Before Babylon, Beyond Bitcoin by David Birch

Author:David Birch
Language: eng
Format: epub
Publisher: London Publishing Partnership
Published: 2017-06-06T15:10:40+00:00

Neither the banks nor the merchants nor the regulators know what is coming next, and the experiences of regulators who have meddled with the price of payments (in Europe, Australia and the United States) have confirmed the ineffectual nature of this kind of transfer of private costs between market participants.

Given these problems, what should be regulated? Well, if we focus on minimizing the social cost of payment systems as a key reason for delivering electronic money as a universal service, we might reasonably expect social benefits. The social cost of cash (that is, the resources that society as a whole consumes to use cash) has been difficult to estimate in the past, but recent, detailed central bank studies in Belgium and the Netherlands have shown that that cost in developed markets with high card penetration is around 0.5 per cent of GDP (0.48 per cent in the Netherlands and 0.58 per cent in Belgium, in fact).

In relation to the universal service arguments, note that the marginal costs are noticeably different, with the marginal cost of cash being about four times the marginal cost of electronic money (van Hove 2006). Cross-subsidizing cash is not, therefore, a welfare-maximizing strategy, and society should switch to cost-based pricing and leave the rest to the market. This strategy would see debit card transactions triple or quadruple in value while cash transactions would fall by a third. A Belgian study estimates that this approach would make Belgium and the Netherlands about €200 million and €150 million better off, respectively. Scaling up, the European countries they study would as a whole save about 0.14 per cent of GDP (i.e. about a third of the total social cost).

So if we get rid of cash, we save everybody money and everyone’s life is made more convenient. Well, if everyone is using electronic money, that’s true. What we do not want is for electronic money to become the demarcation line in a two-tier society. We do not want electronic money to become the hallmark of the included while physical money becomes the hallmark of the excluded. But what about those people who cannot or will not move to electronic money. There are, essentially, three options:

people should be allowed to continue to use notes and coins at their own expense or

people should be allowed to continue but at someone else’s expense or

people should not be allowed to continue to use physical cash.

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