Is Demonetization of High-Denomination Currencies the Real Cure Against Financial Crimes?​ Evidence from an Emerging Market Economy​​

Demonetization of high-value denomination currency is not the appropriate policy tool to root out financial crimes and systemic corruption. Instead, it is a blunt instrument that inflicts severe collateral damage to legitimate, cash-dependent populations. The economic costs of removing the legal tender status of high‑value denominations far outweigh the limited benefits of inconveniencing corrupt actors, making it an inefficient policy choice amid the availability of superior alternatives. Corrupt actors can ingeniously adapt by shifting to more sophisticated stores of value such as precious metals, shell companies, real estate, gold, and cryptocurrencies. Successful demonetization requires a science-based, security‑driven, and well- considered approach. Incentive structures created by institutions often drive corrupt behavior. When institutions are weak and the risks of detection and punishment are low, the rewards for corruption rise. Institutional reforms are key to combating systemic corruption and financial crimes: lifting of bank secrecy law, strengthening technology-aided financial intelligence, enforcing asset declaration requirements, implementing cash transaction regulations, and digitizing government services—including disbursements, collections, and procurement systems—to rein in discretionary power.