How Paypal robs the Bank of England

Digital currencies might start creating a sticky situation for central banks.

Have you ever wondered how the rise of digital currencies will impact on the monetary base, and the effects that will have on seigniorage revenue to governments worldwide? No? Well, this pair of articles by the Financial Times' Izabella Kaminska, "Why central banks should take charge of their digital currencies" and "Turning mobile money into M0" is interesting nonetheless.

Kaminska examines the typical problem central banks have with digital currencies, which is that they tend to mess around with the way banks expect the money supply of the nation to work. The immediate downside of that is that it impacts on seigniorage, the revenue accrued to a government by its right to mint coinage.

In other words, when you use PayPal rather than posting a £50 note, you need never hold that currency, and the government never receives the revenue for having printed it.

She writes:

Consequently, what you end up with is something very different to cash of the realm. In many ways, it’s worse than zero-yielding money due to the natural decay associated with transactional, creation and redemption costs. The other point is that Safaricom [the vendor of a hugely popular Kenyan mobile currency] is actually behaving much like a quasi-autonomous state within a state that’s issuing its own private money system, the value of which is constantly pegged to the official currency of the land.

How can nations fight back? (Assuming, of course, they ought to fight back — but that revenue is likely to be mighty tempting.) One possibility is by working with digital currency vendors to create payment mechanisms which don't require holding a parallel currency to work. And make no mistake, even though PayPal denominates its accounts in pounds and dollars, it's a parallel currency in all but name.

Jean-François Groff, one of the pioneers of the Web at CERN, is working on that option. Mobino, his company, is a mobile payment system which works on real-time debiting, not on keeping a float of a second currency on tap:

Mobino’s system aims to cut out as many intermediaries from the debit process as possible by getting you, the customer, to strike up a single direct debit agreement with itself. The company then charges the customer for transactions conducted with partner vendors, whilst the customer deals only with Mobino rather than a multitude of online or retail vendors.

And if that scheme was done by Mobino — or a similar system — working with a central bank, then the costs of running it could be funded from the seigniorage revenue it returns to the government. Rather than the cost of "printing" money being the actual ink and paper, it would become the price of maintaining servers and bandwidth.

In an ideal state-controlled money world, you could imagine the system mutating into one where the central bank itself ended up billing you directly for the use of their digital cash. So, rather than withdrawing physical cash to conduct your payments, you’d be transacting state-issued digital cash, now credited or debited from your account as quickly as a bank credits or debits cash to you at the ATM wall.

But, while Kaminska mentions it in passing, it would be interesting to see the analysis applied to Bitcoin. Lord knows the currency has its flaws, but it's the only one of the successful(ish) mobile payment systems which actually embraces the fact that it is a parallel currency — and a freely floating one, at that. The Bitcoin ecosystem has a specific method for distributing the seigniorage it generates, but also gradually reduces that rate; by 2140, the system will likely be in de-facto deflation.

By moving the transaction entirely into a parallel currency, the system is also more efficient than even Mobino could ever hope to be — provided you don't plan on converting Bitcoins into real-world money. If you do, things get trickier; the exchanges have had a number of high-profile failures, and are probably the weakest point in a network which manages to combine cryptographic perfection with an incredible amount of possibilities for human error.

It may be the case that central banks have to start examining what their role would be in a world of digital currencies; but if they do, it may be better for them to skip the sticking-plaster world of PayPal and Mobino and move straight to something designed for an all-digital world from the start.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Owen Smith promises to be a "cold-eyed revolutionary" - but tiptoes round Brexit

The Labour leader challenger takes Jeremy Corbyn on at his own anti-austerity game. 

Owen Smith may be challenging Jeremy Corbyn for the Labour leadership but it seems he has learnt a thing or two from his former boss. 

One year on from abstaining from the Tory Welfare Bill - a decision he now says he regrets - Smith attacked the former Chancellor George Osborne’s austerity policies from Orgreave, a former steel plant which was pivotal during the miners’ strike.  

Listing frustrations from library cuts to delayed trains, Smith declared: “Behind all of these frustrations is one cause – austerity.”

Borrowing the rhetoric that served Corbyn so well, he banged the drum about pay, labour rights and fair taxes. 

Indeed, a spokesman from Jeremy for Labour popped up to say as much: “We welcome Owen’s focus on equality of outcome, reindustrialisation and workers' rights - and his support for policies announced in recent months by Jeremy Corbyn and John McDonnell.”

On policy, though, Smith showed a touch of his own. 

His description of the Department for Work and Pensions as “a byword for cruelty and insecurity” resonates with the deep fear many benefit claimants feel for this faceless but all powerful authority. His promise to scrap it will not go unnoticed.

Another promise, to end the public sector pay freeze, is timely given widespread expectations that withdrawing from the EU’s single market will push up prices. 

He also appealed to the unions with a pledge to scrap the “vicious and vindictive” Trade Union Act. 

The policies may be Corbynite, but where Smith stands out is his determination to be specific and practical. He is selling himself as the Corbyn who actually gets things done. Asked about what he would replace zero-hours contracts with, he responded: "Well it could be one [hour]. But it can't be zero."

As he concluded his speech, he promised “revolution” but continued:

“Not some misty eyed romanticism about a revolution to overthrow capitalism.

“But a cold-eyed, practical, socialist revolution, through a radical Labour Government that puts in place the laws and the levers that can genuinely even things up.”

Smith’s speech, though, steered clear of grappling with the big issues of Brexit. He stands in favour of a second referendum on the Brexit deal, which may appease Labour's inner city voters but could frustrate others who voted Leave.

On the free movement of people – widely viewed as a dividing line between Labour’s Corbynite members and the wider voting population - he has been vague. He has previously expressed support for the "progressive case against freedom of movement" and criticised Corbyn for failing to understand patriotism. But this is not the same as drawing up policy. Whether he can come up with strong views on immigration and still appeal to both voter bases will be his biggest challenge of all. 

Owen Smith's 20 policies

1.      A pledge to focus on equality of outcome, not equality of opportunity 
2.      Scrapping the DWP and replacing it with a Ministry for Labour and a Department for Social Security
3.      Introducing modern wages councils for hotel, shop and care workers to strengthen terms and conditions
4.      Banning zero hour contracts
5.      Ending the public sector pay freeze
6.      Extending the right to information and consultation to cover all workplaces with more than 50 employees
7.      Ensuring workers’ representation on remuneration committees
8.      Repealing the Trade Union Act
9.      Increase spending on the NHS by 4 per cent in real-terms in every year of the next parliament
10.  Commit to bringing NHS funding up to the European average within the first term of a Labour Government
11.  Greater spending on schools and libraries
12.  Re-instate the 50p top rate of income tax
13.  Reverse the reductions in Corporation Tax due to take place over the next four years
14.  Reverse cuts to Inheritance Tax announced in the Summer Budget
15.  Reverse cuts to Capital Gains Tax announced in the Summer Budget
16.  Introduce a new wealth Tax on the top 1 per cent earners
17.  A British New Deal unveiling £200bn of investment over five years
18.  A commitment to invest tens of billions in the North of England, and to bring forward High Speed 3
19.  A pledge to build 300,000 homes in every year of the next parliament – 1.5 million over five years
20.  Ending the scandal of fuel poverty by investing in efficient energy