Bitcoin is real - get over it...

I agree BitCoin is real and virtual currencies will (probably) be on the rise in the future as long as someone will accept them as an exchange medium (the legalities are another issue).

However, I do have a personal observation ...and a question regarding the death of cash: As a U.S. citizen, I've always been leery of the supposed 'anonymous' tracking by ...well, everyone these days. Amazon tracks my purchases to make recommendations, my bank tracks my debit/credit card use to prevent fraud, and my government seems to be tracking everything electronic in the name of security. I've always known there is no privacy on the internet, but with recent revelations I've made a subtle shift in my internet use at home including using search engines such as duckduckgo. I've also made it a point to use cash more. The businesses I patronize appreciate it (no fees) and it isn't tracked ...or at least isn't tracked as well.

Here is the question: Has anyone else thought about using cash more and is there the possibility that all the tracking may lead to a cash revival?  (Okay, that was two questions.)

@FinextraM:

As the author of the post in which the aforesaid "interesting debate on Finextra.com regarding the death of cash" is happening, I predicted the revival of cash for different reasons, but not the one you've mentioned, namely, to avoid being tracked. Personally, as of now, I don't think the average person-on-the-street realizes that noncash MOPs come with tracking. As this point strikes home, I agree with you that more and more people might turn to cash.

Anon,

There is an unwritten intent in FATF rules, Patriot Act and other such frameworks to eliminate AML/Terrorist Financing that cash is good for crime/evil and therefore should be eliminated or reduced wherever possible. Since the 90s governments have been intent on getting as much traceability as possible into cross-border transactions for this reason. 

There's a lot of work that has been done on this, such as:

http://repub.eur.nl/res/pub/37747/G-%20Chapter%204-%20The%20Development%20of%20AMLR-%20Criminalization.pdf 

This is in itself an argument for both increasing digitization of cash and for consumers to attempt to gain more anonymity by using cash more. I just think that the imperative to track money movement will trump the consumer imperative to seek anonymity in the end. The other influencer is that our view of privacy is changing because of social and other factors, so while it is a hot topic right now, we'll adapt over the coming years to greater scrutiny in the system and governments, etc will try to position circumvention of that scrutiny as somewhat anti-social, etc. 

The outcome is the same - more traceability, less friction, but less privacy and more efficiency. It tends to lend credibility to a virtual currency model over time.

BK 

I agree with Brett. You can see the regulators and the banking system squeezing cash out. A current example here in the UK (amongst other countries) http://thefinanser.co.uk/fsclub/2013/07/the-african-bank-crisis-and-remittances.html?cid=6a01053620481c970b0192ac2e1266970d.

The conundrum though is, as cash gives way to electronic, how in the internet world can electronic transactions be tracked and controlled? Step one - declare Bitcoin as legal currency, then at least you can bring the force of the law to apply. If it keeps still long enough.

Long before governments did anything to block the use of cash owing to AML concerns, tax evaders and many other types of money launderers abandoned cash, favoring realtime wire transfers across offshore venues as a much more convenient method of moving money anonymously. If Bitcoin takes off, they might switch to transferring Bitcoin - instead of dollars and pounds and euros - electronically, making no great impact on the volume of cash in circulation. 

I have no ax to grind for cash or cheque or mobile wallet or any other method of payment. However, I can't help noting that currency note / cash is the only legal tender I know that is guaranteed by a country's central bank / regulator directly ("I promise to pay the bearer..."). On the other hand, cheques, electronic payments and every other form of noncash instrument involves one or more non-sovereign intermediaries e.g. private sector banks. Against that reality, I find it extremely far fetched to imagine the same regulator / central bank suddenly disowning cash.

Ketharaman,

95% of money movement on the planet today is already virtual/electronic. Central banks do not need to disown the currency to disown cash - clearly.

The issue for Bitcoin and this behavioral shift is not the death of 'currency', but the death of physical cash - for all the reasons previously mentioned. The death of greenbacks doesn't mean the death of the US Dollar...

Some could argue that in the last 50 years money movement has gone from zero percent electronic to 95% electronic - hence, the demise of physical cash might be considered a very real issue. The problem and benefit of the vast amount of electronic movement of funds is traceability. While concerns over Bitcoin's ability to be utilized for criminal activities has been apparent, those same concerns have existed for hard currency for much, much longer:

See - http://rt.com/business/banknotes-euro-criminals-bank-628/

UK elimination of the 500 Euro note is further evidence of the intent of governments in this respect (See DailyMail)

AML and Traceability is clearly going to be a core driver for banks and governments for the forseable future, this will create friction for the public who may not want this level of inspection or the loss of anonymity, but I'm not sure that will make much of a difference in the end.

BK 

@BrettK:

I was confining myself to retail payments when I was referring to friction and tracking of electronic payments. By no stretch of imagination are 95% of payments happening electronically in this space.

Even in corporate payments, with cheques very much in use in B2B payments in many parts of the world (e.g. USA, India), I strongly doubt if 95% of payments are happening electronically. Notwithstanding cheque truncation technology, cheque is still a non-electronic mode of payment.

Currency notes carry central bank guarantee of legal tender. I don't see how a government can ban them and still claim that it's honoring the overall currency. If a government were really serious about banning the use of cash for everyday payments, it'd have begun by demonetizing the EUR 10, not EUR 500, banknote. I'm not sure how many people handle EUR 500 banknotes in their day-to-day lives.

HM Treasury's reversal of UK Payments Council's proposal to abolish cheques in the UK made it amply clear that the government doesn't share banks' views regarding modes of payment. Banks will continue to clamor for reduction of cash due to their own vested interest of keeping as much money in the banking system as possible (e.g. interest on float). But, as in the case of cheques, I expect governments to be more sensitive to the preferences of the average man on the street. Instead of banning cash altogether, I expect the government to enforce greater traceability of cash in order to curb money laundering and other nefarious activities. For example, according to Indian law, customers depositing over INR 50K in cash into their bank accounts must quote their so-called Income Tax Permanent Account Number. As a result, the government enjoys the same level of visibility into cash transactions as noncash ones.

@Ketharaman

I know we could have this debate all day and I'm not going to change your mind, and you're not going to change my mind. However, for the record:

80% of cash transactions in the UK are under £10 (http://news.bbc.co.uk/2/hi/business/8618541.stm)

The decline of cheques is dramatic in the UK (and all the developed world)
(http://www.financialadvice.co.uk/news/12/ukeconomy/7831/decline-of-cheques-tracked-by-campccc.html) 

This change in behavior is because cash and cheques are not the most efficient mechanism in most cases, with the exception of at retail stores for micropayments currently. This decline is very real and measurable and there is no indications that it will stop.

I believe it is better to be prepared for a future where digital payments and currency are the norm, than to hope that this shift will stop and behavior will revert to 19th century norms.

Remember, the objective of digital payments and virtual currencies are not primarily to challenge traditional mechanisms, in the end these changes are being driven by consumers who see these as better ways to live their life in the payments ecosystem. If you believe consumers are mistaken in their acceptance of these changes, you had better start educating them fast, because right now Apple, PayPal, BitCoin, Moven, Visa/Mastercard, and a bunch or others are working to enable customers on this layer. There's almost no one saying that cash and cheques are a better way...

Just for the record, should anyone inadvertently get the idea that cheques are not being superseded by electronic in the UK, see the stats on the growth of Faster Payments. It's happening, as a result of customer voluntary adoption, at some speed.

Oh, and the main reason people resisted losing cheques isn't down to the payment per se, it's down to ease of reconciliation. To paraphrase an attendee at a Remittance Coalition meeting in the US (there are a lot - 7bn from memory - b2b checks in the US) 'I can process a check to account for 17c. ACHs (absent the remittance data) require manual review to process to account, and thus are expensive.'

Lest anyone inadvertently get the idea that "once an ePayment, always an ePayment", cash is replacing ePayments in eticket booking and other traditional areas of ecommerce that have hitherto only accepted ePayments. Note that, as I've highlighted here, this is an empirical fact and not crystal ball gazing into what may or may not happen in the future.

Not that reconciliation cost is irrelevant in the larger context but, at least in the case of UK, HM Treasury rescinded UKPC's proposal to ban cheques because the banking industry wasn't in a position to offer a more convenient alternative to cheques even by 2017-18, so it's entirely down to mode of payment. 

As a payment instrument per se, cheque may or may not be relatively costly. However, what really counts for a business is the end-to-end cost of introducing ePayments, including RECON cost, which is clearly higher for ePayments according to the aforesaid attendee at the Remittance Coalition meeting in the USA.

This reminds me of an online university in Virginia, USA, which stubbornly refuses to move from cheques to ACH. According to its calculations, the high IT and SI costs of migrating to ePayments won't pay back even after 5 years of savings in reduced instrument costs.

Going back to Bitcoin, the main topic of @BrettK's blog post, does the following news item make it more or less real?

Every Important Person In Bitcoin Just Got Subpoenaed By New York's Financial Regulator 

If regulators are regulating it, it is because it's impact is very real. That impact is felt either at the consumer or market level, or both.

It is important to note that at no time have any of the regulators suggested that Bitcoin should be made illegal or be stopped. The move to regulate is to protect the market, not the incumbents (or cash). 

"If regulators are regulating it, it is because it's impact is very real."

I won't dispute the impact (however minor at this point relative to other forms of currency), but I would dispute why the regulators want to regulate. How many people are really using BitCoin? How many merchants accept them? Are they regulating because of the impact or because they don't understand or don't trust it? Which is an impact of itself now that I think about it.

I can't help but notice the over-regulation of everything - especially in the EU. The U.S. is a distant second mainly because they haven't seen the need to regulate the length of a banana or define what a 'standard' seed is ...yet. There are more banking/financial regualtions coming out in the U.S. (and the EU) than ever before - all in the name of 'protecting' this group or that. Yet the bubbles still happen, and the unintentional consequences reverberate throughout the system.

I'm curious to see if novel internet currencies will ever be allowed to become mainstream, or regulated to death.

Now Germany is saying Bitcoin is 'real' and should be taxed...
https://www.finextra.com/news/fullstory.aspx?newsitemid=25132

The question is not cash versus virtual currency, but it is government backed currency versus consumer backed currency. If I am getting paid salary in BitCoin or my business is earning profits in BitCoin, then I should expect that it will be treated like any other currency in respect to taxation and reporting.

You can't tax something that isn't real, and you can't tax a virtual currency unless you argue that it works just like a real, centrally-backed, government-recognized currency. The more BitCoin gains traction, the more likely it will become a niche currency that is legal recognized to prevent taxation and money-laundering breaches.