Understanding the War on Cash

A world without cash! Motley Fool senior analyst Jason Moser recenlty caught up with Brett Scott, author of Cloudmoney: Cash, Cards, Crypto, and the War for Our Wallets, to discuss:

• Incentives in the war on cash.
• How money transforms when it moves from your wallet to a Venmo account.
• Why cash is like an emergency staircase.
• How COVID changed the way we use money.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on August 7, 2022.

Brett Scott: I might find it useful to use elevator to get to the top of a skyscraper, but that doesn't mean I want the emergency stairs removed. In many senses, the cash system is like the emergency stairs, the payment systems, extremely resilient, doesn't go down when the power goes down or when the hurricane hits. Actually it's an extremely important system, and actually it's more advanced in many situations than digital payments are.

Chris Hill: I'm Chris Hill and that's Brett Scott. He's the author of the new book, Cloudmoney: Cash, Cards, Crypto, and the War for Our Wallets. For the past five-years on this show, we've talked a lot about the war on cash, but today, we're taking a closer look at the other side of the war on cash. Jason Moser interviewed Scott about the implications of moving toward a cashless society. How money transforms when it goes from your wallet to a Venmo account, and why fintech companies really don't want to become banks.

Jason Moser: Brett, your position on cash comes from not really politics, but rather a critique of financial capitalism as you mentioned in the book. Let's get started. Tell us a little bit about your background in finance and what inspired you to write this book.

Brett Scott: Sure. I actually worked in, I guess, high finance for awhile, which was in the realm of over-the-counter derivatives contracts. Particular swap contracts. This was during the financial crisis and these are considered exotic derivatives. People often think of ease is very complicated instruments that are hard to understand. I found when I was working in high finance, lots of people, they had very high opinions of their financial skills, but often actually wouldn't really understand much about the monetary system. It turns out to be a high finance trade, you don't really need to understand the huge amounts, but how the monetary system works.

I was working that for a little while and then I left and read a book called The Heretic's Guide to Global Finance, which was a book basically for ordinary citizens who are concerned about the financial sector and who are interested in finding new ways to challenge its power or to build alternative types of finance. That book came out 2013, and then since then, I moved into working lots of different financial reform campaigns, but also working on potential alternatives including alternative currencies, alternative banking, alternative fund management, all stuff like that. By alternative, I mean, alternative to business as usual, thinking about new types of finance that might be better for society. This eventually took me into looking at this realm of where technology intersects with finance, so the whole world of fintech and the fintech community often had this little self image of being a disruptor that was really going to revolutionize finance and so on.

I really started to adapt this narrative, and it became very apparent to me that actually with the fintech community was often doing was simply automating finance. That might be experienced by some people as empowering in a certain sense. But really, when you zoom out and you look at roll of fintech sector, it's basically been to try and extend the power of big finance, more often than not, rather than actually reforming the financial sector. This is it that led to my new book, Cloudmoney, which is looking at how actually in a way the cash system, which is often reviled as those out-of-date system. Actually the cash system is much loved by people, and there's a lot of ideology and attacks that go against the cash system, but many people actually value the cashless and very, very deeply, but are constantly told that they should feel ashamed for using this non-automated form of more money. I'm looking at the power dynamics of who's attacking the cash system, why, how big tech and big financial involved.

Jason Moser: Well, let's dig into that power dynamic because I think it's really all boils down to incentives. The parties that participate in this value chain in their incentives. In the book you talk about the four war on cash conspirators, which I love how that sets the table. Who are these conspirators and what are their incentives?

Brett Scott: Well, first of all, I'll quickly say that I use the term conspirator in a tongue-in-cheek way. Because actually in a big economic system, you don't really need to directly via conspirator to push your power and messaging to society. Actually a lot of the big banks and stuff we're involved in as a tech tuck-ins, cash wouldn't think about themselves as being conspirators. But in reality, this is like how they're operating. The big parties who are attacking the cash system, the first-party is the banking sector. Bear in mind that the banking sector runs the underlying account infrastructure that is used in mainstream digital payments. When you're tapping your card, or when you're using a mobile app of some sort making payments, inevitably going through the banking sector.

The Bank of America CEO has openly said this, he say, we want a cashless society precisely because they run the underlying account infrastructural fire, which they can get data and fees via digital payments. The second big body of players as the payments companies like Visa and Mastercard, which who basically specialize in telling the banks who's trying to move money from who to who. They basically intermediaries and for Visa and Mastercard, it's very straightforward. I mean, every cash transaction is a transaction they're not making fees from. It's very straightforward for Visa or Mastercard, they openly attack the cash system all the time. The third player is actually the fintech sector. fintech companies, they do more than just payments, are often trying to automate loans, are trying to automate insurance claims, they do all automation activities and finance. For them, cash has an offline form of money that it doesn't gel well with automated systems.

It's a human to human form of payment. The ideal form of payment for a fintech company who want to automate things is to deal with the data centers of the banking sector. To say, work with other big institutions rather than trying to directly deal with cash payments from people. In terms of the automation, all the big tech players want to work together. The fourth set of players, it's actually governments. There's lots of governments who have attacked the cash system. Governments are slightly more complex because they have multiple different departments who have different agendas. For example, some people in central banks are very reticent about letting the cash system go down. Whereas some people in, for example, securities circles, I'd say, hey, we can watch payments more easily if they're digital, so let's attack the paper cash system. Amongst certain nation-states, there isn't anti-cash push too depending on where you are.

Jason Moser: Let's dig into the fintech side of things for a moment because I think our investor community can really relate to that word fintech, it's an bandied about a good bit here recently as really opportunity for investors. First and foremost, just going back to exactly how money moves, physical cash versus digital currency. Can you give us just a quick tour on the mechanics of how money changes from cash to your bank to then a tertiary player in the space like a PayPal for example.

Brett Scott: Sure.

Jason Moser: How does that money move along that chain?

Brett Scott: That's very big question that could take a little time unpacking. [laughs] Let me try give a simple version of it. One of the metaphors that are sometimes used to try and quickly convey the dynamics of this is to ask people to think about casinos. If I walk into a casino with let's say, $100 in cash and I hand it over to the cashier and they hand me $100 worth of the casino chips. If you think what has just happened there, the casino took ownership of my physical cash and gave me this physical chip, which I can now use within the confines of the casino. Now that's casino chip is actually a secondary form of money. It's a privately issued form of money that's tethered to the original form of money, the actual government cash, but it's privately issued and it's within this casino. Now if you want to understand the banking sector, something related actually happens in the banking sector.

If I handover cash to, let's say, Bank of America, they take ownership of that cash and they issue me a chip, the equivalent of a casino chip, but it's in digital form, so it's a digital chip issued by Bank of America. If you have a Bank of America account and you see numbers in that account, you're basically seeing the digital chips they've issued to you. It's a privately issued form of money that can be moved around within the confines of the bank payments system. Now the big power that banks have, unlike actual casinos, is banks can issue far more of these digital chips, and they have been government money reserves. That's sometimes called fractional reserve banking, probably more accurately called credit creation of money, but the basic deal is banks have the ability to expand the money supply through issuing far more of these chips than they haven't reserved. They do that through the process of when issuing loans.

But the basic deal is when we're using the digital payment system, and by that I mean, when using your credit card or debit cards, all these types of apps and things like that, you're using these Bank issued chips within elaborate series of data center operations, the paper going with the help of Visa and Mastercard. If you're looking at players like PayPal, they actually add a new layer onto it. They will take your bank issued chips, take control of them and issue you their own third tier chips as it were. It's like taking your casino chip to a different casino and then they take ownership of that and giving you a new chip. Basically the monetary system is often made up of what we call the US dollar, is actually multiple different currencies with different issuers that have the same name, that are tethered together with each other. What's often called the cashless society is a society where you essentially lose the ability to hold government money in physical form, and you have to use this bank issued or corporate issued money like PayPal issues.

Jason Moser: We talk about big banks, and you keyed in on something there in the power that the big banks have really throughout all of this. Why don't fintechs ultimately want to be banks? Do you feel like this puts them in a longer-term precarious position? At least competitively speaking, it feels banks can really come in there and more or less call the shots if it's fintech layer, I don't know if it necessarily needs to exist. It feels like it's very convenient, but ultimately it does feel like if they don't want to be banks, that's going to limit the power that they have.

Brett Scott: Absolutely. But I don't think many fintech have ever wanted to be banks. Bear in mind, if you're running a big bank, it's a big ship. It's a big ship and it's hard to turn it in different directions, but it's extremely powerful. If you're sitting in the boardroom meeting of one of the big banks, they are thinking about many things. For example, how exposed are we to the geopolitical risks of Russia or what about are there are risk portfolio? That they're thinking about is a very big issues. Things like, what does our new app look like, is but one of many issues that they're thinking of. Fair amount this banks do want to automate, they do want to create these fintechs systems to essentially automate their interaction with their customers because that's how you optimize profit, but they're quite slow to do it. Whereas if you're running a 10-person start-up, it's simply specializes in building apps, you're much faster.

A lot of the fintech accelerators and so on basically specialize in these small teams, who if they were within a bank would be a very specialist little division, but they can operators as a start-up initially, get venture capital financing, build these nice-looking apps, which essentially are basically interfaces that we would interact with, and which often will plug into the banking sector in the background. Now, a lot of these fintechs don't want a banking license. They don't want to deal with all the actual politics of being a bank. What they often will do, is enter into partnerships with the banking sector, and find ways to interface with them, or else they just get bought up. I was just in London, and I remember about 10 years ago or so, maybe there was a new start-up in London called Nutmeg, which was investing start-up.

They had this whole advertising campaign which they were putting on the London underground system, a train system, saying, don't trust the banks. Now, go back 10 years later, and I see Nutmeg now belongs to JPMorgan, so it has a JPMorgan company underneath it. Basically they did this, it was outsourced R&D effort in the end for JPMorgan. Now have been incorporated in, which happens in a lot of fintechs. Many of the fintechs sector is grafting itself onto the banking sector. In the process actually enables Big Tech like Apple, and so on to interface more effectively with the financial sector.

Jason Moser: You certainly talk about that threat of consolidation, the risks that come with that. I don't know that anything can really stop that ball from rolling. I wanted to ask in regard to cash specifically, and I'm not a lawyer, I didn't go to law school, I don't think you're a lawyer either, but I talked to a lawyer friends about this from time to time. It's interesting when you look at actual physical cash. The notes says, and I quote, this note is legal tender for all debts public and private end quote. That's on the bill. Given that, it feels there has to be some legal ramification for a store or for a merchant saying, no, we don't accept cash. In a book that you called out the example on the flight where you're trying to buy the drink, you offer cash, and they say, I'm sorry, we don't accept cash. Someone, a stranger that jumped in and there and budget a drink with a card, but he ruined your point, he's still your thunder. Are their legal ramifications for saying listen, we just don't accept cash, because I feel like I've read at least of some litigation out there coming to the surface where people are challenging this?

Brett Scott: Legal tender laws are actually a lot more subtle than people think often. Legal tender doesn't mean a person has to accept cash for anything. That doesn't have to accept the legal tender for any transaction, what it means is they have to accept it if the person giving it to them is in debt to them.

Jason Moser: Got you.

Brett Scott: Notice actually on the bill you, the quote was for all debts public and private, for all debts. If I enter a shop, and I'm not in debt to the shop, they can actually refuse legal tender. But for example, imagine I went into a restaurant, ate the food, which would actually technically put me in debt to them, because I've taken something from them without paying. Now, actually the legal tender laws start to kick-in. Because now they if they tried to refuse my legal tender, they're trying to prevent me from exiting debt, which historically is debt bondage. These legal tender laws are trying to stop forms of debt bondage. If a person is trying to exit their debt, and you're stopping them, you are in breach of legal tender laws. That's what the legal tender thing is.

That's an interesting legal cases to test out when it comes to people refusing cash. Which situations are truly in breach of legal tender laws. But in terms of, for example, when banks are doing things like shutting down ATMs, or trying to make it out as though the provision of cash is some burden upon them, that is a very dubious legal situation, because think of that casino metaphor I gave to you earlier, if I have a casino chip, that's actually a legal claim upon cash held with the cashier. If I go back to the cashier and they say, sorry, we don't actually redeem those anymore, they are now in breach of their legal agreements. This is not in the realm of legal tender, but this is a different legal issue. When banks say, we're going to penalize you for using cash, we're going to stop you from exiting our system bio through the ATM, they are now in breach of some other types of laws. Does that make sense?

Jason Moser: Yeah, absolutely. In line with this use of cash, do you feel going cashless marginalizes certain parts of society, and if so, how?

Brett Scott: Absolutely, there's a huge class dynamic to this. It's very easy to see that this, you don't need it to have a sociology PhD to notice which places, "go cashless first." It's always boujee, upper income places. Largely because not only do banks historically have targeted those people before they target poorer people, but actually those people in those type of establishments have much higher trust in institutions more generally. Whereas people who are more marginalized not only get less service from institutions, but they also often don't trust those institutions either. There's a very strong correlation between socioeconomic status, and cash usage.

There's many studies which will show this. When there's this public messaging coming out, that there's something wrong with the cash system, or somehow it's an inferior form of payment, that's a very strong class dynamic to that. There's a very strong value judgment being made upon people who actually often prefer the cash system. If you think about that messaging, you basically been told, if you don't want to be absorbed by large scale banking institutions, there's something wrong with you. That is a very loaded message that comes out of many mainstream circles. But we live under an ideology which says, where we always have to go to is evermore scale speed, complexity, automation. That's really a corporate message, that's not something that ordinary people resonate with necessarily.

Jason Moser: That feels like when we talk about the war on cash, steering away from cash, the risks of systems of digital money. Looking at what's been going on recently in regard to the war in Ukraine. You see networks cutting off Russian nationals. I think a lot of the world is probably on board with that. You see folks were resorting to alternate forms of currency, whether it's cash or whether it's crypto in order to be able to move money around, and that really goes to one of the greater risks here of a cashless society in that. Maybe a lot of folks right now are on board with what's going on in shutting off Russian nationals because of what's going on in Ukraine. But what happens when they're shutting you off? What is something that you agree with? What happens when the shoe is on the other foot, because it feels like that's just a matter of time.

Brett Scott: Yeah, absolutely. If you're a citizen of authoritarian country, you very quickly understand the implications of what a cashless society means. Because basically it means, all your transactions can go through institutions that can be watched, but they can also perform a vector via which power can be exercised, so you can be stopped from doing certain things and so on. Now obviously there's an interesting balance here when we're talking about potentially. This is a debate that goes throughout society more generally about, when is it OK to exert power and when does it form of overreach? Now actually in the case of Russia right now, while you say, many people agree with the idea of imposing these sanctions, bear in mind that within Russia, there are many people who hates pizza and who chooses to agree with his policies and are now finding themselves essentially shafted because they are not bearing the brands.

Often these are people who don't have the ability or the buffers to actually deal with that. The actual Russian Elite are not going to be heavily affected necessarily, they have ways of surviving, but many poorer people don't. Things like the cash system in this context becomes super useful. But even outside of the Russian contexts, it's a plus. In a good example, which is in Hong Kong. During the Hong Kong protests. Hong Kong is a highly digitized society in many ways, but people were queuing up at the train stations to try and buy paper tickets with cash precisely because they were aware of those potential that if authorities could watch where there were traveling to via digital payments systems, they would be identified as potential protesters. Now the cash system and that situation enables that alternative but imagine if you don't have that alternative. But not only could you be watched, but hypothetically, you could be stopped from exiting a particular station, for example. There's a huge potential problem in getting rid of cash and nobody is really thinking about it right now because cash still remains an option. But in some future where it doesn't, then you get to know about it.

Jason Moser: Yes, I have a hard time imagining a world without and can't imagine I know a lot of listeners probably know, I mean, I love the investing opportunity in regard to digital payments, payment networks, and whatnot. I mean, I own shares in companies like Visa, and Mastercard, and PayPal, and [Block's] Square. I'm a big proponent of cash. I feel like if you're a merchant and you don't accept cash you're explicitly telling people you don't want their business, which I just find to be the opposite of what you should be doing.

Brett Scott: One of the great metaphor is that people actually want to convey this as cash is like the public bicycles system of payments. Whereas things like your Venmo and so on, you can think about them as being at the private Uber system of payments. Now you might like Uber, it doesn't mean you want them controlling the entire transport system. That just gives too much power. You want a balanced transport system with multiple different options. With payments it's very similar, you want a balanced payment system with multiple options. You don't have to be anti-digital to be pro-cash. They're not mutually exclusive. You can have both these and actually, it's extremely important for the resilience of economies to have both of these. Unfortunately, the only players who benefit from the removal of the option to use cash are the companies.

But for most ordinary people, they want options to remain open. Nobody wants a reduction in payments options. There's always want an increase. It's only the industry that has an incentive to destroy the ability to use cash. One final metaphor is quite useful to grasp the dynamics of this, as I might find it useful to use elevator to get to the top of a skyscraper. But that doesn't mean I want the emergency stairs removed. In many senses, the cash system is like the emergency stairs that payment systems extremely resilient doesn't go down when the power goes down or when the hurricane hits. Actually, it's an extremely important system and actually, it's more advanced in many situations than digital payments are.

Jason Moser: Yes, I like that analogy there. Speaking of cash and having that emergency use case, early on, COVID accelerated this movement away from cash. The general idea was cash is dirty. It transmits germs, therefore, stores more and more really try to steer away from the use of cash. Then I think you actually said it, as time has gone on, we've seen there's greater risk and actually using things like the PIN pad on the actual hardware than transacting in cash. It feels like we're moving back away. Maybe we're seeing that that risk isn't necessarily as great as once thought, but it also feels like this is something we could probably expect to see more and more of down the road. I don't mean COVID specifically, but it does feel like the industry itself will find every opportunity for reasons why we shouldn't be using cash and should be focusing more on digital payments.

Brett Scott: I mean, one of the big things I'm talking about in the book is there is war on cash, which is a way of talking about the top-down pushes against the cash system. Because historically the narrative that comes out, the standard narrative is that it's a bottom-up process. You'll find this idea that, the reason why we've seen the decline of cash because ordinary people are just making this choice. But that completely ignores half of the picture, which is that these very big players has been a very long time undermining the cash system, which makes it ever more likely that you will "choose to use digital payments." Actually, during the pandemic we saw this, big players will always against the cash system. They were pushing its cash system will fall prior to the pandemic. But as soon as the pandemic came, they will very quickly weaponized it.

Being extremely aware that people were scared temporarily of physical contact, they rarely weaponized and pushed that narrative forward the cash is dirty and transmits disease. This narrative is unscientific. I'm based in Germany here and the Robert Koch Institute, which is one of the world's preeminent Health Institute's based in Germany came out and said there's no evidence that cash transmits COVID. In fact, subsequent research has shown as you mentioned, that actually the digital screens and check on self-checkout counters and PIN pads of the card terminals pose a greater risk of transmitting COVID. But in places like London, for example, all these big retailers used it as an excuse to push forward this automation drives that we're interested in. Now in London, people, for example, don't wear masks anymore.

All these COVID measures have been reversed, but these players have stayed with their anti-cash position. They've used it to ratchet up the use of digital payments and to not go back. That's been happening and this is a very big problem and one final example I can give you there is actually the NFL entered into deal with Visa in 2019. Sponsorship deal with Visa said we want you to do cashless Super Bowls. The first one of these cashless Super Bowls came out in 2020 and the narrative that surrounded that was all about COVID, but that deal was signed in 2019. [laughs] This was prior to that, and they just happen to find a convenient narrative for that. There's a lot of top-down players that are working to not only [inaudible 00:28:04] shut down the cash infrastructure, but also have ideological war against it to make people feel ashamed for using this and essentially make people feel ashamed for not wanting to use large institutions all the time.

Jason Moser: Brett, I want to be respectful of your time here, maybe if we could just wrap up with one more question because ultimately, this goes back to, I think one of the themes in the book and these contradictions of corporate capitalism. We as consumers, we weigh the convenience versus things like monitoring, censorship, manipulation, whatever that may be. It feels like it's going to be difficult to go back. But like I said, as much as I like the idea of the war on cash from an investor's perspective. I mean, I personally have a hard time believing we'll ever actually live in a fully cashless world, at least in my lifetime. That being said, what is the path forward with this?

Brett Scott: Sure, I mean, the first thing I'll say is the de facto mainstream narrative is that cash will die. The reason why the narrative exists is that, if you just push play on standards capitalism as it were, companies try to scale, they try to automate, and so on. The cash system stands against that. But as we know, companies often don't actually act in their own best interests collectively. Sometimes they can mess themselves up and this is a contradiction in market systems. In reality, in terms of what's in the best interests of a market economy, it's actually to maintain the cash system because the cash system creates resilience for the monetary system. It actually helps to keep the whole monetary system together. If you're thinking about what's actually in the long-term interests of an economy. It's some super important to maintain the cash system, not only for personal privacy and all the things we've mentioned but just for the basic stability of markets, financial stability perspective.

I think what's going to start to happen is actually, many policymakers will start to realize this and they already have started to realize this. Especially in Rome and an era of increased geopolitical instability, where there's massive potential for cyber attacks. Also in an era of climate change with ever-increasing natural disasters, it's actually not obvious that you want to get rid of the cash system where you want to be totally dependent upon these digital infrastructures. I think in the next few years we're going to see a lot more discussions as quite serious discussions about how to protect the cash system and how to actually counter in a way, going back to the metaphor of cash being the public bicycle of payments to promote and say actually, this is a very viable and important system to keep. But bear in mind, I'm going against the ideological grain by saying this because de facto standard story is that we have to get ever more automation, ever more connection, ever more convenience, and so on and so on. I'm not going to bet against cash by any means.

Jason Moser: His new book is Cloudmoney: Cash, Cards, Crypto, and the War for Our Wallets. Mr. Brett Scott, thanks so much for joining us today.

Brett Scott: Thanks for having me.

Chris Hill: As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against. Don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.