Forget El Salvador, Scotland Could Show Us The Future Of Money

The Scottish Nationalist Party (SNP) have just published their vision for an independent Scotland. Obviously, this is some way off because the legal wrangling about whether and when they might be able to hold a referendum on independence is far from resolved and even after such a plebiscite it would take years to actually happen, but… Well, an independent Scotland, part of the European Union (EU) but no longer part of the United Kingdom (UK) is on the cards.

The reason I think this should be interesting to the fintech community is that the SNP have committed to a policy which means that on independence Scotland would continue to use the pound sterling for a period before moving on to having their own Scottish currency.

Forget about El Salvador or the Bahamas, if handled right this could make the Scotland the centre of financial innovation that it used to be!

So when Scotland becomes an independent country, how should they go about creating a currency that can recapture their glorious financial innovation. heritage? Surely they will realise that messing around with notes and coins, other than for post-functional symbolic purposes, is a total waste of time and money and a much better idea would be to go straight to the post-age modern age and create McPESA, which would be a digital money infrastructure rather like Kenya’s famous M-PESA, but with two crucial enhancements to take advantage of new technology and new economy opportunities.

The Money

First of all, M-PESA works on the exchange of commercial bank money between accounts, whereas McPESA would use risk-free Scottish central bank digital currency (CBDC) distributed through the commercial banks but held in wallets, a Caledonian citIzen’s cash alternative for the new era, a kind of Braveheart Alipay.

(The economist John Kay once suggested that the “groat” or the “bawbee” might be good names for a new Scottish currency but I’ve always preferred the “thistle”. Anyway, they will probably have a national competition to choose it and it will end up as Groaty McGroatface or something, so let’s put that aside for while.)

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Why not remain in a currency union with England (or the EU, for that matter) instead of creating a new currency? Well, if the argument for currency union is about transaction costs, then former British Prime Minister John Major showed us the way forward many years ago with his perfectly sensible alternative to the euro, which was at the time was labelled the “hard ECU”.

The idea of the hard ECU was to have an electronic currency that would never exist in physical form but still be legal tender (put to one side what that actually means) in all EU member states. Thus, businesses could keep accounts in hard ECUs and trade them cross-border with minimal transaction costs, tourists could have hard ECU payment cards that they could use throughout the Union and so on. But each state would continue with its own national currency — you would still be able to use Sterling notes and coins and Sterling-denominated cheques and cards — and the cost of replacing them would have been saved.

What about resurrecting that idea the other way round? Why couldn’t Scotland have a hard e-Thistle? Everyone in Scotland could carry on using Sterling notes and coins, which would remain legal tender, but they could open e-Thistle bank accounts and have e-Thistle credit cards and so forth. The Scottish government would naturally pay its domestic bills (e.g., public sector salaries and pensions) in e-Thistles that it would “print” itself. If the currency was overprinted, then the value of the e-Thistle would slide against Sterling and soon enough the situation would sort itself out. English people would start spending more money in Scotland, investing in new businesses there and going on holiday there.

(Floating exchange rates are surely much more efficient than government transfer payments.)

This Thistle would never exist as a physical thing, purely as an electronic currency. The Scottish government might want to produce some thistles for ceremonial purposes or for souvenirs, but not to create the circulating means of exchange. After all, one of the Scottish government’s goals would surely be to increase the efficiency of the economy (and reduce tax evasion, crime etc) by reducing the cash in circulation and increasing the use of electronic payments.

The System

Secondly, while M-PESA is an amazing success, it is not perfect. In recent times it has gone down, leaving millions of customers unable to receive or send money. These failures cost the economy significant sums (billions of shillings), which is not not surprising when you the volume of retail and person-to-person transactions that M-PESA handles every day. When it drops out, it leaves customers hanging, it leaves agents losing revenue and it leaves the banks unable to transact. Yet it is vital national infrastructure, just as McPESA would be.

Therefore McPESA should not use the same technology. It should, as discussed here before, be built on a technology platform that is fully decentralised, using secure hardware to implement fully offline transactions so that Scots could buy and sell in remote highlands, the middle of Loch Ness or in Waverley Station.

Back to Innovation

As I said earlier, the goal of the transition to a Scottish retail CBDC would be to make the Scottish financial sector the epicentre of innovation that is was before, because the era of “free banking” there was, as most historians would confirm, a period of incredible innovation when the more tightly regulated London and country banks failed more often than the less tightly regulated Scottish banks did.

(Free banking does not, as you might think, mean that Scottish banks were once operated as charities but that they were free to compete in currency issue.)

Scotland had an enviable track record of innovation in the finance and banking sector right up until the time when the Bank of England’s monopoly was extended north of the border in 1845. Their innovations included:

  • Britain’s first joint stock clearing bank, the Bank of Scotland, which was created by the Scots parliament in 1695;
  • The first overdraft, granted by the Royal Bank of Scotland in 1728.
  • The British Linen Bank (Scottish, despite the name) which built the world’s first branch network in 1750.
  • The world’s first multi–coloured bank notes, printed by the Royal Bank in 1777.
  • The first savings bank, established in Ruthwell in 1810; and
  • Banknotes printed on both sides, launched by the Royal Bank of Scotland in 1826.

The lesson seems clear to me: When a previous wave of innovation (paper money) swept through the British economy, free banking Scotland was far more successful than England in exploiting that technological change to make the economy more efficient (and more stable). In fact, as the historian Niall Ferguson pointed out in his excellent book “The Cash Nexus”, in 1850 when 90% of all commercial transactions in France were still being settled in gold or silver (as were a third of those in England), 90% of all commercial transactions in Scotland were being settled with paper!

Surely it would be possible for Scotland to embrace the next wave of change in the technology of money (digital currency) and generate yet more innovation. The regulatory environment has been changing to encourage competition in Europe, the Scots could build on this. The European Commission’s Directive on Electronic Money, the Payment Services Directives have already created the institutions — the Electronic Money Institutions (ELMI) and the Payment Institution (PI) to allow Scotland to drive innovation forward.

How would this all work in practice? You might think that a variable exchange rate between the Thistle and Sterling would be a nuisance for individuals and businesses even if, as would be likely, the rate did not fluctuate much. But would this be true with a hard e-thistle exchanged via McPESA? There would be no queues at f/x bureaus because there would be nothing to change the foreign currency into: I suppose frequent travellers might obtain hard e-thistle prepaid cards, just like I have prepaid cards in Aussie dollars and Canuck loonies. But most of the time I just use my chip and PIN cards, my smart watch and my mobile phone to buy stuff.

I didn’t get any physical Aussie dollars last time I went there and I didn’t get any physical Canuck loonies last time I went there either. Why would I bother with Thistles? I would just get off the plane in Edinburgh and fire up McPESA and go. Come on Scotland, show the world what a digital currency can do!

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