Digital Money To Play Central (Banking) Role In Financial Future

  • Digital financial systems – “digital money” for want of a better phrase – will dominate the future, as we’ve regularly opined here in our News section. Close to 80 percent of the world’s central banks are either not allowed to issue a digital currency under their existing laws, or the legal framework is not clear, according to research conducted by the International Monetary Fund.
  • Our friends at Finextra report:

The IMF paper reviewed the central bank laws of 174 IMF members, and found out that only about 40 are legally allowed to issue digital currencies. At 104 central banks, the law only authorises the issuance of banknotes and coins.

“Any money issuance is a form of debt for the central bank, so it must have a solid basis to avoid legal, financial and reputational risks for the institutions,” states the paper. “Ultimately, it is about ensuring that a significant and potentially contentious innovation is in line with a central bank’s mandate. Otherwise, the door is opened to potential political and legal challenges.”

To legally qualify as currency, a means of payment must be considered as such by the country’s laws and be denominated in its official monetary unit. Legal tender status is usually only given to means of payment that can be easily received and used by the majority of the population.

“To use digital currencies, digital infrastructure — laptops, smartphones, connectivity — must first be in place,” notes the paper. “But governments cannot impose on their citizens to have it, so granting legal tender status to a central bank digital instrument might be challenging. Without the legal tender designation, achieving full currency status could be equally challenging.”

An important design feature is whether the digital currency is to be used only at the wholesale level, by financial institutions, or could be accessible to the general public. Allowing private citizens’ accounts, as in retail banking, would be a tectonic shift to how central banks are organized, states the IMF, and would require significant legal changes. Only 10 central banks in the sample would currently be allowed to do so.

“The creation of central bank digital currencies will also raise legal issues in many other areas, including tax, property, contracts, and insolvency laws; payments systems; privacy and data protection; most fundamentally, preventing money laundering and terrorism financing,” the paper concludes. “If they are to be the next milestone in the evolution of money, central bank digital currencies need robust legal foundations that ensure smooth integration to the financial system, credibility and broad acceptance by countries’ citizens and economic agents.

Historical Performance And IFISA Process Guide

  • Money&Co. lenders have achieved an average return of more than 8 per cent gross (before we deduct our one per cent fee). 

That figure is the result of over £20 million of loans facilitated on the site, as we bring individuals looking for a good return on capital together with carefully vetted small companies seeking funds for growth. Bear in mind that lenders’ capital is at risk. Read warnings on site before committing capital.

  • Money&Co. has been lending for over 5 years and has only had two bad debts so far, representing a bad debt rate of 0.03 per cent per annum.

All loans on site are eligible to be held in a Money&Co. Innovative Finance Individual Savings Account (IFISA), up to the annual ISA limit of £20,000. Such loans offer lenders tax-free income. Our offering is an Innovative Finance ISA (IFISA) that can hold the peer-to-peer (P2P) business loans that Money&Co. facilitates. For the purposes of this article, the terms ISA and IFISA are interchangeable.

So here’s our guide to the process:

  • Step 1: Register as a lender. Go to the login page, and go through the process that the law requires us to effect. This means we have to do basic checks on you to comply with money-laundering and other security requirements.
  • Step 2: Put money into your account. This is best done by electronic transfer. We can also process paper cheques drawn in favour of Denmark Square Limited, the parent company of Money&Co.
  • Step 3: Buy loans in the loan market. Once you’ve put cash in your account it will sit there – and it won’t earn interest until you’ve bought a piece of a loan. It’s this final step that requires lenders and IFISA investors to be pro-active. Just choose some loans – all loans on the Money&Co. site can be held in an IFISA – and your money will start earning tax-free interest.

The ISA allowance for 2019/20 is unchanged from last tax year at £20,000, allowing a married couple to put £40,000 into a tax-free environment. Over three years, an investment of this scale in two Money&Co. Innovative Finance ISAs would generate £8,400 of income completely free of tax. We’re assuming a 7 per cent return, net of charges and free of tax here.

Once you have made your initial commitment, you might then consider diversifying – buying a spread of loans. To do this, you can go into the “loans for sale” market. All loans bought in this market also qualify for IFISA tax benefits.

Risk: Security, Access, Yield

Do consider not just the return, but the security and the ease of access to your investment. We write regularly about these three key factors. Here’s one of several earlier articles on security, access and yield.

 



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Disclaimer: Money&Co.™ is the trading name of Denmark Square Limited, Company Number 08561817, registered in England & Wales, authorised and regulated by the Financial Conduct Authority (FCA). The company is identified on the Financial Services Register under Reference Number 727325. The registered office is 58 Glentham Road, Barnes, London, SW13 9JJ where the register of Directors may be inspected. Denmark Square Limited (ISA manager reference number Z1932) manages the Money&Co. Innovative Finance ISA.