Saturday , February 24, 2024

Security Notes: The Real Key to Frictionless Payments

A payor either owns the money he pays or is commissioned to pay on someone’s behalf. There is no other honest option, right?

Well, Alice could hand money over to an escrow agent and instruct her to make the money available to her grandson, Bob, to buy a nice jacket of his choice. The spending right is valid for the next 48 hours, but only if Bob shaves his facial hair. If, when the 48 hours tick away, Bob is still walking around with his scraggly long beard, the money reverts to his grandma. In this scenario, Bob assumes conditional spending privileges for Alice’s money, but no “ownership” thereof.

This situation may appear very marginal. Not so, as we shall see in a moment. First, let’s assert that this arrangement of granting temporary spending privileges to someone for money not theirs is a frictionless, easy capability for money in digital form. Digital money may be tethered to any logical term, so Alice can pass digital money to Bob, earmark the money for a designated purpose, and further specify a time limit for this privilege.

The terms are cryptographically sealed to the money. If Bob does not shave, for example, the tethered money becomes worthless and his grandmother does not need to wait for the money to return to her wallet. It is there instantly when the time lapses (and the money was not spent).

Have you ever paid extra for a rush delivery of merchandise, only to have it arrive two days late and hear from the merchant every excuse in the book not to return your money? Well with temporary spending privileges (TSP) money, there is no argument. The money cannot be spent before the shipper certifies delivery, and it evaporates after 24 hours. In the business-to-business world, this case is even more pronounced.

But let me dedicate the rest of this column to a prospective revolution in the retail business. Let’s say a bold entrepreneur posts an online price for a given commodity, say, a 48-inch flat-screen TV, and propose to his readers to sell them the item for 15% less than the lowest posted price. To take advantage of the offer, the buyer must send the 15% discounted price as tethered digital money in favor of the entrepreneur, who has no more than, say, 12 hours to spend the money. If the money is not timely spent, the digital money bits evaporate.

Popular consumer articles have a volume of demand on a national basis (which is how sales happen today), such that quite a large number of people interested in this flat-screen TV will find it to their advantage to prepay 15% less than the lowest online price. The entrepreneur then will simultaneously approach Amazon, Walmart, Target, and so on, saying: “I have a large sum of money payable instantly to the lowest bidder.” If enough takers sign up, the per-item lowest bid price is likely to be at a 20% discount or more, leaving a nice margin for the entrepreneur.

Together with the payment, the winning vendor receives the addresses of the buyers to ship the TVs to. If for any reason the lowest bid is higher than a 15% discount, the deal is off, and the digital money in the form of TSP evaporates from the coffers of the entrepreneur.

The only way this could work smoothly is if the entrepreneur can lure the vendors with cash-in-hand, not “will collect later.” On the other end, if the bid fails there is no need for a tedious payback.

Applications for this concept are numerous, including with loyalty money and advertising implementations. Today, security needs induce protocol overhead for any movement of money (legacy or crypto), so that paying and then reversing a payment generates too much friction. Tethered money avoids this overhead and moves without friction.

In machinery, lubricants make a world of difference between grinding moving parts, and a smooth apparatus. It is very much the same when it comes to payment.

The greatest impact of TSP is expected in the Internet of Things and micropayments, which choke with friction. Same for payments controlled by artificial intelligence. These can be carried out with speeds much greater than humans pulling a wallet out of their back pockets, but friction is the limiting factor.  Read more in my book, Tethered Money.

—Gideon Samid •

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