[Dave Birch] It seems to me that there is a something a little wrong in charging central banks with maintaining efficient, effective and stable payment systems when they not only have a dog in the fight but have a particularly naughty dog in the fight. If a central bank’s income derives from cash, it can hardly be expected to take an independent view of cash as one of a number of alternative payment options in the economy, can it? 

A central bank’s prime charter is to provide stability in the financial system; cash is still an important part of that system and a significant revenue earner for governments through seigniorage. If nothing is done, then inevitably we will see the demise of banknotes and coin sooner rather than later.

[From The Demise of Cash – More Radical Change Needed — Counting On Currency]

You can see the problem with this: if alternatives to cash that are better for the economy (because they are cheaper, for example) come along then it means that the central bank, and therefore the government, will lose revenues unless they (in the spirit of the Royal Canadian Mint’s MintChip Challenge decide to issue the electronic money themselves. Marc Brule of the Royal Canadian Mint will be talking about the MintChip system and their experiences at our Tomorrow’s Transactions Forum next week, by the way.

Thinking about government or central bank issuance of electronic money makes you wonder whether electronic money is actually money or not, doesn’t it? If it is, should it then be provided by the central bank as a public good? If it isn’t, shouldn’t private issuers compensate the government for lack of income?

The key message then is that M-PESA units should not really be considered Kenyan base money (M0) in the traditional sense. In fact, it’s much more of a parallel currency.

[From Why central banks should take charge of their digital currencies | FT Alphaville]

Personally I wouldn’t characterise M-PESA as a parallel currency, but is clearly isn’t part of M0 since the ultimate liability for the M-PESA balances rests with the commercial banks where the float is deposited (M-PESA has a 100% reserve). The fact that it isn’t part of M0 is, from the government’s point of view, a potential problem.

M0 being an interest-free liability of the Central Bank toward cash holders vs M1/M2 being a liability of commercial banks towards deposit holders. In the worst-case scenario, M0 keeps shrinking, depriving the state of seigniorage revenue, which the government needs to compensate with a special tax on mobile money operators.

[From Why central banks should take charge of their digital currencies | FT Alphaville]

This would be true in the UK as well, but the way. The government obtains something in the region of £2 billion per annum in seigniorage revenue. This is nothing compared to the US, which earns fantastic profits from the wads of $100 bills stuffed under mattresses in Latin America, Russia and elsewhere.

Governments, after all, earn money from seigniorage – the profit from issuing coins and notes rated at more than their intrinsic value. The US Treasury department, for example, received $77bn in profits from the Federal Reserve in 2011.

[From Finance: More flash than cash – FT.com]

Money for nothing, as they say. In essence, this is a stealth tax on the people who use cash (predominantly the poor). But it’s significant government revenue. It seems to me then that the advent of electronic money and the reduction in M0 (except for criminal purposes) mean a revenue gap opening up. Governments therefore have two choices: they can reduce expenditure and become more efficient and effective users of tax revenues or they can find alternative sources of tax income. Since the former is a fantasy, the latter is inevitable. Thus we find Kenya, pioneers in M0 replacement, is instituting a new tax on mobile money.

The amendments are contained in the Finance Act of 2012, which introduces a 10 percent excise duty tax on transaction fees for all mobile money transfer services provided by cellular phone providers, banks, money transfer agencies and other financial service providers.

[From Kenya: M-Pesa mobile money users hit by new Government Tax – The Habari Network]

The impact of this is that Safaricom, already Kenya’s largest taxpayer, has just put its M-PESA fees up by 10%. So just as the unbanked trapped in a cash economy pay the stealth tax on notes and coins, they are now paying the not-to-stealthy for the replacement.

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers

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