[STANCE] Cash restrictions in the EU: a fight against the shadow economy or an assault on civil liberties?

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The European Union is preparing another assault on civil liberties. Under the fight against money laundering, there is to be restricted cash turnover for entrepreneurs and consumers. Can this help reduce the shadow economy? Scientific evidence shows that it doesn’t have to necessarily. The Warsaw Enterprise Institute’s stance is that the successive eradication of cash from circulation is a negative trend, and the introduction of regulations should not be based on the convictions of policymakers but on sound analysis.

The European Council and Parliament have agreed on a package as part of the EU’s new anti-money laundering and counter-terrorist financing regime. One of the elements is the limitation of cash transactions to €10,000, with the possibility of further reduction by member states. This does not apply only to professional trading but also to purchases or flows made by consumers. In addition, obligated entities will have to identify and verify the identity of persons making occasional cash transactions from 3 thousand to 10 thousand euros, and in the case of crypto-asset suppliers, from 1 thousand euros.

As usual, the goals are laudable – preventing money laundering, fighting the shadow economy, or tightening the tax system. However, do the planned changes serve this purpose, and do you know if there will be any negative consequences? The answer to these questions is less apparent than it might seem to EU regulators. Although the common understanding is that cashless transactions, thanks to increased supervision, reduce the incidence of fraud, research does not confirm such a relationship. Cash payments do not necessarily result from a desire for fraudulent practices but are a consequence of habits and traditions in various markets. In particular, the data do not show a correlation between the size of the shadow economy and the number of cash transactions. At the same time, it is an illusion that money laundering or tax evasion is carried out only with cash. Large, organized groups in the shadow economy also use fictitious transfers or other non-cash forms.

We live in times when more and more people are using electronic payments, valuing their convenience. This is a natural trend related to technological development. However, this does not mean that cash is unnecessary in circulation, and efforts should be made to eliminate it. Cash payments are also subject to controls and regulations, and a complete redirection of the market to electronic transactions can be risky. For example, it is worth pointing out the development of cyber risks and the increasing activity of hackers, especially from across the eastern border. A possible crisis in the financial market could lead to massive chaos in economic trading. Most importantly, however, the proposed changes primarily harm economic and civil liberties, limit choices, and increase state surveillance of ordinary people’s disposition of private funds. The only beneficiaries of the changes appear to be financial institutions, which will increase the volume of transactions, and thus profits from commissions, for handling them.

The Warsaw Enterprise Institute’s stance is that restricting cashless transactions is not the way to fight the shadow economy and money laundering. The declared benefits of proposed regulations should be based on scientific research, not well-established stereotypes. In particular, fundamental rights and freedoms cannot be restricted based on a regulator’s “see me,” even if it is assumed to have good intentions.

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