What is “digital money”? Or what is money in the digital age?

(4 min. read)

FinExtra today covers the introduction of the MintChip in Canada: “Royal Canadian Mint demos digital currency.”

Questions arise:

  • why are we talking currency here?
  • what is “digital currency”?
  • where does the money/value reside?
  • what does the “money” in the wallet constitutes off?
  • can the wallet be regarded as a personal account maybe? (i.e. as opposite from a bank account)
  • where does this scheme deviate from other chip based solutions (e.g. e-purse, EMV debit and credit cards, NFC secure element based…)
  • what is the network topology used?
  • can it be used in a scale free network allowing for p2p transactions anywhere?
  • how does this relate to crypto currency, or the national fiat currency for that matter?

In the comments to the Finextra MintChip article Andrew Rothwell from Tyro Payments asks:

In Canada you have a super low cost national debit card network: Interac, which receives 1c for each transaction (from acquirer and issuer); and there is no interchange payable (at least for the next couple of years – government mandate).

And there is an increasing number of low cost card accepting terminals out there too…which are very often integrated into the merchant’s point of sale.

So what is the need for a digital currency, when your loonies are already stored, accepted and processed digitally, at low cost?

Considering the above I don’t understand the value of a digital currency for use in-store…

Whether a new money/payment type like MintChip will be successful depends on many aspects and coincidences. In general the penetration rate of new payment types is very slow. In a practical sense and in relation to existing efficient infrastructures the question posed by Andrew is a valid one.

To me the MintChip’s main contribution is a change of network topology and where the “money” resides. It combines money (the value) and the payment (the logistics). This could mean a fundamental shift as supposed to traditional chip based payment methodologies (which only covers the payment hence the logistics).

Lets consider a regular debit card scheme where the debit card EMV chip is used for authentication of the payer and transaction but where the “money” and the exchange of it between payer and payee resides within the confines of the bank or between banks. One could argue that in the debit card transaction no money is exchanged at all only IOU’s from the bank to the payee. The combination of the money and the logistics in the MintChip scheme asks for a dedicated network layer on top of and as a part of the networked society. It, the money, can not get out of this dedicated layer and the secure elements it is based on. This is where it fundamentally differs from a true crypto currency.

Schermafbeelding 2013-04-26 om 13.15.05Recently I was asked how “micro payments” could be created for online (and offline) use in a way it is cost efficient in relation to the value of the amount exchanged from the perspective of a bank. I intuitively fired back with a conceptual “high over” idea. Instantly and instinctually I knew I was on to something even though at that moment it was not much more then a notion at most.

After leaving the meeting I asked myself whether my very rough ideas could actually work and how it should be detailed to be at least conceptually proven. Secondly I realized that the persons I was talking too did not resonate to the idea and I was wondering why. To the credit of my counterparts I only expressed a few buzz words without much explanation in a specific setting referring to subjects discussed earlier in the meeting separately.

After giving it some thought I realized that I have been shaping my ideas on many aspects of “money” and “payments” in the digital age for a long time. Several parts of it have been covered here at Red Planet Dust and are summarized in “Bitcoin’s Legacy and the Crypto-currency promise”. (NB download PDF; it is optimized for tablet reading, just open it in your e-book app!)

These insights and especially how the various topics interact need pondering and internalization. I started realizing that I implicitly referred to my notions on “money” and “payments” which my counterparts did not share yet. From a blogpost here at RPD I quote:

Strategy is about understanding the terminology used and sharing (internalizing!) the same notions.

To innovate in money and payments in the digital age one has to shed the analogies and notions of times past.I do not believe we should build a (dedicated/propriatory) secure element based currency/payment method. The idea to have (digital) money outside of the bank walled gardens, like you can with regular coins and bills is very tempting though.

I re-quote Craig Mod from yesterdays post:

Those invested in the old will rightfully take issue with the new. Because anyone who loves and has invested in a way of doing something will not — and should not — give it up without good cause. But that doesn’t mean the changes aren’t real.

The value of discomfort in the march forward: …. discomfort is where potential lives. Potential rarely rests on a chaise lounge by the beach. Potential almost never lives in the systems cradled by the incumbents. In fact, discomfort and change go hand-in-hand.