Monday, October 4, 2021

It’s all about cash in the end...for now.

by Andrew Crawford, Doctoral Researcher (GIGA, Universität Hamburg) and IMTFI Fellow

News about a political upheaval often includes a story about frantic citizens desperately trying to get cash. Recent cases in point are events in Afghanistan and Myanmar. In Afghanistan, the departure of US forces and subsequent Taliban takeover led to a banking crisis with long lines for the limited number of functioning ATMs. Traditional informal money transfer agents, known as hawaladars, faced similar shortages with excess demand for cash that they could not satisfy.  Behind the scenes, the Taliban pushed central bank and finance ministry officials to get to work on solutions, a difficult task considering the brain drain caused by the hundreds of thousands that have already fled the country.   

People line up outside a bank to withdraw cash in Yangon, 5/15/2021 (Photo: Reuters)

Meanwhile, Myanmar faces similar skills shortages as state employees refuse to assist the military junta that deposed their democratically elected government in February and has since killed more than 1000 civilians. Government limits on branch and ATM withdrawals were implemented and in late August the government closed numerous bank branches, under the pretence of COVID-19 safety.  To enter open branches customers had to line up for tokens that later emerged for sale on Facebook. Informal bank account markets also evolved online where people could sell their bank account access data in exchange for physical cash at commission rates of 7-15%.  Even retailers sitting on cash revenue began offering money exchange services rather than try to bank their company takings.

The Taliban inherits a central bank with depleted USD and local currency reserves
(Photo: Elmer Laahne/johan10/Adobe Stock)

Considering the scramble for cash you may be surprised to learn that both Myanmar and Afghanistan had, until recently, digital payment systems. Their provision of mobile money led financial inclusion proponents to suggest that both countries could ‘leap-frog’ traditional banking infrastructure. But the unrest immediately ended this dream and demonstrated the fragility of fintech when government institutions fail. Mobile money agents continued to operate but needed to increase fees to 10 - 12% to compensate for the difficulty of obtaining cash for withdrawals. Myanmar mobile money companies, such as Wave Money, were left desperately trying to provide cash to their agents to stop them charging egregious fees to their 1.3 million clients.

Why not print more cash? The Myanmar junta tried to until the German company supplying their ink and materials for printing, Giesecke & Devrient, suspended their deliveries citing it as “a reaction to the ongoing violent clashes between the military and the civilian population”. This further compounded the sense of panic and desperation for cash and left the junta pleading with other foreign banknote companies, so far to no end.

Myanmar has smartphone penetration of over 80%, a rate comparable to many European countries (Photo: Sasin/Adobe Stock)

So, what happens when people give up on cash? Well cryptocurrency has always been viewed by its proponents as the game changer for such crisis situations. Cuba, for instance, has recently seen the growth and legalisation of crypto currency to facilitate remittances, overcome US sanctions, and prevent inflation.  But the recent legalisation of cryptocurrency in Cuba may not mainstream its use due to unreliable internet access and geo-blocking by crypto exchanges.  

The recent adoption by El Salvador of bitcoin as legal tender may provide one way by which cash shortages may later be avoided. If many Salvadorans keep their funds in bitcoin, they could continue to trade and will not lose their life savings in the case of political upheaval. Whether this happens may depend on how much Salvadorans are willing to put into the volatile cryptocurrency. Additionally, if the Salvadoran government felt threatened, they could still hit the internet kill switch preventing users from trading bitcoin. The security of the government backed Chivo cryptowallet also remains untested

Overcoming the internet kill switch is tough and would require satellite internet technology like that offered by Elon Musk’s Starlink (although Starlink is currently not available in countries such as Cuba, Myanmar or Afghanistan). Does this mean the combination of satellite internet, solar generated electricity, and cryptocurrency (along with the knowledge of citizens on how to use all of them) will free people from relying on cash? Well, the missing ingredient that no technology can provide is trust. With such complex technology it may be difficult to have citizens willing to depend on cryptocurrency to protect their life savings. Another barrier may be an innate behavioural instinct to grab something physical and dependable during a crisis (like the hoarding of toilet paper in many countries during COVID-19 lockdowns). Until citizens in an institutional vacuum are willing to trust complex, intangible, hi-tech solutions to both transact and protect their wealth, it will remain all about cash in the end.

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