Why not abandon paper money?

Do we still need cash in 2024? The number of transactions made with cash has halved in Canada between 2009 and 2022, now accounting for about 20%, according to figures compiled by the Bank of Canada. Are there benefits to keeping currency in circulation, or should we advocate for a shift to a virtual and contactless economy? This will be explored in the following lines.

A Matter of Cost

The cost of physical currency is far from negligible. The production of physical currency includes not only material costs but also logistical and security expenses. In 2019, the Bank of Canada spent approximately 110 million dollars solely on printing and distributing bills. This cost was significantly higher when the central bank introduced new polymer bills. The cost of currency also explains the decision to withdraw the 1-cent coin: its production cost exceeded its nominal value.

Virtual transactions do not involve exchanging currency that needs to be produced, but their infrastructure network is much more complex than what is involved in currency manufacturing. Online payment systems require servers that must be secured, updated, and maintained, but these investments are shared by all telecommunications players, offering economies of scale, making each transaction marginally cheaper as their volume increases.

As they are virtual, these transactions also minimize human and manual interventions, making errors rarer and benefiting the system as a whole.

Environmental impact

The extraction of resources needed to produce currency, its production, and distribution have a significant environmental footprint. However, data centers and server farms also have substantial impacts: they are major heat sources affecting ecosystems.

Over time, as cash transactions continue to decline, the ecological footprint of virtual transactions could increase without real innovations to optimize networks.

And what about illegal transactions?

Combating illegal transactions and tax evasion is another argument often made in favor of abolishing cash, as it is frequently used for illicit activities such as money laundering, corruption, and terrorism financing. While this notion is based on true elements, organized crime employs much more complex strategies and mechanisms that go beyond simple cash exchanges to conduct their transactions. Thus, it is somewhat simplistic to claim that abandoning paper money would reduce the number of illegal transactions, especially in the era of cryptocurrencies.

Additionally, integrating tracking technologies and fraud detection algorithms into all virtual transactions comes at a cost. Preventing cyberattacks and protecting consumer data become major issues in a cashless world.

Could Canada become the first country to adopt an official policy of abandoning cash? It would be surprising. Countries like Sweden and Denmark are considered on the path to becoming "cashless" with cash transaction rates just below 10%, according to figures compiled by Visa. Canada could choose this cautious option of gradual withdrawal over a decade to promote the implementation of digital technologies across its vast territory before ratifying a policy to that effect.

While the idea of completely eliminating cash is appealing, it doesn't seem realistic yet. But we're getting close!

The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This blog was written, designed and produced by Pierre Dauth, Investment Funds Advisor with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc. The information contained in this blog comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any securities.  Mutual Funds are offered through Investia Financial Services Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments.  Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.