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Bad IdeasThis week we’re looking at mistakes, missteps, and misconceptions.
Many forms of so-called digital money aren’t actually so new or innovative—nor actual ‘money,’ in most cases—and often have a number of key aspects in common. The ways in which they differ may be our best indicators for whether this or that payment system or crypto-coin will survive, or simply end up worthless.
For millennia, social and financial thinkers have considered the risks of ‘bad’ money in the market, or other inaccurate holders of value—often during times of financial strain or innovation, such as the advent of new currencies or other ways to represent and quantify value, which we members of society may trade for other things, or accumulate as ‘wealth.’
Whether about ‘plugged’ nickels and ‘clipped’ silver, government-backed fiat currencies like paper dollars, shady annuities, or crypto coins that flop, people’s underlying worries have mostly centered on the idea of value falling through the cracks and possibly landing in someone else’s pocket. Such concerns continue today as companies like Apple, Uber, and Facebook join the push for fintech and ‘digital money,’ proposing a range of options that aren’t always easy to tell apart, let alone assign fair value.
Digital finance has many forms, but isn’t always ‘money’
Modern societies have coined countless names for our trade-able items, assets, and currencies (like the ever-admirable “hay,” “scratch,” “gravy,” and “wad”), but also multiple different systems to classify and exchange our items and tokens of value. For practical purposes, we often lump them together as ‘money,’ but the major varieties are actually quite different.
Today, consumer life mostly deals with two kinds of money: the first is a type of currency known as fiat currency, like the US dollar, the value of which is ensured by the government issuing it (rather than by an equivalent amount of gold or silver, as in previous generations). The second kind is commodities: in short, things that have their own, inherent worth (like gold, silver, and oil) and can be traded or sold based on the value of those commodities, as expressed in currency.
In 2020, only around a tenth of the fiat currency in the world exists as actual, physical money; most exists only digitally (or ‘on paper,’ to use the classic phrase) and moves around the globe in a complicated pattern between our bank accounts and various other destinations.
“The banks, SWIFT, and the card networks would tell you that money is digital already,” according to Lex Sokolin, Global FinTech Co-Head at the blockchain software company ConsenSys. At this point, he told Gizmodo in an email, “What we move around from bank account to bank account using payment rails or core banking systems is just software liabilities between corporate entities.”
In places like the U.S., Europe, and China, authorities and many consumers have been all for this transition, incorporating card- or transfer-based and even contactless payments into ever more aspects of daily life. Numerous brick-and-mortar businesses have even been going cashless, a.k.a. card and/or contactless payments only (creating yet another context for the phrase, ‘Your money’s no good here’).
Because of this trend, a wide range of firms have sought to get in on the action, developing ways of handling, storing, or promising access to monies which may seem like distinct new methods, but mostly rely on the same familiar tools.
When it comes to breaking down the electronic options out there, Sokolin said, there should first and foremost be a distinction between “digital money as an instrument”—e.g. crypto tokens or ‘coins’ you can pay with—and “digital payment rails more broadly,” which includes Apple Pay, Uber Money, department store credit cards, and many, many others.
Payment rails and digital wallets: from Macy’s cards to Apple Pay and Uber Money
The idea of branded or company-specific payment systems is popular, but not new. In the U.S., department stores like Macy’s and Sears were among the first firms to formalize ‘running up a tab’ by offering credit-based store accounts, which might offer discounts, reward points, and the opportunity for delayed payment. Among other things, these kinds of accounts have been used to attract customers and promote spending.
More recently, many firms began partnering with financial institutions so that brand-related cards, as for an airline or hardware store, can be used elsewhere like a regular credit or debit card, while simultaneously reducing such companies’ separation (and, potentially, fees) from their customers’ payment methods and habits.
The majority of current digital payment options from popular brands as well as tech platforms still exist along these lines. In other words, Sokolin said, “Money that ‘sits’ in an Uber Money account, or on some Apple app connected to a Goldman Sachs account, is not really digital money. It’s a reward point, or a debit in a bank account that is connected through fintech APIs into the software company’s user experience.”
For example, “When Credit Karma offers an account, it likely uses some third-party provider to hold the license and open a traditional bank account, which then uses traditional banking software,” he went on. “Notably, Square has been gunning for a bank license for a while, and is finally getting one. To that end, [it’s] money inside of the Square Cash app, but there’s nothing particularly new about it other than the user experience.”
Indeed, other than (presumably) collecting data points on users’ spending habits, changing the user experience is about all that branded digital rails can do—that is, assuming those users live in a place where digital and financial infrastructure exist to support them.
Attorney Ricardo Heredia Salazar, who practices law in the U.S. and Mexico and has written about the rise of fintech in both countries, wrote in an email that he’s noticed an “incredible” amount of marketing around in Apple products, including its Apple Pay platform (one form of ‘digital wallet,’ which “uses your actual credit cards through iPhone software,” Heredia said) and Apple Card (“really issued by Goldman Sachs Bank USA’s Salt Lake City Branch, not Apple”).
Nevertheless, because Mexican finance law still centers strictly on their national peso, Apple Pay is neither used nor available to install on Mexico-based iPhones. In fact, fiat cash still reigns supreme, he said, thanks in large part to Mexico’s big informal economy. In many cases, too, people can’t afford smartphones at all. The Mexican government is now working on a plan for nationwide financial innovation, Heredia wrote, but for now even using debit cards isn’t always an option. “Of course, Apple Card is not even on the radar.”
Sokolin echoed this point, writing that another key “lens” for gauging the impact of fintech is “trying to understand the maturity of the government-provided payments infrastructure,” such as wire transfer or ACH options common in the U.S., but far less so in Mexico and other places. “In Europe, for example, contactless payments are much more widespread. In Asia, QR code payments are powered by high-tech companies because they have direct access to the government’s banking system,” he explained.
And while Apple seems likely to weather the costs of its experiments in finance whether they’re successful or not, other companies’ offerings have left some experts raising their eyebrows, and/or scratching their heads.
On the matter of Uber Money, which plans to offer credit accounts for riders and debit cards with deposited earnings and overdraft-protection for drivers, John Detrixhe reflected for Quartz in October 2019, “In the near term, Uber Money could keep its drivers on the road and away from competitors [and] could also make Uber’s own business more efficient,” as by cutting down on hundreds of millions in annual card-processing fees.
In addition, he wrote, “Outside the U.S. and Europe, cash payments are still popular in many markets, and providing riders and gig workers with banking services could shift transactions away from notes and coins to digital.” But today, Detrixhe noted, “Uber is burning through cash quickly in its main business, and financial services seem unlikely to offset that anytime soon.”
And then there’s Libra: Facebook’s answer to crypto and decentralized currency—except it’s not actual currency, at least for the foreseeable future, and both Facebook and traditional currencies play a central role.
The highs and lows of crypto-commodities, a.k.a. ‘currencies’
In several ways, Facebook diverged from the Big Tech pack last year by announcing its plans to launch Libra, a new digital ‘coin’ or ‘cryptocurrency,’ as well as a separate organization charged with democratically managing it.
Unlike payment rails, the world of crypto and blockchain has a relatively short history, and likely contains unfamiliar territory for both engineers and the average reader. Unlike the fiat money linked by payment rails, the mathematically complex digital products called ‘cryptocurrencies’ usually aren’t tied to governments or private companies, and use different methods and amounts of energy (as well as different philosophies) to create their digital and/or decentralized currency models.
Thomas Nguyen, developer of Riecoin, told Gizmodo in an email that there are several main factors to consider regarding Facebook’s Libra plan, and digital money in general. Firstly, he said, “Whether you prefer Bitcoin, Libra, or the Federal Reserve digital dollar comes down to your beliefs on economics and society.”
“Libra, for example, would be a private money minted from the balances of user accounts and hosted by the largest Silicon Valley oligopolies,” Nguyen wrote. “Users of money controlled by organizations will have to fully trust them. And we know that [private organizations] often don’t act in the best interests of users, i.e. by collecting personal data, charging considerable fees, or arbitrarily banning users.”
“Decentralized currencies solve trust issues, but also introduce their own,” he continued. “Governments tend to be hostile to such solutions and can restrict or even ban them, making them practically unusable even though it’s not possible to shut them down.”
Nguyen said it’s also important to recognize that different public tokens are calculated in ways that can make them more or less accessible to different users. How they’re ‘mined’ or ‘staked’ will also affect how wasteful that process is, energy-wise—a concern he called “justified, in an era of climate urgency.” To that end, Riecoin’s developers based their token on calculations that seek prime-number constellations, so as to benefit scientific research while mining.
But the deeper issue of Libra’s place in a dynamic crypto ecosystem is “much more discrete,” Nguyen said. “Can blockchain-based assets be more efficiently provided at scale to power the economy? My answer is yes, over time.” However, he said, what Facebook is proposing—a so-called “stablecoin,” backed by world fiat currencies—doesn’t seem as revolutionary, nor as viable long-term.
“The idea of ‘stable coins’ comes up regularly, promising a stable value in contrast to Bitcoin and many others,” Nguyen wrote. “However, I see them more as a temporary practical solution to easier currency conversions than anything else. Indeed, one might simply store or use dollars, gold, or even any already existing centralized digital money.”
Sokolin seemed to agree, describing Libra as “a way for alternative capital [to] simulate a bank account return, without necessarily succumbing to the same regulation (but keeping the net interest income).” For that reason, he predicted, “Governments all over the world will push back either to transform it into the digital version of their own currency, turning the consortium into a public utility instead of a private money. Or they will find ways to slow its progress to resemble something like loyalty points in other apps.”
Nguyen said he also worries about the problem of education, in that folks looking to participate in crypto might not hear about all the options out there, and will be unlikely to choose a better option once they’ve already settled on something. In a way, he echoed a point famously raised by economist George Akerlof in his 1970 paper exploring the risks of a market for used cars where some consumers are doomed to pay good money for a ‘lemon’: The cost of that exchange, which was made dishonest by the dealer, Akerlof wrote, “lies not only in the amount by which the purchaser is cheated, [but] also must include the loss incurred from driving legitimate business out of existence.”
With our present and future finances in chaos, will digital dough rise?
Rick Barlin, a New York City-based CPA and business writer, said he has mixed feelings about the outlook for crypto in tomorrow’s finances, as well as payment rails and other digital tools.
On the one hand, he said, it’s good to remember that most forms of digital finance have failed so far, to put it bluntly. In addition, fledgling products still don’t have a lot of the details worked out, and could lead to practical hassles when users deal with established infrastructure—for example, when it’s time for crypto-owners to pay their taxes, which quickly gets confusing.
“The consumer is essentially using an investment to buy a product, but rather than treating it like an exchange of property, the third party’s conversion of the virtual currency makes it an ordinary business transaction,” Barlin explained in his 2017 article on the issue. “This leads to major reporting issues for bookkeeping and tax purposes.” Under current IRS guidance, he found, it’s required to be alternately treated as property or as currency, depending on the situation.
In a phone interview, however, Barlin pointed out that the tax implications for crypto and other forms of digital finance are just a few uncertain factors in a veritable sea of them at this particular moment in economic history, given the unprecedented and growing impacts of covid-19.
“The market could blow up in the next couple months, or you may have people taking their money out of crashing stocks and putting it into digital currency, which could be helpful to the economy, but the key is innovation. Creative new ideas are what we need, because [the current situation] is something the likes of which the world has never seen.”
“There are a lot of unknowns right now,” he added reflectively, speaking a few days after a doctor had told him to stay home and monitor his temperature. “What I will say is that people will have to think of a lot of creative ways to make money and get value out of that money, especially now and in the near future.”
“It’s pretty nerve-wracking: I don’t know what the world will look like in two months,” Barlin said. “Making money digital may be the next step in the conversion of our livelihoods.” Then again, he said, in the case of seemingly non-innovative brand offerings, digital ‘money’ could be just another way to cut costs, and find revenue.
In any case, he said, “We’re going to need an innovative solution. Maybe that’s virtual currency, and maybe it’s something no one has thought of yet.”
Dr. Atle Mikkola Kjøsen, Assistant Professor of Information and Media Studies at the University of Western Ontario, said he’s hesitant to speculate at this point as to Big Tech’s long-term motivations in finance (beyond the fairly obvious, perhaps), or on the role that crypto could play in the near future. “One thing I can say with certainty, however, is that whatever crypto is currently, it is not money or currency,” he commented by email.
“I sincerely wish people would stop referring to it as digital money, because cryptocurrencies have few of the functions of money.” It’s much closer to a commodity, Kjøsen said, “like gold and other precious metals: it has a high value, but you can’t just go to the grocery store and use it as currency.”
“But I’m not the only one who’s argued that.”