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A national digital money system may well be the best way to solve the big problem of small change, but beware the warnings from history! (Updated 31st December with more details on Ecuadoren coin usage).

The topic of currency popped up again this week because I happened to see a tweet from one of my favourite AFC Wimbledon fans, the Sky economics editor, Ed Conway. He was commenting on some of the ongoing troubles in Greece.

A couple of years ago, when the Greek Euro exit was being discussed in another context, I made the point that I thought that given new technology the readjustment of currency zones might not be as difficult or a costly as some people were imagining.

Greece could pull out of the Euro and create a “hard e-drachma”. There is no need for physical currency. It’s badge of national vanity, just like an airline (and soon, an army) used to be. It would be no big deal to, over time, open e-drachma bank accounts, obtain e-drachma payment cards and so forth.

[From What’s a Grecian e-urn?]

I made the same point, in a boringly consistent fashion, a few months ago when discussing the options for money and payments in a newly independent Scotland. As you might suspect, this idea is too good to be mine, and you are right. It is a mash up of some of the incredible work that my colleagues have been doing in the world of digital money and the vision of an under-rated Chancellor of the Exchequer.

John Major proposed an extremely sensible alternative to the euro, which at the time was labelled the hard ECU (and ignored)… The idea of the hard ECU was to have an electronic currency that would never exist in physical form but still be legal tender (put to one side what that actually means) in all EU member states.

[From What’s a Grecian e-urn?]

You can see why this idea is so appealing. It allows for progress in monetary reform at low cost and acts to remove physical cash from circulation where it causes nothing but mischief and costs. I had a fun conversation about this a few weeks ago when I wrote that “it looks as if the Royal Canadian Mint’s Mintchip and Safaricom’s M-PESA have been sitting a tree, because the Central Bank in Ecuador is trying to launch a national mobile payment scheme that is designed to handle B2B transactions (along with P2P, top-up, cash in and out, in-store purchases and electronic receipts), deliver a very low rate (a $50 charge costs four cents, a roughly 0.0008 rate)”. I remarked (in a private forum) that setting aside the feasibility, merits or purpose of such a scheme, you can’t help but wonder why more central banks don’t do this.

Now today I read that the Ecuadorian system is going live and the details have been made public. In essence a hard electronic currency is being created by the Central Bank.

Anyone over 18 can, nationwide, open your electronic money account for free, without the need to approach any window, typing the * 153 # on your cell phone with any mobile operator. Since then, users can open their accounts.

From mid-February 2015, the second phase will begin transactions loading, unloading, delivery of electronic money, people, receipts commercial, consulting and bank transfers.

Finally, the third phase will begin in the second half of 2015 with the incorporation of electronic money payment of utilities, tax obligations, orders and other use cases. Thanks to the model of electronic money the Central Bank of Ecuador, most transactions are free and the rest will cost a few cents.

[From Google Translate]

As I said, a cross between MINT and M-PESA, a centralised government solution to the big problem of small change that I wrote about again last week. An interesting aspect of this otherwise vanilla USSD pre-paid value transfer system is that will be denominated in US Dollars. The US Dollar has been legal tender in Ecuador since 2000, when the post-gold standard “Sucre” was abandoned although, apparently, the “centavo” coins are still in use. This is a practical solution to the big problem of small change under “dollarisation”.

Most countries that use the dollar get around this problem by minting local coins: Ecuador uses the dollar as legal tender but mints centavo coins. The government guarantees that anyone who wants to exchange 100 Ecuadorean centavos for a genuine United States dollar can do so.

[From Using U.S. Dollars, Zimbabwe Finds a Problem – No Change – NYTimes.com]

This, as the economist John Kay noted last year as he reflected on the coins in his pocket in Ecuador, is in itself an interesting comment on the subject of what is or is not a currency.

The 50 cent coin is minted for the government of Ecuador, but there is no Ecuadorean currency, and the cents referred to are therefore not Ecuadorean cents… the US does not issue 50 cent coins, only quarters, nickels, dimes and pennies. While everyone in the Galápagos or the national capital Quito would accept my 50 cent coin, no one in Washington would. Curiously, genuine dollar coins, minted for the US Treasury, have not proved popular in the US but are widely circulated in Ecuador.

[From John Kay – A currency is anything that two people agree is a currency]

It is important to understand that the US Federal Reserve banknotes that are in circulation in Ecuador, stuffed under mattresses in Ecuador and fuelling the less-formal sections of the Ecuadorian economy are in essence an interest-free loan to Uncle Sam. By replacing these with an electronic currency, or I suppose more strictly speaking an electronic currency board, the Ecuadorian central bank can reclaim the seigniorage for itself. All well and good and the ability to transact electronically will also be of the great benefit to the citizens.

If the central bank were to ask the advice of people experienced in the creation of a national non-bank mobile payment system (e.g., Consult Hyperion) I am sure that they would be advised to make the system a platform for innovation to encourage entrepreneurs to build local solutions on top of it. If I might be as bold as to make a warning from history, though, I should add that such a system would also benefit greatly from transparent auditing as the citizens will not hold the electronic currency unless they are sure that it will remain redeemable at par for US dollars themselves. If the government were to fall prey to the temptation to put more of the electronic US dollars in circulation than they have (or have the equivalent of) in reserve then as the Wall Street Journal observed back in August they will simply be creating doomed electronic assignats that will never obtain traction in the wider economy and Ecuador will be unable to reap the many benefits of its transition away from cash. After all, you cannot simply create US Dollars out of thin air but changing a few numbers in a computer somewhere. Oh, wait…

P.S. In case you see any tweets, newspaper comment or learned articles that refer to this as a “cryptocurrency” please bear in mind that it isn’t.

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