Sustainability Starts with Central Banks

We have covered a number of initiatives by central banks and suppliers (individually or collectively through their associations) to reduce the environmental impact of cash, and will continue to do so. But the tactical and operational measures apart, the biggest impact will come from the central banks, and their policies regarding the specification, denominational structure, recirculation and the rules and regulations that cash management and cash-in-transit (CIT) must adhere to.

At the highest possible level, sustainability starts with pursuing sound monetary policy. The evidence is clear that people turn to cryptocurrencies, or choose to hold foreign currencies or gold, when they lack confidence in the stability of their own money. The energy requirements of creating (‘mining’) cryptocurrencies are unbelievably large, and the nature of the distributed ledger technology that underlies them is also power hungry.

The role of specifications in sustainability

Coin specifications affect both the cost and the recyclability of the coins. Banknote designs and specifications determine note life. For example, designs with white paper or pastel colours show soil swiftly.

There are now a wide range of substrate choices that can extend note life.

The vital importance of circulation velocity

One of the most significant determinants of note life is how long a note is in circulation between being sorted. In an efficient cash cycle, a short time between sorts suggests the note is working hard and will wear out, therefore, faster.

The speed of circulation is affected significantly by the denominational structure of coins and banknotes, particularly where the coin-note boundary is set, and the number of low denomination notes in circulation – the more notes per person there are, the less work they have to do.

Which notes are issued by ATMs plays a role since these are the payment notes, while the lower denominations are the ‘market’ notes, used almost as coins.

Start with the denominational structure

This month’s edition includes an article by De La Rue on how to set the coin-note boundary, based on its D-metric™ model. The starting point is calculating the optimal number of coins and banknotes to pay and settle a bill. Within the coin hierarchy there are payment coins, those used to buy a coffee, and settlement coins, those received as change. Notes have these and store of value notes as well.

An efficient denomination structure allows the fewest coins and notes possible to circulate. Any inefficiency requires additional cash to be introduced into the system.

There are just over 1,000 banknote denominations in circulation. The average number of notes per issuer is six, but at the top of the scale, South Sudan has a whopping 13, and Mongolia 11. At the other end of the scale, Somalia has the lowest number of denominations – just two. Of the higher income countries (with per capita income of $30,000 plus), 60% do not have a note in either of the top two note positions, as per the D-metric model.

There are also just over 1,000 circulating coins. The average number of denominations per issuer is again six, but the range here is from nine (Poland, Croatia, Tajikistan) to none at all (Iraq, Laos, Liberia).

Changing the denominational structure has implications for machine handling, retailers and the public, which helps explain why so many countries continue with illogical structures. Inevitably politics gets involved, for example introducing new high values can be seen as admitting the currency has devalued, or high values are seen as encouraging tax avoidance. The evidence for either is hotly disputed but perceptions matter.

The impact of recirculation

Once in circulation, the movement of cash is a key environmental factor. Along with the energy used to power ATMs, the fossil fuels used by CIT companies has a major impact, so reducing movement matters.

An important step to encourage recirculation is if central banks allow banks, cash management companies and CITs to hold cash in their secure storage off balance sheet, sometimes known as Note Held to Order (NHTO) schemes. This reduces the need to ship cash back to the central bank at the earliest opportunity. It requires central banks to be confident in the security of storage and in end of day reporting on what is held.

Local recirculation requires clear sorting standards which are regularly audited so note authenticity and quality in circulation are assured. Rewards and penalties are used in equal measure to encourage good performance. Cashback schemes need to be included within the rules.

Circulation can benefit from using standards such as GS1, which introduces standard packaging units, labelling and data formats allowing interoperable cash systems. Concepts such as returnable boxes, direct exchange and NHTO become possible.

The potential of utility models

Some of the less-cash countries, the Netherlands, Sweden and Norway, have moved to shared ATM networks and cash centres operate on a not-for-profit basis. Theoretically these allow the optimum infrastructure and the avoidance of duplication with all the environmental savings that brings.

Central banks may feel far removed from the sustainability front line regarding cash, but, in reality, they have a key role in setting the agenda and guiding stakeholders to play their part.