Questioning trust-worthiness:

SALAMANTEX
7 min readFeb 3, 2023

what’s the safer option — cash or digital currencies ?

A recent poll on our Twitter channel showed that people have more trust in cash then they have in digital currencies; and this despite Twitter being a major channel for the crypto community and younger generations:

SALAMANTEX Twitter poll results

We wanted to find out if this trust gap is justified and cash really is safer than digital currencies. Let’s start by discussing some of the disadvantages that come with digital currencies, such as cryptocurrencies:

Fraud, Scams, and Money Laundering

Digital currencies currently have a somewhat dodgy reputation because they are a popular playing ground for criminals, who use them for scams, fraud, and even money laundering. The reason for this is that regulations are currently still lacking behind. You can read all the details about this problematic in one of our previous blog posts: The marathon between regulators and criminals in DeFi | by SALAMANTEX | Medium

That being said, we believe that this deficit will be mitigated once the industry has matured. Digital currencies can be a truly safe form of money, once the proper regulations have been established on a global level with a strict law enforcement. Blockchain-based digital currencies indeed have one absolutely crucial advantage over cash or other forms of money: they are highly transparent and traceable due to everything being tracked on the chain and transactions going through a network consensus mechanism, rather than relying on a central intermediate for validation.

High volatility of cryptocurrencies

Another characteristic that is perceived as a big disadvantage of cryptocurrencies is their high volatility. Their value can drop or increase radically in a short period of time, which can be lucrative for investors. On the other hand, however, it limits their usability as a store of value and day-to-day currency. “Cryptocurrencies are volatile by design.”[1] However, there already is a more stable alternative: “stablecoins are cryptocurrencies whose value is pegged, or tied, to that of another currency, commodity, or financial instrument. Stablecoins aim to provide an alternative to the high volatility of the most popular cryptocurrencies”[2]. It is still unclear if crypto markets will stabilize over time or if they will keep their volatile nature on the long-term.

Digital currencies live on the internet or in a smartphone wallet, which makes them much less tangible than cash, that one can physically hold in their hand. Nonetheless, cash also has a series of inherent risk factors, that we will take a closer look at in the following paragraphs:

Loss, theft, and robbery

Have you ever found a coin or banknote on the street? Lucky you — but not so lucky for the person, who lost it. Cash doesn’t have any form of track record or means of identification who it belongs to. Cash is fully anonymous and untraceable. Losing and finding it is one thing; but in a more organized way, this makes it the ideal form of money for theft and money laundering.

In addition, any person or place known to have cash automatically becomes a target for criminal aggression. As per the FBI, each year there are approximately 3,000–4,000 bank robberies[3]. There are not just massive cash heists at banks and minting facilities, as we know them from media headlines or Netflix’s ‘Money Heist’. Robbery is a much more daily offensive that concerns us all, as we are an easy target for pickpockets just walking in the streets or burglars, when leaving our apartments for a holiday. The statistics speak for themselves: “Upwards of 400,000 pickpocketing incidents occur per day”[4] and “on average, over one million home burglaries happen annually in the U.S” with 25% of them occurring in the daylight[5].

Counterfeit paradise

Did you know that when “the Secret Service was founded on July 5, 1865, its primary task was to minimize the counterfeiting problem; at that time, about one-third to one-half of the nation’s currency was counterfeit. As a testament to the Secret Service’s efforts, in fiscal year 2001, the U.S. Treasury estimated that less then .01 percent of approximately $600 billion in U.S. currency in circulation was counterfeit”[6]. Bank notes are updated on a regular basis to make them more difficult to counterfeit. This has resulted in a downward trend over the last years, but the downward trend seems to have been shortlived as criminals are also getting better at copying notes with their security details. According to the United States Secret Service Fiscal Year 2010 Annual Report, the Secret Service removed from circulation more than $261 million in counterfeit currency in 2010 — $79 million more than in 2009.[7]

Can you tell real and counterfeit money apart? Give it a quick try:

Real vs counterfeit money (left is counterfeit, right is real) [8]

Dependence on central banks

The value of cash is fixed with the number written on the bank note or coin; or so we would think. De facto, central banks have the power to change the value of cash by either pumping more fresh cash into circulation and therefore devaluing it, or restricting the amount of cash out there, making it more valuable. “Central banks use monetary policy tools to keep economic growth in check and stimulate economies out of periods of recession.”[9] While this sounds good and healthy for the economy, it also means that we can’t rely on our money always having the same purchasing power, i.e. how much we can buy with it. If there is too much cash in circulation, the prices of goods and services increase, which is called ‘inflation’. The below chart illustrates the concept of inflation with the example of a cup of coffee:

Investopedia / Julie Bang[10]

With fiat money, we trust the central banks to fulfil their price stability mandate so that the money is indeed a reliable store of value.[11] Similarly, we trust central banks to make sure that the money moved from one account to another is not spent twice.[12] With Blockchain-based currencies, however, this trust does not lie with one trusted central agent but is distributed across an entire network, that has to achieve a decentralized consensus for transactions to go through. Cryptocurrencies and Blockchain technology are a means to avoid having to trust a centralized entity and should therefore be considered as much safer and more reliable.

Getting back to our question of trust, it is important to highlight that the trust is not based in the form of currency itself but typically in the issuer of the money. “Survey respondents regard central banks as the preferred institution to issue a digital currency, whereas tech companies are the least preferred option.”[13] We are animals of habit and why trust something that we grew up with and have always known as working just fine? “The challenge [for digital currencies] lies in transferring to the digital world the benefits of cash and its characteristic as a public good, including the trust associated with it”.

Ipsos, MORI, OMFIF analysis [13]

As a conclusion, we can say that all forms of money come with some advantages and some disadvantages. The way forward in a natural evolution of survival of the fittest as predicted by Darwin, will be to combine the advantages to develop the ‘perfect’ currency for the future. Could this be what CBDCs are all about? Central bank digital currencies are “being explored in over 100 countries; [and are expected to represent] an opportunity to implement the innovation in a way that will have the best macroeconomic and societal impact.”[14]

[1] What Makes the Crypto Currency Market Volatile? 6 Key Reasons (makeuseof.com)

[2] Stablecoins: Definition, How They Work, and Types (investopedia.com)

[3] https://capitalcounselor.com/bank-robbery-statistics/

[4] Pickpocketing: Statistics Indicate You May Be at Risk and What to Avoid (havengear.com)

[5] https://www.forbes.com/home-improvement/home-security/home-invasion-statistics/

[6] How much currency is circulating in the economy, and how much of it is counterfeit? Is currency included in the money supply statistics? — Education (frbsf.org)

[7] Business Risk of Customers Using Cash (chron.com)

[8] 4 Ways to Detect Counterfeit US Money — wikiHow

[9] Fiscal Policy vs. Monetary Policy: Pros and Cons (investopedia.com)

[10] Fiscal Policy vs. Monetary Policy: Pros and Cons (investopedia.com)

[11] PC-10_2018_2.pdf (bruegel.org)

[12] What Are Cryptocurrencies like Bitcoin, Ethereum and Ripple? — Back to Basics — IMF F&D Magazine

[13] OMFIF_G+D_LiveFile.indd

[14] Can CBDCs help stabilize global financial markets? | World Economic Forum (weforum.org)

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SALAMANTEX

User-friendly software solutions for payments with digital assets — from cryptocurrencies to loyalty points: www.salamantex.com