“‘Papa! What’s money?’ Mr Dombey was in a difficulty. He would have liked to give him some explanation involving the terms circulating-medium, currency, depreciation of currency, paper, bullion, rates of exchange, value of precious metals in the market, and so forth; but looking down at the little chair, and seeing what a long way down it was, he answered: ‘Gold, and silver, and copper. Guineas, shillings, half-pence. You know what they are?’ ‘Oh yes, I know what they are,’ said Paul. ‘I don’t mean that, Papa. I mean what’s money after all?’”
In this article, we attempt to answer Paul Dombey’s question to his father by providing an overview of the various kinds of “money” (including cash, bank and electronic money, and virtual currency) in the South African context. For present purposes, we attribute to money its widest meaning, namely, any tangible or intangible thing that functions as a means of exchange or debt settlement, a measure of value, a unit of account or as a store of value.
Money, in its simplest form, is cash or currency that (subject to its meeting certain criteria set out in the South African Reserve Bank Act, 1989) constitutes “legal tender”, namely, physical coins or notes issued by the South African Reserve Bank (“SARB”) that must (if tendered) be accepted by a creditor in discharge of a debt. Payment in cash entails the physical transfer of the coins or notes from the payer to the payee, coupled with the intention of the payer to transfer his or her ownership therein.
Intangible money (or “bank money”), in essence, constitutes a credit against an asset account held at a bank, convertible into cash or currency by the bank on demand. Although bank money does not constitute legal tender, it is the most commonly used (and convenient and secure) form of payment, particularly for large transactions. Payment is initiated by way of a payment instruction, which is then cleared and settled among participant banks in the national payment system, each of whom hold an account at the SARB. This entails a series of debits and credits, ultimately resulting in a debit to the bank account of the payer and a credit to the bank account of the payee. The payer does not cede or transfer his or her claim against the bank to the payee; rather, the payer’s claim is extinguished or reduced, and the payee’s claim is created or increased in exchange. If the payer and payee hold accounts at separate banks, corresponding debits and credits occur between the two banks.
A variant of bank money is electronic money or “e-money”. In its Position Paper on Electronic Money, the SARB defines electronic money as follows:
“Monetary value represented by a claim on the issuer. This money is stored electronically and issued on receipt of funds, is generally accepted as a means of payment by persons other than the issuer and is redeemable for physical cash or a deposit into a bank account on demand.”
Forms of electronic money include the monetary value used to execute payment transactions over the internet or mobile phones, as well as that stored on certain pre-paid instruments. Electronic money is distinguishable from the following, among others:
- a credit card with an embedded credit facility (in that a credit card is not issued on receipt of funds);
- pre-paid cards that are not generally accepted as a means of payment; that is, they can be used to acquire goods or services only in or on the issuer's premises or under a commercial agreement with the issuer, either within a limited network of service providers or a limited range of goods or services; and
- subject to certain exceptions, pre-paid cards that have a monetary value irredeemable for physical cash or for a deposit into a bank account on demand.
In South Africa, only a registered bank (as defined in the Banks Act, 1990) may issue electronic money. An example of electronic money is the monetary value “loaded” on a pre-paid smart or chip card. For a non-bank commercial entity wishing to offer such a card to its customers, it must first be “sponsored” by a registered bank, which grants it the right to receive and advertise for deposits as agent on the bank’s behalf. The bank issues the card, bearing the entity’s brand on its face and on the back, the words “operated by [entity name] under the banking licence of [name of bank]” or words to this effect. Customer funds received by the entity may be held in a pooled account at the bank in the name of the bank, with various virtual sub-accounts or “e-wallets” for each cardholder. Payment is effected by way of debits and credits, either closed- or open-loop, depending on where the payee’s account is held, or whether the payee has an e-wallet with the entity.
Another kind of money is virtual or digital currency, examples of which include Bitcoin, Ripple, Tether, Ethereum, and WingCash. There is no universal definition or taxonomy of “virtual currency”, nor is there consensus on whether it constitutes “money” and whether (or to what extent) it should be regulated.
In its Position Paper on Virtual Currencies, the SARB defines a virtual currency as “a digital representation of value that can be digitally traded and functions as a medium of exchange, a unit of account and/or a store of value, but does not have legal tender status.”
Other definitions include the following:
- the European Central Bank: “a digital representation of value, not issued by a central bank, credit institution [ie bank] or e-money institution, which in some circumstances, can be used as an alternative to money”.
- the International Monetary Fund: “digital representations of value issued by private developers and denominated in their own unit of account”.
Most virtual currencies are privately issued, although a number of central banks (including the SARB) have expressed an interest in the development of a national virtual currency. Virtual currencies may be centralised or decentralised, convertible or inconvertible (into real currency), self-anchored or in a claim-check format. So far as virtual currency is not redeemable against an issuer, it is not seen as deposit-taking under banking legislation, and is also unlike electronic money.