When was the last time you had a Kermit in your hand?

For the uninitiated, a Kermit is slang for an Australian hundred dollar note (they’re green). Since 15 May 1996 – the date of first circulation – I think I’ve had two in the normal course of events. I see Pineapples (fifties) all the time. It’s not that I’m really poor; Kermits just aren’t that common.

According to the RBA, at the end of June 2016, there were 1.4 billion banknotes worth $70.2 billion on issue in Australia. The Kermit accounted for 23 per cent of the number (328M) and 47 per cent of the value ($32.8B) of all banknotes in circulation. So where are they?

One theory is that they’re simply a convenient store of value for those who prefer to keep money under the bed over in a bank or superannuation account. Australian banks are considered safe by world standards, and deposits can be covered by a government guarantee, so one would have to distrust a lot of things to see cash as the safer option. Interest rates are low, but they’re not zero in Australia, so there’s at least a small incentive to have savings in a bank account.

To me, a better explanation is that some people prefer the anonymity and untraceability of cash transactions. Cash makes it easy to avoid tax, obviously, and one still hears it costs less for cash when getting a quote from a casual worker or shop attendant. But surely there aren’t that many people using Kermits to fix broken pipes or pay babysitters or get discounts on clothing.
A wad of Kermits is a small, lightweight, easily concealed brick of value which makes a great pay-off for a shipment of drugs. That’s my educated guess at where they all are.

Is it possible that honest everyday taxpaying consumers, who have embraced e-payments, are subsidising and facilitating criminal activities by paying for the cost of manufacturing and distributing Kermits?

Demonetisation the act of stripping a currency unit of its status as legal tender; Investopedia.
On Tuesday 8 November 2016, at 8pm local time, the Indian Prime Minister Narendra Modi announced live on television that the 500 and 1000 Indian rupee notes would be taken out of circulation, and would no longer be legal tender from midnight that night.

The intention was to eliminate the shadow economy including counterfeiting, corruption, black-market trade and tax evasion.

Mayhem ensued. The Indian economy plunged into chaos for months. Enormous queues formed outside banks the next morning as normal citizens tried to change their high value demonetized notes to smaller value legal tender. But there weren’t enough smaller value notes available, and the Government also used the opportunity to check for unpaid tax and ill-gotten gains.

Weddings were cancelled (no dowry), workers without bank accounts couldn’t be paid, retailers in high cash segments (real estate, jewelry, restaurants, etc) faced an instant drop in sales and a liquidity squeeze, stocks crashed, tourists couldn’t get cash in their country of origin, and the list goes on.

An interesting side effect was that BitCoin reached USD$1,000 for the first time in years soon after. Indians were driving up BitCoin value in a rush for ways to transact, or perhaps to store value. This indicates potentially that there is a future for digital value stores that are unregulated; at least governments can’t de-monetize BitCoin! This aligns with the stated intention of the mythical inventor of Bitcoin, Satoshi Nakamoto in November 2008, so congratulations mythical inventor. You did well.

On 16 December 2016, the Bolivian 100 boliva note ceased to be legal tender; this caused mayhem similar to India’s. Further back in history, there have been some truly disastrous demonetization programs, notably Myanmar in 1987 (triggering widespread civil unrest including directly attributable deaths) and USSR in 1991 (widely accepted as the event that triggered the collapse of the Soviet Union).

Dump the Kermit

If demonetization was so disruptive in India and Bolivia recently, and other economies historically, then why consider it in Australia now? My favourite superhero, Captain Obvious, can explain. Australia will be cashless soon anyway. Dumping the Kermit would have almost no impact on consumers and retailers because market forces have been driving cash out of tills for decades, and the Kermit is rarely seen even when cash is used.

47 per cent of people used cash in 2013, according to an RBA’s study of 1,500 people, down from 62 per cent in 2010 and 69 per cent in 2007. RBA figures from March 2017 indicated that ATM withdrawals fell by 7.7 per cent in January compared to the same month last year. This follows two consecutive years of ATM withdrawals falling by more than 6 per cent in each year. Cash is on the way out.

Spot on, Captain. We could save taxpayer funds, and drug dealers would be really angry and inconvenienced if we dumped the Kermit. Right again.

Kangas

If we dumped the Kermit, what would happen to the gaping value hole in the cash economy? $33.8B. One outcome might be that criminals simply adopt BitCoin, driving its value up further. At least taxpayers wouldn’t be footing the bill for minting BitCoins, and authorities might get more clues about their whereabouts and scale of activity from the Block Chain ledger.
But what if the Australian Government replaced Kermits with an official digital currency? Let’s call it Kanga Koin, in honour of an iconic national fauna emblem. Alternative names could be Emu Earnings or Dingo Dollars.

Why should we do this? When the current Prime Minister took office, he made big announcements about Australia embracing innovation and becoming the FinTech capital of the world. He was apparently infatuated with BitCoin, as he mentioned this several times in speeches and press releases, which was a bit weird because BitCoin wasn’t looked on favourably by Australian regulators or financial institutions, and there were confusing differences in treatment between Australian regulators. But perhaps the sentiment was right. Perhaps Australia could dramatically accelerate financial innovation through adopting Kanga Koin?

Some more solid economic benefits of adopting Kanga Koin might be:

• • Cost reduction – it should be cheaper to mint and distribute a Kanga than a Kermit, and one doesn’t have to organise secure destruction of damaged and worn notes reduced costs to retailers as the Kanga replaces other notes and coins in physical shopping.
  • Transparency of money flow, not only for identifying criminal and black market transactions, but to simply know how value is being exchanged in the economy ability to apply taxes to currently untraceable transactions.

No doubt there would be negatives, and it would be much easier not to do anything, but at least it’s worth considering. Australia is better positioned than most countries in the world because it’s almost cashless anyway, and we are so keen to embrace new gadgets and technologies. We should play to our strengths.

Some requirements of Kanga Koin would be: coexistence with physical cash; this is easy as Kermits exist independently of Pineapples, and cards and eWallets exist independently of cash, so no problem easily adopted by banks, merchants and consumers cheaper than physical notes secure; defences against counterfeiting, replicating, etc available for use offline; one of the great things about cash is that it can be used after a natural disaster has destroyed infrastructure or in an underground house in Coober Pedy (a great place to visit, by the way!)

A requirement that I struggle with is Anonymity versus Traceability. Cash is anonymous and (largely) untraceable. Australia’s national privacy principles require an ability to transact anonymously or under a pseudonym. This conflicts with all trends in payment processing globally relating to Knowing Your Customer and understanding sources and destinations of funds to detect and prevent money laundering and terrorist financing. If we introduced Kanga Koin, then we might be torn between anonymity and traceability, which is also useful for collecting taxes.

Note that I’m not advocating BitCoin as the vehicle for Kanga Koin. This wouldn’t make sense because by definition BitCoin is outside the control of Australian authorities. I’m not even proposing that Kanga Koin would be based on blockchain, for several general reasons (complexity, computational intensity, time to achieve consensus) and one specific reason: Kanga Koin should be available offline.

Wait a minute? How can a digital currency be available offline?

Back in the 1990s we trialled several smart card based digital currencies that worked offline, eg Mondex and Digicash. These technologies were on cards that interacted with local offline (or online) terminals, and the same idea could be used in cards or digital wallets today to allow for the case where internet communications are not available temporarily, or intermittently, perhaps because of remoteness, perhaps because of disaster.

Challenge

Here’s a challenge to the Australian government: let’s get rid of $100 notes, which are probably mainly used by drug dealers, other criminals and tax evaders, and which cost honest taxpayers lots of money, and replace them with an equal value of legal tender AUD digital tokens, which could, if done properly, stimulate economic growth and financial innovation for the next few decades.

Kermits out, Kangas in!

Rod Tasker Associate, Melbourne

Rod is presenting these ideas at FINSIA Around the Table lunchtime lectures in August 2017. Feedback and discussion is most welcome!
Rod consults in strategic management and innovative solution delivery in the banking and finance industry. He has experience in Australia and internationally and is an expert in payment services, e-commerce and transaction banking.