We were delighted to get a lot of good feedback on Neil’s previous blog on Mondex Memories and CBDCs and its relevance to CBDCs and thought it would be interesting to respond to some of the more interesting – and difficult – points raised in a follow-up blog. Before addressing those I wanted to put the Mondex program into some historical context. They were very different days – we didn’t have an intranet until 1996, let alone internet access. There were no SDKs – although actually we did build a precursor to one of those – or APIs and the idea of remote payments was still in its infancy (although we did that too).
At the CSFI’s April “Fintech for Breakfast”, which was kindly hosted by the law firm Denton’s, an interesting topic popped up in discussion about Bitcoin. I’ll come back to precisely what the discussion was later on, but at this point I just want to note that it involved a core issue that often wanders into fintech chats: legal tender.
Andrew Hilton (CSFI), Izabella Kaminska (FT), Emma Vartolomei (AllStreet), Winston Yong (IBM) and Angus Young (CSFI).
Who knows what “legal tender” means? Pretty much no-one, in my experience. I remember a story about a schoolboy who was chucked off a Welsh bus for trying to pay with a Scottish banknote. The bus company apologised, saying that “Scottish currency is legal tender” which, of course, it isn’t. Scottish banknotes are not legal tender in England or, for that matter, Wales. Only Bank of England notes are legal tender in England and Wales. Scottish banknotes are not legal tender anywhere, even in Scotland. In fact, Bank of England banknotes aren’t legal tender in Scotland either, because Scotland (which has a separate legal system) has no legal tender law although (and thanks to Colin Platt for this via Twitter) Royal Mint coins are legal tender in Scotland in thanks to the Coinage Act 1971 (Section 2).
No legal tender notes! Oh my goodness, it must be chaos!
Actually, it isn’t. I’ve been to Scotland several times and I’ve often seen Scots buying things in shops using banknotes, cards and mobile phones. So not having legal tender laws does not seem to be much of a barrier to trade. This shows how uninteresting the issue of “legal tender” really is in the modern age and for decades I’ve tended to assume that any article that talks about making a digital currency legal tender is written by someone who hasn’t taken this on board yet.
I do mean decades, by the way. If I cast my mind back to 2006, I can remember writing about the Snap Cafe in Georgetown, Washington D.C. This particular establishment had attracted my attention because it had decided to stop accepting cash. This is commonplace for forward-looking eateries today, but then it was a revolutionary act. As I reported at the time, the owner said that it had saved her time and money, meant she didn’t have to go to the bank any more and (most importantly, I suspect) didn’t have to trust staff she didn’t know. That point about trust is a recurrent theme in surveys of retailers and cashlessness: even if they perceive cash to be cheaper than electronic payments, cash has a tendency to evaporate. There was discussion around that time as to whether it was legal to do this, since Federal Reserve Notes (ie, greenbacks) are legal tender in the U.S.A. So, people said, the cafe owner could not refuse them, and some outraged comment asking whether it was legal to ban cash from an establishment.
Some time later, I remember an interesting clarification of the subject of legal tender in a useful paper on Payments and the concept of legal tender by Nick McBride, Legal Counsel, Reserve Bank of New Zealand. The paper describes something else that happened a decade ago, when the coins in New Zealand changed. The new coins were introduced on 1st July 2006. For a period of three months, the old coins were circulating in parallel with the new, but some retailers put up signs saying that they wouldn’t accept the old coins. This, presumably, was because they didn’t want the hassle of having to bag them all up and take them to the bank to swap for new coins. So could retailers refuse to take the old coins in payment even though they were legal tender?
The answer in both cases was that retailers can refuse to accept legal tender.
Wait, what? So what’s the point of legal tender then?
Well, the point is that you cannot force a retailer to accept legal tender or indeed any other form of tender. If, however, you buy something from them and there is no contractual barrier to the use of any form of tender, and you offer legal tender in payment, and they refuse it, then they cannot enforce the debt in court. That’s what legal tender means: it’s about discharging debts. If you incur a debt you can discharge it with legal tender, but you cannot be forced to incur the debt in the first place, if you see what I mean.
A couple of years later, the European Commission (remember that) put forward its recommendation on legal tender (22nd March 2010). It was, as I recall a banker saying, “strange and undesirable”. So, what is the European perspective? Well, the key points were:
Euro notes and coins are legal tender and retailers can only refuse them for reasons of “good faith” (for example, the retailer has no change).
Retailers should only refuse high-denomination banknotes in “good faith” (for example, if the value of the note is disproportionate to the purchase)
No surcharges should be imposed on cash payments.
Banknotes stained by the Intelligent Banknote Neutralisation System (IBNS) remain legal tender but should be returned to national central banks (as they likely come from a robbery).
Retailers must accept 1 and 2 eurocent coins in payment.
Sensible policies for a better Eurozone, you might think, but you’d be wrong. The essence of these recommendation was that shops will be forced to accept €100, €200 and €500 euro notes and 1- and 2-euro cent coins. Why? Well, because in many countries the shops don’t want them. In some countries (eg, The Netherlands and Finland) the retailers and the public seem to have, in a decentralised fashion, decided to abandon the 1- and 2-cent coins. They are nothing but a hassle and do nothing to assist commerce. At the other end of the scale, retailers in many countries will not accept high-value notes, partly because they don’t want to make change and partly because they are worried about counterfeiting. After all, if you are a corner shop and you get stuck with a bent €500 note then you are €500 out of pocket: the ECB won’t take your counterfeit note and give you a new one. It’s worth paying a few cents to the bank for a debit payment to avoid that risk.
I thought the Commission’s recommendation was dead in the water, largely because it didn’t take economics into account and I rather think that the EU’s goal for payment systems should be economic efficiency. Forcing your average tabac to take 500 euro notes does not contribute to that goal in any way.
Anyway, apart from people like me, and Professor van Hove and the European Commission, no-one much cared about legal tender one way or the other for another couple of years after the recommendation. Until Bitcoin came along.
Now, people say the silliest things about Bitcoin, such “the [insert name of distant country here] have made it legal tender”. No. Bitcoin isn’t legal tender anywhere and it never will be any more than Avios will be (and I’ve bought more cups of coffee with Avios – one – than I’ve ever bought with Bitcoin). I shouldn’t really be so sweeping, but I am tempted to say that the only reason that people say Bitcoin will be legal tender is that they don’t understand what legal tender is (and almost certainly don’t know what Bitcoin is either).
The media don’t help. A couple of years further on, in 2014, Britain’s Minister of Finance (a man of the people who for historical reasons is known as George Gideon Oliver Osborne, of the Baronetcy of Ballentaylor and Ballylemon in the County of Waterford, Chancellor of the Exchequer and Second Lord of the Treasury) gave a speech at an Innovate Finance conference in London, in which he said that he had instructed Treasury officials to hire some management consultants to knock up some slide decks looking at the benefits and threats of digital currencies. This was reported on as being interesting, although as I mentioned at the time he wasn’t clear about the benefits to whom or the threats from what. It was even reported on (in The Telegraph, for example) as “Chancellor embraces Bitcoin” and I remember one or two comments along the lines of “British government may legalise Bitcoin”, which set me thinking, since I had already seen shops advertising that they accepted Bitcoin and it had never occurred to me that it was illegal (because, of course, it wasn’t).
There’s another aspect to the discussion. People like me think that Bitcoin is an interesting kind of property, not money. This brings us to Japan, which was the subject of the discussion at the CSFI breakfast, because someone mentioned that Japan is legalising Bitcoin. But what does this mean, exactly? I’ve read in several places that Japan is going to make Bitcoin legal tender. At least, according to that journal of record Sputnik News, which seems to be the origin of the claim. I’m sure this isn’t true. As far as I can tell, and as was confirmed around the CSFI table this morning, the actual story in Japan is that new provisions there consider Bitcoin a commodity and any such commodity that can be exchanged for goods and services or legal tender (my emphasis) will be considered a currency, bringing Bitcoin and many other cryptocurrencies into the normal course of business.
Sorry to be a spoilsport, but to the very best of my knowledge, Bitcoin is not legal tender in any country. Nor, I would wager, will it ever be. As I hope my quick trawl through the last decade has shown, legal tender is an outdated and essentially meaningless concept, which is why I am baffled by the continued discussion of it. Businesses are free to accept to Bitcoin in payment, just they are free to accept wampun or used tea-bags, since it’s a matter of private contract, but they cannot and will not be forced to accept Bitcoin in settlement of debts incurred.
[Updated 8th April 2017 with clarification on coinage]
I had a really enjoyable time chairing the “futures” panel in the closing plenary of Intergraf’s Security Printers 2016 in Seville. This is a conference for the people who (amongst other things) print banknotes so I had a fun time behind enemy lines learning about paper, ink, substrates, polymers, foils and special machines that print serial numbers.
One of the topics that came up on the panel was the role of central banks as currency issuers. I think this is a pretty interesting topic because it may be that the switch from physical to digital currency will change the way that the medium of exchange is managed. As Marilyne Tolle from the Bank of England noted on their “Bank Underground” blog recently, one might imagine a central bank-issued electronic money that she labels “CBCoin”:
If households and firms were given access to CBcoin accounts at the CB, banks’ dominant role as providers of payment services would be called into question.
Indeed it would. Note also that Marilyne is clearly describing a digital currency not a cryptocurrency, but that’s by the by. Right now, money reaches the public through commercial banks, a practical structure that stems from the banks role in providing payment services. In response Marilyne’s hypothetical example, I might observe that not only is there no fundamental economic reason why banks should be the dominant providers of payment services, there is no fundamental economic reason why they provide them at all — see, for example, Radecki, L., Banks’ Payments-Driven Revenues in “Federal Reserve Bank of New York Economic Policy Review”, no.62, p.53-70 (Jul. 1999) — and there are many very good reasons for separating the crucial economic function of running a payment system to support a modern economy and other banking functions that may involve systemic risk. Marilyne goes on to note
The conflation of broad and base money, and the separation of credit and money, would allow the CB to control the money supply directly and independently of credit creation
As far as I can tell, this would be a good thing. But we must recognise that impact that it will have on commercial banks. According to the management consultancy McKinsey (2016), global payment revenues are around $1.7 trillion (and will be $2 trillion by 2020) and these account for around 40% of global bank revenues! So if payments go away, banks are going to have to think of something else to do instead.
I have a suggestion (you know what’s coming, don’t you) and I think it’s a practical one. The Security Printers panel was actually called “the future of banknotes and identity” which I think shows us the way forward… If you can move money from anyone to anyone else, instantly and for free with final settlement in central bank money, and this is provided as a utility service provided by the central bank, then the fraudsters who are plaguing the Faster Payments Service (FPS) in the UK will have a field day. Perhaps, then, the role for the central bank is to issue the digital currency and run the digital currency payment platform that will (in a fairly short time I would think) replace commercial bank (and all other) payment services. Not so much CBCoin as CBPesa, since it would manage balances not coins.
However, the central bank doesn’t want to do KYC on millions of people, run mass-market authentication services, perform AML checks, manage black lists and run interfaces with law enforcement and so on. Just like Bitcoin, the central bank accounts would be pseudonymous. The central bank would know that account no. 123456789 belongs to a retail consumer, but not which consumer. It would know that account no. 987654321 belongs to a retailer, but not which retailer. This way the central bank could generate a dashboard of economic activity for the Chancellor to look at when he wakes up, but not routinely monitor what you or I are up to.
It would be the commercial banks provide the services linking the pseudonymous accounts to the “real” world (and get paid for them). Then your Sterling bank account will just be a pass-through API to a central bank digital currency account (what Marilyne calls the “CBCoin Account”) because my Barclays current account and your Lloyds current account are just skins on the Bank of England UK-PESA platform and the commercial banks can chuck away their legacy payment systems and focus delivering services that add real value.
Commercial banks will then have an important function as the vaults that look after identity, not money. As I told the panel in Seville, money and identity look like very different topics, but in reality they are the same.
Back in January, the International Monetary Fund published a report “Virtual Currencies and Beyond” which concluded that a currency such as bitcoin does not fulfil the economic roles associated with money. It is not a reliable store of value because of its volatility, although I personally could be persuaded over time that in some scenarios volatility could decrease to a point where it could become an acceptable store of value for some communities. The report goes on to note that bitcoin has very restricted use as a medium of exchange, and my interpretation of the widely available usage figures is that it remains primarily a tool for speculation (there is very little retail use, almost all bitcoin purchases are in Yuan and and almost all trading is currently carried out on two Chinese exchanges). As the IMF further point out, bitcoin does not seem to be used as an independent unit of account against which other currencies might be measured. Taken together these points suggest that bitcoin is better understood in economic terms as a peculiar kind of digital commodity rather than as money.
If you want to give bitcoin a try, send some to this address!
I have a hard time seeing bitcoin as money and I’m not alone. In particular, regulators do not really know what to do with. Writing in the Southwest Journal of Monetary Economics, Charles Evans “The Blind Economists and the Elephant” attributes the problem in classifying Bitcoin to the multiple facets and the way each looks to different constituencies.
This confusion results from the fact that specific regulators oversee specific subsets of regulated activities. It is understandable that they would side with Easterbrook (1996) and view Bitcoin in terms of a preexisting category over which they have authority (Brito & Castillo 2013), rather side with Lessig (1999) and take a laissez faire, hands-off approach—in the post- USA PATRIOT Act, post-Dodd-Frank Act regulatory state (Zarate 2013)—until legislators draft new statutes or create some new regulatory agency to oversee this weird new stuff that defies conventional definitions.
An excellent point. The different regulators regulate on the basis of their own perspective and there is no holistic view or logical regulatory position on cryptocurrency (which is what the World Bank meant by “virtual currency”). Evans goes on to make an interesting comment that I think illustrates a very fundamental point about the interplay between technology and money.
Black (1970), Fama (1980), Greenfield & Yeager (1983), and Hall (1982a, 1982b) speculate that the historical functions of money—medium of exchange, store of value, unit of account, and measure of value—can be separated and that each function can be performed by different means.
I do too. One of the first things I ever wrote for a client on the topic of electronic money, a couple of decades ago, included the observation that technology would allow us to separate these functions and implement each of them in a different way, another example of the “back to the future” dynamic of a more interconnected world. We might find it odd to use London Loot as a medium of exchange and Islamic e-Gold as a store of value and US Dollars as a mechanism for deferred payment, but our phones won’t. As the former Governor of the Bank of England Mervyn King wrote in his recent book “The End of Alchemy”, money is a particular historical institution that developed before modern capitalism and owes a great deal to the technology of an earlier age. There is no reason why money should continue to work the way it does in response to technological change and no reasonable person would expect it to.
Will money as we know it be replaced by bitcoin? I sincerely doubt it, but I’m very much looking forward to hearing law lecturer Tatiana Cutts present her views on whether bitcoin is money at our 19th annual Tomorrow’s Transactions in Forum in London on 20th and 21st April. As always, the Forum (this year sponsored by our friends from WorldPay, VocaLink and Oslwang) will be limited to 100 people, so head on over to register for a place right now. Thanks to the amazing generosity of the sponsors, it’s only £295 for both days – you’d be mad to miss R3, Intel, Ripple, Barclays, Mondo, Fidor, Equens, Clearmatics, the FCA, Shell, Samsung Pay, World Remit, Visa Europe, Curve and many others in an environment of genuine discussion, debate and learning. See you there.
News arrives that our Scandinavian cousins are getting serious in the war on cash.
The Danish government has proposed getting rid of the obligation for selected retailers to accept payment in cash, moving the country closer to a “cashless” economy. Nearly a third of the Danish population uses MobilePay…
Actually half of the adult population of Denmark use MobilePay, the mobile-initiated account-to-account (mA2A) immediate payment services, the equivalent of Barclays’ PingIt, that is offered by Danske bank in Denmark. It was launched two years ago and has attracted more than two million users out of a population of 5.5 million which, when you look at the demographics, means that already has around two thirds of its total addressable market (i.e., Danish smartphone users aged 13 and up). Right now it is processing around 200,000 transactions per day with an average value of around €33.
The mobile phone provides a secure and convenient A2A initiator.
MobilePay has over 7000 merchants signed up and has an “small business acceptance” app in place so that merchants can accept electronic payments without a POS terminal. They charge merchants a flat 1% fee (with a maximum of five Danish Krone, or abut 50p) for payments and I’m told (by a very reliable source) that the fraud levels through this channel are significantly lower than they are on cards. They are now extending the app to provide a contactless NFC and Bluetooth option for point of sale. What interests me most about their roadmap is that they have a very good API and are now trialling it with some merchants because, as we all know, merchants want on their own apps to deliver the best customer service and the future is “app and pay”. I saw a very good example of this using a Copenhagen coffee shop app.
Direct A2A payments from inside merchant apps look set to grow.
In the UK, we have two mA2A mobile-centric front ends to the faster payments service (FPS). These are the aforementioned PingIt, offered by Barclays, and Paym, offered by everyone else. Paym has around two million people registered and transferred around £26m in 2014, We happen to be a Barclays-centric household, so I use PingIt all the time and find it very convenient. Therefore I was very excited that they decided to extend their addressing from mobile phone numbers to Twitter names!
Barclays has declared on 25 February that it will be the first British bank to allow people to pay each other and small business through their Twitter handles from 10 March.
If you want to try this out for yourself by supporting a good cause, by the way, then simply fire up the PingIt app on your mobile phone, select a modest amount for test purposes (say, £250) and send it to @dgwbirch. I will let you know as soon as your payments reaches the Dave Birch Holiday Home in the South of France Emergency Appeal Fund. Both PingIt and Paym are a long way from being used by half the adult population of the UK and edging cash out of the way for the person in the street but, back across the North Sea, Mobile Pay is playing a key role is edging Denmark closer to cashlessness.
The Danish government said as of next year, businesses such as clothing retailers, petrol stations and restaurants should no longer be legally-bound to accept cash. The proposal is part of a pre-election package of economic growth measures aimed at reducing costs and increasing productivity for businesses.
The context here is specific to Denmark. In common law countries (e.g., the UK and the USA) there is no requirement for retailers to accept any form of payment at all, cash included. It’s a misunderstand of what “legal tender” means to imagine that they do. But in Denmark, the law says that certain types of retailer must accept cash and so the law is being changed so that they don’t have to.
The Danes are very welcoming to visiting consultants.
I think it is really interesting to see this approach to national payment strategy – that is, one based on productivity and economic efficiency – in contrast to the UK’s where the mere idea of ending cheque clearing in a decade was enough to induce apoplexy in the shires and a shake up of the UK payments industry governance.
With my feet up and a cup of tea, I was relaxing reading David R. Warwick’s “The Case Against Cash” in the July edition of “The Futurist” magazine. He notes that of the $829 billion in US currency “in circulation”, two-thirds is outside the US. According to the Boston Fed, the average US consumer has only $79 about their person, with another $157 at home or in the office. Say $200 each for 200 million consumers, that comes to only $40 billion. Even if you calculate it at $300 each for 300m consumers, that’s still only $90 billion, which would imply that about two-thirds of the cash in the US in unaccounted for, a figure that tallies well with more detailed calculations made for some European countries. That means that if the US is as law-abiding as, say, Norway, then there’s about $200 billion of cash in the US that is only used for tax evasion, crime, money laundering and so on.
Mr. Warwick says that the biggest single benefit of the abolition of cash in the US will be the elimination of cash robberies, which costs the country about $140 billion per annum. This may be so, but personally, I think that the greatest benefit will be what he puts second on the list: financial inclusion. People trapped in a cash economy are not only discriminated against (because they pay the highest transactions costs) but they are cannot get on the financial services ladder. They have to take payday loans instead of bank loans, use cheque-cashing services and so on. Helping these people on to that ladder is a very positive outcome for the electronic payments industry (assuming that it can deliver the low-cost products that are needed to do this).
Naturally I sympathise with Mr. Warwick, but I don’t hold out much short term hope for the US getting rid of cash, although I can see that there are some interesting ways to make progress. A correspondent wrote, kindly, in response to a recent post I made about the role of e-payments in reducing cash evasion.
In addition to strict regulations that require POS technology to retain sales records (and criminal liability if they are found to be tampered), the Brazilian state of Sao Paulo created a program called “Nota Fiscal Paulista” which works by consumer demand. It encourages consumers to ask for their receipts, which pressures the business into declaring their sales taxes to the state tax collector. At year’s end the consumer gets a share of their taxes paid returned to them, as well as an entry in a larger lottery. I’ve had family members win sizeable pots simply for opting in to this receipt at check out.
Many merchants really dislike this scheme, presumably because it works, but they are obliged to offer it because of consumer pressure. There’s another similar scheme in Korea, whereby merchants who take more than some threshold (75%?) volume of their transactions electronically rather than in cash get a tax break. The government has presumably calculated that reducing tax evasion from cash sales more than makes up for the revenue reduction from the tax break. Perhaps in these straightened times the US tax authorities might begin to make similar calculations.
However, while the US may not be able to get rid of cash domestically — more’s the pity — it could at least start trying to get rid of cash in some other theatres. Perhaps a good place to start might be somewhere where, unlike America, there is a viable mobile phone-based alternative to cash: Afghanistan, where the M-PAISA scheme is up and running.
Electronic payments, if implemented properly, can bring transparency as well as efficiency. And transparency can have some unexpected consequences. Look what happened when the M-PESA service was launched in Afghanistan (as M-PAISA) and used to introduce efficiency into the process of salary payments for civil servants…
Another factor pointing to Afghanistan as the nexus for such an experiment is that the campaign against cash there may be able to co-opt a pretty powerful ally: the US military.
For the past few years the military has been striving to replace its cash transactions with electronic fund transfers and debit card payments in the hopes of achieving a “cashless battlefield,” in the words of Peter Kunkel, a former assistant secretary of the Army.
Right now, the battlefield is only cashless because all of the cash is being spirited away as soon as it arrives and (I’m sure) to no good purpose — as I heard our (former) man in Kabul Sherard Cowper-Coles pointing out on the BBC’s Start the Week programme recently — and there doesn’t seem to be any way to keep it in place.
Last month, a well-dressed Afghan man en route to Dubai was found carrying three briefcases stuffed with $3 million in U.S. currency and $2 million in Saudi currency, according to an American official who was present when the notes were counted. A few days later, the same man was back at the Kabul airport, en route to Dubai again, with about $5 million in U.S. and Saudi bank notes.
I love the title of the article, don’t you? It doesn’t seem that much of a “puzzle” to me.
Cash declaration forms filed at Kabul International Airport and reviewed by The Washington Post show that Afghan passengers took more than $180 million to Dubai during a two-month period starting in July. If that rate held for the entire year, the amount of cash that left Afghanistan in 2009 would have far exceeded the country’s annual tax and other domestic revenue of about $875 million.
There really ought to be more upset about the havoc that these billions of US dollars cause but not merely facilitating but actively encouraging corruption on such an enormous scale, yet even at the very highest levels there’s no sense (that I can find) of outrage. In fact, everyone (except taxpayers, presumably) seems quite happy with the seigniorage-powered status quo.
Karzai said cash transactions are quite normal and then-President George W. Bush was aware of the Iranian donations. The United States supposedly gives him bags of cash as well.
Interestingly, when he says “bags of cash” he isn’t speaking metaphorically: they actually do give him bags of cash, as do the Iranians apparently. I don’t think any of them are going to get behind my campaign to reduce the use of cash to the great benefit of society as a whole.
Suspicions of corruption in the Afghan government, with one cable alleging that vice president Zia Massoud was carrying $52m in cash when he was stopped during a visit to the United Arab Emirates.
Not mobile phone top-up vouchers or open-loop prepaid cards or high-street vouchers, but FIFTY TWO MILLION GREENBACKS. That made me wonder about his baggage allowance. How much would $52m in weigh? Could you fit it in cabin luggage or would you have to check it? After all 520,000 $100 bills take up a fair bit of space. I seem to remember from a previous discussion, that a cereal box can hold $500,000 so we’re talking about 100 cereal boxes at least.
In reality, restricting ourselves to $100 bills, the maximum is only $450,000 (the New Jersey ne’erdowells didn’t pack optimally!).
Look, I’m not making any sort of political point about Afghanistan, I’m arguing this general point. The US should cease printing $50 and $100 bills immediately. They have no function in supporting commerce.
And it’s not just that carrying around cash is inconvenient and time consuming. These days, one of its main functions is to finance the black economy: drug deals, counterfeiting, under-the-table employment and other nefarious activities. Because cash is anonymous, people can easily opt out of the taxable economy – leaving the rest of us to pick up the tab for their use of public services. Remove cash entirely, and you make it far more difficult to avoid tax, not to mention discouraging criminal activity.
I have to say that this piracy is looking more and more like a viable career option to me. It is very well remunerated and there appears to be much less chance of going to jail than in, say, investment banking or management consultancy.
Of the 650 Somali pirates caught since late 2008, 460 have already been released, according to Lloyd’s Market Association