In one form or another, e-money is now burning holes in the pockets of thousands of people around the world. Although few of those participating in digital-cash trials have yet realised it, the new money puts into those pockets most of the trading power of a City foreign exchange dealer. Although governments don't yet realise it, once small traders begin to take advantage of the power of their electronic purses then airlines, supermarkets and other big corporations could rapidly become mints, printing their own currencies in competition with the government-issued stuff.
The reasons underlying such developments lie in the ease of electronic transactions, large and small. But the consequences go far beyond the electronic world. As everyone becomes a currency trader, governments will have to pay attention to fighting inflation as never before. And to fight inflation effectively, central bankers may have to worry about the supply of frequent-flyer miles. Here's why.
Most e-cash is carried on smart cards which "fill up" with cash by connecting to a bank over the network. But once full, they swap money back and forth with other cards independently. Because the card is such a safe, convenient store of value, it is only a matter of time before it also begins keeping track of other sorts of tokens. Pay a supermarket with e-cash and the store could easily credit the card with the loyalty points it offers for frequent shoppers. Pay an airline and the card would be charged with air miles. From there, it will only be a small step for the airlines to allow people to transfer miles electronically to another person's account; a mechanic eager to have air miles to take his family on holiday might well value them more than the busy executive who already travels too much on business.
And why should the process stop with supermarkets and airlines? Auto companies already offer points that can be accumulated to use for discounts on cars; stores offer various loyalty schemes. Once these go online - and become transferable - there will be a proliferation of non-bank, private-sector near-moneys.
Here's where the regulatory issues crop up. The most obvious, but least worrisome, is that money is only as good as its issuer. Airlines and even auto companies go broke. That's bad news if you just accepted payment of 50,000 miles on a carrier which goes under. Even if that didn't actually happen, rumours of it could make those miles virtually valueless overnight. Today, similar things happen to accounts in shaky banks and to the currencies of politically unstable countries.
In practice, consumers are probably savvy enough to avoid putting too much trust in Fly-By-Night Airlines; only blue-chip companies will be successful in creating near-money. Yet even they might be tempted to do something more insidious than default outright. Suppose an airline finds that fewer of its miles are being redeemed, because people are busy trading with them on the Net. Then it might become more generous in the number of miles given away per paid flight, thus gaining a competitive advantage over other carriers. After all, the whole reason for giving away miles is to fill seats, not to create currency.
If the airline puts out too many miles, then there would be a flood of requests to use miles for flights, which the airline would not be able to meet. It would initially have to ration them by making reservations hard to get, and eventually it would probably create "air-mile inflation" by upping the number of miles needed to obtain a free flight. Nevertheless some - who knows, maybe even most - companies will realise that it is in their long-term interest to maintain the value of their near-money, even if that means ignoring some opportunities to boost market share. These companies will eventually build up a strong reputation, and they will be able to carry on issuing near-money even when others crash. They will come to play the same role in the near-money markets that sound currencies like the Deutschemark, the dollar and the Swiss franc play in real money markets.
Should dollars, Deutschemarks and air miles all become so freely available, governments with shaky records in maintaining the value of their currencies will find it increasingly difficult to issue any notes and coins. Why would anyone want to hold an unstable currency when stable ones are so easily available? Equally, the rationale for Europe's single currency will also disappear, since existing major currencies would be usable day-to-day across the whole continent. And there is no need for all those major currencies to be issued by governments.
Free from political pressure to swell the money supply by easing credit, raising spending and cutting taxes all at the same time, companies may yet prove the most able guardians of value in the currency world. Instead of just printing money to pay for spending programmes that voters want, politicians would have to limit themselves to what their countries can afford. With that threat to motivate them, would anyone be surprised if politicians try to stop e-cash before it forces them to be honest?
- Giles Keating is global manager of economics at Credit Suisse First Boston.