Insurance makes MM a radical new currency. However, the electronic wallet (EW) itself is a target for hackers; which is why the EW needs separate insurance for the wallet, perhaps from a competing insurance company (one not insuring the currency itself). Insurance companies will have details of all transactions users make, data currently available only to financial institutions (FI) from payment card transactions or gross real time transactions. The block chain (depending on its contents) also prevents complete anonymity. Worse for those wishing a private environment, a trail of transactions relating to a single transaction have their contents potentially available to any owner of the value while residual value exists in an EW. Once a government implements the full design of MM then the final archive becomes a treasure trove for academic researchers, jealous spouses, and law enforcement personnel. It is possible to make MM transactions completely anonymous which gives government impetus to enact laws to prevent such anonymity especially with large value transactions. Governments, however, cannot force EW holders to add meaningful data to a block chains, and insurance is not a requirement for MM transactions. In the Halcyon days when privacy once existed, and cash was king, concerns of eyes not party to a transaction having an intimate knowledge of the tiniest transactional details only existed in the gleams of treasury executives.
Trust once was the bulwark of any financial transaction. When times between acceptance and settlement of electronic or check transactions could take weeks, trust remained the foundation of commerce. Now, with implementation of the MM 400 microsecond settlement time and insurance guaranteeing the finality of a complete transaction, trust is irrelevant, and anonymity is obsolete. Is it worthwhile to restore these components to MM transactions?
Governments will not willingly allow large value transactions to move anonymously between payer and payee. Trust but verify ensures the camel’s nose will always enter the tent. However, smaller value transactions such as small value retail payments, or consumer-to-consumer payments for unknown purposes, must be assimilated or cash stays in the economy, and the collection of anonymous large cash caches will continue to exert sinister influence on an invisible underground economy. So which situation causes more harm, large underground economies, or, small value transactions sometimes involving purchase of contraband?
Posing the question negates a necessity for answering it. Customizing MM for its issuers and its users will be a service offered by all payment system architectures, after all selling guns to customers lawfully does not prevent the buyer from using guns illegally. A partnership between governments and digital currency is inevitable, but will government use it to build a foundation for the elimination of underground economies or instead will they use such a partnership to create a barrier to a modern society equipped with an advance payment system without the need for cash (or barter)? I very much doubt if this dialectic, regardless of its importance, will enter mainstream political converse soon, but I can only do my part. Let people spend nominal amounts electronically and anonymously.
There exists an unusual characteristic of transactions; the cost as a percentage of transaction value increases as the value of the transaction decreases. The cost increase is dramatic making smaller amounts extremely expensive as the pie chart indicates.
The same phenomenon exists for non-cash tender types; merchants will refuse non-cash tenders under a floor value. Interestingly, the same condition exists for payment systems generally and large value movement costs next to nothing for parties conducting transactions, whereas needs-based payment systems force merchants to incur extraordinary charges for acceptance of these tender types.
Current virtual payment systems such as bitcoin do not allow tenders of odd values and so transaction costs for low value items are cost prohibitive. This friction for low value payments taxes most consumers and creates high percentage transaction costs for most ordinary transactions. Cash eliminates this tax, however cash drawbacks such as low accountability, and security risks make cash tenders rare in the US.
Money Modules (MM) issued by the Fed will reduce transaction friction considerably for the following reasons:
· There are no constraints on value
· Security in the form of insurance is a low transactional cost
· Elimination of acquirers and forwarders increases speed
· Electronic wallets are a one-time cost and are available with current technology
· Bank profitability will increase because of regular high demand for the currency
Changing the banking status quo requires financial institution leadership and imagination sadly not present today. The costs of transactions for everyday consumers remains staggeringly high while banks focus on large value transactions or high fees at the expense of ordinary consumers. FI profitability will increase after the Fed issues MM. FI eventually will support this obvious profitable service, but only when the Fed recognizes that it must issue digital fiat currency.
Now that large financial institutions jumped on the issuance of digital currency, the Fed shirks its responsibilities by claiming FI have met the market demands, so Fed interference recklessly imperils a nascent service in the making. The Fed serves FI, not the consumers dependent on them. The Fed exists to “to provide the nation with a safer, more flexible, and more stable monetary and financial system.” It also apparently exists to create excessive friction to the unwashed masses making mundane transactions.
It is time for Fed leadership, not an incestuous relationship with FI they theoretically oversee. Since this call likely will go unheeded, government branches must issue digital currency for specific purposes so at least government agencies do not pay for excessive friction in their low value transactions.
Many government programs distribute funds for specific uses by varying constituencies. Anyone of these programs could show my conclusions on the efficacy of government issued digital currency. The LEAP program, the SNAP program, housing assistance, and many other federal programs allow administrators to select a good sample for a pilot. The SNAP (Supplemental Nutrition Assistance Program nee food stamps) is a perfect fit for many reasons. Participating retailers redeem benefits by use of a government issued debit (Electronic Benefit Transfer or EBT) card. The Government can emulate the capture of card and personal identification number (PIN) but use money modules (MM) instead.
The problem of keeping track of diminishing value within the MM core exists only with conventional magnetic stripe data entry. This is a problem easily solved by using the Samsung method of using radio waves to emulate magnetic stripe motions to the reading head within the card acceptance device. Using the digital signature embedded within MM to encrypt value and present payment eliminates requirements for a tricky technical approach.
Florida makes a perfect test bed for such a pilot. The State administers many needs-based programs targeting various communities. The State also will have a nascent retail digital currency acceptance infrastructure because a large commercial bank will start issuing a digital coin in the State. Beyond the mirage of a government adversarial competitor in a commercial banking arena, the pilot will give a good model of government issuance, and with the discount or surcharge mechanism governing MM issuance, government will determine if the new fiscal controls work in a microeconomy.
The selling points for the pilot will be quite apparent when retailers redeeming payments by participating in needs-based programs no longer will need to pay fees to acquirers, forwarders, or other middlemen to redeem the digital currency for conventional fiat currency. The banks will receive fees seamlessly without disrupting current operations based on incentives government will use either to redeem the currency faster, issue the currency faster, or keep the currency pool constant. Keeping the currency pool constant will generate interest payments from the government based on the value of digital currency banks float to needs-based participants.
The implementation requires preparation for many different reasons. Questions such as:
We must look at the consequences of thousands of financial institutions (FI) issuing billions of dollars in digital currency to increase their margins on the backs of consumers. Regardless of the coming actual future, as rational humans we can still ponder the likely outcomes of the impending feeding frenzy.
What are some worrying consequences of private digital currencies:
Check out all the Proposals for Faster Payment systems at