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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The problems with ending encryption to fight terrorism

Forcing tech firms to create a "backdoor" to access messages would be a gift to cyber-hackers.

The UK has endured its worst terrorist atrocity since 7 July 2005 and the threat level has been raised to "critical" for the first time in a decade. Though election campaigning has been suspended, the debate over potential new powers has already begun.

Today's Sun reports that the Conservatives will seek to force technology companies to hand over encrypted messages to the police and security services. The new Technical Capability Notices were proposed by Amber Rudd following the Westminster terrorist attack and a month-long consultation closed last week. A Tory minister told the Sun: "We will do this as soon as we can after the election, as long as we get back in. The level of threat clearly proves there is no more time to waste now. The social media companies have been laughing in our faces for too long."

Put that way, the plan sounds reasonable (orders would be approved by the home secretary and a senior judge). But there are irrefutable problems. Encryption means tech firms such as WhatsApp and Apple can't simply "hand over" suspect messages - they can't access them at all. The technology is designed precisely so that conversations are genuinely private (unless a suspect's device is obtained or hacked into). Were companies to create an encryption "backdoor", as the government proposes, they would also create new opportunities for criminals and cyberhackers (as in the case of the recent NHS attack).

Ian Levy, the technical director of the National Cyber Security, told the New Statesman's Will Dunn earlier this year: "Nobody in this organisation or our parent organisation will ever ask for a 'back door' in a large-scale encryption system, because it's dumb."

But there is a more profound problem: once created, a technology cannot be uninvented. Should large tech firms end encryption, terrorists will merely turn to other, lesser-known platforms. The only means of barring UK citizens from using the service would be a Chinese-style "great firewall", cutting Britain off from the rest of the internet. In 2015, before entering the cabinet, Brexit Secretary David Davis warned of ending encryption: "Such a move would have had devastating consequences for all financial transactions and online commerce, not to mention the security of all personal data. Its consequences for the City do not bear thinking about."

Labour's manifesto pledged to "provide our security agencies with the resources and the powers they need to protect our country and keep us all safe." But added: "We will also ensure that such powers do not weaken our individual rights or civil liberties". The Liberal Democrats have vowed to "oppose Conservative attempts to undermine encryption."

But with a large Conservative majority inevitable, according to polls, ministers will be confident of winning parliamentary support for the plan. Only a rebellion led by Davis-esque liberals is likely to stop them.

George Eaton is political editor of the New Statesman.

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