BANGKOK, Thailand – A report that around 140 billion baht worth of older 1,000-baht banknotes have disappeared from normal circulation has prompted discussion over whether Thailand could use demonetization to bring large amounts of cash held outside the financial system back under closer scrutiny. Bank of Thailand Governor Vitai Ratanakorn recently disclosed that two series of 1,000-baht banknotes, issued around 20 to 30 years ago, with a combined value of approximately 140 billion baht, have not returned to the financial system through normal channels. One policy idea now being discussed is demonetization, a measure in which a government or central bank declares particular banknotes no longer legal tender after a specified deadline. Under such a system, holders of old banknotes would normally be given a period to exchange them for new notes or deposit them through banks. Once the deadline passed, the old notes would no longer be usable for purchases, payments or other normal transactions.
Supporters of the idea argue that such a measure could force large quantities of cash held outside the banking system into the open. This could include cash linked to tax evasion, corruption, illegal businesses, money laundering or other activities that have avoided the formal financial system.
The key mechanism would be the requirement for people holding substantial amounts of old banknotes to bring the money to banks for exchange or deposit. Large transactions could then create financial records that allow authorities to examine the identity of the holder, the source of the funds, tax obligations and possible links to suspicious transactions.
The measure could also make it more difficult to circulate counterfeit versions of the withdrawn banknotes. Once an old series ceased to be legal tender, counterfeit notes based on that series would lose their usefulness, while attempts to exchange large quantities could attract greater scrutiny.
However, demonetization would not automatically eliminate illegal money. Holders of illicit funds could attempt to move cash through other people, purchase assets, convert money into gold or foreign currencies, or use other channels before the measure took full effect. For that reason, demonetization would require strong supporting measures, including effective banking systems, identity verification, transaction monitoring and enforcement. Without such systems, illicit funds could simply move from cash into other forms of assets or financial channels. India provides one of the best-known examples. On November 8, 2016, the Indian government announced that existing 500- and 1,000-rupee banknotes would cease to be legal tender. The two denominations represented a substantial share of the country’s cash in circulation. The Indian government said the move was intended to tackle unaccounted cash, tax evasion, counterfeit currency and money associated with illegal activities and terrorism financing. People were given a limited period to deposit or exchange the withdrawn notes through the banking system.
The policy demonstrated the ability of demonetization to rapidly push large amounts of cash into the formal financial system. However, it also became a major economic and administrative exercise, highlighting the risks involved when a large cash-based economy is subjected to a sudden currency withdrawal. The key lesson is that bringing cash back into banks is only the first step. Authorities must also be able to determine where the money came from and who ultimately owns it. For Thailand, any discussion of demonetization would therefore involve a much wider question than simply replacing old banknotes. It would require careful consideration of the impact on ordinary people who legitimately hold older notes, businesses dependent on cash transactions and the broader economy. At present, demonetization is a policy concept being discussed in connection with the missing older banknotes, rather than an announced government measure. Any decision to withdraw a banknote series would require clear rules, sufficient exchange arrangements and safeguards to prevent legitimate holders from being unfairly affected. (Story and Photo: MGR Online)
