One story I heard is that one cell system operator didn’t have a good distribution system so he changed the software to allow a cell phone user to transfer minutes (prepaid talk time) to another phone. This way one person from a distant village could buy and take back several cell phones and sell the phones to villagers along with minutes. It required no further technical changes or central policy for minutes to become money as they already had all the attributes of money.

Presumably the ultimate record of who has how many minutes is in the cell system control computers—hacking a phone may steal but not counterfeit money. Mere custody of the phone provides access to the money so no hacking is necessary to steal the money. The phone is like a wallet regarding security. Cell phones with minutes are just as likely to be targeted by digital attacks whether or not they are used as money unless their money role leads to greater stored values. Simple air link encryption should suffice for this threat. Of course a PIN can provide limited protection from abuse of a phone by a thief.

The creation of money is fraught with moral hazards. The cell operator will become tempted to create more money for his own benefit. Indeed cell users will buy more minutes for the convenience of payment. If cell service competition requires lowering cell rates, the cell operator whose system is providing ersatz money is tempted to merely lower cell prices and thus ‘inflate’ the money supply by making current cell accounts, denominated in minutes, lose value in trade. The cell operator with a long run view may choose to double the minutes of each subscriber as he halves the price of minutes thus preserving the value of his customers accounts. This would tend to preserve his reputation as a bank. Here is an account of cell minutes as money.

Some press accounts: USA Today, BBC. A UN report.

Cell systems that advertise monetary use of cell phones (see links below) denominate values in local currency. I suppose then that the cellular account has two balances, minutes and local currency units.

There are several such services now in Africa and I don’t know if transfer of value between such services is now possible. Even without such money interconnect third parties with accounts on two such systems can pass money between the two in the classic pattern of money changers.

India:
Cellular Banking in India
Obopay any text-message phone.
mChek Payments

Maxis & Globe Telecom with emphasis on international transfers; $1.47 charge per transaction. Another report.
Remittances to India

Here are reports of heavier weight American services designed, perhaps, to produce bigger profits.
Controversy and Insight on moving larger amounts.

Some of these systems don't do phone to phone transfers. Instead they do phone to cache and back at special transfer points, and also payments to selected payees.

Such approaches have their critics; Swamy is one. He says that India could, in fact, become utterly cashless; a man like Karehanumaiah could be paid for his farm labor electronically and buy goods and services the same way. Given that many areas of India have no banking infrastructure at all, he argues, it makes no sense to try to build kiosks and machines. “Those are nonscalable models and very labor-intensive models,” Swamy says. “If he can do it in his village, he can do it in his pocket [with his cell phone]. That is our perspective.” Still, most experts say a wholesale changeover to electronic transactions is unrealistic, and that mobile banking will require some connection to the cash economy.