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EPC Newsletter
Issue 7 - July 2010

SEPA for Cash

Continued Commitment to high QualityEU Regulation on authentication of euro coins and handling of euro coins unfit for circulation

19.07.10 BY Leonor Machado

INTRODUCTION AND SUMMARY

To guarantee public confidence in euro coins, in September 2009 the European Commission introduced a proposal for a Regulation which aims to implement procedures for their authentication and the handling of euro coins unfit for circulation. A draft EU Regulation is now in a preparatory phase and scheduled for approval by the European Parliament at the start of September 2010. The proposed Regulation is built on Council Regulation 1338/2001, modified by Council Regulation No 44/2009 of 18 December 2008, which requires credit institutions and other professional cash handlers to verify the authenticity of euro coins before they are returned to circulation and check for counterfeits as of 1 January 2012 at the latest. Leonor Machado comments on the envisaged Regulation and recommends tailoring its provisions proportionate to its actual objectives.

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The legislative proposal needs to be improved to ensure that it best meets its objectives

Even though euro coins as such only account for a small fraction of cash in circulation, in order to preserve the public confidence in the euro as a payment instrument it is certainly important that they, as well as notes, are authentic and fit for circulation. The European banking community is committed to contribute to the high quality of authentic coins in circulation and to cooperate with ECB Eurosystem and its Member National Central Banks to harmonise the cash circulation chain to increase efficiency and thus realise cost-optimisation gains. In the view of the banking industry, the related Regulation now in the pipeline, however, needs to be improved to ensure that it will support these objectives in the best way possible.

After reviewing the Regulation proposal and the yearly statistics of seized counterfeited coins and projections of potential counterfeited coin volumes, the European banking payment community finds that the costs for banks to comply with the requirements of the proposed Regulation would be out of proportion considering the "damage" the latter aims to prevent.

Existing authentication checks and current detection tests imposed on professional cash handlers and vending machines already achieve their objective - as evidenced by the low level of counterfeits today. The cost of additional verification requirements would by far outweigh the marginal increase in unfit and suspected counterfeit coins which could be predicted.

Past evidence shows that it is very unlikely that counterfeiters would manufacture and distribute fake low value denomination coins due to this low value when compared to the value of the metal and the cost of counterfeiting. Therefore it is considered that only a check on the three higher denomination coins (€ 2, € 1 and € 0.50) should be mandated. A similar opinion was formulated by the Commission's Impact Assessment report in May 2009 and the ECB in November 2009. Other denominations could of course be regularly sampled.

Public authorities should protect the public interest by themselves absorbing the costs they incur with a view to ensure that currency in circulation  is genuine and safe to use

Coins are considered to be available freely, and at little or no cost, to all those who need them. But significant costs are actually incurred in checking coin, and in transporting it to and from the cash centres for checking. The Regulation proposes to add the potential costs of handling counterfeits and unfit coins incurred by national central banks yet without clearly specifying the criteria for partial or complete exemption of such handling costs. In order notably to avoid that informal coin exchange systems are established, it is proposed that these costs should be absorbed by the public sector.

National authorities know how many coins they have issued (confusingly, they often call this coins 'in circulation'); but they do not know as precisely how many remain actively circulating between consumers and retailers.  It is probable that, as the years pass, many coins will be lost or hoarded.  Therefore, the Regulation should rather focus on checking coin that is actively circulating and passing through the coin-handling businesses, not on checking a permanently fixed fraction of the total of all coin issued since the introduction of euro coins.

The Regulation makes coin handlers responsible for identifying chemical or other unhealthy substances which contaminate coins. Public authorities should welcome the return of such contaminated coins at no cost. This would otherwise create informal coin exchanges whereby contaminated coins would continue to circulate. It is in the interests of protecting the public that the Regulation should reduce the lifespan of such coins to the shortest possible timeframe.  It would be all too easy for an unscrupulous operator to ignore an unsafe coin and return it to circulation. But for the sake of public confidence in euro cash European authorities should refrain from suggesting that euro coins could be contaminated and therefore unfit for use.

Finally, the Regulation should specify that authentication machines do not need to separate unfit but genuine euro coins from suspected counterfeited euro coins - and that both can be returned in a single package to the relevant authorities. Otherwise an interpretation of the Regulation could compel professional cash handlers to modify or replace authentication machines - again an unnecessary additional expense.

Citizens perceive that the use of cash is free of charge. However the complex wholesale infrastructure used to run and to protect the cash cycle between National Central Banks, credit institutions, cash-in-transit companies and retailers is not readily visible to every citizen. This cost of cash circulation and related protection is financed via the pricing of services and products provided by retailers and credit institutions.  The EPC suggests that the public authorities who issue cash should protect the public interest by themselves absorbing the costs they incur with a view to ensure that currency in circulation is genuine and safe to use.

Leonor Machado is the Chair of the EPC Cash Working Group.

Related link: 

European Parliament procedure file: protection against counterfeiting - authentication of euro coins and handling of euro coins unfit for circulation http://www.europarl.europa.eu/oeil/FindByProcnum.do?lang=2&procnum=COD/2009/0128 

Related articles in previous issues:

Significant Growth in cashless Payments in Europe. Yet cash will remain predominant payment method in 2014 (EPC Newsletter, Issue 6, April 2010)

The Road Show. EC expected to harmonise rules for cross-border cash transport by road (EPC Newsletter, Issue 5, January 2010)

Cashing out. National Central Banks commit to optimise cash handling in SECA: a progress report (EPC Newsletter, Issue 4, October 2009)

Overcoming the Homer Simpson in us. How to create a less-cash society (EPC Newsletter, Issue 2, April 2009)

 

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