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Demonetisation is an economic process where the existing currency unit (such as bank notes, coins) is withdrawn from circulation and replaced with new currency. When a government demonetises its currency then such currency effectively loses all of its value because it can no longer be used as a legal tender.

Demonetisation can happen for several reasons, like changing the country's currency or phasing-out obsolete payment methods. Several nations have adopted currency demonetisation methods with varying degrees of effectiveness.

Motives for Demonetizing

  • Countries all across the world have implemented demonetisation procedures for a variety of reasons, despite the fact that it is uncommon.

  • If the value of the currency spirals out of control owing to issues like hyperinflation, governments may decide to implement demonetization.

  • Demonetisation can also be used to stop illegal activity, like tax evasion, terrorism, and counterfeiting.

  • Demonetization can also initiate the push towards a cashless economy, as the government can reduce the circulation of physical currency and promote more digital options.

Benefits of Demonetization 

A nation can benefit from currency demonetisation, such as increased monetary standards and crime prevention.

1. Decreases a variety of criminal activity

Demonetisation has the advantage of reducing numerous types of criminal activity. Old banknotes and coins are removed out of circulation effectively losing all of their value. For organisations engaged in criminal activity, such as terrorism, the currency effectively loses value because it is no longer accepted as legal tender.

For individuals who are involved in counterfeiting, banks will check to see if old banknotes are fake before exchanging them, enabling the government to get rid of fake money from the system.

2. Minimises tax evasion

Demonetisation of currency can also stop tax evasion since individuals who possess black money would be forced to deposit the old currency notes with banks in exchange for new currency. This helps the government to identify tax evaders and retroactively tax their unreported gains throughout the currency conversion process.

3. Encourages a cashless society

Demonetisation can accelerate the transition to a cashless economy by allowing the government to reduce the use of paper money and increase the use of digital payment methods.

Negative effects of demonetisation

On the other hand, the demonetisation process may have some drawbacks, such as:

1. Costs associated with the production of fresh banknotes and coins.

The costs associated with producing new banknotes and coins, as well as ending the use of existing currency, are one of the initial downsides.

2. Possibly won't completely stop criminal activities

Demonetisation may have no effect on crime because criminals may continue to hold onto their money in the form of gold or real estate.

3. Can cause civil unrest among people

Last but not least, if the demonetisation procedure isn't carried out effectively, it could cause unrest among the general public as individuals rush to exchange their currency before it stops being used.

4. Economic slowdown

Another disadvantage is that demonetisation can lead to a temporary slowdown in economic activity. When people are unable to use their old currency notes, they may be hesitant to spend money, which can lead to a decrease in demand for goods and services.