The monthly law journal covering legal issues in banking, e-finance, e-money and online payments including, mobile payments (m-payments), micropayments, pre-paid cards and other payment cards, online banking, NFC (near field communication) and other contactless payments, digital currencies such as Bitcoin, mobile wallets and virtual money, e-invoicing, e-billing and e-payments, card fraud and other cybercrime, as well as regulatory regimes such as the E-Money Directive (EMD and 2EMD), the Payment Services Directive (PSD), SEPA, the US Electronic Money Regulations 2011, and the UK Bribery Act 2010. / read more
The question of taxing electronic money by Dave Birch, Director at Consult Hyperion
It's no secret that I believe that cash is not the best way of maintaining an effective, efficient and stable payments system, something that is one of the core duties of central banks. Yet if a central bank's income derives from cash, it can hardly be expected to take an independent view of cash as one of a number of alternative payment options in the economy, can it?
You can see the problem with this: if alternatives to cash that are better for the economy (because they are cheaper, for example) come along then it means that the central bank, and therefore the government, will lose revenues from seigniorage. In the UK the government obtains something in the region of £2 billion per annum in seigniorage revenue. This is nothing compared to the US, which earns fantastic profits from the wads of $100 bills stuffed under mattresses in Latin America, Russia and elsewhere - $77 billion in 2011, according to the FT.
Thinking about government or central bank issuance of electronic money makes you wonder whether electronic money is actually money or not, doesn't it? If it is, should it then be provided by the central bank as a public good, in the way that is starting to happen in Canada with Royal Canadian Mint's MintChip system? If it isn't, shouldn't private issuers compensate the government for lack of income?
To understand this, we have to consider what in monetary terms electronic money actually is. Let's look at one of the most successful electronic money systems out there, M-PESA in Kenya (which incidentally, Consult Hyperion helped create). The ultimate liability for the M-PESA balances rests with the commercial banks where the float is deposited (M-PESA has a 100% reserve). That means that it isn't part of M0, which combines liquid assets held by the central bank and physical currency circulating in the economy and is a liability of the central bank towards cash holders. Anything that shrinks the amount of cash in circulation shrinks M0 and therefore seigniorage.
In essence, seigniorage is a stealth tax on the people who use cash (predominantly the poor). But it's significant government revenue. It seems to me then that the advent of electronic money and the reduction in M0 (except for criminal purposes) mean a revenue gap opening up. Governments therefore have two choices: they can reduce expenditure and become more efficient and effective users of tax revenues or they can find alternative sources of tax income. Since the former is a fantasy, the latter is inevitable. Thus we find Kenya, pioneers in M0 replacement, is instituting a new tax on mobile money - a not inconsiderable 10% excise duty on all mobile money transfers. The impact of this is that Safaricom, already Kenya's largest taxpayer, has just put its M-PESA fees up by 10%. So, just as the unbanked trapped in a cash economy pay the stealth tax on notes and coins, they are now paying the not-exactly-stealth tax for the replacement.
So, maybe we should keep cash? However, it's not that straightforward. Cash might produce seigniorage revenues on the one hand but on the other, the tax revenues lost to European nations from cash's prominent role in the 'unofficial' economy are astronomical and the unfairness of cash, which distributes its costs unevenly toward the poor, is no longer tolerable. Surely, the first step, as I've long advocated, is the removal of high value notes such as the €500 from circulation.
This reminds me of a conversation I had recently about Proton, the venerable Belgian electronic purse. As one of my companions pointed out, you could show merchants all the spreadsheets you liked proving that the electronic purse was cheaper than cash, it didn't matter: the merchants didn't want electronic money, they wanted cash because they didn't want to pay tax. Cash wasn't 2% or 5% or 10% cheaper than cards, it was 50% cheaper than cards. So let's not listen to merchants on the subject. Belgium alone loses €30 billion a year from tax evasion, which blows the seigniorage figures right out of the water.
In the end I think Kenya and Canada are heading in the right direction - physical cash needs to go. Any resulting revenue losses can be made up either through taxing providers or through the government issuing electronic cash themselves.
Dave Birch, Director