E Money Research at the Bank of Canada - Chief Economists' Workshop 19 May 2015 Grahame Johnson Funds Management and Banking Department Bank of Canada
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E‐Money Research at the Bank of Canada
Chief Economists’ Workshop
19 May 2015
Grahame Johnson
Funds Management and Banking Department
Bank of Canada
Organization of the talk
The Changing Landscape for Retail Payments in Canada:
From Money to E-Money
Selected research on e-payments and e-money at the Bank
of Canada
2
Canadians are using less cash relative to cards
33
Canadians are using less cash for making payments, but
why is demand for banknotes stable relative to GDP in Canada?
Banknotes outstanding over GDP
4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
$1-$10 $20 $50 $100 and above
4
Understanding the cash demand puzzle
A model of cash in which cash is used in different sectors and substitution
between cash and other payment methods is not even across sectors.
Cash also flows from one sector (cash-credit) to another (cash only).
Suppose cash used in the cash-credit sector is reduced due to competition
from other means of payments
Changes in cash management practices can result in lower velocity of cash,
thus no decrease in total cash demand
Cash only $ Cash-credit
sector sector
BanksSelected research on e-payments and e-money at
the Bank of Canada
6Main goals of the Bank’s e-money research
agenda
1. To deepen our understanding of digital alternatives to cash,
and their likely evolution and pace of adoption;
2. To analyze the implications of an increased reliance on these
alternatives for the Bank;
3. And to establish a view on:
– the potential role of public institutions as e-money issuers;
– the need for regulation of e-money schemes.
71. To deepen our understanding of digital alternatives to
cash, and their likely evolution and pace of adoption
Research questions
– Why are some e-money schemes more successful than
others?
– What determines the adoption of a new payment method
and its speed of adoption?
– How do different policies affect adoption?
Major research projects:
– Consumer payment survey, Cost of payment survey
– Experimental studies
– Modeling adoption
81.1. Method-of-Payment survey (2013): Canadians are
adopting payment innovations
9… but the share of innovative products in terms of usage is
still small
Volume
2009
2013
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Cash Debit Contactless Debit Credit Contacless credit Stored-value cards Cheque
Value
2009
2013
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Cash Debit Contactless Debit Credit Contactless Credit Stored-value cards Cheque
101.2 Adopting a new efficient payment method: An
Experimental Study (work in progress)
Laboratory experiments to study if a particular payment method
(e.g. e-money) will be adopted by buyers and accepted by
sellers
Two-sided network effect is important for studying adoption in
the retail payments market
Strategic interactions between buyers and sellers result in
multiple equilibria
– Full adoption is beneficial to both sides and thus socially
desirable
– No adoption because of miscoordination
111.2 Experimental study and theoretical modeling: What we
learned and future work
What we learned from preliminary results from pilots
– Fearing to lose business, sellers tend to lead adoption of the new
payment method
– Complete adoption tends to occur after sellers maintain a high level
of adoption, which prompts buyers to use more the new payment
method
– If fixed cost is too high, however, adoption will be slow and the
process will result in severe miscoordination and efficiency loss
Next steps: how policies will affect/promote adoption
– Incentives: subsidy, tax (on buyers/seller, proportional/lump-sum)
– Pricing regulation: surcharge, discount
122. To analyze the implications of an increased
reliance on these alternatives for the Bank
Effect on the demand for cash, seigniorage revenue and the Bank’s
balance sheet
Impact on financial system stability
Impact on the implementation and transmission of monetary policy
132.1 Research on digital currencies
Goals: to advance our understanding of these new digital currencies, to
foresee their future developments and to study their implications for the
demand of bank notes.
1. Platform-based digital currencies, e.g. Facebook Credits, Amazon Coin,
World of Warcraft Gold, Q-coin
– Question: How likely is it that these digital currencies will become a widely-
accepted means of payment outside of their platform?
– What we learned
• They are designed to promote their core business rather than for day-
to-day purchases
• Have the potential to be broadly used as a medium of exchange for
transactions outside of their existing platform only if the digital currency
is transferable among users
142.2 Research on competition between cryptocurrencies
2. Cryptocurrencies, e.g. Bitcoin
– Question: Why are people holding Bitcoin?
• As a medium of exchange: network effect => winner take all
• As a financial asset: substitution effect important
– Methodology: Study how the demand for Bitcoin is related to
that of other cryptocurrencies over two periods from May 2013
to Feb 2014
– What we learned:
• In the earlier period, the demand for Bitcoin did not show
correlation with the demand for other cryptocurrencies
• In the later period, higher demand for Bitcoin tended to
correlate with a higher demand for other cryptocurrencies
152.3 Central bank under a Bitcoin standard: Lessons from
the gold standard (work-in-progress)
Question:
– What would be the implications for the economy, the financial system and
the central bank if digital currencies such as Bitcoin were to be widely
adopted as a medium of exchange?
Methodology:
– Draw lessons about the performance of the Canadian economy from the
period when Canada operated under a gold standard
– Describe how a central bank could implement monetary policy and conduct
other central bank functions under a gold standard.
– Examine the similarities and differences between a gold standard and a
monetary system that is based on Bitcoin rather than gold
– Study the implementation of monetary policy and of central bank’s lender of
last resort function under a Bitcoin standard
– Discuss how such a system could be modified to improve economic
performance
163. To study the potential role of public institutions as
e-money issuers
What are the public policy arguments for the central bank to issue
e-money?
Can a privately-issued e-money scheme operate efficiently?
– If not, can regulations, appropriate supervision and other
government interventions be able to achieve that?
Or should the government be issuing it?
– If so, should the government be the sole issuer or should it
compete with private e-money to improve efficiency?3.1 The central bank as an issuer: Lessons from US
experience with bank notes prior to 1933
Question:
– What lessons can be learned from the period before 1933 in the United
States regarding government-issued and privately-issued e-money? For
example,
• Can a privately-issued e-money system operate efficiently?
• Would government interventions such as regulation, supervision,
insurance and note clearing be needed?
Methodology: examine historical evidence on how well privately issued bank
notes functioned with respect to a set of characteristics
– Ease of transacting
– Counterfeiting
– Over-issuance
– Safety
– Uniform currency (par exchange)3.1. Lessons learned
Three periods considered:
1. State banking period/Free banking era (1786 – 1863)
– Large number of banks (regulated and supervised by individual states)
issued their own notes
– The system failed to operate efficiently
2. National banking period (1864-1914)
– Large number of banks chartered under the National Banking Act and
supervised federally were issuing notes
– The system performed well against the 5 characteristics, key factors of
success are: government insurance of bank notes and government-run
gross note clearing system with note issuers paying the clearing cost
3. Federal Reserve period with national bank notes (1914-1933)
– Both national bank notes and Federal Reserve notes were simultaneously
in circulation, and both notes performed well during the periodOther issues
Current issues (not necessarily within the Bank’s
mandate)
– Consumer protection
– AML and counter-terrorist funding issues
– Ensure the safety and soundness of new payments systems
– Level playing field, compared to regulated payment system
entities
– Innovation and efficiency
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