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Money – Global Challenges

Money has four basic functions, each of which can be implemented in a different way and so each of which are available for different types of change. To me it is reasonable to consider these four functions and look at the global challenges to each of them individually and from there ask about the future. Read more

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Money – Options and Possibilities

Over the next decade, the technology timeline is one of the most predictable components of the Future Agenda for money. As William Gibson commented in 1999, “the future is already here, it’s just unevenly distributed.” All of the technologies that will make a difference to any organisation’s business model in 2020 already exist. The right way to get ahead of the curve is not to try and imagine amazing new technologies from scratch but to simply look at how technologies are moving from the lab into the world and consider their impact in a reasonable structured way. Read more

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Money – Proposed Way Forward

If we are to choose a path forward, let us make it a shared goal to make a substantial reduction in the amount of cash in circulation: Willem Buiter (Professor of European Political Economy at the London School of Economics and Political Science and former chief economist of the EBRD) is not the first economist to think about getting rid of cash. But he may be one of the first to think about getting rid of cash in a technological era that actually makes it entirely feasible. It wasn’t feasible when Hayek was thinking about it in 1970s, or when European banks were thinking about in the 1990s, but it is entirely feasible in the 2010s. Why? Well, there are some key technological developments that make Willem’s vision more than science fiction: in fact, some might say, make it more likely than not. These developments mean that we can overcome the main barriers to cashlessness — POS (Point of Sale) density and anonymity — in ways that can deliver more functionality than Willem might expect.

To make something “cash like” then you have to be able to use it pretty much everywhere (you need a high POS density) and you need to be able to make small transactions in private, without being tracked, traced and monitored. There are two ways in which the technological developments of the last two decades have addressed these key objections and have put us in a position to be able to take Willem’s ideas and implement them.

The first is the mobile phone. We are already seeing the launch of mobile phones that can replace payment cards (there are 40 million of them in Japan already) and provide prepaid “e-money” accounts (M-PESA in Kenya, provided by mobile operators Vodafone and Safaricom, has over six million users already). But the strategic impact of mobile phones in the payment space is yet to come. Yes, mobile phones can be payment cards and that’s great. But mobile phones can also be payment terminals. Or to put it another way, you can use a chip and PIN card to pay, but you can use a mobile phone to both pay and get paid. Since I live in a country where, essentially, everyone has a mobile phone this means that it is absolutely feasible to eliminate cash altogether. In this coming world, if I want to pay you a pound, I will do it by text message or mobile Internet and you will know immediately that you have the cash.

The second objection is that losing the anonymity of cash would change the relationship between citizen and state (and bank) in an undesirable way. I used to think that this was true, but now I’m not so sure. Thinking about anonymity again, my experience back in the old days was that, for different reasons, neither the consumers, nor the banks, nor the retailers, nor anyone else actually valued anonymity at all. So, if you put it in a tick-box, some people will tick it, but that’s because they haven’t really thought about it. Once they had thought about it, their interest in anonymity plummeted.

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Money – Impacts and Implications

So, my central prediction for the decade is that the mobile phone will be used to transact non-fiat currencies.  Not much of a prediction perhaps because it is already happening. But the impact will be truly transformational and will, I would argue, primarily benefit the poor.

If the central problem is the cost of transactions for poor people, and the central solution is to use mobile phones to make transactions (including non-fiat currency transactions) then the key compromise is straightforward to set out: We must encourage easy-entry competition for low-value, inter-personal transactions and allow not only mobile operators but other newcomers to deliver a service.

Why not take the €500 note as an example? Any prepaid instrument with a maximum daily transfer of €500 should be regarded as cash and regulated globally much as the FSA regulates Electronic Money Issuers (ELMIs) in the U.K. – but with higher limits on both balances and annual transfers. In Europe, there will be an additional chapter in the Payment Services Directive (PSD) to create a framework for electronic money institutions (alongside the frameworks for credit institutions and payment institutions). So perhaps this could form the basis of reciprocal international agreement. In other words, anyone should be able to buy a pre-paid card with €500 loaded on to it and then do what they like with it; use it on eBay or in Marks & Spencer; send it to a grandson at University or back to the old country as a remittance.

Think about it – the immediate benefit to the poor (who lose some 20% of their annual remittances to charges or fraud) would surely outweigh any marginal convenience offered to drug dealers. And if an international terrorist were to go round Post Offices buying a pre-paid card in each one and then sending €100,000 worth of cards to their uncle up the Khyber Pass, not only would it engender significant effort but it would also cost them a lot more than sending €500 notes (which the Royal Mail might well lose anyway).
More realistic limits for the Know Your Customer (KYC) and Anti Money Laundering (AML) protocols and increasing competition in the provision of mobile payment services would bring (literally) hundreds of millions of people into the financial system. This would deliver a significant net welfare increase and make a huge difference to the daily lives of some of the poorest people.

So, if we are to try and choose a path forward, let us make it a shared goal to make a substantial reduction in the amount of cash in circulation by adopting regulatory compromise to open up the space for solutions and encouraging new thinking, particularly around mobile phones, to deliver those solutions. In fact, we might make the goal the substantial eradication of cash, as previously suggested. Controversial? Perhaps, but possible, plausible and potentially probable!

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