Thursday, December 19, 2013

How The Coming Cashless Society Will Allow Unprecedented Government Control Over Your Life



How The Coming Cashless Society Will Allow Unprecedented Government Control Over Your Life
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Econgularity, shorthand for economic singularity, is an ugly word I created to describe an unfortunate approaching moment in time when our current technological snooping prowess, the ease of big data manipulation and our sprint to a cashless economy will converge. This will happen in such a way as to permit governments to exercise incredibly powerful control over all human behavior.

While this may sound like a paranoid doomsday scenario to some, as a real world finance professional, I believe that this scenario is not only eminently possible, but most of the technology is already available — albeit not yet fully marshaled — to frighteningly make it reality.

Technological advances have led to the creation of algorithms that can instantaneously review financial transactions, determining the nature, location and even the appropriateness of a purchase decision. These have been freely used by credit- and debit-card companies.

Cardholders already encounter this technology when they receive fraud alerts after a transaction that looks out of kilter with the particular consumer's normal purchasing patterns. The technologies can thus serve to protect consumers. That said, they have already been used to control consumer behavior.

In 2010, Visa and MasterCard, bowed to government pressure — not even federal or state law — and banned all online-betting payments from their systems. This made it virtually impossible for these gambling sites to continue operating regardless of their jurisdiction or legality.

It is not too far-fetched to wonder if the day might come when the health records of an overweight individual would lead to a situation in which they find that any sugary drink purchase they make through a credit or debit card is declined. Sounds far-fetched but maybe not so.

You might think then that the person can always pay cash and remain outside the purview of these technologies. This may be the case for the moment, but we are well on the road to becoming a cashless society. According to a MasterCard study, 80 percent of U.S. consumer transactions are electronic.

In Sweden, one observer estimates that only 3 percent of transactions are made with currency. In fact, the decline in cash use has become so pronounced in Sweden that homeless beggars have been given card readers by Situation Stockholm to sell freely distributed newspapers and to receive alms, since potential donors no longer carry cash.

Governments and central banks are also subtle supporters of a cashless society as there are indeed costs to producing currency and coins. Monetary policy could also be much more efficiently executed without currency circulating, since it would then be easy to implement negative interest-rate policies. But there is also a sinister risk to a cashless society.

Cashless society a threat to freedom?

Signature Bank's chairman Scott Shay is worried about the potential for a cashless society.
This point comes when a society goes cashless and the potential for econgularity is at its highest.

A singularity is defined as the point in which technological advancement will "radically change human civilization and perhaps even human nature itself." It is impossible to know if this will actually happen, but a cashless society would certainly give governments unprecedented access to information and power over citizens.

Currently, we have little evidence to indicate that governments will refrain from using this power. On the contrary, the U.S. government is already using its snooping prowess and big-data manipulation in some frightening ways.

The technological command of the National Security Agency has been widely reported on and does not need repeating here. Suffice it to note, that it would be no challenge for the NSA or certain other government agencies to monitor any company or consumer transaction in real time, if it so desired.

To provide another example, the U.S. government is becoming very fond of seizing money from citizens first and asking questions later via "civil forfeiture." Amazingly, the government is permitted by law to do this even if it is only government staff members who have a suspicion, not proof, of wrongdoing.

By seizing a citizen's or a firm's money, the victim/defendant has almost no choice but to settle. A case about civil forfeiture was recently argued in front of the Supreme Court in which the government seized all the money of a tiny family-owned grocery store on the suspicion that it was laundering cash because its cash deposits were below the $10,000 level, an occurrence that triggers a report to the government.

By depriving companies and individuals of the cash to defend themselves, even innocent firms are under immense pressure to settle or to plead guilty. To make matters worse, the dramatic consolidation of the banking system has made it easier for the government to acquire information as there are fewer access points. For example, JPMorgan, one of America's largest and most powerful banks, is the size of more than 3,000 smaller banks combined, and the top four U.S. banks control about 60 percent of the U.S. banking deposits.

The U.S. government has also been using less dramatic means to limit the freedom of its citizens. In recent years, it made it increasingly difficult for companies to operate or individuals to transact by adding compliance hurdles for banks wishing to deal with certain categories of clients.

By making it too expensive to deal with certain clients or sending the signal that a bank should not deal with a particular client or type of client, the government can almost assuredly keep that company or person out of the banking system.

Banks are so critically dependent on government regulatory approval for their actions that observers like Warren Buffett, among many others, have recognized the government's immense power over banks. Recently, even JPMorgan, announced that it would be ending relationships with whole categories of clients that pose compliance challenges.

If current government trends continue, a cashless economy could thus very well lead to an econgularity. Imagine a future in which soon, a government staff member could suspect an individual of some misconduct, or perhaps deem that person's politics or speech unacceptable.

It would take just a few keystrokes to order all financial institutions to decline any withdrawal or payment from that individual and to transfer any deposits or payments of that person to the government, or at least freeze any access to funds. Perhaps this would need to be reviewed by a secret court that would approve 99.7 percent of all requests, but would provide a veneer of due process. It is fair to think that the targeted individual might starve to death. This could be insured by cutting off access to the payment system of anyone suspected of helping the targeted individual.

While bitcoin, a private synthetic cyber currency, might seem like an antidote to this scenario, it, too, requires connectivity, which can be subject to monitoring. Further, the exchange of bitcoin to the currency of the country in question can be regulated in ways that could limit or even end its utility.

Testimony by regulators to the U.S. Senate on Nov. 18th that the government can deal with bitcoin via the existing currency transaction surveillance laws and surveillance methods in place is a pretty good indication that U.S. agencies could also envelop bitcoin via meta-data and behavioral analysis.

It is by no means certain that such a dystopian outcome will occur in a cashless society. It could be that certain countries such as Sweden can make the leap without any adverse consequences. But my fear is that some governments will find it irresistible to take much greater control of the everyday behaviors of their citizens simply because they can.

Cash should be preserved: Pro

Signature Bank's chairman Scott Shay says there is a "place for cash and a place for non-cyber means of transfer." He also discusses his view of bitcoin.

There are certainly positive outcomes that can be obtained by going cashless. For example, banning sale transactions of cigarettes or sugary drinks or stopping cardholders from overeating, gambling, or whatever other vice is targeted, could lead to a decrease in these vices and their associated problems. A decrease in those problems could positively impact other areas, like, for example, our nation's health-care system. A cashless society would probably also mean less street crime.

Yet in return for these benefits, there is an incalculable cost to our humanity. We would lose our freedom to make decisions. It is easy to imagine a totalitarian regime using these tools to great harm. Given current U.S. government policies, it is also very easy to imagine even a liberal government such as our own, being sorely tempted to use the confluence of these technologies.

And once used, because they are so very, very powerful, even liberal governments will be enticed into using them until there is pretty complete monitoring and control of every transaction.

So now is the time to urge Congress to repeal civil forfeiture and to forbid government agencies from intruding on the financial payments of U.S. citizens or companies without due process unless it is a matter of national security or imminent harm. We can also hope that the Supreme Court will find civil forfeiture to be unconstitutional as it should be viewed.

By putting such strictures in place today we can change the trajectory of our current path. On a day-to- day basis, we should also decrease out debit- or credit-card use to preserve the market share of currency in our economy and stop the demise of cash. There are lots of other benefits to this as spending real cash out of our pockets makes us consider our expenditures more carefully and increases our savings rate.

Philosopher and economist Adam Smith observed that we are all economic beings in the sense that our essence as humans stems from our ability to make fair trades for our labor or our products. We make these transactions in the presence of the usually benevolent "invisible hand," as Smith called it in his book "An Inquiry into the Nature and Causes of the Wealth of Nations."

The invisible hand optimizes our total production, and, by and large, fosters our freedom. A "visible hand" monitoring every single transaction we make could be one of the greatest — and least expected — threats to freedom we have ever encountered in human history. This is the threat of econgularity.

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