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Report to Congress ponders a future of cryptocurrency over cash

Migration away from cash transactions leaves an opening for digital currencies

A man purchases bitcoin from a bitcoin ATM in Boston in 2014. The use of cryptocurrencies to make payments in the U.S. is still “quite rare relative to cash and traditional systems,” a new CRS report says. (Darren McCollester/Getty Images file photo)
A man purchases bitcoin from a bitcoin ATM in Boston in 2014. The use of cryptocurrencies to make payments in the U.S. is still “quite rare relative to cash and traditional systems,” a new CRS report says. (Darren McCollester/Getty Images file photo)

Congress may be beginning to contemplate a country where cryptocurrency — not cash — is the coin of the realm.

The Congressional Research Service examined the decline in cash usage in the United States and the potential rise of alternative payment systems, including bitcoin or other digital assets, in the purchase of goods and services.

The CRS is tasked with producing nonpartisan advice on issues that may come before Congress, especially when lawmakers express interest in a certain subject. Alternative payment systems are gaining steam as lawmakers introduce legislation that would require stores to take cash and examine the impact of financial technology, or fintech.

Although the amount of currency in circulation has increased over the last 20 years, Federal Reserve studies suggest the use of cash in payments may be dropping, according to the CRS report, issued May 10. Just how much may be a matter of debate, but the migration away from cash transactions at retail stores is evident in daily life. So far, the move has been largely in favor of what the CRS refers to as “traditional noncash payment systems” such as credit cards and debit cards. And the report even includes rising payment mobile apps, of which there are many and no clearly established market leaders, in the category of “traditional.”

The question facing businesses, policymakers, consumers, and the economy at large is how significant a role alternative channels such as digital currencies will play in the future of the U.S. retail payments system.

The use of cryptocurrencies, blockchain technology and distributed ledgers to make payments in the U.S. is “quite rare relative to cash and traditional systems,” the report states. While there is a public interest in and demand for some digital currencies, analyses indicate they are not being widely used and accepted as payment for goods and services, “but rather as investment vehicles.”

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For one thing, unlike dollars, cryptocurrencies are not legal tender, meaning creditors are not legally required to accept them to settle debts.

“Consumers and businesses also may be hesitant to place their trust in these systems because they have limited understanding of them,” CRS writes, suggesting people are satisfied with the speed and convenience of current traditional electronic payment systems, and see no reason for society to move on to unfamiliar crypto-based alternative. The report includes services such as Venmo, Apple Pay and Google Pay in the traditional category.

Despite the limited uptake so far, some believe they will be at least part of the payment options in the future.

“While cryptocurrencies may not supplant traditional payments aggressively in the near term, the value of blockchain and innovative approaches to the payments industry extends beyond fiat currency replacement,” said Amy Zirkle, interim CEO of the Electronic Transactions Association, a Washington-based trade group for the payments technology industry. She said the value could be in solving cross-border payments, streamlining communication between financial institutions, and better securing data.

Cashless discrimination

One concern about moving to new payment options, though, is the possibility of excluding people if certain digital assets become the norm. Even under the current traditional electronic payments system, there is a growing political opposition in some parts of the country to “cashless” retail establishments, which accept only credit cards, debit cards and mobile apps for payment.

Opponents of cashless brick-and-mortar stores and restaurants say such establishments discriminate against lower-income individuals, often members of minority groups who do not have access to credit and debit cards. The Federal Reserve reported last week that 14 percent of blacks and 11 percent of Hispanics have no bank accounts. Sixteen percent of U.S. adults are “underbanked,” which means they have an account but also used money orders, check-cashing services or payday loans in the past year.

New Jersey, Massachusetts and Philadelphia have enacted laws that largely prohibit cashless stores. Earlier this month, the San Francisco Board of Supervisors passed legislation that requires nearly all brick-and-mortar retailers in that city to accept cash. The measure had been introduced by Supervisor Vallie Brown, who told CQ Roll Call in an emailed statement: “A ‘no cash’ sign is a ‘not welcome’ sign for many San Franciscans who do not have access to banking services. … The future may be cashless but denying the ability to use cash as a payment today means excluding too many people.”

Earlier this month, two Democratic members of Congress introduced separate bills that would make it unlawful for physical retail establishments to refuse to accept cash as payment.

Volatile pricing

High volatility in the price of many cryptocurrencies also undermines their ability to act as money, according to the report to Congress. “Cryptocurrencies can have significant value fluctuations within short periods of time; as a result, pricing goods and services in units of cryptocurrency would require frequent repricing and likely would cause confusion among buyers and sellers,” it states.

The CRS report also casts doubt on the ability of cryptocurrency systems to handle the sheer volume as a cash replacement.

“At present, the systems underlying cryptocurrencies do not appear capable of processing the number of transactions that would be required of a widely adopted, global payment system,” the CRS writes, even raising questions about the environmental impact of a widespread alternative electronic retail payment system. “One concern involves the significant energy consumption required to run and cool the computers that validate the transactions on these platforms.”

There is also some question about the enthusiasm of traditional payment system operators to embrace a new crypto-based system.

The CRS reports that both the Federal Reserve and private institutions are working to increase payments system speed and reduce the time it takes to finalize certain transaction such as the lag that can occur between when a payment, such as a paycheck, is deposited and when the full amount of funds become available to the depositor.

“Payment system operators arguably have little incentive to achieve faster or real-time payments,” the CRS writes. That is because they are already in compliance with the federal law requirement directing that most deposits be available by the second business day, meaning generally the next day depending on the time of the deposit.

Updating systems to improve on this would be costly for the institutions that operate them.

Moreover, banks, which act as intermediaries in traditional payment systems, are generating revenue through overdraft fees, something they would lose with the adoption of theoretically faster alternative systems.

Future unclear

While the future role of alternative electronic payments systems in the U.S. is “speculative,” according to CRS, one payments industry expert says they are not going away.

“I think you will see them co-exist,” ETA’s Zirkle said. She told CQ that among her group’s members the use of distributed ledger technology is definitely “an area of attention.”

Zirkle said she sees growth potential in the e-commerce sector, noting that online retailer Overstock has been accepting cryptocurrency since 2014. She was cautious, however, about the possibility that cryptocurrency use will find widespread acceptance among small-scale merchant brick-and-mortar stores in the near future.

Despite an uncertain future, cryptocurrencies, blockchain and distributed ledger technologies “have the potential to significantly affect the usage of cash and traditional systems for payments,” according to the CRS. That conclusion and that potential may put the future U.S. use of alternative electronic payment systems on Congress’ radar screen.

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