September 22nd, 2013
Via the Financial Post, two articles on the Canadian Mint’s plans to introduce its own digital currency:
As the government body responsible for the production of loonies, toonies, nickels and sundry “limited-edition” collector coins, the Royal Canadian Mint is hardly the first thing that comes to mind when you think of cutting-edge technology. But that may be about to change.
Sometime before the end of this year, software engineers at the 105-year-old Crown corp. will begin pilot testing a novel form of digital currency that so far has received little attention but which has the potential to revolutionize how we do business.
“Where we’re going is not a road that has been travelled,” said Marc Brûlé, head of the MintChip project and chief financial officer of the Mint. “It has its challenges but there are lots of people who are encouraging us.”
Like many such technologies, the initiative has mostly been cloaked in secrecy – apart from an app building contest last year aimed at coming up with new ways of using the currency. Beyond that, the Mint has been determinedly tight-lipped about what it’s up to, which has only served to heighten expectations among the tight-knit community of techno-geeks and others that are focused on the sector.
Certainly, interest in so-called crypto-currencies is exploding for a variety of reasons, not least because of loss of faith in traditional money in the wake of recent central bank money-printing. Digital money such as Bitcoin, Litecoin and various online game currencies that have made the jump into the real world are starting to garner major attention, but there’s a big difference between them and what the Mint is doing. As a government organization, the Mint has the backing of the federal government, while Bitcoin and the like clearly do not.
Anyone following recent news events knows that this is creating enormous regulatory and legal challenges for their proponents. Here in Canada for instance, most of the banks have quietly stopped doing business with the handful of companies that allow customers to exchange Canadian currency for Bitcoins. Meanwhile, authorities in the U.S. recently seized two bank accounts belonging to Mt. Gox, the world’s largest Bitcoin exchange, on the grounds that it was operating an unlicensed money transfer business, effectively stymieing the Japan-based company’s efforts to expand into the U.S.
“The challenge for most companies trying to do this is they are not a federal mint,” said Catherine Johnston, chief executive of ACT Canada, a leading payments industry association. “What they’re really doing is giving a digital representation of money, and it really requires a federally regulated body to be able to do true digital currency. So I see the Mint as having everything they need to make it a reality.”
MintChip is “the future of money,” according to the Mint’s promotional video, which goes on to present it as a digital version that would be legal tender, just like physical dollars and cents. You would hold it on a smartphone or other electronic device, just like a wallet. And according to the Mint’s Mr. Brûlé, the money could be used just as easily whether you’re shopping at a conventional bricks-and-mortar retailer, on-line or at your neighbour’s garage sale, though your neighbour would of course need a properly equipped smartphone.
Mr. Brûlé sees it as part of the leading edge of a tsunami in mobile technology that is now washing over our society. “We’re at the very beginning of this, you know. But I believe that smartphones are very powerful devices and very popular. You miss your wallet in a couple of hours but you miss your smartphone in minutes,” he said.
One reason there’s so much interest around digital money is the enormous possibilities that it opens up, for consumers, for businesses, and for criminals. Unlike credit cards which merely link to a complex payment system run mostly by the banks, MintChip is an actual digital representation of money, giving it many of the same qualities of physical cash, including the capability for anonymous, efficient and almost instantaneous transactions.
I see the Mint as having everything they need to make it a reality
Because its digital, the cost of managing it – and one of the primary responsibilities of government is running the money supply – is much lower. You’re re not constantly replacing lost and warn out coins. Theoretically, instead of an entire government organization like the Mint, all you need is a laptop and a good economist.
The most exciting possibilities are opened up on the user side. Providing it gains acceptance, it can be used in transactions anywhere on the planet between any two parties who accept the currency. Most important, MintChip would be cheaper, according to Mr. Brûlé.
Every time you use a credit card, the credit card issuer charges a fee, typically around 3%, paid by the merchant who then passes it on to the customer – you. According to the federal Competition Bureau bureau, those fees add up to more than $5-billion a year. Proponents of digital currencies usually claim such fees would be much smaller or non existent in their system. Mr. Brûlé says MintChip can do it for a whole lot less than the credit card companies and banks.
On top of that, users wouldn’t need a bank account or even a half-decent credit rating. As long as they have a smartphone, they can buy the Mint’s digital money.
That’s one of the most exciting aspects of this technology – the ability to operate outside of the traditional financial system. Critics argue that the poor and the unemployed end up getting hurt the most by the current financial system, because they’re the ones that end up at payday loan companies because they don’t have bank accounts. Mr. Brûlé argues that this segment of society would benefit enormously from MintChip because it would free them from fat transaction fees.
Needless to say, traditional financial companies are watching closely.
The Canadian Bankers Association declined to discuss the matter.
“It’s exciting to see all of the movement in this space,” said Derek Colfer, head of mobile commerce activities at Visa Canada, who added that MintChip is “an interesting product.”
Mr. Colfer said Visa already has investment in various technology companies in the mobile payments sector including Square, a successful U.S.-based start-up with a product that lets customers accept credit cards with their smartphones, making it a potential competitor to Visa.
I have trust in the Canadian dollar, because it’s backed by something
But as for new digital currencies such as Bitcoin, they’re a little beyond the scope of Visa’s appetite.
“Our world is based on conventional currencies, I haven’t really formulated an opinion on currencies that aren’t traditional, I’m familiar with non traditional currencies, but beyond that I think the big difference is the trust and the acceptance levels. I have trust in the Canadian dollar, because it’s backed by something. I don’t know where I could use a Bitcoin.
Even MintChip is a stretch, he believes. “MintChip needs to have acceptance levels, too, right? You need to be able to use MintChip somewhere.”
For his part, Mr. Brûlé acknowledges that’s a major challenge for his new digital money. Backed by Ottawa, he has all the financing and software expertise he needs to make MintChip a reality. What he doesn’t have is the ability to convince the public that MintChip is the way to go. The plan is to focus on what’s known in the industry as micro-payments, things like paying for a bus ride or a stamp or maybe an article from an online magazine.
The ability to be able to pay easily for such services instead of fishing around for the correct change (and maybe not finding it), would be a major convenience to the public, so in theory there would be plenty of demand on the part of consumers. And provided enough consumers joined the MintChip bandwagon, presumably merchants would see the benefit of the currency. Still, unless that hurdle can be overcome, the Mint’s new money will stay on the drawing board.
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Digital currencies such as MintChip offer enormous opportunities for both consumers and business, but experts warn the space is fraught with peril. Marc Brûlé, the Royal Canadian Mint’s point man on its virtual money project, talked to the Financial Post’s John Greenwood about what makes MintChip different and why it will be successful
____John Greenwood: When did the Mint first start thinking about MintChip?
Marc Brûlé: We’ve probably been following electronic commerce for 10 years, but we got serious with it about four years ago. It came out of a strategic retreat with our board. Every year our board goes on a strategic retreat and we talk about things that are five and 10 years out. So we said, I think we should look into electronic currency, what’s out there, what’s not out there, what do we think consumers and merchants would like to have.JG: But that’s a big step from making commemorative Superman coins and the like to digital currency.
MB: We are a diversified business and that’s an important thing to know as well. One of the things that I always do when I speak at conferences on digital money is I explain that this isn’t a stretch for us. Research and development is in the Royal Canadian Mint’s DNA. Three of our four business lines are in commercial operations, making collector coins, making coins for other countries, selling bullion products, refining gold and silver. And we’ve done a number of creative things over the last few years, we have a patent on the way we manufacture Canadian coinage, and we use that patent to our advantage when we bid on foreign products.
In the last two years we’ve put securities on the TSX for gold and silver bullion, where you and I as retail investors can invest in gold, they’re called ETR’s, electronic traded receipts. They are backed by physical gold.
JG: But this is your first foray into the digital world?
MB: Yes, it is.
JG: How much have you spent on this? Broadly speaking.
MB: I don’t know if I can share that, but we’re serious. I don’t think I want to put out numbers.
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JG: How would you describe MintChip?MB: I guess you would all it a digital cash product. There’s nothing out there quite like it. It’s kind of like a pre-paid product, and it’s virtual so it can work in a cloud environment, and can be used in all the channels for bricks and mortar, it can be used online and it can also be used in peer-to-peer payment.
JG: Like PayPal?
MB: You know, there’s many products that could be viewed as competitors, there’s something coming up every day. There’s Litecoin, there’s Ripple, there’s Bitcoin, there’s debit/credit cards. What we’re trying to do is offer something that we think is unique, that is simply giving consumers another choice. In the physical world, people carry around debit and credit and other forms of payment including hard currency. What we’re looking at is in the digital world and the way things are moving with smart phones today. There should be a digital cash product. There’s a market for it and consumers need to have that kind of choice.
JG: Can you talk a bit more about the concept of a digital cash product?
MB: It’s basically a cryptography, so its cryptographic message. Technology for moving the value from one secure chip to another. And it moves instantaneously.
JG: How’s that different from an ordinary credit card payment system?
MB: Ok, so let’s use [that] as an example. I go up to the counter in a store. I want to pay with a credit card, the merchant punches in the amount and it comes up on the screen and he asks me to put my card in. The first thing that comes up is, “Purchase $19.95 OK?” And I hit “OK” and then I put in my PIN number, I hit “OK” again. The next words that come up o the screen are “Processing” and then “Authorization”, and then I pull my card out. What happens is when I put in my credit card it gets routed through an approval process to tell the merchant that Mark Brûlé is good for the credit and therefore has the means to pay for the goods or services.
But digital cash has none of those steps, there is no processing, no approval, it’s like you’re handing cash across the counter in a digital form, and once it’s been processed there’s no charge back, you gave cash to somebody, they get confirmation of the value and that’s the end of the transaction.
JG: Is it possible that down the road, money might be all digital?
MB: No, I think cash is going to be around for a while. We see about the same demand for coinage from trade and commerce today as we have for the last few years. But if you think about it…
JG: But you guys just took the penny out of circulation.
MB: That’s not our decision that’s the Department of Finance.
JG: What’s the biggest challenge in making MintChip a reality?
MB: Technology is not the big problem — with time and money you can solve that. I think it’s the business model on the one hand, and secondly, in any payment product it’s the adoption by consumers and merchants, getting mass adoption of your product. Not only do you have to get their confidence, it’s got to be easy to use, and fill a need. We think we can produce a very cost effective product that will be very cost effective for low value payments.
JG: How are you going to make a profit?
MB: You have to have partners at some point in time, there’s several ways of making money at this. You have to charge merchants at some point. And in our model there would be a float of Canadian dollars equivalent to all the mint chip value in the eco system, so there would be a float on which you would earn a return.
JG: Sort of like a bank, you mean?
MB: Correct. We would earn a return on customer deposits. We wouldn’t lend it out obviously [like banks] but we would invest. You would have some charges for the merchant, value proposition for customers.
JG: Can you explain the appeal for consumers to do transactions with MintChip?
MB: We believe we can be more cost-effective for merchants. For you as a consumer, we believe you could use it in many places, you could use it for bricks and mortar, you can use online and you use for person to person payment. There aren’t many products today that you can do that with. Very few. Secondly, when you do shop with it you don’t need to give out any personal information, you don’t need a bank account to use it, and you don’t need to be credit worthy.
JG: So a huge segment of society that today is not served by the traditional financial industry.
MB: Yes, the underbanked, is part of it. But I think there are other people who will find the attributes of this product quite appealing.
JG: When are we going to see this product unveiled?
MB: We are still working on that. What we’re doing is we’re continuing to update our business model through discussions with various stakeholders and potential partners, we are actually creating mint chip 2.0 that has updates to the technology and we’re creating a complete eco system so we an do testing with Mint employees, and lastly we are in discussions with our shareholder about next steps.
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