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What happens to democracy in a cashless society?

New technology is transforming the way we pay for everything, but at what cost?

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Last month I was asked to speak at a conference in the City of London on the ethical issues surrounding new payment systems. The audience was packed with people working on innovative things like payment apps for smart phones and ‘contactless payments,’ where you can just wave a card or a phone over a terminal.

Their new financial technologies are rapidly changing the way we pay for everything. This may be convenient, but as wand-waving and other high-tech alternatives to cash become the only ways to pay for anything, what happens if the wand loses its magic? What are the costs of becoming entirely dependent on technology in a cashless society?

Given that banks have been such lousy guardians of the public trust and that technology firms have been so disrespectful of our privacy, I told the delegates that major dangers lie ahead. I see at least four big areas of ethical concern.

The first is how to protect consumers as they become dependent on electronic payments and e-money systems in their everyday lives. E-payment systems are becoming equivalent to utilities like water and heat, in the sense that they are indispensable to our ability to live normally. So what will happen when someone is switched off from a payment system? With such power comes great responsibility, so new regulations will be required. Some authorities like the Financial Conduct Authority (FCA) in the UK, appear to recognise this issue, but no-one knows how far they will go to protect consumers.

This uncertainty is related to a second issue—that of anti-competitive practices. Visa and Mastercard already account for over 80 percent of the credit card market worldwide, and well over 90 per cent in many countries. The Financial Times refers to this situation as “a well-protected oligopoly” and so, for them, a good investment. Yet it also represents a hitherto unimaginable degree of control over the means of payment. Even if policies are adopted to diversify this market or—if that doesn’t work—to break up these oligopolies directly, such unprecedented levels of control raise a third area of concern in the form of peoples’ rights to privacy.

In my understanding of good governance, individuals are sovereign and should only give up their freedoms knowingly. There was no such consent to mass surveillance, and privacy is a human right that is recognised by the United Nations. At a time when exchanges of general communications data between spy agencies are routine, what happens to privacy as the payment revolution rolls on?

In the UK, the FCA gives the following guidance  to the e-money industry:

“Ensuring the security of payments and the protection of sensitive customer data is a critical part of the infrastructure of robust payment systems. Payment service providers have a responsibility to maintain adequate risk management systems and ensure consumers’ payments (including payments messages) are safe and secure.”

The FCA haven’t yet published their advice on the security of internet payments, but they do reference the European Central Bank’s “Recommendations for the Security of Internet Payments (SecuRe Pay)” from 2014, which mention privacy just once in a footnote and don’t mention  surveillance at all.

The vague nature of these pronouncements on questions of consumer dependence, market oligopolies, and privacy, means that little is being done by regulators to protect people from a fourth issue –perhaps the scariest of them all— the recent ‘weaponisation’ of payment systems.

Over the last few years, governments and politicians have told payments firms or banking networks to switch off access for organisations or banks they want to damage, outside of any legal framework. For example in 2011, after the online publisher Wikileaks continued to embarrass the US military by releasing diplomatic cables on the conduct of US wars, MasterCard, Western Union and PayPal responded to requests from a small number of US politicians to block Wikileaks' accounts, preventing them from receiving donations, even in Europe.

Similarly, after disputes between Iran, the European Union (EU), and the US in 2012, the EU ordered the Belgium-based banking network SWIFT to suspend all transaction services with Iranian banks. In 2013, the US also encouraged the EU to impose financial sanctions on Russia by targeting five major state-owned Russian banks.

Whether or not you like Wikileaks, Iran or Russia, the transformation of payments systems into weapons of geopolitics is a crucial issue. It has legal ramifications because such moves can be illegal under existing national and international laws. That’s why the US government has sought to normalise its actions by issuing an executive order authorising it to ‘block the property’ of any foreign entity involved in, or benefiting from, online activities it deems contrary to US interests.

This raises a political dilemma: should governments be able to disrupt organisations’ financial operations so easily? What does it mean for international relations when such a weapon lies in the hands of just a small group of countries?

Currently the US, the EU and a range of US internet firms don’t want any additional cross-border regulation of payments systems, arguing that private arrangements are working just fine. That means that pressure for change will have to come from elsewhere, including from responsible professionals in the finance and payments sectors themselves

Greater diversity in the financial marketplace is also required so that if payment firms do cut off a group like Wikileaks, then those firms would lose custom rather than damaging the recipient because of a lack of payment alternatives. There also need to be alternatives so that if SWIFT is once again pressured by a single nation to freeze out another country’s banks, then the rest of the world’s banks could use another system. Here then is an urgent role for payments innovators to provide new alternatives.

So what about alternative currencies like Bitcoin—how do they fit into this emerging picture? Given the problems with oligopoly power that exist in finance today, currency innovations could be usefully disruptive. Yet if such ‘crypto currencies,’ as well as novel credit transaction systems like Ripplepay, are to be usefully transformative, they will also need ethical leadership from entrepreneurs and appropriate regulations from law makers.

Unfortunately many proponents of Bitcoin ignore the flaw in the way it is issued to first adopters and those rich enough to have powerful computers. Instead, we should explore the social benefits that can come from adaptations of the ‘blockchain’ system for distributed ledgers that can be used for currencies that are more equitably issued, such as through collaborative credit systems.

Grassroots innovations might be more positive still—for example where small business networks can create their own currency systems. One such system, called Banglapesa, is a new currency in Kenya that is backed by the spare capacity of participating micro-entrepreneurs. Now being replicated across the country, these currencies are created autonomously by business networks so that their trade is not restricted by a lack of national currency among their members. If such systems can be supported by innovations in payment systems such as with mobile phones, then financial technology could have a positive role to play in promoting development in poorer communities.

It was these grassroots innovations that drew me to the topic of payment innovation in the first place. As I’ve looked at them more closely, I’ve come to realise that we have to raise awareness of the ethical and political aspects of the entire global payments sector. If current trends continue, organisations and individuals are at risk of becoming prisoners of their payment systems, but open democracies require open transaction mechanisms. By ‘open,’ I mean non-discriminatory, secure, apolitical, and well-regulated systems, with a variety of competing alternatives so that people are not dependent on a few corporations.

Moving the debate forward on these ethical and political issues requires more of what I call ‘citizen staff’ in financial services—people who recognise the public role of payments systems and decide to take that responsibility seriously, by looking beyond near term profits to what is best for society.

At root, this debate is not about individuals satisfying themselves that they are ethical, but about promoting more informed public involvement in a discussion which currently excludes pretty much everyone without financial expertise. We should all be calling for international institutions such as the International Telecommunications Union to play a greater role in providing a framework for a future where billions of people will be making e-payments, safely protected from abuse by corporate oligopolies or geopolitical struggles.

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