Why Paper Money Will Stay 

Article published on Jan. 15, 2016
Article published on Jan. 15, 2016

This article has not been vetted by an editor at Paris HQ

In the recent years, even as the number of ways to pay has exploded, the growth in the supply of paper currency in most countries of the globe has shown little signs of slowing. But actually, it doesn’t mean much.

In the US for example, the amount of small bills in circulation — $1s to $20s — has remained pretty resilient over the past two decades. Nicholas Colas, Chief Market Strategist at Convergex says that even as Americans have become bigger users of credit and debit cards and have begun using online payments like eBay Inc.’s soon-to-be-spun-off PayPal, or some even used the new virtual currency BitCoin -, the demand for paper currency has not dwindled.

“$1 bills wear out fastest, and the Fed’s 2015 order of 2.5 billion bills is higher than 2014 (2.3 billion) and 2013 (1.8 billion),” Colas noted. “That’s growth and relevance any startup online payment company would be happy to see,” says Colas.

Industry experts claimed that even though the digitalization of money is still on the rise, banknotes remain resilient and are growing by 4–5% per annum.

Thomas Savare, CEO of Oberthur Fiduciaire, the French company that is one of the world leaders in banknote printing is similarly optimistic about the future of paper money.

"Our sector is expected to experience sustained growth in the coming years due to structural factors. First of all, globalization goes along with a desire to reaffirm one’s country singularity. Yet, banknotes traditionally embody strong symbols and values, just as national anthems and flags do”, Thomas Savare says.

Proponents of digital money however claim that the centuries old paper currencies have a shelved life and the economics of the world is to be taken over by electronic tools.

Andy Haldane of the Bank of England has recently proposed that Britain should abandon our centuries-old system and opt for a government-backed digital currency. Haldane is of the view that such a move would give the bank new flexibility in the event of another economic downturn. He believes that getting rid of cash would also remove the option of people hoarding up money in economies like the UK and the US where the interest rates are near zero. "What I think is now reasonably clear is that the payment technology embodied in [digital currency] Bitcoin has real potential," Haldane says.

Chris Preimesberger for his part, Editor of Features & Analysis at eWEEK, says that mobile money is the next big thing in world economics. “Apple Pay started almost one year ago and has spread quickly among commercial enterprises. Android Pay is about to launch, and Samsung is set to launch its own pay system soon,” Preimesberger says.

Rolf Bofinger, one of the German government's top economic advisers, is of the opinion that by scrapping banknotes and coins, a severe blow could be dealt to black-market transactions and the shadow economy as a whole.

However, the recent Bitcoin controversy has tilted the debate in the favor of paper money. Over the past several years, Bitcoin has been controversial. The digital currency has experienced a number of ups and downs in its fortunes since it was launched in 2009.

Earlier this month, the Japanese government charged the head of collapsed Bitcoin exchange MtGox with embezzlement, amid fraud allegations over the disappearance of hundreds-of-millions-of-dollars-worth of the virtual currency. The indictment of France-born Mark Karpeles, 30, comes after he was taken into police custody in Tokyo last month over the affair.

Karpeles now remains in police custody but has the option of petitioning the court for release pending trial. It is alleged that Karpeles fraudulently tinkered with data and transferred funds to other firms controlled by him dozens of times between 2011 and 2013 to the tune of 321 million yen or $2.7 million.

Proponents of digital money however claimed that the incident did not affect people’s interest in digital money. Yoshimitsu Homma, head of Japan Digital Money Association says: “the issue is in the past for the virtual currency world itself, and more people are getting interested in digital money”.

While security has emerged as the most important threat to digital money, paper money suffers from the same threat. Therefore central banks and leading printing companies are devising newer ways to make paper currency more secure.

"Security printing is an industrial activity with very high technology content. While paper money has been around for centuries, today's banknotes have almost nothing in common with those of yesteryear nor those which circulated several years ago. These are real condensed technology as a result of continuous innovation. We do the same job as before and with the same passion as before, but using constantly new processes, new technologies, all in order to maintain an impeccable level of quality and security," says Thomas Savare of Oberthur Fiduciaire. As a result, the company remains at the forefront of global issues in security for banknotes today, and the company is engaged in designing and printing paper currencies in 70 partner countries.

In the same way, some analysts are of the opinion that as long as there are security issues with digital money and incidents like Bitcoin keep happening, paper currencies will be in demand and if security printing companies are able to infuse confidence about security of paper currency, it would remain difficult to replace paper currency with digital money. Experts from Economy Watch website explain: “fears of hacking, viruses, and other attacks on the entire financial foundation of a nation via purely digital means will likely make most nations slow to adopt such a form of currency.”