(3 min. read)
Yesterdays post dealt with MintChip, the new Canadian digital currency based on a secure element on a chip to make payments. The novelty of this scheme is that payer and payee can exchange real currency electronically between them without the involvement of financial 3rd parties (e.g. banks, cards processors). As a consequence these exchanges can be done for free. Nice, but this seems trivial at first glance. I called it a fundamental shift though. Let me explain.
MintChip’s topology places itself somewhere between a traditional card scheme where every single transaction has to be passed via 3rd (financial) parties to get from payer to payee and bitcoin’s (BTC) where these 3rd parties are not involved at all. (NB I am not saying that there are no 3th parties in the bitcoin ecosystem, but these are involved when wanted, not because you have too).
In MintChip the electronic „coins” can be exchanged, i.e. being transferred to the traditional financial infrastructure, via brokers. The guaranteed exchange of the digital „coins” in MintChip into real Canadian dollars assures the status of the MintChip currency. Until then every party can exchange and store these „coins” between them at will directly without being charged or tariffed. In this sense it resembles the use of tangible coins and bills.
When paying with coins and bills the money is exchanged between payer and payee directly. No other party involved, no transaction cost involved. (NB keeping money, deferring interest, risk of loss and cost to change into/from bank account are cost to the actors, but not directly related to the over the counter exchange.) If we pay with an electronic payment type the technical provisions are involving payments providers and banks who will charge for the provisioning of the transfer.
The choice is up to the buyer and the merchant what route they prefer. Both routes, cash and electronic transfers, have costs and benefits which are dependent on party, preferences and situations. In many real world situations both have their „raison d’être” at the same time: you can pay cash or with a card in many a situation. Until recently physical money and the networked electronic world were separated. While cash and electronic payments could be both used in the physical world, on the net only electronic payment types were viable.
When setting up electronic payments over the years banks and card scheme’s have organized it – technically and contractually – in such a way that every payment has to pass their gates. This is a reality that is hardly questioned let alone challenged. It is taken totally for granted. But the institutions have crafted an exclusive role for themselves with the exclusion of others in the exchange and processing of every single electronic payment.
But why should there always be a third party involved in an electronic value/money exchange in the first place? Bitcoin and now MintChip show that value/money/currency can be directly exchanged electronically between actors at will without the involvement of others.
In a networked (global) society where potentially every actor can reach and interact with every other actor money exchanges that can be done without the involvement of others will be more efficient. It liberates the networked society from the technical and commercial tie-in with the financial network.
PS On micro payments: if there would be no 3th party involvement – hence no cost incurred by a third party, and NO transaction fees levied – what would be the constrains for micro payments again?