International Monetary and Financial Law Paper

The boom in technology in recent years has led to the diversification of new payment
methods. From the creation of the cheque in the 19th century, then debit and credit cards, to mobile
payments, digital banking and cryptocurrencies today, consumers benefit from a wide range of
alternatives for carrying out their financial transactions. This multiplication of payment methods has
consequently reduced the use of paper money in transactions. The use of cash has gradually declined
in many countries around the world, thanks in particular to the convenience and popularity of mobile
phones. The arrival of digital and online banks, which by their very nature offer services promoting
account-based money over fiat money, has only amplified this effect. Electronic payments would
represent almost 90% of the value of transactions in the United States.

Even before the covid-19 pandemic, the future of fiat currency was hotly debated, with the growing
use of digital payments. The press and media regularly inform us of the potential disappearance of
cash in favor of digital payments and e-money. Paper money would be replaced by e-currency.

So, for this essay, I wanted to look at the position of cash in today's financial system, and in particular
around the topic of its future. What’s the future of cash in the more and more digitalized banking
system? Will paper money be obsolete soon and be replaced by Central Banks Digital Currencies
(CBDC)? will banknotes soon be a distant memory and become collector's items? As utilization of
paper money decrease should we keep issuing cash or get rid of it? It is through these questions that I
wish to structure my reflections.

The rise of digital technologies have not spared the financial market and the banking system,
quite the contrary. The many innovations in this field have changed the financial system from a
traditional system to a more and more digitalized one. The digitization of the banking system involves
an ever-increasing proportion of electronic payments, whether by credit card or via smartphones,
eating away more and more of the transactions made in cash. As the graph below shows, debit card
payments exploded after 2016, surpassing cash payments by 2018. This phenomenon is easy to
observe in everyday life. For example, in the early 2000s, when I was still a little girl, I used to go to
the bakery with a coin in my hand to buy bread. Today, however, whether at the bakery or in any
other shop, I'm used to pay for everything by debit card or via ApplePay, even for very small amounts
like €1. There's no need to think about withdrawing money or bringing your wallet, just your phone.
For the sake of convenience, people seem to be abandoning paper money in favor of digital money.
 The future of cash can be seen as increasingly threatened by the emergence of CBDCs. What
are CBDCs? CBDC are an electronic form of fiat currency (e-money) issued by central banks. For the
purpose of this paper, we will only look at Retail CBDC used for payment of good and services. This
CBDC project was launched in response to the rise of private cryptocurrencies. Many central banks
have pilot programs and research projects intending to determine the possibility of introduction of
CBDC in their economy. Although CBDCs are still at the research stage for most countries, some have
already experimented with the use of this new digital currency, leading to promising results. Sweden
was the first country to develop and introduce an effective CBDC concept into its economy. Similarly,
in China, the use of digital Renminbi also known as e-CNY (electronic Chinese Yuan) continues to grow
and attract new users. Japan and the European Union are also working on a digitalized version of
their currency. The European Central Bank is making progress on its digital euro project. The aim is to
enable citizens to pay for their everyday expenses in the same way as with banknotes, but in the form
of a card.

This digitalization of national currencies could be seen as a move by central banks to replace paper
money with a completely digital currency. However, this does not appear to be the path being
followed. According to the European Central Bank: “A digital euro would complement cash, not
replace it. A digital euro would exist alongside cash in response to people's growing preference to pay
digitally, in a fast and secure way”.

To decide whether we should keep fiat currency or not, we first need to take stock of its
advantages and disadvantages.

There are many reasons to believe that digital currencies are more advantageous than fiat currency.
Cash has always been associated with illegality. Indeed, cash enables the financing of illegal activities.
Without physical cash available, it's impossible to engage in off-the-books work. With digital currency,
it's impossible not to declare the transaction. Furthermore, fiat currency has the disadvantage of
facilitating money laundering and tax evasion. It's very easy for two parties to make arrangements
without the transaction passing through the banking system or being reported to the tax authorities.

We must also not forget that cash is a costly means of payment for banks. Printing banknotes,
sourcing from central banks, securing transportation, and distribution infrastructure (ATMs, etc.) are
factors that make the cost of physical currency high for banks. Cash therefore does not appear
advantageous for banks, especially since it is difficult to pass the cost on consumers. Most of these
costs do not exist with the use of digital currencies, although the cost of securing transactions must
be taken into account, which is still lower, making it a top choice for banks.

Additionally, we can also see in physical currency a security defect. Unlike digital payments, it is easier
to lose or have physical cash stolen, which requires extra caution.

Finally, although minor, a disadvantage of cash is the requirement for handling. Since money is
physical, whether banknotes or coins, every payment requires the buyer to handle the currency.
That's why we saw a decrease in cash payments during the COVID period. Many people were afraid of
the transmission of germ and virus.

Despite its disadvantages, physical currency has numerous advantages that explain why its use,
although declining, persists in the market.

First, one of the most significant advantages of physical currency is its untraceability. Cash allows for
anonymity in the transaction. Each buyer can conduct financial transactions without needing to
disclose any personal information. In contrast, due to the traceability of electronic payments, the
electronic payment system prohibits transactional anonymity since all movements between accounts
can be easily traced and monitor.

Furthermore, we cannot neglect the accessibility to all that fiat currency offers. The financial system
is before all designed to regulate the exchange of goods and services, which are the center of society.
If we decide to modify payment methods, the overall society is impacted. Cash has the advantage of
not incurring cost. It is relatively easily accessible to everyone regardless of social class and income,
which is not the case with digital banking systems. Elders, children, those with limited education, or
small incomes often struggle to access electronic payment systems due to the costs associated with a
bank account or simply the access to a smartphone and/or to internet. Similarly, cash is easy to use;
one only needs to know how to count to use it. In contrast, digital payments require higher levels of
education and digital knowledge to understand online banking, how the apps work, how to access
one's account, and how to make a payment. Taking the example of buying a book that costs 50 THB,
for many people, it is easier to hand a banknote to the cashier rather than open their phone
application to pay or to pay buy card. For many, the choice between these two options is equal, while
for others, such as the elders or young children, only the first option allows them to complete the
transaction, as the second option is either inaccessible or too complex. In this regard, cash is
incomparably practical.

Lastly, fiat currency, apart from its production and distribution, is not dependent on technology nor
energy. It has the advantage of being usable in all circumstances, which is not the case for digital
means of payment or digital currencies that may cease to function in the event of a natural disaster
or a simple power outage preventing access to the network. Similarly, it is one of the oldest legal
tenders, making it a trusted instrument.

Thus, physical currency has several benefits that cannot be achieved with digital currencies or digital
banking systems. Therefore, would it be beneficial to replace cash payments with digital payments, as
some suggest?

In my opinion, cash is not about to disappear yet and still has a promising future ahead.
Technological development is unstoppable and is indeed extremely beneficial. However, I believe the
most pertinent approach would be to preserve the key aspects of the traditional cash system while
experimenting and creating new forms of currency to complement it.

A crucial variable, in my view, to consider to answer this question is the country's situation. Indeed,
the evolution and future of cash vary depending on where we are on the globe. The future of cash
greatly depends on the country in question. Indeed, the same mechanisms cannot apply between
developed countries, developing countries, and underdeveloped countries.

In my opinion, digital currencies and CBDCs have the potential to replace cash in highly developed
economies and countries with significant access to technologies. Indeed, these countries have the
means and infrastructures to enable the exclusive use of digital currencies and digital payments. For
example, in China, paper currency is almost nonexistent, and all payments are made through Alipay
or WeChat Pay, which cover the entire Chinese economy. Therefore, it seems entirely possible to
imagine the same scenario in other developed countries such as the United Kingdom, where cash
payments accounted for only 28% of payments in 2018 (UK Finance), or in South Korea, where only
15% of payments were made in cash in 2021 (Bank of Korea).

On the opposite, in countries where the majority of the population is rural or low-income, replacing
cash with digital currencies seems unthinkable and hard to implement to me. It seems difficult to
visualized in certain regions of Africa or even Latin America where the lack of digital infrastructures
prevents the implementation and widespread adoption of these payment methods. Similarly, even in
developed countries, many transactions still occur in cash, such as in markets, small stores, and street
vendors. It seems challenging to imagine how to eliminate cash. Moreover, cash appears to be crucial
for ensuring the integration of minorities into the systems, to have a legal tender accessible for those
who cannot have access to the digitalized banking system.

Paradoxically, cash proved to be a preferred option for many during the COVID crisis. Although cash
transactions were sharply decreasing, the pandemic generate a rush towards cash as a
"precautionary savings" in France, once again demonstrating the demand for physical currency.

Even if digital payments become the norm, maintaining cash ensures a certain freedom of choice in
payment methods. The benefits of having both paper money and digital currency available are that
consumers and businesses have the flexibility to use the legal tender that makes the most sense for
them.