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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Metro mayors can help Labour return to government

Labour champions in the new city regions can help their party at the national level too.

2017 will mark the inaugural elections of directly-elected metro mayors across England. In all cases, these mayor and cabinet combined authorities are situated in Labour heartlands, and as such Labour should look confidently at winning the whole slate.

Beyond the good press winning again will generate, these offices provide an avenue for Labour to showcase good governance, and imperatively, provide vocal opposition to the constraints of local government by Tory cuts.

The introduction of the Mayor of London in 2000 has provided a blueprint for how the media can provide a platform for media-friendly leadership. It has also demonstrated the ease that the office allows for attribution of successes to that individual and party – or misappropriated in context of Boris Bikes and to a lesser extent the London Olympics.

While without the same extent of the powers of the sui generis mayor of the capital, the prospect of additional metro-mayors provide an opportunity for replicating these successes while providing experience for Labour big-hitters to develop themselves in government. This opportunity hasn’t gone unnoticed, and after Sadiq Khan’s victory in London has shown that the role can grow beyond the limitations – perceived or otherwise - of the Corbyn shadow cabinet while strengthening team Labour’s credibility by actually being in power.

Shadow Health Secretary and former leadership candidate Andy Burnham’s announcement last week for Greater Manchester was the first big hitter to make his intention known. The rising star of Luciana Berger, another member of Labour’s health team, is known to be considering a run in the Liverpool City Region. Could we also see them joined by the juggernaut of Liam Byrne in the West Midlands, or next-generation Catherine McKinnell in the North East?

If we can get a pantheon of champions elected across these city regions, to what extent can this have an influence on national elections? These new metro areas represent around 11.5 million people, rising to over 20 million if you include Sadiq’s Greater London. While no doubt that is an impressive audience that our Labour pantheon are able to demonstrate leadership to, there are limitations. 80 of the 94 existing Westminster seats who are covered under the jurisdiction of the new metro-mayors are already Labour seats. While imperative to solidify our current base for any potential further electoral decline, in order to maximise the impact that this team can have on Labour’s resurgence there needs to be visibility beyond residents.

The impact of business is one example where such influence can be extended. Andy Burnham for example has outlined his case to make Greater Manchester the creative capital of the UK. According to the ONS about 150,000 people commute into Greater Manchester, which is two constituency’s worth of people that can be directly influenced by the Mayor of Greater Manchester.

Despite these calculations and similar ones that can be made in other city-regions, the real opportunity with selecting the right Labour candidates is the media impact these champion mayors can make on the national debate. This projects the influence from the relatively-safe Labour regions across the country. This is particularly important to press the blame of any tightening of belts in local fiscal policy on the national Tory government’s cuts. We need individuals who have characteristics of cabinet-level experience, inspiring leadership, high profile campaigning experience and tough talking opposition credentials to support the national party leadership put the Tory’s on the narrative back foot.

That is not to say there are not fine local council leaders and technocrats who’s experience and governance experience at vital to Labour producing local successes. But the media don’t really care who number two is, and these individuals are best serving the national agenda for the party if they support A-listers who can shine a bright spotlight on our successes and Tory mismanagement.

If Jeremy Corbyn and the party are able to topple the Conservatives come next election, then all the better that we have a diverse team playing their part both on the front bench and in the pantheon of metro-mayors. If despite our best efforts Jeremy’s leadership falls short, then we will have experienced leaders in waiting who have been able to afford some distance from the front-bench, untainted and able to take the party’s plan B forward.