Of all the futuristic promises that were made at the end of the 20th century, mobile digital payments is one of the handful that our society has delivered. Whenever you have to pay for something, there is a very good chance you can do it with your card, phone, or even watch. During the first decades of the 21st century, cash has gone from the primary American form of payment to third place. Debit cards jogged past in 2018, and credit cards followed in the first pandemic year, 2020.
Now, cash usage has dipped below 20 percent of transactions, only seven points above direct bank transfers and only five above “other.” Every day, we inch closer to the mythical cashless society, a transition that is great for the companies that manage the digital money system but not necessarily wonderful for the rest of us.
There is an undeniable measure of convenience to digital payment. At its best: beep, buzz, go. Convenience, however, rarely comes without a cost, and here there are a few. In his forthcoming book, Cloudmoney: Cash, Cards, Crypto, and the War for Our Wallets, journalist and former derivatives broker Brett Scott sets out to convince the reader that we all have something at stake in the war on cash. Scott’s target is the campaign to computerize all transactions and the corresponding vision of a predestined historical arc from cha-ching to beep-boop,as promoted by anti-cash interests. What he shows is that a cashless society would be so fast it’s guaranteed to leave some people behind.
It is better for the banking and payment-processing cabal if we do not understand what it does exactly. We imagine it goes something like this: There are bills in a vault somewhere on a shelf with your name on it, a magnetic card lets you access the pile, and the bank squares the accounts at the end of the day. The bank card becomes an object with which you can perform the physical acts of money payment. Phone payment apps even include skeuomorphic pictures of plastic cards, giving them a link by proxy to the vault of cash.
This is, Scott explains, a misunderstanding. It may surprise the reader to learn that there are, in fact, two kinds of money. The cash we recognize as money, the bills with the government guarantees and all of that, is called “base money.” The money we access when we swipe a card is “bank money,” and it is issued not by the state but, as the name indicates, by a bank. Scott uses the helpful metaphor of a casino, which changes your dollars for dollar-denominated chips at the entrance. Banks do the same thing: Once you deposit your cash, the numbers in your account refer to bank money; there is no stack in a vault with your name on it, just a line on an index of account holders. Customers “cash out” by visiting ATMs or teller windows. Much like casinos, banks would rather you not do that.
Banks do hold reserves of base money, but this stockpile need only constitute a fraction of the bank-money chips they issue — that’s why it’s called “fractional reserve” banking. When a bank makes a loan, it doesn’t take your cash and put it on another person’s shelf; it simply stamps some new chips. The banks are left in a very powerful position: Not only do they decide who is worth printing money for, but they can charge fees on their own chips. It’s no wonder banks don’t want customers to use cash.
App banking is like driving a car: It feels frictionless only if you don’t think about how cars work. As Scott explains, cash is like a bicycle. It’s not as fast or smooth, but you don’t need to get a license to ride, and your vehicle isn’t dependent on an Earth-destroying fossil-fuel industry. “‘Going cashless,’” he writes, “is like closing down bike lanes that run parallel to roads in a city of cars.” Car companies have worked hard to narrow the portion of American thruways allotted to bicycles and pedestrians, and the banking industry has done the same. In 2018, Visa rewarded 50 small businesses with $10,000 in its “Cashless Challenge” sweepstakes — a smart investment in future fee income. The industry has propagated the term unbanked, shifting it from a geographical descriptor about market penetration to a personal adjective, as if every human being has an inalienable right to get ripped off by Wells Fargo.
Despite how well they go together, banks were not especially quick to introduce digital consumer interfaces, which opened the financial-technology — or “fintech” — space for aspiring disruptors in Silicon Valley. But fintechs, Scott writes, “on average, do not bypass the existing financial system but plug into it.” PayPal is the most successful example: Supposedly a revolutionary peer-to-peer technology, it became just another layer. “‘Dollars’ in your PayPal account are third-tier chips,” Scott writes, “that promise you second-tier bank chips that promise you first-tier U.S. government dollars issued by the Fed.”
There are dangers to thinking about dollars on your phone as dollars in real life. “Stablecoins,” for example, are what bank dollars call themselves when they’re not issued by banks — or, if you’re being slightly less charitable, casino chips when they’re not issued by casinos. Distributed ledger technology — better known as “blockchain” — allows for a permanent and public list of holders, which means firms can offer their own chips without leaving users worried that a tricky manager is going to alter the list when no one is looking. These stablecoins are the bank money of the crypto market, and they are supposed to be “full reserve” since there’s no state guarantee in the background. But, as we’ve seen, money comes in different forms. Maybe stablecoins are backed one to one with bank money and base money and their equivalents, but maybe they’re not.
The issuers of “algorithmic” stablecoins make calculations and investments that are supposed to ensure their reserves are always ready to back the coins in the case of a run. This is essentially fractional-reserve coining, and when it goes wrong, you get Terra, an algorithmic stablecoin that fell off its peg almost all the way to zero, wiping out tens of billions of dollars in money. Well, phone money anyway. The bank money that people invested into the scheme didn’t disappear, even if holders could no longer cash out their worthless chips for it. The people who were smart enough to draw down early got theirs; rumors are that Terra insiders exchanged billions of dollars in chips before the whole thing came down.
There is little risk that Bank of America chips or even PayPal chips are going to zero or even 99 cents. (Tether chips? I wouldn’t be so sure.) But that doesn’t mean we should bulldoze the payments bike lane. Pointing to the three-way incestuous overlap between the banking, fintech, and crypto sectors, Scott notes that they all share the same oligopolistic structure: A handful of big players compete and collaborate and get rich, and, most of the time, most of us don’t have to worry about the relationship between the dollars on our phones and dollar bills backed by the full faith and credit of the United States of America. But not everyone drives a car.
Anyone can hold base money — you can literally just hold it — whereas bank money is subject to bank conditions. Electronic purchases generate data linked to your personal identity, which can be used for all sorts of purposes ranging from innocuous to nefarious. Americans under 18 need an adult co-signer for a savings account. Immigrants without legal documents may not be able to get one nor people without fixed addresses. Unlike the government, banks can have minimum-deposit requirements and charge all sorts of fees. Processors and fintech firms are subject to arbitrary political pressures, and anti-porn extremists have used this vulnerability to attack sex workers. Cash doesn’t discriminate, but Mastercard might.
There has been some pushback against cashless operations, and some progressive municipalities have passed rules requiring businesses to accept government money. But there are powerful anti-cash interests; in 2019, emails between Amazon and Philadelphia officials regarding the language of the city’s pro-cash rule leaked, revealing efforts to stall the legislation and then to write in an exception for Amazon’s cashierless Go stores, which are not built for hard currency. A pro-cash bill in Florida died in the legislature earlier this year. It’s a live political issue, but I fear it won’t be for long. Cash requires some critical mass of users to function. As a Franklin Avenue barista explained to me on a recent trip to Brooklyn, the shop does technically take cash, but he couldn’t; there were no bills in the drawer.
In other words, you can’t ride a bike on the highway. Scott’s metaphor points to the possibility of a larger political position: If cash is a bicycle, then what would the financial equivalent of an urbanist political agenda look like? It would include lots of large bike lanes, for one, but also subsidized public-transit options, like buses (postal banking) and high-speed trains (central-bank digital currencies). And, most important, walkable neighborhoods — the kind of communal relationships that aren’t mediated by money at all.