In almost the same breath, the Royal Canadian Mint did away with its penny and introduced the MintChip — the first entirely digital currency ever issued by a government. The projects are separate endeavors, yes, but it would be foolish to not consider the implications of the two projects together. Physical currency is becoming less and less important to commerce, to the point that some can imagine a world where it doesn’t exist at all.
While the mobile wallet has made significant inroads and many anticipate that phones are the future of currency, these boosters don’t advocate for the end of the dollar. Dollars are loaded onto your Google Wallet, and dollars are tapped away to merchants, friends, whomever. But there’s a physical dollar — somewhere — that corresponds to the dollars exchanged electronically. Right? Or, is there?
While we all know that our paper lobby spiked Congress’ efforts to replace the $1 bill with a $1 coin, Canada did away with their dollar bill more than two decades ago, when they replaced it with the “loonie” — a coin with a common loon on it. More recently, Canada released its national budget and revealed that the country was to do away with the penny six months from now. The problem that Canada has, which the United States has too, is that of negative seigniorage.
Seigniorage refers to the difference between the nominal value of a piece of currency and the amount it costs to manufacture. This is why treasuries love paper money: a $100 bill has about $100 worth of seigniorage, which means $100 of profit for the government as soon as the bill is cut loose from a sheet of hundreds of nearly-free $100 bills.
On the other hand, because of inflation and rising commodities prices, pennies’ seigniorage has more than disappeared: the Canadian mint was putting 1.6 cents worth of raw materials into their pennies, disappearing 0.6 cents of metal in the process, reports CBC News. That’s not a good position to be in, so Canada had the choice to either rework the physical makeup of the penny or get rid of it — inflation solved that conundrum. Pennies are virtually worthless in Canada, and they’re worth 1/100th more than an American penny, at most recent exchange rates.
Shouldn’t this work here?
David Wolman, who wrote a book called The End of Money, recently explained on The Awl that by eliminating the penny, the American government would inadvertently call into question the intrinsic value of its currency — which is a fiat currency, and as such, depends on users’ faith in the currency. It’s based on nothing but the government’s decree, so by tacitly acknowledging that monetary policy has made the money less valuable to the point that our coinage system is practically useless would raise too many questions.
“All of a sudden, the seemingly small idea of ending pennies isn’t merely about inconvenient objects or the various uses for zinc,” writes Wolman. “It’s about the whole damn economy.”
Doubts about a currency can lead to hyperinflation, explains Wolman. Officials in Ottawa clearly think Canada will do fine — but you know how level-headed they are up there.
On Wednesday, the Royal Canadian Mint announced the launch of MintChip: a currency that exists only in the ether of the Web and connected devices. The comparisons to BitCoin — the pioneering electronic currency — have been immediate. And MintChip is quite similar to that anti-statist decentralized digital currency except for, well, everything.
“Using a chip,” explains a video the Mint posted, ” you securely load value onto a smartphone, USB device, computer, tablet or cloud — maybe even some future device that doesn’t even exist yet!” From there, you’re free to spend it online or wherever. The Mint seems convinced that this will be a good way for media companies to sell content for tiny prices. (Click on this story? — three Canadian MintChip “pennies” please, and thank you.)
The real pitch, however is that no personal data changes hands when you make these transaction on- or offline. It would be just like cash in that sense. It also works for P2P payments, too. And you won’t have to worry about Google or American Express or whomever mining your data to tell you about deals nearby. You’ll only have to worry about the Canadian government knowing exactly how much money you spend or take in.
The Mint has not made clear exactly how one procures a MintChip or how value gets onto a MintChip — or if it’s already there in the first place — because it seems that is still being hammered out. The Canadian government issued a challenge to developers to create payment apps that use MintChip. The prize for first place is $17,000 — in gold bullion!
Indeed, it will take a long time for a digital currency to actually scale, and there are many hurdles for it to overcome along the way. But it will solve a number of problems: the underbanked’s exclusion from e-commerce and debit, privacy issues from e-commerce and those pesky pennies. But by getting rid of pennies, and making cash obsolete, Canada runs the risk of making its fiat currency look, well, very arbitrary. Naming MintChip for a flavor of ice cream doesn’t help its case, either.
But at the very least, someone other than paranoiac BitCoin miners and sellers on illicit deep-web site Silk Road are showing interest in digital currency. And thank goodness we don’t have to be the first ones to try it out.