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    Does e-money make you spend more?

    December 06, 2019

    Many countries have already started to shun physical money – and the UK and USA are already lagging behind. Are we wise to keep our cash? Or are we simply stuck in the past?
    I have a memory as a boy, saving my pocket money by placing it in a special drawer, the golden pound coins collecting into a neat stack. (Although the stack never got too high to endanger its structural integrity.) I grew up in Hastings, a small coastal town in East Sussex, famous for 1066 and seaside charm. It has a reputation for being somewhat rundown and is forever “up-and-coming”.I got my first debit card when I was 14. Later, I saved up money for a gap year, by working at a bingo hall, and I put the money into a savings account. I avoided credit cards. Back then (2007) it was still around 5% interest rates, and I remember getting £70 ($91) one year, which made me feel very rich indeed.
    Skip forward to 2018 and I was living and working in Beijing, China, as a freelance journalist. All around me Beijing residents were paying for everything using just their smartphones. They would walk up to a counter of a restaurant, shop, or convenience store, and offer up a QR code for the cashier to scan. Once scanned, the online system would immediately deduct the exact amount owed from the payer’s e-wallet. No fumbling for cash and waiting for change. No swipe of a plastic card either. The transaction would take seconds.


    But I was a stubborn holdout. My friends, both Western and Chinese, would make fun of me for being so traditional – for clinging onto “dirty cash” – seeing the crumpled paper bills as evidence of my Luddite ways. But there were a couple of reasons why I kept using physical money and avoided getting into e-payments and e-wallets. Firstly, it felt safer. I wasn’t really aware of how electronic money would work on my smartphone and I feared it would somehow get easily siphoned off. Having physical cash just felt safer.

    Secondly, I feared that by moving to electronic payments, and losing the greater friction of paying with cash, I would end up spending more. I was afraid that by losing the tangible, visible qualities of paper money, and the physical transaction – of fishing out my wallet, finding the required bills, and handing over the cash – I would lose all sense of how much, day by day, I would be spending.

    Were these fears justified? As more and more people across the world shun cash, these are essential issues to consider.


    Some people fear transitioning to electronic payments, thinking that they will spend more (Credit: Javier Hirschfeld/Getty Images)

    Before we get into the twisty and tricky slopes of consumer psychology, and the conflict between classical economics and psychology that led to the birth of behavioural economics – let’s first consider what money is exactly.

    Money is an abstract concept – and today we take it for granted, not considering how a piece of paper, or pieces of metal, are valuable items in themselves. But money is a relatively recent invention, and it represented a fundamental change in human society, says Natacha Postel-Vinay, who teaches a course in the history of money and finance at the London School of Economics.

    “It was completely different from barter,” she says. “You don’t need exact matching from two different people and their desires. If you wanted to buy some bread, the bread seller didn’t need to have something specific from you; your coat or your garden veg. You just needed some silver.”

    The first recorded use of money was in ancient Iraq and Syria, in the Babylon civilisation, around 3000BC
    In technical terms, money is a store of value, and should be a unit of account, which simply means that it must be of a standardized unit (like a currency).

    The first recorded use of money was in ancient Iraq and Syria, in the Babylon civilisation, around 3000BC. In Babylonian times people used chunks of silver which were accounted according to a standardised weight known as a shekel. From Babylon, we have records of the first prices, recorded by priests at the Temple of Marduk, as well as the first ledgers and the first debts.

    From Babylon we have many of the essential things required for a monetary economy. These include the fact the silver was regularly tested for its fineness and there was a stabilising force, such as a King or government, which people could trust to guarantee the value of the money. “At all times, in order for money to have value, trust is needed,” says Postel-Vinay. But there have been many developments in money along the way. Babylon had money, but it was still bulky and had to be weighed – it wasn’t as advanced as coins. From about 1000BC other civilisations were using precious metal, and in ancient Greece, in the Kingdom of Lydia, the first coins were minted.


    The ancient Babylonians were the first to come up with the concept of money (Credit: Javier Hirschfeld/Alamy)

    The first paper bills were used in Imperial China during the Tang dynasty (AD 618-907), which existed as privately issued bills of credit or exchange notes, but Europe wouldn’t cotton on to the idea until the 17th Century.

    Nowadays, money is not tied to physical objects that are in themselves valuable commodities, such as gold or silver coins, but we use a form called fiat money which is a currency that a government has established as legal tender.

    The concept of credit (and debt) existed long before credit cards were invented. “It doesn’t need to be physical in order for it to be money,” explains Postel-Vinay.

    The bank-issued credit card was invented by John Biggins of the Flatbush National Bank of Brooklyn in New York in 1946. Subsequently, credit cards were promoted to travelling salesmen, for them to use while on the road, in America. In the UK, Barclays issued the UK’s first credit card on 29 June 1966.

    The first debit card appeared in the UK in 1987. Chip and pin was introduced in 2003, and contactless credit cards followed four years later.

    Just five years ago I paid my rent in cash! – Emelie Svensson
    In China, meanwhile, scanning QR codes with your smartphone, or generating QR codes on your smartphone to be scanned by merchants, was co-opted as a means of making payments. China’s rapid adoption of electronic payments is explained by the ubiquity of WeChat in the country, a super-app that includes e-payment/e-wallet, messaging, and social media functions; the popularity of e-commerce platforms, such as Alibaba’s Taobao platform; and the fact that China has relatively low rates of credit card usage. From around 2015, adoption of e-payments in day-to-day usage became much more prevalent.

    Countries that have the highest rates of cashless spending include Canada, where having more than two credits cards per person is a norm. In Europe, Sweden is the most cashless society, with just 13% of Swedes reporting that they used cash for a recent purchase, according to a nationwide survey conducted last year, down from around 40% in 2010. In comparison, around 70% of Americans still use cash on a weekly basis, according to a recent Pew Research Center study.

    Emelie Svensson, a Swede who works in New York City as a broadcast journalist, says the two countries are very different when it comes to the use of cash. “It’s based on tipping and a lot of stores don’t even take cards, or it’s a minimum $10 purchase,” she says, referring to her experience of living in America. “It’s getting better though, just five years ago I paid my rent in cash!”


    China invented paper money - but the country now fully embraces electronic payments (Credit: Javier Hirschfeld/Getty Images)

    And although the UK might be increasing in its use of non-cash payments, it still has a long way to go. For Moa Carlsson, a 20-year-old butcher from Gothenburg, the country feels quaint in comparison to her native Sweden. “I guess it’s a bit of fun and almost strange in a way to use cash,” she says, when she visits the UK. “England feels a bit more old-fashioned in itself. I would almost feel strange not to use cash there. I feel like the pound is a big part of England, much more so than the krona for Sweden”.

    For people who live in these increasingly cashless societies, the benefits of electronic payment are obvious. “It’s very convenient. You don’t have the feeling of having £200 in your pocket or [the hassle] of having to go take out money. ‘Where is the cash machine?’ It’s there in your pocket,” says William Vanbergen, a British entrepreneur who first arrived in China in 2003, and was a late adopter of e-payments.

    Like Carlsson, he says dealing in cash feels antiquated. When Vanbergen travels to Hong Kong for work, where cash is still the more usual payment method, or back to his native England, he says it’s like going back in time.

    Does spending without using physical cash make people spend more?
    But what of the supposed disadvantages?

    Does spending without using physical cash make people spend more? This is a complicated question and it involves seeing humans as fundamentally irrational creatures, in various ways. For instance, it has been shown psychologically that people feel more pain when they lose £100 than the joy they feel on gaining £100. In other words, the pain of the loss stings more, even though the two sums are exactly the same.

    This kind of psychological insight has powered enormous change in the field of economics. Whereas before, in classical economics, academics based their theories on the assumption that people behave rationally (so that the loss and gain of an equal sum would be treated the same by an individual), this was shown to be false by psychological studies. This led to the discipline of behavioural economics and branches such as consumer psychology.


    We find it much easier to spend on plastic than we do cash (Credit: Javier Hirschfeld/Getty Images/Alamy)

    One of the great researchers in this relatively new discipline is Drazen Prelec. The MIT professor once conducted a study that involved a silent auction. The auction was held for students at the prestigious Sloan business school, for tickets to sold-out NBA basketball games. The researchers told half the bidders they could pay only with cash, while the other half were told they could pay only with a credit card.

    The results astonished the researchers. On average, it was found that the credit card buyers were bidding more than twice as much as the cash buyers. What this means, according to Prelec, is that the psychological cost of spending a dollar on a credit card is only 50 cents.

    Spending on a credit card clearly has effects on how people spend, which numerous studies have borne out. However, it’s also been shown that credit card bills, when they arrive, cause enormous pain for the receiver. So much so, in fact, that behavioural economists believe this explains the continuing popularity of debit cards.

    But what about using e-wallets? What’s important is feedback, explains Emir Efendic, a post-doctoral psychologist and behavioural economist at the University of Louvain. “With credit cards, you don’t get instant updates. But with online banks, you see the amount deducted immediately,” says Efendic. “If you lose feedback, then yes you’ll be spending more”.

    Neural pathways light up almost like brief physical pain when we part with our money
    With credit cards, the pain of payment is delayed (until that monthly bill arrives, anyway). The great ability of credit cards, in other words, is that they wield the psychological power of separating the pleasure of buying from the pain of paying.

    But with e-wallets, users can see that money is deducted immediately. Emily Belton, a British ex-pat who uses WeChat Pay in Beijing, says she likes getting a notification each time she pays with it, and her balance and payments are updated in real-time. This is instant feedback and so does not have the same effect as a credit card.

    However, Prelec has found that neural pathways light up in what he describes as a “flinch moment”, almost like brief physical pain, when we part with our money. Although there is no similar research yet on paying with e-wallets, it could be hypothesised that the flinch moment could be missing when paying with a smartphone. But this needs more research.


    For people living in increasingly cashless societies, the convenience of electronic payment is obvious (Credit Javier Hirschfeld/Getty Images)

    This pain of parting with our money can keep us from overspending, but the negative aspect is that it can rob us some of the joy in consuming. This psychological cost, what Prelec calls a “moral tax”, can be reduced in various ways. Pricing instruments such as bundling – including “free” goods along with the purchase of a main good, can take away some of this “moral tax”. Prepayment is another method, even when there is no financial advantage. For example, people have been shown to prefer to pay in instalments for vacations (even though they’re losing some of their cash liquidity).

    And once they’re abroad they also find it easier to spend in foreign currency, treating it with much less seriousness than with the “real money” of their native country. Companies such as Club Med have latched onto this kind of psychology, where their resort guests buy plastic chips to use instead of cash.

    For me, I eventually transitioned to using e-payments in Beijing. I’ve found the cashless system quite staggering in its seamlessness, its convenience. It is like living in a world where you get all the benefits of spending, without the pain of paying.

    Perhaps this is better for economies, where it could be beneficial if people spend their money more freely, and many governments around the world are trying to encourage this. There is an old English saying: “Money, like manure, does no good till it is spread.” But sometimes, this kind of free spending, without any friction at all, leads to a kind of uneasiness.
    Perhaps this is the “moral tax” Drazen Prelec refers to, which is a psychological tendency to feel opportunity costs as real pain. In other words, I might be feeling this uneasiness because I am imagining that I could be spending that money on other things instead.As more societies move from cash-based to cashless, the way we spend might change. But money will remain a governing force in the lives of humans.
    Weird West
    This article is part of our Weird West series. Back in 2010, a team at the University of British Columbia pointed out that psychology research contains a major flaw: much of it is based on samples entirely from Western, Educated, Industrialised, Rich and Democratic – or Weird – societies. The researchers often assumed that their findings would be applicable to people anywhere. But when they did a review, the university team found that from reasoning styles to visual perception, members of Weird societies are, in fact, “among the least representative populations one could find for generalising about humans”.
    From the mainstream media to academia, however, it remains common to see the Weird as “normal” – or at least as a “standard” against which other cultures, and people, are judged. In this series, we dig into what this looks like in everyday life. What habits and ways of thinking are common in Weird societies that people living elsewhere in the world might find, well, weird? And what does this tell us, not only about cultural differences, but about ourselves? From when we shower to how we shop, this series re-examines the behaviours often taken for granted – and explores how the “standard” is rarely the best, or only, way.

    Will cash disappear? Many technology cheerleaders believe so, but as Rose Eveleth discovers, the truth is more complicated.
    Rose Eveleth
    By Rose Eveleth
    24th July 2015

    It’s a hot summer day in 2025 and you’re wrapping up a long meeting at the office. Several of your colleagues have attended the meeting from home, their faces and bodies projected as holograms into seats at the table. But you came into the office, and were rewarded with a nice array of meeting snacks – slices of lab-grown salami and grapes. Afterwards, you step out of the office to grab some fresh air and a coffee. On the street the cars are driving themselves, and people with internet connected retinal implants walk past, checking the scores and their stocks as they go.

    You order a latte with soy milk – the only kind of milk that’s affordable any more after the collapse of the dairy industry. You reach into your wallet, and pull out a few bills, folded and slightly crumpled on the edges, smoothing them before you feed them into the robot barista’s money slot.

    Wait. Crumpled bills? Isn’t this supposed to be the future? Nobody is going to use cash in 10 years, right?

    If you take a closer look at the evidence, it’s a bit premature to predict cash’s disappearance
    Not quite. It’s tempting to forecast the demise of cash. In fact, people have been predicting the end for physical money for nearly 60 years. With the rise of credit cards, contactless payments and cryptocurrencies like Bitcoin the death knells have only gotten louder. It may seem like physical money could soon be a thing of the past, but if you take a closer look at the evidence – and the intriguing psychological relationship we have developed with notes and coins – you’ll find that it’s a bit premature to predict cash’s disappearance.


    In the US, cash in circulation grew 42% between 2007 and 2012 (Credit: Getty Images)

    Physical money has been with us for thousands of years for a reason. Cash is essentially untraceable, it’s easy to carry, it’s widely accepted and it’s reliable. If the power goes out, or there’s a blip in the electronic systems that make the online commerce world go round, cash is there. If someone wants to buy something without anybody tracing it back to her, cash is the way to do it. If someone wants to be certain that their form of payment will be accepted, cash is the best bet. Even with advances in technology, some of the aspects of cash simply aren’t reproducible with bits just yet.

    Cash is essentially untraceable, it’s easy to carry, it’s widely accepted and it’s reliable
    There is simply no alternative system of payment that is as convenient, reliable and anonymous. Bitcoin is anonymous, but currently unstable and inconvenient. Credit and debit cards are widely accepted, but they instantly connect your purchases with your person. Peer-to-peer payment systems like Paypal or Venmo require apps and accounts, and are still easily traceable.

    Then there’s the question of global reliability. In the case of American money, cash has value beyond the borders of the country. In fact, two thirds of cash holdings in American dollars exist outside the country. People store up cash for emergencies, to keep a safety net, and to ensure that whatever happens, their wad of cash will be there for them.


    Is cash really on the way out? (Credit: Getty Images)

    While technology is trying to design a system that has all the components that cash does, it’s simply not there yet. Which is why, when you look at the statistics we have on cash use around the world, paper and coin isn’t doing too badly after all.

    Number crunching

    It’s difficult to put a number on just how much cash is used day-to-day across the globe. One of cash’s key attributes is how hard it is to track. Still, the data that does exist gives us a glimpse.

    Two thirds of cash holdings in America exist outside the country
    The first way to estimate cash use is to calculate how much of it is in circulation. By this measure, cash is far from disappearing. In the United States, cash in circulation grew 42% between 2007 and 2012, and the amount of American money floating around in bills and coins is expected to grow by about 5% each year. The average growth globally is 7% per year, according to Eric Ziegler, President of the Security Technologies Group at Crane Currency, which manufactures notes.

    However, that’s not the same as how much cash is actually changing hands in daily transactions. “Nobody has a way of going into the economy and counting how many bills are out there and the value of those bills,” says Daniel Wilson, an economist with the Federal Reserve Bank of San Francisco. “We don’t know exactly how many cash transactions are occurring on any given day.”

    To get some sense of how cash moves, economists design models and surveys. In the Netherlands, for example, economist Nicole Jonker and her team at the Dutch National Bank conducted something called a diary study, in which they asked participants to write down a day’s worth of transactions, both cash and non-cash. From there, Jonker and her team built a picture of the how Dutch people were buying things.


    Many have suggested that digital payments will lead to the end of cash (Credit: iStock)

    The Netherlands is an interesting case study to look at more closely, because their retail sector has recently embraced card payments in a big way. There are now 1,400 supermarkets in the Netherlands with registers that don’t accept cash.

    In the UK, half the transactions by consumers in 2013 were with cash
    As a result, card payments in the Netherlands have been growing by about 8% annually over the past few years. And yet, cash is still king. In 2012, there were 2.7 billion card payments, but an estimated 3.5 to four billion payments were made with cash. “Even in supermarkets which all accept debit cards, cash is still used heavily,” Jonker says. “For the time being we think cash will keep on having an important role.”

    Studies of other nations tie in with these findings. In the UK, half the transactions by consumers in 2013 were with cash, according to a report released in May by the UK Payments Council (now known as Payments UK). “The current forecast is that this figure will drop below 50% next year (2016), but there is no prediction for cash to disappear,” the report reads.

    And one study that rounded up surveys like Jonker’s from around the world found that, in the seven countries they looked at — Australia, Austria, Canada, France, Germany, the Netherlands and the United States, 46-82% of all transactions in 2012 were conducted using cash (a wide range that may reflect both the uncertainty in the survey methods, and the variability between nations).


    Some like cash because it is anonymous and can be squirrelled away (Credit: Getty Images)

    Even countries that are often held up as the leaders of a cashless crusade, such as Sweden and Denmark, aren’t really getting rid of notes and coins. In June of this year, there was a round of headlines declaring that Denmark would rid itself of cash by 2016. “Burn your bills: Denmark wants to go cashless by 2016,” the headlines read. Not even close, Rene Thomsen, manager at the Danish Bankers Association told me. “I think, there’s been some misunderstanding on what the Danish proposal really is,” he said. In Denmark, he explained, there is currently a rule that all shops must accept cash. This new proposal would let some shops get around that rule. That’s all.

    “It’s difficult to say, but I would be very surprised if we didn’t have cash in 10 to 15 years,” he says. “It’s hard to imagine that within 10 to 15 years that it’s not possible to go into a bank and say ‘I would like $1,000 and I want it in cash.’”

    Irrational urge

    Perhaps cash’s sticking power has something to do with our strange relationship with notes and coins. As with most of our decisions and preferences, our affinity for cash isn’t entirely rational. People value cash differently than they value electronic money, even though the two have the exact same value. Psychologist Eric Uhlmann, from the Paris School of Management, has done a handful of studies that picked apart how differently people feel about different kinds of money. “I’m interested in human intuition and economic irrationalities,” he says. “There’s this sort of irrational feeling that if money is physical, it’s more yours, and you feel like you own it more. If you touch a dollar more, then that particular dollar becomes yours.”

    There’s this irrational feeling that if money is physical you feel like you own it more
    Uhlmann tested these ideas by presenting a set of scenarios to participants. In one, they were told a story about Ted and Donna. Forty years ago, the story goes, Ted’s great-grandfather stole $1,000 from Donna’s great-grandfather. Ted eventually inherited that money. In one scenario, Ted inherited the actual money – a wad of bills in a box that his great-grandfather passed down to him. In the other scenario Ted’s great-grandfather deposited that money into Ted’s bank account. When Donna finds out that Ted has the money, she asks for it back.


    Contactless payment is here but it's unclear yet how it will impact cash use (Credit: iStock)

    Participants were then asked whether Ted should give the money back to Donna. Those who heard the story with the physical money, in which Ted had a box of bills, were more likely to say that he should give Donna the money back. Participants who heard the story in which the money lived in Ted’s bank account, rather than a box, were more likely to say that Ted no longer had “quite the same” money that had been stolen, and were less inclined to force Ted to hand it over.

    This kind of thinking applies not to just dollars in a box, but larger questions of theft and justice as well. Another researcher has done studies showing that people feel less negatively about white-collar crime, where people aren’t stealing physical things, than they do about blue-collar crimes in which an object is taken. Another study found that people cheat more when they’re cheating for tokens, than when they’re cheating for actual money. If you leave a Coca-Cola out, people are far more likely to take it than if you leave a dollar.

    There’s been a backlash against abolishing pennies – despite being worth less than they cost to produce
    Of course there are limits to these effects. “If your bank subtracts money from your account, you’d still feel stolen from,” Uhlmann says. But when the two amounts are the same, there is a clear difference in how we feel about physical money compared to its digital proxy. “It says something really interesting about the human mind,” he says, “and the difficulty that we have being logical despite our rational beliefs.”

    Could that mean that we might resist giving up cash entirely? There’s some evidence that suggests so. In the US, there has been a backlash against abolishing pennies – despite being worth less than they cost to produce, some Americans aren’t ready to part with the coin. Over in Australia, talk of abolishing the five cent coin was met with concern over the loss of income that charities receive from small change, and potential consumer backlash over rounded-up prices.


    In 2012, between 42-80% of transactions were in cash, depending on the country (Credit: Getty Images)

    History also suggests that there is a safety and security we feel about cash that digital currencies can’t quite match. Anybody who’s seen Mary Poppins knows the chaos that can happen when there’s a run on the banks. When there’s a financial crisis, people would rather have their money in hand, than behind the teller’s window or in the cloud.

    It’s possible of course that developed Western countries like the US may be more attached to cash than elsewhere. “Different cultures have different attachments to their currencies,” says Nicolas Christin, a researcher at Carnegie Mellon University, “and as far as the US is concerned there’s a strong attachment.” Christin argues that’s because in the US the national currency has been relatively steady, where other countries have seen periods of boom and bust in the value of their money. This might make Americans more attached and trustworthy of their bills than other people.

    The mobile caveat

    While most conversations about the future of technology might myopically focus on America and Europe, some of the greatest innovations in money aren’t coming from either place. In some developing countries, cash transactions are quickly being replaced by digital payments, powered by mobile phones.

    'Kenya has done mobile payments better than anyone' - Benjamin Mazzotta
    While in the US, you still might buy your coffee with cash in 2025, that might not be the case in Kenya. In 2007, Kenyans began to adopt a system called M-Pesa and today it is used by over 17 million Kenyans, over two-thirds of the adult population. Users top-up their accounts and transfer money by sending a text message; the recipient then takes their phone to a vendor to get their money. No banks are involved.

    “Kenya has done mobile payments better than anyone,” says Benjamin Mazzotta, a researcher at Tufts University who studies cash use. “M-Pesa is now accepted not just for large transfers, but for meals and clothes and school tuition. You can do lots of things with M-Pesa today that five or 10 years ago would have sounded like Neverland.”


    The ATM remains ubiquitous (Credit: Getty Images)

    Still, in places like the US and Europe, a system like M-Pesa might have a harder time catching on. Much of the technology’s success is due to the fact that it’s run by Safaricon, the country’s largest mobile-network operator by far. In other countries, competition is stronger: if each operator chooses to introduce their own proprietary form of mobile payment, it might not be anywhere near as convenient and seamless.

    Take the Apple Pay system for example. Apple has faced hurdle after hurdle in getting the system adopted both in the United States and elsewhere. They’ve struggled to cut deals with places like China, where one company controls transactions between banks.

    And it’s worth remembering that M-Pesa is a system for moving cash around, not a system to eliminate it. Users still hand cash to the M-Pesa vendors to top-up their accounts, and retrieve cash from them when money is sent to them.

    So, while tech evangelists might like to believe they can replace global use of cash with digital transactions or Bitcoin, the truth is a bit more complicated and the hurdles aren’t all fixable by technology alone. Our psychological attachment to money, the infrastructure available to banks, and the need to create systems that are compatible with lots of vendors and users, all make progress away from cash more of a slog than a sprint.

    Money makers

    When you ask those who actually make currency whether they lose sleep over the looming cashless future, they say they’re not worried. “Frankly, based on the continued growth rate of cash, we don’t anticipate the disappearance of cash in the possible near term, or even medium term,” says Eric Ziegler at Crane Currency, a money design and manufacturing company. He doesn’t think Crane even has a cashless contingency plan, nor that they need one.

    The fight against counterfeiters goes all the way back to the 4th Century BC
    Of course, saying that cash isn’t going away isn’t the same as saying cash is going to look the same forever. Banks and printers are constantly engaged in the fight against counterfeiters – a fight that goes all the way back to the 4th Century BC. And our future money will probably be a lot more digital than it is now.

    Manufacturers like Crane are developing futuristic bills that involve large, easy to recognise security features. According to Ziegler, the best security features are the most obvious ones. “You want it to be technologically advanced, but so easy and obvious that if it’s missing the average cashier isn’t going to miss it,” he says. For that reason, he says, future money will likely continue to feature portraits and heads. Not just because we love to memorialise people, but because portraits are also a great way to challenge counterfeiters because as humans we’re good at recognising irregularities in faces. “If the hair is slightly different, or the glasses are off, we notice,” says Ziegler. “Portraits are a great security feature.”


    Could cash one day only be found in museums or galleries? (Credit: Getty Images)

    Beyond creating new bills with advanced security features, others are toying with the idea of slapping the digital world right on top of the physical one. In 2001 the European Union considered adding an RFID chip to each bill, largely in response to a huge number of counterfeit euros discovered in Greece. They ultimately rejected the idea, as it would increase the cost of producing bills dramatically, but according to Christin, future money might be full of these kinds of digital elements. In fact, it’s not the technology that’s missing, Christin says, it’s the infrastructure. An RFID chip is only useful if someone has an RFID reader to scan it with. “Think about the guy on the beach in Thailand who wants to rent a surfboard,” says Christin. “Do you have all the infrastructure you need to use that technology there?”

    Unless we have sufficient and reliable alternatives in place, it would be dumb to get rid of cash now
    “It’s not that the technology doesn’t exist,” he adds, “it does, it would just cost a lot of money and be hard to deploy universally.” In other words, the exact challenges that face digital currencies are what make digital additions to cash so difficult.
    So where does that leave us? “Until we have sufficient and reliable alternatives in place, it would be dumb to get rid of cash now,” says David Wolman, author of the book The End of Money. “Honest people and legit businesses still rely on it.” Instead of constant cheering or hand wringing about the word “cashless,” people should be examining the trends that are pushing cash away. “It would be foolish to conflate enthusiasm about the impact of that marginalisation with unthinking cheerleading for cash’s total demise,” he says.

    Many who think about cash like to use Mark Twain’s quote: “reports of my death have been exaggerated.” In one paper, the authors compare cash to a kind of Cinderella. “It doesn’t have a mom or dad to watch over it – just those horrible stepsisters that try to convince Cinderella that she is ugly. But she isn’t,” they write. Cash is with us, and it will stay with us whether Bitcoin and PayPal advocates like it or not.

    On that fall day in 2025 you may take a self-driving car to work, or hologram into the office, and you may not even touch a piece of paper money. But you’ll likely still have a few notes and coins on hand somewhere, just in case. And you can be certain that somewhere in the world, somebody is pulling cash out of their pocket to buy something.

    How often have you looked at the cash in your wallet? Look closer: it’s riddled with hidden patterns designed to deter counterfeiters. Chris Baraniuk investigates.
    Author image
    By Chris Baraniuk
    26th June 2015

    A brand-new Xerox colour photocopier had just arrived at one of Cambridge’s industrial labs. It was the early 2000s, and word of the new-fangled contraption quickly got around – including to computer scientist Markus Kuhn, then a PhD student. It didn’t take him long to decide on the best way to test its abilities. “We were students,” he recalls with a laugh. “We went straight for the banknotes.” (Don’t try this at home – the photocopying of banknotes, in the UK and in other countries, is illegal).

    Kuhn placed a British £20 note on the glass surface to scan. He closed the lid, pressed the copy button and waited. The copier whirred. But no colour reproduction of the note appeared in the tray. Instead came a message printed in various languages – explaining that copying banknotes was illegal.

    Recurring constellation

    This was a surprise. How did the copier know what it was being asked to print? “The euro banknotes had just come out,” says Kuhn, “and I had a 10-euro banknote in my wallet. On the 10-euro banknote, I spotted this particularly obvious pattern of little circles. I stared at it for a while and I saw that the constellation inside this pattern was recurring.”


    The ‘constellation’ of circles recurs across different currencies; it’s shown here, on the right, on a £10 note (Credit: BBCW)

    Kuhn looked again at the £20 note. The pattern was there, too, but on the front of the note it was hidden in a motif of printed music: the circles were printed as the heads of the musical notes. So a recurring pattern of five circles existed on sterling and euro banknotes, on both the front and back. Other currencies around the world, it soon emerged, were printed with the same pattern. But since different notes varied their colours and orientations of the patterns, even across different denominations of the same currency, how did colour photocopiers pick out the pattern each time?

    Kuhn began to investigate. At first, he drew the pattern in isolation on a blank piece of paper, printed it and tried to photocopy it. When it was a black-and-white pattern, the photocopier reproduced it without quibbling. But when Kuhn coloured in the circles, the anti-counterfeiting message was churned out instead. “There appears to be some circuitry that requires the circles to be present in a colour channel, not in a black-and-white channel,” he says. Kuhn named the pattern the EURion Constellation after the astronomical constellation of Orion, which it resembles.

    Although Kuhn thinks colours are one key part of the code, others have suggested that photocopiers are also looking for specific distances between the five circles. Kuhn has not been able to independently verify this theory.


    The EURion pattern in isolation. Some think photocopiers are looking for the specific distances between the five circles

    The precise means by which copiers and scanners recognise the pattern remain a mystery. One clue, though, comes from a document published by India’s Bank of Maharashtra, which suggests that there is some kind of mechanism for detecting the circles in a different colour to that seen by the naked eye. “The highlighted portion […] in the banknote when photocopied will exhibit a different colour distinct from genuine banknote,” the document reads.

    No one, from bank officials to equipment manufacturers, wants to talk about the pattern
    Getting confirmation of how the pattern works – or even whether it does what researchers think it does – is difficult. No one, from bank officials to equipment manufacturers, wants to talk about it. The Bank of England has never commented publicly on the existence of the so-called EURion Constellation. Instead, in an interview, director of banknotes Victoria Cleland explained that the bank has an interest in making counterfeiting as difficult as possible. “If you get a £20 counterfeit note today, it’s worth absolutely nothing,” she explains. “You’ll be £20 out of pocket. So on an individual by individual basis, it’s bad news – and people could lose confidence in the cash they’re using.”

    Who came up with the EURion Constellation in the first place? Although they declined to comment for this article, a Japanese firm called Omron was linked to the pattern in a 2005 press release published by the Reserve Bank of India. In January of this year, a blog post apparently written by a retired Indian government official named N R Jayaraman stated that the design, which he called the Omron pattern, has been used on banknotes around the world since 1996. His blog post also stated: “The design and size of the Omron mark shall be as per the master film provided by the SSG-2, the film supplied by the firm itself and should not be altered in any manner, lest the anti-copying feature will fail to work.”

    Security ‘doughnuts’

    It seems that SSG-2 refers to the method by which the pattern is transferred to banknote paper during printing. In an email, however, Jayaraman said that the specific machinations of the process are not known to him.

    A string of public patents provide further evidence that Omron is indeed behind the EURion Constellation. This one, filed in 1995, states that “marks are detected which are arranged in a given spatial relationship in image data printed on, for example, bank notes or negotiable securities.” An image attached to the patent shows a pattern that is conspicuously similar to the EURion Constellation, albeit with the central circle missing.

    One person able to shed some light on the pattern is Steve Casey, marketing director for Innovia Films, which manufactures sheets of material onto which banknotes may be printed. “The rings are called ‘doughnuts’ in the industry”, he explains. “It’s one of the first security features that was ever developed for banknotes in the digital era.”


    Here, the EURion appears on a £50 note (Credit: BBCW)

    When asked to confirm whether Xerox photocopiers and scanners have been designed to recognise the EURion pattern, a Xerox spokesperson said in an email that “Xerox, along with other imaging companies, consults with the global law enforcement and the Central Bank Counterfeit Deterrence Group, a consortium of 32 banks and note printing authorities, to assess threats to currency and to promote and support the use of anti-counterfeiting technologies. To provide protection against specific criminal behaviour, technology to detect counterfeiting is standardised.” However, they added: “Xerox does not comment on the scope of deployment.”

    Level 3 features aren’t discussed. No one knows about them except a central bank
    Even if it were possible to get to the bottom of the EURion Constellation, there’s another piece of the puzzle: there are other hidden codes on banknotes, too. Innovia Films’ Casey says that there are also ‘Level 3’ features within banknotes that are even more secret than the EURion Constellation. “Level 3 features aren’t discussed. No one knows about them except a central bank,” he says. “That is something that their high speed note-sorting machines will be calibrated to read and they will be able to definitively identify whether something is a counterfeit note or not.”

    Indeed, the Bank of England’s Cleland says the greatest source of counterfeit notes are the sorting machines used by “wholesale cash handlers” – those who distribute cash to and from retailers, banks and ATMs, for example.

    Other codes may affect photo editing software like Adobe Photoshop
    Other codes may affect photo editing software like Adobe Photoshop, preventing users from editing images of banknotes. This has been investigated by Steven Murdoch, a computer scientist and former student of Kuhn’s. Murdoch believes image editing programmes are detecting something other than the EURion Constellation: a digital watermark invisible to humans. A method for doing this is described in a patent by Digimarc, the company believed to have developed the technique. Digimarc has also filed other interesting patents in this area, such as one which describes a method for secretly recording whether a computer user has been working with images of banknotes in a photo editing programme. Law enforcement agents could later retrieve such data after seizing a suspect's computer.

    It’s not known which, if any, commercial software programmes include such a technology. Digimarc also refused to comment for this article. But Pierre Laprise, director of the Central Bank Counterfeit Deterrence Group, says that CBCDG has not developed a method of recording illicit use. “We do not track,” he says, “because of the privacy issues.”

    Laprise did, however, confirm that the CBCDG has indeed developed technologies to prevent photocopying and image editing – but he would not discuss any of the details. Whatever the specifics, Laprise says his group’s efforts in the area have been highly successful. “It’s definitely been effective,” he comments. “Will we be ever able to stop counterfeiting? Probably not, but we’re working at reducing it, and it’s been pretty well contained over the years.”
    We may never know the full details of these technologies
    We may never know the full details of how technologies intended to deter counterfeiting work, or where they are used. But as Kuhn says, perhaps it’s just as well. That people would try to use colour photocopiers to reprint banknotes was, of course, inevitable. “I think it’s a fairly obvious thing to do,” he says, “and the manufacturer evidently thought so.”

    And Steve Casey says it’s ultimately better to restrict counterfeiting to dedicated and more easily traceable cells, rather than many pockets of amateurs all having a go. “What a central bank doesn’t want is hundreds of counterfeiters across the country. They don’t want people able to set up their little photocopying operation and then move on.

    “That,” he adds, “would be very hard to trace.”

    The world’s “first decentralised digital currency” promises financial salvation, but what is it and can it really deliver?
    Tom Chatfield
    By Tom Chatfield
    18th November 2014

    Dubai. Greece. Spain. Portugal. Italy. Cyprus. Ireland. The list of countries needing financial bailouts seems to go on and on. And that’s before you include those banks in the US, the UK and beyond that were “too big to fail”.

    As well as revealing the fragility of the global economy, the current crisis has also raised some existential questions about the nature of money.

    Can any government really promise to protect the value of its currency and be taken at its word? And how – other than by hiding gold bars under their mattresses – can the residents of a country in crisis hope to safeguard their wealth? As a controversial economist once noted, there are times when all that seemed solid can melt into air.

    One recent and much-publicised answer to this last question is a form of money that comes pre-dissolved into the ether: Bitcoins. The world’s “first decentralised digital currency” hit the headlines this week, but has been lurking at the edges of global attention for considerably longer.

    Trust in maths

    Born at the start of 2009 in the aftermath of the global financial crisis – courtesy of a mysterious and possibly non-existent Japanese programmer calling himself Satoshi Nakamoto – Bitcoins are a mathematical concoction, combining the attributes of a scarce commodity, like gold, with the frictionless trading of an electronic currency. They achieve this through the ingenious combination of three factors: “mining”, peer-to-peer networking and cryptography.

    The first of these is one of the central reasons for their appeal. Despite being wholly electronic, every Bitcoin in existence has been “mined” by someone running Nakamoto’s software, which regulates the global supply of Bitcoins by forcing computers to crunch increasingly difficult equations in order to generate each coin. Coins emerge at a pre-determined rate: as more people use the software, it gets harder and harder to create them, with the global supply decelerating geometrically towards a predetermined limit. At the time of writing, there were a total of 11,023,350 Bitcoins in the world (one of the joys of an open digital currency is the ease of accessing statistics), and there will never be more than 21 million.

    Like everything else about Bitcoins, these factors are hard-coded into its software – and it’s the peer-to-peer element of this software that makes the system so compelling. Almost every modern currency is guaranteed by the “fiat” of government regulation or laws. That is, their worth is based on faith in a central authority – and is undermined when faith declines in that authority.

    Bitcoins have no central authority and no such promise, and rely on no intermediaries or banks to hold or to transfer money. Instead, each user operates an “electronic wallet” that embodies their money in a highly secure electronic form, and allows them to exchange Bitcoins directly with any other user on the network. Every transaction is automatically confirmed by the software of every other user, and cannot take place if it fails to match the network’s standards: each transaction is “stamped” with the unique time of its occurrence to prevent double spending, while the cryptographic standards in place ensure the network confirms the validity of every action taking place.

    There is, in other words, no need ever to trust any central database or authority. It’s a narrative perfectly matched to troubled economic times, and one reason for the staggering increase in the recent value of Bitcoins. Buying a single Bitcon on 9 April 2013 – through any one of the growing number of online exchanges – would have cost you almost $200, more than fifteen times its $9 value in January. As author Paul Ford wrote in Businessweek: “There’s nothing to trust but math... [and] that’s where Bitcoin thrives: where people would prefer to throw in their lot with anonymous strangers instead of the world economy.”

    Boom and bust

    The recent surge of media-driven interest in Bitcoin has, however, shown every sign of becoming a speculative bubble. Come 10 April, the exchange value of Bitcoins plummeted by 60% from a brief high of $265 to around $150. These are numbers that belong more to a volatile commodity than to a currency, and that emphasise an uncomfortable paradox noted by Reuters finance blogger Felix Salmon at the start of April: “The commodity value of bitcoins is rooted in their currency value, but the more of a commodity they become, the less useful they are as a currency.”

    As a currency, then, failure is already in the air. Yet this does not mean that the Bitcoin effect can be ignored, not least because it can be divided into two halves. On the one hand, there’s the computerised mining of a commodity strictly limited to a certain number of units. On the other hand, there is a genuinely trans-national medium for payment that is free of almost all the friction of a traditional financial system – and that brings with it a promise of security more transparent and verifiable than any bank or government can match.

    Bitcoin’s software is entirely open source, and this means that its security algorithms have been subjected to just about the most rigorous testing and attempted cracking the world’s geeks can come up with. The consensus is: they’re extremely secure. Moreover, should the cryptography at some future point be found wanting, its flaws will almost certainly be identified and updated far faster than with any private system (a major software issue in March was resolved within six hours).

    Interestingly, your Bitcoin wealth becomes most vulnerable the moment “real” currency gets involved. The central software may be secure, but online exchanges have been hacked – or closed up shop completely – at an alarming rate. Similarly, users’ computers can themselves be unsafe places to leave open digital wallets containing hundreds of thousands of dollars worth of virtual assets.

    What’s needed is a way of taking advantage of the system’s astonishing openness and transactional security while evading its incentives towards illegality: something that opportunistic start-ups like OpenCoin are trying to tap into, under the tagline “committed to a simple, global and open currency system”.

    It may sound outrageously ambitious, but it isn’t the first time we’ve seen the birth of a new monetary concept. During the Industrial Revolution, banks eager to fund booming trade and industry began issuing their own private currencies, a system whose booms and busts led to many of the centralised regulations we enjoy (or not) today.

    Some economists, certainly, would welcome further disruption. Writing in 1976, Fredrich Hayek argued in The Denationalization of Money for the removal of the legal obstacles preventing people from using any kind of money they wanted, thus creating a kind of global battle between different rival systems.

    “We have always had bad money,” Hayek argued “because private enterprise was not permitted to give us a better one.” No government has yet has acted on Hayek’s faith in the power of the open market. The world, though, may already have embarked on just such an experiment. Betting against Bitcoins is one thing. But the change they represent packs quite a punch – and, with conventional finance on the ropes, it’s still anybody’s fight.

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