We have been writing a lot about the advent of e-commerce and how mobile banking is removing barriers to moving money for transactions. There was a thought-provoking piece posted by J.J. Hornblass this week on Bank Innovation about “The Dark Side of Emerging Payments.” While the advent of electronic purchases and electronic funds transfer is opening up new commerce models, it also is creating new threats we need to consider. As Hornblass notes:
“Let's try an exercise. Reach into your wallet or purse and pull out a dollar. Now go to your favorite online shopping site using your desktop or mobile phone and pick something to buy -- the baseball season is still young, so I'll choose a pack of baseball cards for my son. When you get to the checkout, try to pay with your dollar bill.
“Unless you can jam the dollar into a USB port, that bill can’t buy you a peanut online.
“And therein resides the great revolution in banking in this nation today. That physical dollar in your hand is becoming less useful as more purchases are made online or with a mobile device. By 2015, e-commerce and m-commerce could collectively account for 20% of the $8 trillion of global sales.”
So $1.6 trillion will flow through electronic commerce by 2015. That’s virtual dollars powered by alternative payment strategies like PayPal, Facebook credits, etc. Handling those transactions will be private, for-profit companies like eBay, Verizon, MasterCard, Visa, and American Express. Digital dollars will flow from virtual wallets via web browsers and mobile phones, essentially printing electronic cash without the benefit of the U.S. Treasury.
Let’s consider the implications of this. First, consider the potential risk to consumers. As more transactions move online through electronic channels, it increases the potential for fraud and theft. If you start using your cellular phone for mobile payments, consider what happens if you lose your phone. The consequences could be more disastrous than just losing your wallet. Or what happens if your virtual bank account is hacked by some unscrupulous crook? Most credit card companies and banks limit liability in the event of fraud, but can we count on virtual bill payers to do the same thing?
Also consider the larger impact on the economic structure. As Hornblass notes, there are number of companies vying to become the Digital U.S. Mint. Think about that. What happens it all digital financial transactions are managed by a for-profit business entity. Suddenly we are looking at taking the U.S. Treasury out of the equation, limiting the effectiveness of the Federal Reserve, and putting fiscal policy in the hands of private enterprise.
The trend has already started. PayPal is being used more and more for business and consumer transactions. Facebook is mandating that sellers on their system use Facebook credits as currency, with Facebook collecting $0.13 for every credit spent – a 13% tax on the right to buy stuff using alternate currency.
Okay, the real dollars behind the e-dollars are still managed by the Federal Reserve, and electronic transactions are linked to bank accounts and credit cards that ultimately pay in real dollars. However, consider that these alternative payment systems are not regulated, no licensing fee is required, and they can set whatever terms they choose. If consumers want to use the system, like Facebook, they have to play by the rules, including using Facebook credits. As Hornblass states it, “The fact is virtual currency will create a casino of currencies with various valuations. And that makes the situation ripe for consumer abuse.”
So should the U.S. government surrender its right to print legal tender by leaving virtual dollars unregulated? What are the potential consequences of letting private enterprise compete with the Treasury for the right to produce money? Do we need to start worrying about digital counterfeiting? Or more importantly, do we need to worry about a digital currency provider going out of business and taking consumers down with them (a worry we don’t have with the U.S. Treasury)?
This is a huge issue that the government has largely overlooked to date. Hornblass recommends the U.S. government taking ownership of digital currency, but maybe there is another approach. How do you balance the risks of privatized currency against the rewards of ecommerce and the innovation that goes along with it?