not particularly efficient: In the underground economy, much bigger amounts will keep changing hands, and cash couriers will continue crossing borders, ignoring the financial system that is visible to the authorities.
The crackdown on cash in its current form can perhaps reduce small-time tax dodging. But it won't mop up the hundreds of billions of dollars already circulating in the underground economy -- or in countries with a low uptake of cashless payments. Cash accounts for about 85 percent of consumer transactions worldwide. In the U.S., only 45 percent of such transactions are cashless; in China, just 10 percent.
All kinds of people, not just criminals and tax dodgers, like cash, mainly because it's still more convenient than any other form of payment. It works when power is down, it's not subject to computer glitches, you're lucky if you have it when the government declares a forced bank holiday as it did in Greece last summer (plastic card payments were allowed in that case, though, so holding cash wasn't a huge advantage). Privacy -- the main argument of the intellectual opponents of a cashless society -- is also a concern: Instinctively, people don't want all their transactions to be transparent to governments, even when they're not doing anything illegal.
Consider, however, what would happen if cash were banned but alternative currencies were freely allowed to circulate.
People would be forced to convert their cash savings to bank deposits. In itself, that's a nasty proposition for consumers: It wouldn't just allow governments to monitor all transactions, it would also let them take interest rates below zero, forcing people to pay banks to hold their money. That opportunity is the main reason why some economists are calling for the abolition of cash.
The free circulation of decentralized virtual currencies, however, would put a damper on governments' extortionist moves, letting people exchange their money for what is in effect a virtual commodity that, unlike money, is not state-issued. Interest is an alien concept to the bitcoin world, though there are schemes that allow one to earn it; banks will want to offer depositors something to prevent them from fleeing into the virtual world, and governments will have a reason to back them if they want more control over transactions.
It's likely then that most people will want to keep their savings and borrow in traditional money. Bitcoin and its kind will be useful only for transactions that require privacy and also as a risky alternative investment: The volatility of bitcoin's exchange rates is far greater than any other currencies or money-like commodity.
That volatility, however, would make the alternative system risky for terrorists to use. Groups like Islamic State and their contractors don't want a means of payment that can lose half of its value in a day. They may still want to use bitcoin because it'll always be harder (though not impossible) to trace than the movement of funds in the traditional banking system, but the risks will be much higher than with cash, and the exchange rate will be open to government manipulation ( it is now, though governments don't use the opportunity).
Cash use is shrinking in the developed world, anyway. So perhaps attempts to cut off terrorist funding will usher in a cashless financial system earlier than it would have developed by itself. It's important, though, to give people alternatives, perhaps in the form of virtual currencies. Cracking down on them is not going to be helpful, and it won't hurt terrorists as much as a move away from cash would.
Leonid Bershidsky, a Bloomberg View contributor, is a Berlin-based writer. For more columns, visit Bloomberg View
