Financial Times, November 18, 1996, pp. 1, 20.


   Electronic money threat to central banks

   By George Graham in London


   Central banks could lose billions of dollars of revenue if
   consumers start to jettison the traditional banknote in
   favour of electronic money, economists from the Bank for
   International Settlements have warned.

   A report issued today by the BIS, the central bankers'
   central bank. says that innovations such as "electronic
   purses" loaded on to a smartcard or "digital cash" used for
   making payments over the Internet could erode central
   banks' income from issuing banknotes.

   Note issue is a significant source of revenue for many
   central banks because the private sector must in effect
   make interest-free deposits to obtain the notes.

   The BIS cites studies estimating the loss of this
   "seigniorage" at more than $17bn for its 11 member
   countries if prepaid cards were to eliminate all banknotes
   below $25 in value although not all seigniorage comes to
   central banks.

   Central banks could "consider issuing e-money value
   themselves" as a way of offsetting the lost income, the
   Basle-based BIS says. Alternatively, it suggests, they
   could increase mandatory reserve requirements, although
   this would run counter to the general trend towards lower
   minimum reserves.

   The BIS report appeared as MasterCard, one of the world's
   two leading payment card consortia, prepared to expand its
   efforts to develop a widely accepted electronic purse by
   taking control of Mondex, a UK-developed smart card.

   MasterCard will announce today that it is taking a 51 per
   cent stake in Mondex, which is currently on trial in
   Swindon in the west of England and in Hong Kong.

   Widespread substitution of e-money for cash could make it
   more difficult for central banks - by reducing their
   ability to control the money supply - to affect interest
   rates. But the BIS says that this is unlikely to happen.

   Although central bankers are nervous about the implications
   of widespread use of e-money, they are anxious not to be
   viewed as Luddites. The BIS report warns that if central
   banks chose to issue their own e-money, they "could limit
   competition or reduce incentives to innovate".

   While curbs are not usually imposed on the issue of single-
   purpose prepaid smartcards. multipurpose electronic purses,
   which can be used as money in a variety of places, raise
   different questions.

   Some central bankers view them as comparable to deposit
   accounts, which in most countries can be managed only by
   authorised banks. Others see them as equivalent to
   travellers' cheques, on which few restrictions are imposed.

   The BIS report warns that any decision will involve a
   trade-off: "If issuance of e-money is limited to banks, the
   regulatory framework already in place can be extended to
   cover the new products, but competition and innovation
   might be more limited."

   [End]