Consequences of Digital Currency

In theory any entity can issue a digital currency but practically only a financial institution (FI) has the trust of the public at large to issue wholesale stored value to personal electronic devices (PED). However once issued, there is nothing preventing the purchaser of digital currency from reissuing it, and that dear reader(s) will attract the attention of smugglers, terrorist groups, legitimate commercial sectors, and financial crime investigators.   

FI can know their customers quite well, but will never know the difference between a reissuance and a legitimate purchase, especially if digital currency freely circulates for years or decades without returning to the issuing FI. If the security for stored monetary value makes successful conventional attacks too expensive then the values stored on PED will increase dramatically; people will think nothing of purchasing houses, cars, or jumbo passenger jets with currency stored on their PED.

I can read your thoughts dear reader(s); I am channeling “Farfetched”, “impossible”, or “not in this century”. Yet we already see the demand for the semi-anonymous bitcoin, regardless of its fatal flaws. Consider stored values with associated currency able for exchange or validation instantly. FI or digital currency insurers can add multiple features to data associated with the value stored on PEDs. Customers will demand anonymous transfers or interest payments and FI will respond if not constrained by regulators.

The initiation of secure and speedy movement of large values by PED may make gross real time payment systems obsolete and central banks as relevant as buggy whips in the near future. After all why let FI know the destination of your payments if it is not required. Why would FI need a discount window or to tie up funds in reserves if people purchase digital currency and never redeem it until the accrued interest has increased the purchased value exponentially?

Next Blog: The importance of digital currency logs

Evolution of Stored Value on a Personal Electronic Device

Circulation of digital money using personal electronic devices (PED)  must be reliable and secure for widespread acceptance. Vulnerabilities existing in current electronic payment systems remain with digital money, however the methods to exploit the risks change. Vulnerabilities include:

• Issuance to a counterfeit PED
• Unauthorized issuance
• Intercept and capture of issuance to a legitimate PED
• Surreptitious or unauthorized transfer from a PED to another device  
• Payment to a counterfeit payee
• Intercept and capture of payment to a payee
• Intercept and capture of payee redemption
• Capture by use of force
• Friendly Fraud

Mitigation of these vulnerabilities requires careful design of the end-to-end solution. The solution requires the use of public key interchange (PKI) (or similar method to create a non-reputable issued or transferred value). There must be a method to determine the history of legitimate transfer of value from one point to another with the understanding that the circulation of the digital value does not require redemption at the issuer within any time limit. The PED transfer and receive functions must detect attacking agents and have the capability to evolve easily as attacking agents mutate.

Manufacturers must design PEDs better to mitigate the vulnerabilities of digital money. Certainly the use of biometrics to validate users has helped the situation but the capability of PEDs to detect and prevent attacks remains abysmal. PEDs must have situational knowledge when transferring digital currency and that requires allowing only code registered with the payment application to execute during vulnerable processing cycles. 

As manufacturers, financial institutions, and others involved in the payment services industry tighten their security posture the ease, cost effectiveness, and ubiquity of digital currency tied to a value in an account will increase to the point that payment cards and the infrastructure that supports them will go the way of all things.

Next Blog: Digital Currencies and Underground Economies

Storing Value on Personal Electronic Devices; Push Pay Nirvana

It is just a matter of time before people start storing monetary value on their personal electronic devices (PED); cooperative solution of a few architectural problems solution remains the only obstacle. Some of those problems include:

• Lost, damaged, or stolen (LDS) PEDs
• Foreign exchange
• Standard data protocols
• Communication Network availability

People solved these problems more or less with pull payment architecture and provided a common (and somewhat shaky environment) for payers and payees alike. A push architecture (moving value directly from payer to payee, not a payee requesting payment from the payer) requires less messages and less time, and so is inherently more secure. Storing value on a PED eliminates the need for payment networks and if designed correctly eliminates the need for any network if payer and payee share the same physical space.

Tying the value to the holder of the value mitigates the LDS threat. Foreign exchange occurs when the value arrives at a financial institution (FI). However getting makers of PEDS and network providers to cooperate and develop a data standard is harder than herding cats. Perhaps we do not need such a standard.  One FI will issue electronic value to its customers and the storage of that data on the device will become a de facto standard much as the VISA 1 standards evolved from the early attempts to negotiate a line and send a payment message.

If people share the same space then use of USB ports solves the problem of network availability. The problem of converting the ownership of value from payer to payee in a secure manner remains a delicate problem, however there are enough smart engineers out there to do it well. The German Geldkarte solves most of these problems; I wonder if the world will shake if Geldkarte move their solution from smart card to PED.

Next Blog: Payment Traffic Jams

If State Governments Build a Bum’s Pocket for Pot Purchases, Would the Feds Bust ‘em?

Twenty one States and DC have some form of legal marijuana distribution. Two more have imitative on the 2014 ballot. Yet the Federal Government continues to force consumers and businesses to pay for pot with cash. Financial Institutions (FI) do not want to get involved in business that may force their permanent closure and have their principals banned from the financial services industry forever. Governments, with a theoretical purpose of protecting citizens, instead put them at risk by forcing them to carry and keep large volumes of cash. It’s really time for State Governments to pool their resources, build a jointly held bum’s pocket for any retailer to join, and move marijuana industry money safely and efficiently. If the States adopt some of the features that I described in an earlier blog (see http://paymentnetworks.blogspot.com/2014/09/payment-system-architecture-for.html ) then states can protect their citizens and create a continuous daily stream of tax money that the businesses will no longer need to collect and pay.  

I understand the reluctance to attempt the push payment architecture of the bum’s pocket, but all state governments already have a ubiquitous payment system using a pull design for consumer redemption at retailer locations. All States have electronic benefit transfer (EBT) used to efficiently allow citizens to access their cash from many different types of government programs such as SNAP (nee food stamps), or child support funds. It would be simple to add a pot program to allow consumers to fund the account and retailers to accept the EBT card. Consumers can walk into any grocery store or retail location that accepts EBT cards, and fund accounts with a return transaction. The entire infrastructure already exists!

The account aggregation occurs at the State treasury level. Since the State treasuries actually move the money into the retailer accounts, they act as the FI. If the Feds want to stop it, they would have the Hobson’s choice of taking action against the State government or its EBT contractor. Either way, the 22 point headlines will scream something like “Black Booted Federal Thugs block Food Funds destined for Poor Children”. The public outcry might accelerate the movement to repeal Federal marijuana laws once and for all.

I ask the States that allow legal distribution of marijuana, do you want to protect your citizens or let them operate with the Federal Sword of Damocles dangling over their heads? What happens if citizens pass a referendum that requires EBT systems to support pot purchases? That is a case to make Supreme Court justices queasy and the DEA and FINCEN despair.

Next Blog: Unnatural Payment System Evolution

Is an Escrow System Cheaper than Charge Backs

Trust is tough when payer and payee never meet physically. When any part of a transaction fails costs mount and recriminations fly. If the concept of a small value gross real time payment system succeeds it will need a mechanism other than Reg E or charge backs to cure a failed transaction.

So the bum’s pocket (small value gross real time payment system designed earlier in this blog) requires a method to protect both sides of a transaction. I envisage different solutions when the world eliminates charge backs. There might be healthy competition between shippers and financial institutions (FI). 

Shippers may offer a service similar to collection on delivery except collection occurs before shipment. In this scenario the payer pays shipper; shipper picks up and delivers goods; payer accepts shipment; shipper pays payee (keeping shipping fees).If the payer or payee disputes the transaction then the shipper picks up the goods and returns them to the payee and refunds the payer(subtracting more fees).

Another alternate solution dictates the design of the data protocol for a command to pay message. The message must allow for multiple payees. In that way a FI can offer standard escrow services. The payer directs the bum’s pocket to credit a shipper and an escrow account owned by the FI.  The FI moves the funds to the payee after notification of receipt by the payer or the passage of time. In the case of a dispute the FI holds the funds until payer and payee resolve it and both parties notify the FI they resolved the dispute. 

The question arises what costs more, routine multiple transactions, or charge backs. It seems to me that the former is more cost effective, but without any data or actual firms providing these services it is at best a haphazard guess. Certainly the passage of time allows for interest charges which allows the intermediary payee a chance for income without charging either the payer or payee.

However the payment system evolves, payees likely will be happier, and payers will not see much difference unless they intend to defraud their payees.

Next Blog: A discussion on current methods for foreign exchange transactions

Payment System Architecture for the Colorado Pot Industry

The Colorado (CO) pot industry suffers from the war on drugs; the industry requires a payment system architecture that cannot use common settlement procedures available to all other commercial enterprises. Headline: Government Hypocrisy Makes Payment Architects Drool (excuse the puddle).

CO needs a bum’s pocket (small value gross real time payment system) for its pot industry, and I thought I would sketch out a design.  

Step 1: Assign a public account number to all payees. The number only allows credits to the account, no debits.

Step 2: Give payers a private number associated with a funded account. The funded account might be the same account as the public payee account, just assigned a separate number.

Step 3: Write a clearing application, which receives a message from the payer to move funds to a payee; moves the funds electronically; notifies the payer and payee of the results.

Step 4: Create a club of merchants and their customers. The club’s business is to serve its members but not participate directly in the marijuana trade. When members deposit money to their accounts the club pools all the money in a financial institution account but keeps track of money with normal accounting methods.

Payers will fund their accounts using the regular payment system infrastructure. Payers then go to any establishment connected to the Bum’s pocket. Retailers of all kinds should be able to join this new merchant payment hub. The payer initiates a payment to by using the publically accessible payee account number as a destination for the funds already in their account. The club’s clearing system moves the money to the correct account. Whenever a member wishes to cash out, the club deposits their money in a bank account if the member is fortunate enough to have one or pay cash otherwise.

It may be hard to convince a financial institution to create a bank account for the club. However since the money deposited at the club comes from private citizens and not marijuana businesses it should not be denied access to banking services. I encourage any reader with legal training to comment on whether this payment hub runs afoul of the bank blab everything act.

Next Blog: A clearing house for barter services

Repeal the Bank Blab Everything Act

The war on drugs now the war on terror has become a war on banks, needlessly, causing great harm to the country. The intrusive nose of government only serves to have legitimate financial activity flee the US because a group of analysts at FinCen scrutinize every wee dime and can deduce future activity, which people want to keep secret for legitimate purposes.

There are plenty of ways government can monitor the aggregate movement of money in small and large value payment systems; and present a court of law a probable cause warrant to get details of particular financial activity; without having to watch everyone’s financial activity every second.

  

This 70’s relic of a law symbolizes the surrender of  people’s liberties to the right wing cause that government dictate citizen behavior conform to an obtuse concept of morality based on 17^th century religious ideals. How much of our payment infrastructure flees every day to unregulated, unsafe, and untaxed methods because of this constitutionally suspect practice? 

We cannot fulfill the dream of a cashless society without people initiating their transactions with anonymity. We see the routine avoidance of government detection methods for two reasons, movement of funds to and from underground payment hubs, and preventing people other than government from seeing financial activity. How many FinCen investigations turned up adulterers, closet drinkers, compulsive gamblers, small cash businesses, and other harmless souls not requiring investigation by the Federal Government? It’s odd, but I see no data on the investigation of false positives and yet that is a critical number to determine the effectiveness of any payment hub detection activity. More to the point, how many money launderers no longer use US banks?

If banks did not spend the money needed to comply to this ridiculous intrusive nanny requirement perhaps they could use those funds to bolster their current payment architectures and stop relying on other companies to perform what used to be one of their primary functions, efficient cost effective funds movement.

Next Blog: Welding a push payment architecture to a bum’s pocket