Digital Currency a Banker Could Love

A startup called eCurrency Mint, backed by eBay founder and philanthropist Pierre Omidyar, is pitching technology that would let central banks issue digital currency with attributes of bitcoin and physical cash. As with any fiat currency, the supply of eCurrency would be determined according to each country's monetary policy.

For banks, eCurrency could help save money on cash-handling activities, reducing the need for some tasks performed by tellers and couriers.

The proposal dispenses with one of the defining characteristics of bitcoin (decentralization) but, at least in its default implementation, may improve on another (the ability to transact without being traced).

"People might like bitcoin because they think even if the government or central bank goes away, bitcoin doesn't go away," said Tilman Ehrbeck, partner at Omidyar Network, Pierre Omidyar's investment company and an investor in eCurrency Mint. "But the bitcoin value is only there as long as enough people believe in bitcoin. If somebody creates Fitcoin or Ditcoin, and multiplies this idea of alternative digital currencies, who knows what is going to happen to its value, whereas the national currency is backed by the full faith and credit of the government."

eCurrency Mint said its technology, as designed, doesn't let a central authority track the ownership and usage of the digital money. This may appeal to users (not necessarily wrongdoers) who value their privacy. But it could be a tough sell for governments in the wake of the Paris and San Bernardino attacks, and the company says individual countries could implement the technology differently.

Why Another Digital Currency?

Most people would agree that there's an inevitable shift happening from paper to electronic money.

"The demand for money to be digitized is unstoppable — the next generation is going to want to transact digitally," said Jonathan Dharmapalan, founder and CEO of eCurrency Mint, which has been operating quietly for the past five years. He said the venture is now working directly with two central banks (he wouldn't say which ones) to enable them to start issuing eCurrency.

What gives physical currency its usefulness is its universal acceptance.

"The dollar works whether or not somebody knows me," Dharmapalan said. "It's the ultimate instrument of financial inclusion or equality: $50 in your hand is exactly the same as $50 in my hand, in the hands of a millionaire or a pauper. The bearer is not the important thing, the legal instrument or entity they carry is important." The trust in the value of the currency enables debts to be settled.

Dharmapalan's team wanted to preserve these attributes in the digital world.

They decided the digital currency would have to be issued by a central bank, have a legal identity, and be legal tender that would work effectively on any system. "It cannot have its own private system," he said.

A central bank is needed to prevent the digital currency from being replicated and to keep its value stable, something central banks have gotten better at, Dharmapalan said.

The company initially created eCurrency with an eye on emerging markets, where banking penetration was really low and cash use was high. But it says it has talked to the central banks of 30 countries as well as the U.S. Treasury.

How It Works

In eCurrency Mint's scheme, a central bank might produce $1 billion. But instead of printing a billion one-dollar bills, it would issue digital objects called cryptocomplexes that it would inject into the financial system much as it does cash today.

Each cryptocomplex would start with a predetermined value (say, $50) and each could be subdivided or added to others.

The key here is that the central bank doesn't have to track the currency because each piece keeps track of itself. Through a unique identifier, each unit is forever associated with the original block from which it came. The central bank would know immediately if the total of all the pieces added up to more or less than a billion. But it wouldn't know where each piece is, or who owns it.

There's no general ledger like bitcoin's blockchain for eCurrency. Only the values of the currency are constantly added, to make sure they add up to the original block issued. To prevent double-spending at the user level, there are several logic and security checks. If a currency unit doesn't make sense algorithmically, it will be rejected.

Just like with physical cash, ownership doesn't matter. The only thing that matters is that the currency maintains its value.

"The central banks will always have enough visibility to have a high degree of confidence that the billion they created exists," Dharmapalan said. "They don't need to know how that money is distributed. Interestingly enough, all the central bankers I've talked to have no interest in knowing. They don't know now. And they don't think it's their job to know. Law enforcement may feel differently. This is an age-old argument we can't solve."

Once the digital money is created, it would be transported in digital form within a secure storage device to payments systems such as banks and other financial providers, using the existing delivery mechanisms used for notes and coins. Those institutions would load eCurrency into their systems, making it available to the public for transacting.

Use Cases

In the U.S., production and distribution of paper currency is expensive, Dharmapalan said. The central bank produces and distributes cash, and three years later collects and destroy it. The burning of cash pollutes the air; currency contains a lot of lead.

"Paper is very inefficient," he said. "But we've gotten used to that so we tolerate it."

Once cash leaves the Federal Reserve, all the cost of handling it goes to commercial banks. Even a 10% reduction in cash handling activities could be a big cost cut for a bank, he said.

Closed-loop prepaid cards such as transit cards and Starbucks are also inefficient, with the purchase amounts generally not adding up to the value of the card, leaving a lot of unused value.

"We act as through we don't care, but we have a lot of stranded money locked up in these systems," he said. "By the way, Starbucks might go out of business tomorrow. You're not getting your money back. If you took that card back to the U.S. Treasury, they wouldn't give you anything for it."

The company is pitching the software for accepting eCurrency to transit authorities, banks and retailers. The changes would be made at the back end, so these entities would not need to change their cards or card readers, eCurrency Mint says.

Financial Inclusion

Omidyar Network, which recently became a lead investor in eCurrency Mint, sees eCurrency as a way to accelerate financial inclusion by turning some of the mobile money systems in emerging countries, like Kenya's M-Pesa, into sovereign-backed national currencies — therefore increasing trust and addressing key issues hindering broader adoption.

"Our overarching interest is financial inclusion, which is access to and use of financial services for those who are today excluded from the formal financial system we take for granted," said Ehrbeck. "That's a surprisingly large part of humanity. On average around the world, 40% of working age adults are outside the formal financial sector." These people have no traditional banking services: no checking account, credit card, debit card, credit, insurance, savings. In poorer countries, the rate averages 80%.

"They use informal financial services — the money lenders, the pawn brokers, the rotating savings clubs, which are all very expensive and very unreliable," Ehrbeck said.

Traditional brick-and-mortar banking is too expensive a business model to work for the working poor in developing countries and emerging markets, he said.

"We need a digitization of the retail financial services front end to deliver better services at a far lower cost," he said.

M-Pesa, the mobile money distributed by telecom companies in East Africa, makes transactions cheaper and safer for participants and creates data that could be used to underwrite small loans for people who don't have enough history for a FICO score.

But the central banks in places where such payments have taken off are ambivalent about telco companies issuing e-money, seeing operational and systemic risks.

Letting the central banks issue digital currency would allow them to maintain the regulatory and legal framework they have in place.

The telecom companies like the idea, Ehrbeck said, because it would reduce their operating risk and increase trust in the system.

eCurrency Mint has a well-thought-out digital money design. The biggest hurdle is likely to be acceptance by the major financial players. But if the Treasury and the Fed like it, it could conceivably become a key piece of our financial system.

Editor at Large Penny Crosman welcomes feedback on her column at penny.crosman@sourcemedia.com.