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 Tories' aim is to put Labour out of business for good

Rather than merely winning again, the Conservatives are seeking to inflict permanent damage on the opposition. 

The Conservatives are numerically weak but politically strong – that is the peculiarity of their position. Their majority is the smallest of any single-party government since October 1974. Yet, to MPs at the Tory conference in Manchester, it felt like “2001 in reverse”: the year of Tony Blair’s second election victory. Then, as now, the opposition responded to defeat by selecting a leader, Iain Duncan Smith, who was immediately derided as unelectable. Just as Labour knew then that it would win in 2005, so the Conservatives believe that they have been gifted victory in 2020. David Cameron has predicted that the party’s vote share could rise from 37 per cent to a Thatcherite 43 per cent.

For Cameron and George Osborne, who entered parliament in 2001, this moment is revenge for New Labour’s electoral hegemony. They believe that by applying Blair’s lessons better than his internal successors, they can emulate his achievements. The former Labour prime minister once spoke of his party as “the political wing of the British people”. In Manchester, Cameron and Osborne displayed similarly imperial ambitions. They regard Jeremy Corbyn’s election as a chance to realign the political landscape permanently.

Seen from one perspective, the Tories underperformed on 7 May. They consistently led by roughly 20 points on the defining issues of the economy and leadership but defeated Labour by just 6.5 overall. It was their enduring reputation as the party of the plutocracy that produced this disparity. Those who voted for Labour in spite of their doubts about Ed Miliband and the party’s economic competence may not be similarly forgiving of Corbyn. To maximise their gains, however, the Tories need to minimise their weaknesses, rather than merely exploit Labour’s.

This process began at conference. At a dinner organised by the modernising group the Good Right, Duncan Smith, Michael Gove and the Scottish Tory leader, Ruth Davidson, affirmed their belief that, contrary to Thatcherite orthodoxy, inequality is a problem. Only the Business Secretary, Sajid Javid, an admirer of the libertarian heroine Ayn Rand, insisted that equality of opportunity was the defining metric.

George Osborne’s assured speech was most notable for his sustained appeal to Labour voters. Several opposition MPs told me how unsettled they were by the Chancellor’s declaration that Labour’s new leadership calls “anyone who believes in strong national defence, a market economy and the country living within its means” a Tory. He added, “It’s our job to make sure they’re absolutely right. Because we’re now the party of work, the only true party of labour.” The shadow minister Jonathan Reynolds told me: “We’ve got to be extremely clear that this is not business as usual. This is a real attempt by the Tories to put us out of business – possibly for ever.”

The Conservatives’ aim is to contaminate Labour to the point where, even if Jeremy Corbyn were deposed, the toxin would endure. For those opposition MPs who emphasise being a government-in-waiting, rather than a protest movement, the contrast between the high politics of the Tory conference and Corbyn’s rally appearance in Manchester was painfully sharp. They fear guilt by association with the demonstrators who spat at and abused journalists and Tory delegates. The declaration by a rally speaker, Terry Pullinger, the deputy general secretary of the Communication Workers Union, that Corbyn’s election “almost makes you want to celebrate the fact that Labour lost” was regarded as confirmation that some on the left merely desire to run the party, not the country.

But few Tory MPs I spoke to greeted Corbyn’s victory with simple jubilation. “It’s a great shame, what’s happened to Labour,” one said. “We need a credible opposition.” In the absence of this, some fear the Conservatives’ self-destructive tendencies will reassert themselves. The forthcoming EU referendum and leadership contest are rich in cannibalistic potential. Tories spoke forebodingly of the inevitable schism between European Inners and Outers. As the Scottish experience demonstrated, referendums are almost never definitive. In the event of a close result, the party’s anti-EU wing will swiftly identify grounds for a second vote.

Several cabinet ministers, however, spoke of their confidence in Cameron’s ability to navigate the rapids of the referendum and his pre-announced departure. “More than ever, he’s the right man for these times,” one told me. By this December, Cameron will have led his party for ten years, a reign exceeded in recent history only by Stanley Baldwin, Winston Churchill and Margaret Thatcher. That the Conservatives have so far avoided cataclysm is an underappreciated achievement.

Yet there are landmines ahead. An increasing number of MPs fear that the planned cuts to tax credits could be a foul-up comparable to Gordon Brown’s abolition of the 10p tax rate. Despite the appeals of Boris Johnson and the Sun, Cameron and Osborne have signalled that there will be no backtracking. At such moments of reflection, the Tories console themselves with the belief that, although voters may use Corbyn as a receptacle for protest (as they did Michael Foot, Neil Kinnock and Ed Miliband), they will not elect him. They also acknowledge that the current Labour leader may not be their opponent in 2020. The former paratrooper Dan Jarvis is most often cited as the successor they fear. As with Cameron and Blair, his relative lack of ideological definition may prove to be a strength, one MP suggested.

William Hague is fond of joking that the Tories have only two modes: panic and complacency. If the danger before the general election was of the former, the danger now is of the latter. 

George Eaton is political editor of the New Statesman.