The future of the paper money

[cutesakura]

The case to eliminate paper money!

Modern financial markets are behaviourally and structurally different to anything that was previously conceptualised.  It would have seemed impossible previously to assert that central banks would ever need to take interest rates below zero, but we exist at a time where that is possible and many argue necessary.  “Paying a negative interest rate on currency, or on electronic reserves at the central bank, may seem barbaric to some…” writes Rogoff, “But it is arguably no more barbaric than inflation, which similarly reduces the real purchasing power of currency.”   With any paper money in circulation, and no deflation wiggle-room, it becomes close to impossible for bank rates to (in reality) breach zero.

Paper money also provides anonymity from the government.  Rogoff notes that, “Standard monetary theory (e.g., Kiyotaki and Wright 1989) suggests that an essential property of money is that neither buyer nor seller requires knowledge of its history, giving it a certain form of anonymity. (A slight caveat is that the identity of the buyer might be correlated with the probability of the currency being counterfeit, but until now this is a problem that governments have been able to contain.) There is nothing, however, in standard theories of money that requires transactions to be anonymous from tax- or law-enforcement authorities. And yet there is a significant body of evidence that a large percentage of currency in most countries, generally well over 50%, is used precisely to hide transactions.”  This is a huge amount of physical cash; around 7% of US GDP, 10% of Eurozone GDP and almost 18% of Japan’s GDP.  In the US alone, this underground economy creates a tax-gap of around $450 billion (the European figure, with a much harsher tax regime, would be considerably larger).

The case to keep paper money

As we sit here today (perhaps in large part due to the underground economy) the demand for paper currency is outstripping the potential for that paper currency to be replaced by electronic central bank reserves.  If we were to simply stop accepting paper money, the world’s central banks would have to absorb a large proportion of the difference, perhaps upto $70billion per year in the case of the USA.  Theoretically it is possible for a government to issue currency which could be de-facto anonymous (using platforms like Bitcoin) however the potential for said money to facilitate a tax-gap and underground economy would continue (a large price to pay for a non zero-bound interest rate world…).

Rogoff also comments that“…another important argument for maintaining the status quo is that eliminating a core symbol of the monetary regime could disrupt common social conventions for using money, possibly in unexpected ways. For example, it could lead to a precipitous decline in demand for debt and not just for fiat money.”  He continues, “…just because a similar equilibrium can obtain with or without a significant transactions role for money, it does not necessarily mean that private agents will focus on the same equilibrium as they would when there exists paper currency. Yes, the government can help coordinate expectations by insisting that taxes are paid in the electronic fiat currency, and that all state contracts be denominated in this currency. But it is important to acknowledge that there is a least an outside risk that if the government is too abrupt is abandoning a century-old social convention, it will destabilize inflation expectations, introduce a risk premium into bond pricing, and generally induce unexpected macroeconomic instabilities.”

From a geopolitical perspective also, we see the threat that by eliminating a domestic currency, the population may just shift to using another- again, this is not beyond the realms of reason, many failed states have adopted the USD as the de-facto currency when that national offering ceased to serve its purpose.

The risks of living without paper…

Alongside the obvious risk of electronic currency to cyber-attack and infrastructure failure, there is also the broad-line concern as to whether a full shift to electronic currency introduces in tracking and traceability which would violate our basic civil liberties.

Despite huge and on-going technological advances in electronic transactions technologies, it [paper currency] has remained surprisingly durable, even if its major uses seem to be buried in the world underground and illegal economy…. Nevertheless, given the role of paper currency (especially large-denomination notes) in facilitating tax evasion and illegal activity, and given the persistent and perhaps recurring problem of the zero bound on nominal interest rates, it is appropriate to consider the costs and benefits to a more proactive strategy for phasing out the use of paper currency.” writes Rogoff.   

The normalisation of innovation into a society (where said innovation becomes accepted as a norm) can happen gradually, or through shocks.

Mobile communications and the internet illustrate this clearly.  In western societies, the normalisation of these technologies was relatively slow – taking a couple of decades.  In other countries however, they became the norm from day one; for many developing nations, mobile telephony and the internet were inserted into culture as a shock by development groups as the first form of reliable telecommunications ever to be in-place, and so the allied and emergent concepts built on these (such as electronic money and so forth) are not only more prevalent, but highly normalised.

For a true replacement to emerge for paper currency, the step-change in innovation would have to be more than marginally better for some of the stakeholders (as current alternatives are) it would need to be a pivot that gives states, central banks, governments, businesses and consumers a real reason to make the switch.

For my mind, I feel the solution will be more abstract.  It would be hard to see (at least in the short or medium term in the western world) a situation where paper currency is truly abandoned- the socio-cultural momentum that would require is perhaps a generation or two away, and will almost certainly require a role-model country elsewhere in the world to show it works.

What we are seeing however is that technology has enabled transactions to occur in the middle-ground between barter and money.  Fundamentally money exists when the community using it agrees that it is an acceptable, secure and sustainable store of value.  Crypto-currencies and many other technologies  in the space are giving credible platforms on which the notion of money can exist.  The pace of technological development also means that these platforms move much more rapidly from the development world into the real world; where they can live or die in the markets.

In the future, we could have three layers of currency in our world.  A macro layer enabling central banks to trade with each other (perhaps using some modified form of the SDR), a sovereign layer enabling nations or country alliances (such as the EU) to have a core currency as their systemically important money-supply and a third layer; the civic layer- where the community itself creates currencies to facilitate trade between themselves with freedom from policy interference.

More so than any of this, we have to remember that money is a human invention, and a human technology.  As Ayn Rand said,  “Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.”

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[mark78]

As for me there is no future in paper money,cause you can`t keep $10k in you pocket.But with btc,you won`t have any troubles.

[faridkifly]

i think paper money will never replaced. because paper money has been there since long ago
and to replace paper money requires a very long time, because we had to change habits 

[hoian0809]

i think paper money will never replaced. because paper money has been there since long ago
and to replace paper money requires a very long time, because we had to change habits 

I think it will. Not in the close future. People like to see what they own, it gives them a sense of security holding their money and knowing they have it. However, people will slowely lean away from paper money and everything being a digital currency as it is a much easier medium to use for purchasing goods.

[1K]

Paper money will dissapear over time naturally, but the central banks/govs will still issue whatever currency as they wont want to give all the power and control away. It would be great if bitcoin overtook fiat currencies naturally and people just gradually moved over to that and refused to use any state backed currency.

[HeroCat]

In your lifetime paper money will exist, there are many countries in the world, where people using mainly only paper money 

[zodiac3011]

because digital currency is decentralized, the government can get their hands controlling it which makes them quite useless while paper money are easy to track, totally backed by the government so they can do what they want with it: printing, holding, tracking,... If the government decides to incorporate with digital currency, there will be nothing good as they will try to alter it and control it. Furthermore, they still don't really love bitcoin so why the hell do they want to create one and use it? So paper money are still going to be the trend for a while

[AdopterOfCoin]

As for me there is no future in paper money,cause you can`t keep $10k in you pocket.But with btc,you won`t have any troubles.

One hundred years ago, you could not keep $100 in your pocket. Today, you can easily keep $1k in your pocket. In 10 years, you can keep $10 in your pocket easily. Bitcoin is futuristic, You can keep numerious bitcoin in your pocket. It beats all the currencies.

[RealBitcoin]

As for me there is no future in paper money,cause you can`t keep $10k in you pocket.But with btc,you won`t have any troubles.

One hundred years ago, you could not keep $100 in your pocket. Today, you can easily keep $1k in your pocket. In 10 years, you can keep $10 in your pocket easily. Bitcoin is futuristic, You can keep numerious bitcoin in your pocket. It beats all the currencies.

You can keep a billion $ worth of bitcoins in your pocket if its encrypted, and nobody knows its there, because they might try to force you to reveal your password.

It's not the pickpocketing thats the big danger but the extortionists robbers.

[AdopterOfCoin]

As for me there is no future in paper money,cause you can`t keep $10k in you pocket.But with btc,you won`t have any troubles.

One hundred years ago, you could not keep $100 in your pocket. Today, you can easily keep $1k in your pocket. In 10 years, you can keep $10 in your pocket easily. Bitcoin is futuristic, You can keep numerious bitcoin in your pocket. It beats all the currencies.

You can keep a billion $ worth of bitcoins in your pocket if its encrypted, and nobody knows its there, because they might try to force you to reveal your password.

It's not the pickpocketing thats the big danger but the extortionists robbers.

Or the government trying to tax the last bit out of your pocket. Everything goes to government eventually.

[Amph]

As for me there is no future in paper money,cause you can`t keep $10k in you pocket.But with btc,you won`t have any troubles.

One hundred years ago, you could not keep $100 in your pocket. Today, you can easily keep $1k in your pocket. In 10 years, you can keep $10 in your pocket easily. Bitcoin is futuristic, You can keep numerious bitcoin in your pocket. It beats all the currencies.

You can keep a billion $ worth of bitcoins in your pocket if its encrypted, and nobody knows its there, because they might try to force you to reveal your password.

It's not the pickpocketing thats the big danger but the extortionists robbers.

Or the government trying to tax the last bit out of your pocket. Everything goes to government eventually.

how can they know about your treasure? the only way is if you convert a portion

then they can ask you if you have more, another way is if you buy something very expensive in bitcoin

if you buy small thing here and ther,e there is no way they can ever know about it

[thejaytiesto]

As for me there is no future in paper money,cause you can`t keep $10k in you pocket.But with btc,you won`t have any troubles.

One hundred years ago, you could not keep $100 in your pocket. Today, you can easily keep $1k in your pocket. In 10 years, you can keep $10 in your pocket easily. Bitcoin is futuristic, You can keep numerious bitcoin in your pocket. It beats all the currencies.

You can keep a billion $ worth of bitcoins in your pocket if its encrypted, and nobody knows its there, because they might try to force you to reveal your password.

It's not the pickpocketing thats the big danger but the extortionists robbers.

Or the government trying to tax the last bit out of your pocket. Everything goes to government eventually.

how can they know about your treasure? the only way is if you convert a portion

then they can ask you if you have more, another way is if you buy somethign every expensive in bitcoin

if you buy small thing here and ther,e there is no way they can ever know about it

True, but what is the point of being a millionaire if you can only buy small things with them?
Imagine that in 10 years, your bitcoin stack is worth a million dollars. Will you really just use it to buy a new computer or new shoes or something?
If you can't use it to buy big things and invest, you aren't really rich. Unfortunately, I don't see any other ways around this but getting taxed. So if your Bitcoins are worth a million, after taxes I have no idea how much they will be.. I assume a lot less. But you will be able to buy a house and rent it, or invest it in something else that gives you more money back. You can't do this with untaxed Bitcoin..

[AdopterOfCoin]

I dont even care about taxing it, they could create a legal tender cryptocurrency that would have transaction tax implemented in it, and that would be it.

I am a big proponent of transaction tax, only, and this TX tax would replace all other taxes (income,VAT, property,tariffs,etc.)

A constant 1% tax on every transaction would be a fair tax, and no other taxes. It would be hardcoded into the protocol and the genesis address would be owned by the government.

This would keep politicians happy, and would be significantly better than a 30% income tax. But bitcoin would serve as a tax free commodity to hold your reserve in

1% tax hard coded into the protocol? I do not think we get that consensus all over the world, even though I think unified tax is better.

[Supercrypt]

As for me there is no future in paper money,cause you can`t keep $10k in you pocket.But with btc,you won`t have any troubles.

One hundred years ago, you could not keep $100 in your pocket. Today, you can easily keep $1k in your pocket. In 10 years, you can keep $10 in your pocket easily. Bitcoin is futuristic, You can keep numerious bitcoin in your pocket. It beats all the currencies.

You can keep a billion $ worth of bitcoins in your pocket if its encrypted, and nobody knows its there, because they might try to force you to reveal your password.

It's not the pickpocketing thats the big danger but the extortionists robbers.

Or the government trying to tax the last bit out of your pocket. Everything goes to government eventually.

how can they know about your treasure? the only way is if you convert a portion

then they can ask you if you have more, another way is if you buy somethign every expensive in bitcoin

if you buy small thing here and ther,e there is no way they can ever know about it

True, but what is the point of being a millionaire if you can only buy small things with them?
Imagine that in 10 years, your bitcoin stack is worth a million dollars. Will you really just use it to buy a new computer or new shoes or something?
If you can't use it to buy big things and invest, you aren't really rich. Unfortunately, I don't see any other ways around this but getting taxed. So if your Bitcoins are worth a million, after taxes I have no idea how much they will be.. I assume a lot less. But you will be able to buy a house and rent it, or invest it in something else that gives you more money back. You can't do this with untaxed Bitcoin..

Yes, if my bitcoins or one bitcoin worth one million dollars means I will not work any more. From the bank interest or from lending money I can make a decent living in my country. But I need to take care of taxes which may not allow one million completely with my bitcoin earnings.

[bitart]

I dont even care about taxing it, they could create a legal tender cryptocurrency that would have transaction tax implemented in it, and that would be it.

I am a big proponent of transaction tax, only, and this TX tax would replace all other taxes (income,VAT, property,tariffs,etc.)

A constant 1% tax on every transaction would be a fair tax, and no other taxes. It would be hardcoded into the protocol and the genesis address would be owned by the government.

This would keep politicians happy, and would be significantly better than a 30% income tax. But bitcoin would serve as a tax free commodity to hold your reserve in

1% tax hard coded into the protocol? I do not think we get that consensus all over the world, even though I think unified tax is better.

It will surely not be a consensus about the 1% of tax. In the EU, countries started to use the TX tax, the rate is totally different. Just an example: somewhere the bank transfer and the cash withdrawal uses different rate, only POS purchase at a merchant is free from transaction tax.
They implemented this tax paralell with the other taxes that were already in use, and they didn't decreased any of the taxes.

[HarryKPeters]

There will always be psyhical  shops and they need a tender, i can't see paper/coin money dissapear.. ever. What i do see is that the amount of transactions with psyhical tender will decrease till less then 1% of all transactions. That day none of us will see though.

[cellard]

Cash will be something of the past that only old people use in isolated villages, or maybe weird hipster people (and that's if it doesn't become straight illegal). The rest of the people will be using either centralized e-fiat or Bitcoin.

[CryptoBjorn]

The need for e-money is growing. Paper money is oldskool and card payments are slowly taking over. From there wireless payments will take over.

Since bitcoin can be used in both wireless and card payments, a big oppertunity has come. Give if 5 years and we will see major party's getting rid of paper money which is;
expensive to print & store
hard to protect & safeguard
just dirty

[Meuh6879]

the problem is not the "e-money" ... the problem is the QE associate to this.
that's why Bitcoin win at the end.

because QE don't serve people.
bitcoin serve (and save) people.

https://www.youtube.com/watch?v=joITmEr4SjY

[pitham1]

the problem is not the "e-money" ... the problem is the QE associate to this.
that's why Bitcoin win at the end.

because QE don't serve people.
bitcoin serve (and save) people.

https://www.youtube.com/watch?v=joITmEr4SjY

QE is an extreme form of currency debasement. It is tough for governments to have access to easy money and resist the temptation to take it. Currency debasement has existed for centuries.