Why is the World heading towards a Cashless Economy?

Decades back it was impossible to think of a world without any physical cash. Interestingly, money often has no intrinsic value. Instead, money is an object that has a value placed on it, which allows for the trade of goods and services. Coins on the other hand have some actual value in terms of the materials used.

During the early days way before money was invented, people bartered for goods and services. The history of bartering dates back to 6000 BC. Introduced by Mesopotamia tribes, bartering was adopted by the Phoenicians.

Traditionally, bartering systems were used within the local community. Due to its certain limitations the bartering system was facing a lot of problems and confusions among people who use it as the society was evolving.

Early currencies were “commodity money,” meaning they derived intrinsic value from the precious metals they were made of. However, the impracticality of commodity money created the shift towards “representative money” , the money that lacks intrinsic value but is backed by its ability to be traded for a physical commodity. First paper money was created in China in 700 to 800 A.D., it would be a long time before paper currency was commonly used.

Then came the gold standard and the gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. That fixed price is used to determine the value of the currency.

The drawbacks of the gold standard became clear during World War I. The gold standard left little room to adjust the money supply because new money could only be issued with a new supply of gold.

In the wake of the government deficits during the war, many countries were forced to abandon the rigid gold standard to print money freely. Following World War II and the Vietnam War, representative money was officially abandoned globally in 1971.

The end of representative money ushered in our current form of currency – Fiat money. Fiat money does not possess intrinsic value nor is it backed by commodities.

Rather, its value is determined by supply and demand, backed by the creditworthiness of the issuing government. Main disadvantage of the fiat currency system is there's no universal currency.

Therefore, to purchase goods and services in a different country, one must convert their currency to that of the other nation, and most governments impose exchange rates for these conversions. Also, inflation increases the prices for goods and services within an economy and, subsequently, erodes a currency's purchasing power.

And the most important evolution was the introduction of banks. The first banks were established by the roman empire around 1800 B.C. These banks offered loans and accepted deposits from individuals, but would later disappear with the collapse of the empire.

By the turn of the 19th century, banks had become respectable organizations within communities and learned the concept of fractional reserve banking. With the banks then came new financial trends as people started using the banks and most new products and tools were introduced.

With paper money being widely circulated and used by most, problems like bank robberies, burglaries and corruption increased. Because cash is mostly untraceable, it has become a big advantage for criminals.

People were scared to carry money or hold it in their homes and were looking for options for cashless transactions and at the same time cash storing options with easy accessibility around the clock.

In 1969, America's first automatic teller machine (ATM) made its public debut, dispensing cash to customers at Chemical Bank in Rockville Centre, New York. ATMs went on to revolutionize the banking industry, eliminating the need to visit a bank to conduct basic financial transactions. After ATM’s Banks started introducing more easier money less transactions by issuing Debit and Credit Cards, Online payments,etc.

In recent years, the global economy has witnessed a significant shift towards digital transactions, leading to a growing trend of moving away from physical cash.

The adoption of digital payment methods and the emergence of new technologies have propelled the world towards a cashless economy. With the Internet boom and growth of eCommerce, online payments have increasingly become more convenient worldwide.

In 2020, credit cards were the most commonly used payment method in the U.S. Today, online payments are one of the most popular ways to pay for goods and services. With online payments, you can simply enter a credit or debit card number on a website and pay for the goods you want.

Online payments can also be made using a bank account number and routing number, but that process can take several days. When you make online payments through a debit or credit card, your card is typically charged right away.

Then came the biggest evolution in cashless transactions with the introduction of Digital Currency. On 3 January 2009, the bitcoin network was created and it changed the world. With the introduction of the crypto currencies world elevated to a new phase. These currencies have a value assigned to them just like any other type of money, with billions of dollars in digital money being transferred all the time.

With the hassle of using banks with their anti money laundering policies, certain rules and regulations implemented by countries, some banks and financial institutions went bankrupt or rogue and leaving many depositors penny less. So the people who wanted to enjoy the freedom started moving into crypto currencies largely.

With introduction of many block chains such as Ethereum chain, Binance Chain, Solana Chain and many more the crypto currencies bloomed. Resulting in many new crypto currency tokens or coins flooding the market.

With the wide use of crypto currencies Decentralized Finance also commonly known as DEFI was introduced. Decentralized finance is an emerging financial technology based on secure distributed ledgers similar to those used by cryptocurrencies.

What are the reasons behind this transformation and the potential implications it carries?

1. Convenience and Efficiency

One of the key drivers of the cashless economy is the convenience and efficiency it offers. Digital payment methods, such as mobile wallets, contactless cards, and online banking, provide ease of use, speed, and accessibility.

With just a few taps or clicks, individuals can make payments, transfer funds, and track their online transactions in real-time. This convenience has reshaped consumer behavior and increased the preference for cashless transactions.

2. Technological Advancements

Advancements in technology have played a crucial role in fostering the transition towards a cashless economy. The proliferation of smartphones, improved internet connectivity, and the rise of fintech companies have enabled the development and adoption of innovative payment solutions.

From mobile payment apps to biometric authentication, these technologies have made digital transactions more secure, reliable, and user-friendly.

3. Cost Reduction

For governments and financial institutions, transitioning to a cashless economy can lead to cost reduction. The production, transportation, and storage of physical cash incur significant expenses.

By promoting digital payments, economies can save on printing and minting costs, cash handling fees, and the maintenance of physical infrastructure like ATMs. Additionally, cashless transactions can streamline administrative processes, reduce fraud, and enhance transparency.

4. Financial Inclusion

Moving towards a cashless economy can contribute to financial inclusion, especially in regions with limited access to banking services. Digital payment platforms provide opportunities for the unbanked and underbanked populations to participate in the formal financial system.

With the help of mobile phones, individuals can now receive salaries, make payments, and access financial services, bridging the gap between traditional banking and underserved communities.

5. Data Analytics and Security

Digital transactions generate vast amounts of data, offering valuable insights for businesses and governments. Analyzing consumer spending patterns can help companies tailor their products and services to meet specific demands.

Additionally, digital payments can enhance security measures through encryption, fraud detection algorithms, and biometric authentication, making it more difficult for illicit activities like money laundering and counterfeit currency circulation.

The world is steadily moving towards a cashless economy driven by convenience, technological advancements, and cost efficiency. Online transactions have revolutionized the way individuals and businesses conduct transactions, offering speed, convenience, and financial inclusion.

However, it is essential to carefully navigate the challenges and implications associated with this transition to ensure the security, privacy, and accessibility of financial systems for all.

As digital infrastructure continues to improve, the benefits of a cashless economy are likely to become even more apparent, leading to further advancements in financial technology and payment systems.