It’s time to find an alternative to cash

Kenya’s banking crisis, if I may call it that, is a long list of 32 banks that have fallen by the wayside since 1988.

Almost always, there is never enough cash to give because all money held in banks is debt, a string of electronic digits that says the bank owes you money.

Our whole financial system is built on this premise, the fractional reserve banking system.

Because of it, as we transition from cash to electronic money, we face a wider systemic risk.

It came as no surprise, therefore, when commercial banks reported a 50 per cent day-to-day surge in cash withdrawals in regions outside of Nairobi days after Chase Bank went into receivership.

Cash is a bearer asset. When you hold paper money, you are in complete possession and no one can confiscate it from you.

Unlike the Sh1,000 you deposit in the bank, when you have Sh1,000, you can spend it. It is said to be censorship-resistant.

Banks, on the other hand, do not like cash, so they are ganging up against it unofficially.

A meticulously crafted scheme is under way to rid the world of paper money and transition us to a utopia where cashless transactions are the norm.

One oft-cited reason is the cost of printing paper money. At a Senate hearing in March this year, Central Bank Governor Patrick Njoroge said printing new notes would cost Sh18 billion.

Why fritter away good money on printing paper?

Another reason to have everyone on electronic money is to make it easier to impose experiential negative interest rate policies (NIRP).

Like the island of Japan, which, as part of NIRP, is charging depositors for holding their money to discourage saving and force consumer spending to kick-start a sluggish economy.

Perhaps, though, the most common reason cited for ridding us of cash is the trio of tax evasion, money laundering, and terrorist funding.

In February this year, the European Central Bank scrapped the 500 euro note, notorious for its utility in hoarding large sums of money by savers and for criminal use.

Here at home, the Central Bank of Kenya just got started, issuing a raft of new measures requiring additional information from customers when depositing or withdrawing large amounts of cash. They want us to put all our money in electronic form and give up cash. But how safe is our electronic money?

Electronic money, whether in the form of mobile money, credit and debit cards, bank balance or cheques, is not cash.

All these are an electronic record promising to pay on request. In Kenya, this debtor can be a bank, a card company, a sacco, a microfinance institution, or a telecom mobile money operator.

When we opt out of cash money, we opt into a system with a systemic risk of failure. The run on Chase Bank was a failure to keep that promise.

We are not the only ones. On election day in Uganda on March 12 this year, nearly 20 million mobile money users woke up to a directive ordering the shutdown of mobile money services.

For two-and-a-half days, people were unable to access the service to withdraw money or make payments or money transfers.

Just like in the case of Chase Bank, as soon as the service went live, users rushed to empty their mobile wallets.

In far-off Europe, Cypriots lined up outside ATMs to withdraw their deposits after their banking system went into a crisis in 2013. As soon as a bank goes into distress, depositors rush to salvage what is left of their money and soon find out that there is not enough to go around.

This is a reverberating theme across the world — Greece, Argentina, China, the UK. In a world full of bank-controlled electronic money, can we trust the system to keep its word?

For over 20 years, true electronic cash was an elusive ideal as attempts by cryptographers faltered. Up until 2008, the hope of a digital bearer asset was all but gone.

However, in that year, at the peak of the 2008/2009 financial crisis, it all came together.

Bitcoin was born. Bitcoin is a form of peer-to-peer digital cash. Because it is a digital bearer asset, holding bitcoins is equivalent to holding cash in the real world.

This is why it always makes the headlines.

I say Kenya’s recent banking troubles behove us to take a look at alternative forms of storing value.

Mr Kimani is a co-founder and CEO at Umati Blockchain Ltd. [email protected].