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DT, July 2013

Security Notes: The Age of Bit Money Is Here
July 1, 2013

Gideon Samid • Gideon@bitmint.com

The specter of consumers pushing electronic money bits to merchants is a cause for concern in the payment empires of today: the networks. Concern, not alarm, because consumers will continue to have eyes bigger than their pockets, and will be eager for credit.

What will the credit industry look like in the era of digital cash? The best way to answer this is to propose several scenarios, then sort them out. Here, then, is one scenario:

Alice drives to her favorite store, and while there her phone-wallet issues a request for her issuing bank to extend her $300 from her credit line. The money flows through to Alice’s phone: $300 in digital cash, cyber-signed by the bank to be at Alice’s disposal. Shopping done, Alice carries her $250 purchase to the cash register, where she sends the bit-money to the merchant’s point-of-sale terminal. Alice’s phone and the POS terminal engage in a cryptographic dialogue that convinces the merchant that Alice’s bits are good money. This instant dialogue happens between the payer and payee devices—without real-time access to the network, eliminating a common bottleneck.

On her way home, Alice may return the unused $50 to the bank in order not to be charged interest on money she did not use. The two network connections (to obtain and return the bit money) are carried out at leisure, as opposed to while standing in line, holding off a queue of shoppers behind her.

What is in it for the consumer? The actual payment takes place at the point of the transaction. There is no subsequent monthly statement that the consumer has to carefully examine to ensure that all the line items are proper. When you pay as you buy, you need not examine a belated invoice. Also, many consumers prefer to pay cash and not leave their credit card data lying around at risk of abuse. As to the interest rate, this is the same issue as today: negotiable.

The merchant is using the network-signed cash as trustworthy cash, but regards the buyer as the payor. The network will no longer have the power to levy surcharges for security violations, dispute resolution, and so on. And the painful business of interchange fees is gone. It will be replaced by a single negotiated service fee.

The network’s deal is to stay relevant and on top, despite the revolutionary wave of money becoming digital. Its burden will be minimized as the abstruse settlement cycles will be eliminated. The issuing bank will buy digital money from the mint, and send this money to its credit customers.

How will this scenario come about? Following the lead seen in countries like Kenya and India, phone-to-phone payment will sweep the United States. The cryptographic tools enabling secure storage of money on the phone, and secure payment to any other phone, are robust and transparent to the consumer. Paying a babysitter, an exercise coach, or a therapist is readily doable via short-message service (SMS).

The mints that issue the digital money typically charge 1% or less (BitMint, for example, plans to charge 0.5% to the buyer of the digital money, and the same to the redeemer). Digital money can be paid instantly without requiring real-time network authentication.

The ease and comfort of digital money, and relief from taxing interchange fees, will render digital currency into the preferred method of payment for merchants. The cost savings alone will lead merchants to find ways to entice their customers to pay them with digital money. Consumers will join in for their own benefit, as described above, and networks and issuers will have to adapt and reorient themselves to making money from credit (loans) and from serving merchants, as opposed to inertia-driven, creeping fees.

The recent Bitcoin excitement proved that the public is ready for digital currency. It’s a huge mental milestone. Alice will click “pay” on her phone and clearly imagine the bits flowing out. And Bob will read the confirmation notice on his phone and readily imagine them flowing in.

And as we transform from the Information Age to the Age of Algorithms, we see greater benefit in shaping money into bit-strings. Algorithms are powerful because they reflect our will, express our desires, faithfully execute our wishes. But to do all that, algorithms must be fed. There is one and only one diet for algorithms: bit strings. Bit-string money will blend right in.

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