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Will Covid-19 sound the death knell of cash?

In January NYC lawmakers banned merchants banning cash. Last year SF mandated merchants accept cash. They may rue the day.

Covid-19 is hammering vulnerable populations and the economy. It’s also making consumers and merchants increasingly leery of transacting in dirty, potentially contaminated cash. On Visa’s April 30th earnings call CEO Al Kelly warned “Currency is a germ-carrying mechanism.” While the coronavirus will be vanquished, the economy recover, and Americans return to a semblance of normalcy, diminished cash use will be a lasting legacy of the coronavirus pandemic.

The payments industry has battled cash since Diners Club’s 1950 inception. In 2018 15.1% and 24.6% of US consumer-payment volume and transactions, respectively, were in cash, excluding mortgage payments. In most countries cash is still the leading retail-payment system.

To fight the coronavirus in March France’s storied Louvre museum stopped accepting cash. In the US Amazon’s Whole Foods has started restricting cash payments.

ATM withdrawals in the UK fell 60% yoy in the month ended April 27th.

Short-term demand for cash in some markets, however, has surged, not for transacting but as a hedge.  In Russia, about 1 trillion rubles ($13.6 billion) was withdrawn from ATMs and bank branches since the beginning of March, more than during 2019. Withdrawals spiked after President Putin extended self-isolation measures and imposed a tax on bank deposits over 1 million rubles. In the Eurozone circulating banknotes rose by €41.2 billion to €1.33 trillion, the largest increase since the 2008 financial crisis.

Fear of Covid-19 will spur greater interest in digital currencies.

Facebook and the Libra Association scaled back ambitious plans announced last year to launch a global digital currency and payment system, which provoked a din of hostility from regulators and politicians. Their rethink will keep Libra’s transaction ledger permissioned, making it less likely bad actors will get access. And Libra stablecoins will be backed by each jurisdiction’s national currency – dollars, pounds, euros, et al, rendering them akin to electronic banknotes. That won’t threaten government monopolies creating money. The coronavirus has created a signal opportunity for the social-media giant’s ambitions in payments.

Signature Bank and Chase already have digital dollars for business-to-business payments. Wells Fargo Digital Cash will launch this year. Banks could repurpose their digital dollars to replace physical cash at grocery stores, restaurants and barbershops.

The Peoples Bank of China is rolling out a digital-currency pilot in 4 cities:  Shenzhen, Suzhou, Chengdu, and Xiong’an, a satellite city of Beijing.

Fear of touching will change the familiar experience of swiping or inserting credit cards and signing, to pay for goods and services.

For a quarter of a century the US payments industry half-heartedly tried to spur contactless payments. In 1996 Mastercard in Manhattan and Visa at the Atlantic Olympics ran pilots. The experience wasn’t compelling for consumers or merchants. Swiping cards was habit and nearly frictionless.

Google Wallet, Apple Pay and Samsung Pay launched in 2011, 2014, and 2015, respectively. Mobile-wallet evangelists enthused they would usher in an era of contactless payments at NFC-enabled merchants. Joe Cardholder and Jose Merchant, however, didn’t bite.

Covid-19 is more persuasive. Cardholders and merchants don’t want physical contact. Banks are rushing to put contactless credit and debit cards in consumers’ leather wallets and purses. Mastercard’s contactless payments increased 40% in the first quarter.

Time-honored signatures at the physical point of sale will disappear. March 23, 2020 Mastercard reminded merchant processors that payments at the physical pos by card or mobile phone don’t require signatures.

In the lockdown online retailers like Amazon are booming. In April, 2020 e-commerce surged to 50% of Mastercard’s transaction volume. While vaccinated Americans will return to bars and restaurants, fly to Europe for business and holidays, and again take cruises, e-commerce will continue its multi-decade trajectory, taking share from in-person commerce.

The Covid-19 pandemic will pass, having put a damper on consumers’ and merchants’ appetites to handle cash, and changed the experience of paying face-to-face.

Facebook’s cryptocurrency Libra provokes a firestorm on Capitol Hill

Facebook’s cryptocurrency Libra has the potential to increase currency and payment-system competition globally. Not surprisingly it’s provoked a firestorm of concern and protest from regulators, politicians, and a medley of activists.

Addressing the House Financial Services Committee July 10th Fed Chairman Jerome Powell declared Libra potentially a “systemic risk” raising “serious concerns regarding privacy, money laundering, consumer protection and financial stability.” Bank of England governor Mark Carney warned it wasn’t going to start unless it was “rock solid.” French Finance Minister Bruno Le Maire thundered he would prevent Libra from becoming “a sovereign currency that could compete with the currency of states.”

Governments protect their currency monopolies. Liberty Dollar founder Bernard von NotHaus was prosecuted and convicted of making and distributing coins resembling U.S. coins. The North Carolina Western District U.S. Attorney lambasted Liberty Dollar as “a unique form of domestic terrorism” attempting “to undermine the legitimate currency of this country.”

Facebook has managed to attract political ire on both sides of the political aisle.

Senate Banking Committee Ranking Member Sherrod Brown mocked Libra as “monopoly money.” House Financial Services Chair Maxine Waters worries it might be intended “to establish a parallel banking and monetary policy system to rival the dollar.”

The day after Powell’s comments President Trump weighed in tweeting “We have only one real currency in the USA,” “it will always stay that way” and that “Facebook Libra’s ‘virtual currency’ will have little standing or dependability.”

Friends of Earth-US, U.S. PIRG, the powerful public-sector union SEIU, et al demanded a moratorium on Libra pending addressing a laundry list of concerns. Some contended Libra was “too dangerous to be permitted to proceed.”

Few argue against more payment-system competition. Currency competition, however, doesn’t square with monetary economic orthodoxy, and, is alien to most Americans. But, the dollar circulates in countries like Ecuador, Panama and Zimbabwe. Hong Kong’s currency is tied to the dollar through a currency board. In Denationalisation of Money: The Argument Refined, Nobel-Prize-winning economist Friedrich Hayek advocated permitting private currencies to compete with government fiat money.

Designed as a global digital currency Libra could do just that. It will be a “stablecoin” backed by a reserve of fiat currencies deposited at banks and short-duration government securities. Tying it to a hard asset like gold would have been bolder but also more threatening to central banks. In contrast, Bitcoin is backed by nothing more than the hope there’s a greater fool willing to buy it for more. Cryptocurrencies Tether and Pax promise to redeem each token for a dollar. Libra, however, is designed more like a mutual fund than demand-deposit liability, perhaps to reduce the risk of being regulated as a bank.

Libra’s manifesto recites a litany of do-good pieties. One doesn’t have to be a cynic, however, to understand Facebook’s commercial motivation. Libra could enable the social-media giant to increase engagement, advertising effectiveness and commerce velocity. It could pay users Libra to watch ads and discount ads and payment fees paid in its digital currency.

Notwithstanding for the moment often weak smart-phone penetration, emerging markets with weak currencies,  banking and payments systems present an enticing opportunity to boost commerce.  In Venezuela with a million-percent-plus inflation Libra might be an attractive store of value, unit of account and means of payment. Activists worry about Libra’s impact on developing countries’ monetary policies. One of the best things that could happen to countries with debased fiat money would be robust currency competition and losing control of their monetary policy.

Libra will be controlled by a Geneva-based association, not directly by Facebook. Geneva conveys neutrality. Washington prevents US-headquartered Visa, Mastercard and PayPal from operating in North Korea, Iran, Syria and Crimea. The governance model is intended to allay fears it’ll be controlled by the social-media Gargantua and create a broad ecosystem of support and participation.

Authorized resellers will buy and sell Libra, supporting processing exchanges and institutions. In the US resellers and processors at a minimum are likely to be regulated as money transmitters.

Facebook will have its own digital wallet for Libra Calibra, integrated with Messenger and Whatsapp. If Libra gets traction Google Pay, Apple Pay, Samsung Pay and PayPal will likely support it.

The two genuinely global retail-payment networks Mastercard and Visa joined the Libra association. While a new currency per se wouldn’t hurt them, a widely-adopted electronic-payment system would. In the tent they signal they’re open to payments innovation and give a di rigueur nod to Facebook’s litany to more financial inclusion. Attaching Mastercard and Visa debit cards to Libra accounts would give it instant global acceptance, albeit in fiat currencies. But, if several billion Facebook users used Libra for retail payments and to transfer funds to friends and family, it’d be catastrophic for traditional retail-payment and money-transfer systems.

If Libra runs the regulatory gauntlet in enough jurisdictions, it still faces an enormous challenge. Unless and until Libra achieves network critical mass it offers little value to anybody. In payments finding a path to critical mass isn’t easy, particularly in markets well-served by established systems. Most new payment systems, notwithstanding being putatively more secure, cheaper, or in some other respect superior, fail.

Libra threatens and stresses existing systems. No bad thing. A credible, lightly-regulated, new global currency and payment system would force existing currencies and payment systems to perform better.