[kictanet] Public Notice by CBK on Virtual Currencies

[Mwendwa Kivuva]

Here is a good article from Wall Street Journal on why cryptocurrency is
inevitable

http://www.bitcointalkradio.com/central-bankers-explore-response-to-bitcoin-their-own-digital-cash/

By Ryan Tracy <http://topics.wsj.com/person/A/biography/7216>

The rise of bitcoin has central bankers around the world studying the
possibility of issuing virtual money backed by the government itself.

A shift in that direction could cut costs across the payment system and
give authorities more control over their money supply. It also could​raise
security and privacy concerns.

To date, no central banks have embraced issuing digital versions of their
fiat currencies. But the prospect is gaining steam as officials around the
world begin to view a mostly digital payment system as inevitable.

“We have to envision a world in which people mostly use e-money,” Carolyn
Wilkins, senior deputy governor of the Bank of Canada, said in a Nov. 13
speech <http://www.bankofcanada.ca/2015/11/innovation-central-bank-style/>.
“We need to anticipate this and manage the risks and benefits that could
arise.”

So far, central banks haven’t settled on a technology that would allow them
to issue their own digital cash. But a Dublin-based startup, eCurrency
Mint, has been meeting with central banks and marketing a technology that
it claims would give them that capacity.

Jonathan Dharmapalan, founder and chief executive of eCM, said the firm has
discussed the technology with 30 central banks, piloted it “in multiple
countries,” and reached agreements with two central banks to transfer to
them the technology necessary to issue the currency. He declined to say
which central banks or countries but said he expects them to announce the
programs publicly soon.

He said that, unlike bitcoin, his technology isn’t designed to operate as
its own payment system outside the existing one. Instead, it could be
transferred just like cash between consumers, merchants, banks and payment
companies, using existing digital transaction systems or new ones. In other
words, it would change the makeup of the currency without changing the
“pipes” through which it flows.

In recent years, Canada and Ecuador have experimented with their own
digital payment technologies, and the topic is on the research agendas of
central banks across the world. The Bank for International Settlements, the
members of which include 60 global central banks, said in a paper last
month that existing digital currencies such as bitcoin raise the
possibility authorities will have less control over the monetary system—and
“one option is to consider using the technology itself to issue digital
currencies.”

Officials at the U.S. Federal Reserve say they are monitoring developments
but haven’t said they are considering issuing digital currency.

Central bankers’ interest in digital currency is an inevitable reaction to
the rapid shift away from physical cash. The existing payment system is
electronic, but money is stored centrally in bank accounts and verified via
payment networks, which add cost along the way.

A digital currency, on the other hand, would be like a bit of encrypted
computer code “minted” by a central bank. It would carry with it all the
necessary information to validate its value. That means in a sense it could
move around with users and merchants.

​ For instance, today a consumer might hold $10 of digital cash on a debit
or gift card issued by a bank or a retailer. That $10 can only be spent
where the card is accepted. But if that card held $10 in digital currency
backed by the U.S. Federal Reserve, its owner could, in theory, spend it
anywhere.

The prospect is appealing to central bankers for a litany of reasons. On a
practical level, they could save money on printing physical cash.
Mr. Dharmapalan says minting and distributing digital currency would cost
10% of what it costs to print and distribute an equivalent physical
currency note while allowing the government to retain the revenue it gets
from issuing currency, known as seigniorage.

Central bankers also might find appealing the ability to better track
transactions, since cash transactions are anonymous and susceptible to
illicit uses.

In a news release Wednesday, the Omidyar Network, a philanthropic
investment firm backed by eBay <http://quotes.wsj.com/EBAY> Inc. founder
Pierre Omidyar, said it had invested in eCM. The company and the investment
firm, which haven’t previously spoken to the media about their digital
currency project, wouldn’t say how much money eCM has raised since it was
founded in 2011.

Felix Martin, an investment fund manager and author of the book “Money: The
Unauthorised Biography,” said he hasn’t evaluated eCM’s technology in
detail, but in theory such an innovation “could be a very useful
technological advance, most likely as something to sit alongside physical
cash” that would allow nonbank firms to interact digitally with the central
bank.

Kennedy Komba, who works at Tanzania’s central bank and with the Alliance
for Financial Inclusion, a global network of financial policy makers, said
he had met with eCM, and that he thinks the prospect of central bank-backed
digital cash has “a lot of potential.”

In Africa, for instance, where mobile-phone payments have grown rapidly,
physical money backed by the government is still crucial, says Mr. Komba.
If a mobile-phone customer in Tanzania wants to put money in her account,
he or she often must deposit cash. If that same consumer wanted to make a
payment to another person who didn’t have the same phone company, he or she
would have to withdraw cash.

To facilitate all that cash movement, the central bank, commercial banks
and phone companies must spend money on employees, vaults and secure
transportation. A digital currency could reduce those costs by making
transactions simpler and easier to execute, and that could lower the cost
of financial services more generally.

In developed countries such as the U.S., digital cash could also have
benefits for consumers by allowing money to move more easily and cheaply in
the digital realm.

Economists such as Andrew Haldane, the chief economist of the Bank of
England, have said widespread use of digital cash could create new
possibilities in interest-rate policy at a time when existing monetary
policy tools are being pushed to their limits to boost the global economy.

Policy makers have generally avoided negative interest rates, in part
because consumers would withdraw their physical cash from banks if they
felt the negative rate would diminish their account value. If there were no
physical cash, account holders wouldn’t have that option.

“Perhaps central bank money is ripe for its own great technological leap
forward,” Mr. Haldane said in a Sept. 18 speech
<http://www.bankofengland.co.uk/publications/Documents/speeches/2015/speech840.pdf>
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