Sunday, June 22, 2014

Capitalism, Regionalism, and the Cost of Moving Small Value Payments

What will cost less to payment system users; large multi-national government projects, or, large single firm projects? Can a consortium of firms with in-country monopoly rights create the best cost for consumers, or will Ed’s Bait and Virtual Currency Shoppe, actually offer consumers the best prices for the same service?

Maybe dear reader(s) a consensus exits that security of currency during transport is a primary element to consider during payment system design phases. Speed of completion of an entire transaction from initial clearing to final settlement becomes a primary consideration for designers because of the common risks to payment systems, namely: liquidity, credit, operational, legal, and systemic risk.

A mined virtual currency fails because of the time for validation. One cycle takes ten minutes and during that time the status of the coin remains uncertain. In the real world, when the coin leaves the bum’s pocket the transaction takes as long as the time it takes for the coin to move from the bum to the bum’s friend.  There may be recrimination about the consequences of the movement, but the time of final settlement is quite clear.

Diagram 13 shows a virtual currency system run by a single nation for the purposes of discussion.

Diagram 13 A Virtual Currency Operated by a Central Bank

If the currency has nominal counterfeit protection, potential payees may not use the validation window much regardless of the value size of the transaction.  If the system cannot prevent unauthorized value from entering the system the validation window will not prevent desertion by its users regardless of the cost of the transaction. Validation needs to occur in microseconds from any correctly formatted query regardless of its source.

Replace the Central Bank in diagram 13 with text of your choosing, say giant bank network company, or Ed’s Bait and Virtual Currency Shoppe, or giant bank network monopoly. The diagram stays constant, but confidence and cost does not.

Next Blog: Response to comments, or, new functions for virtual currency

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