Making electronic money

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Making electronic money legal tender pros cons
Leo Van Hove Digital Money Forum - London, March
31, 2004
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Inspiration
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Inspiration
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Inspiration
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Legal tender quid?

• Common understanding obligation to accept
• agents selling goods, or assets, cannot
  nowadays refuse payment in legal tender
  (Goodhart, 2000, p. 6)
• 3 levels
• for all types of transactions
• for the discharge of debts (US, EU, )
• Retailers are within their rights to specify
  the types of payment they will accept because
  consumers are negotiating an exchange, not
  repaying an existing debt (CBO, 1996).
• compels only the government

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Legal tender in Singapore

• ! no statutory obligation to accept !
• merchants can refuse to accept cash
• If a merchant stipulates that he will supply a
  service only if payment is made electronically,
  he can refuse the service if payment is offered
  by some other method (Low, 2002)
• requires written notice
• merchants will be able to refuse e-money
• impact of legal status limited

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E-purses today?

• in Europe mixed picture, limited success
• Proton (BE), miniCASH (LU), euro boost
• GeldKarte (DE), Danmønt (DK), stagnating
• CASH (SE), MEP (PT), ... on way out

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Active Proton cards
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Number of terminals
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Frequency of use, all cards
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Frequency of use, activated
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Transactions per capita
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Protons success

• figures for December 2003
• 21 of population is active user
• 1.1 trx per card per month
• 4.2 trx per active card per month (increasing!)
• lt 4 of cash transactions

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E-purses in Singapore?

• CashCard launched in 1996
• joint effort of 7 local banks, via NETS
• 1.5 trx per card per month
• especially local ERP scheme
• slow growth
• gt limited success

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?

• Do we need government intervention?
• If the private sector (unaided) attempt to
  introduce an e-money payment system is
  faltering badly, should the public sector step in
  to revive this exercise? (Goodhart et al., 2002)

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Outline

• 1. the case of Singapore SELT
• 2. a more extreme scenario
• 3. arguments in favour
• 4. arguments against
• 5. evaluation

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1. SELT

• SELT no obligation to accept
• certification vs. issuance?
• CB certifies/guarantees private e-money
• CB acts as an issuer itself
• many CBs have explicitly reserved option

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1. SELT

• SELT only MAS will issue SELT
• banks will procure SELT from MAS
• MAS will take over NETS - CashCard
• MAS will confiscate float! (cf. free banking)
• MAS will continue to issue physical cash
• SELT by 2008, but timing flexible
• public acceptance is key
• AAA, would include P2P and possibly interest !

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2. cashless society scenario

• obligation to accept
• CB issues e-money alongside private issuers
• traditional cash is abolished

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3. pros

• The resource cost of cash
• 4.5 bn for the UK 0.75 of GDP
• 0.35-0.56 in BE
• gt considerable social savings to be reaped
• gt cost of cash lowered/eliminated

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New report by DNB

• social cost of POS payments
• 2.9 billion EUR 0.65 of GDP
• 400 EUR per household
• of which cash accounts for 73
• 2.2 billion EUR 0.48 of GDP
• marginal cost Chipknip is cheapest!
• conclusions
• significant cost savings lt increased usage of
  pinpas and Chipknip
• Konings explicit pricing is logical

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New report by DNB
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3. pros

• The underground economy
• in BE some 60 of C not used for legal
  transactions
• will only become worse
• should CBs provide means for these purposes?

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The underground economy
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3. pros

• Competition between networks size matters
• Cash accepted almost everywhere
• Cash is underpriced

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4. cons

• Migration costs
• MAS will use existing infrastructure
• P2P gt public will need device ltgt by 2008
• Government intervention
• social planner lacks knowledge
• can hamper further innovation
• Security (cash as fallback option)

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4. cons

• Social exclusion
• but network of cash is already eroded
• in BE coins in only 30 of public payphones
• in NL municipalities start collecting parking
  fees electronically
• Singapore flexible timing
• Privacy
• Goodhart Orwellian nightmare
• e-money can be programmed gt strike balance

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5. evaluation

• SELT cashless
• stimulus for e-money acceptance solved
• cost of cash lower cost of cash eliminated
  blow to underground
• migration costs migration costs
• social exclusion social exclusion
• privacy privacy
• security security

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Conclusions

• SELT
• govt help is , especially interest
• but as long as cash is not abolished ...
• more extreme LT scenario
• potential efficiency gains are substantial
• many problems can be managed
• BUT can gains not be obtained via ?

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Conclusions

• E-money should be promoted YES
• Cash should be discouraged YES
• Cash should be abolished ?

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Conclusion
Viva the cashless society! Well, lets at
least start thinking about it ...
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