Snippings

CBDC: A Solution in Search of a Problem?
Governor Christopher J. Waller

Christopher J. Waller took office as a member of the Board of Governors of the Federal Reserve System on December 18, 2020, to fill an unexpired term ending January 31, 2030.

Prior to his appointment at the Board, Dr. Waller served as executive vice president and director of research at the Federal Reserve Bank of St. Louis since 2009.

I remain skeptical that a Federal Reserve CBDC would solve any major problem confronting the U.S. payment system.

From Speech by Governor Waller on central bank digital currency – Federal Reserve Board.

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I agree with the general sentiment here, but I would phrase it in a slightly different way: that there is no “burning platform” for a retail central bank digital currency in the United States. Appropriately-regulated private sector “stablecoins” could be used to satisfy the demands of the decentralised finance (“defi”) sector for money that can be algorithmically-traded for cryptographic assets. But it is not obvious that the long-term goals such stablecoins would be congruent with wider public policy goals around money and payments.

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In 1985, Nobel Prize winning economist James Tobin (1985) presented the case for what he called ‘segregated’ or ‘earmarked’ deposit liabilities – ‘earmarked’ for a specific purpose. He argued that one of those deposit types could be equivalent to central bank liabilities. Today, liabilities in such a segregated account would be a form of CBDC.

From A Simpler CBDC – The FinReg Blog.

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The result is that it is all too easy for small groups of people with massive voting power, such as those who control vast amounts of hardware or money, to control such a system. Decentralised systems only work if you want an anonymous oligarchy.

From Web3: A terrible idea that is ignorant of history and technology | by Antsstyle | Jan, 2022 | Medium.

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In the relatively unexciting world of point-of-sale (POS) terminals, things are getting interesting. As more and more merchants, more and more SMEs, more and more micro enterprises move away from cash, so there is a growing demand for cheaper and more flexible technologies than the traditional hardware devices that you see at the Walmart checkout.

One particular trend, driven by the interlinked evolution of tap-and-go payment cards, contactless terminals and smartphones with contactless interfaces is toward software POS (SoftPOS) solutions. These are applications that enable mobile devices to accept contactless payments using the built-in antenna, with no need to connect an external “dongle” via USB or Bluetooth or whatever and the demand for such solutions is significant.

(Note that SoftPOS is often connected with PIN-on-glass, or PIN on COTS — commercial off-the-shelf devices — which is PIN entry on the touchscreen of an off-the-shelf commercial smartphone or tablet connected to a card reader. In the UK, the contactless payment limit is £100, so if the payment is for more than that, the consumer needs to enter a PIN or use something like Apple Pay with a CDCVM — customer device cardholder verification method — more on which later.)

Payment Cards & Mobile (PCM) ’s proprietary research identifies huge demand in this segment. Their Digital and Card Payment Yearbooks 2021-2022 show Europe’s POS estate grew by 8 percent last year and will grow by almost a third in the next five years. All of these new terminals will have contactless interfaces, but a great many of them with will be phones and tablets. According to Market Research Futures, the SoftPOS market will grow around a quarter per annum to reach $76 billion in 2025.

Frankly, these figures could be underestimates. Apple is about to transform the POS market for good. A couple of years ago they bought a small Canadian company called Mobeewave for $100m. Mobeewave made SoftPOS applications, and it was assumed that at some point in the future Apple would integrate this functionality. Today, they announced they will do so in the spring. Apple will provide the underlying APIs to allow apps to securely access the NFC hardware and other relevant iPhone technologies. A variety of providers will step up to use those APIs to deliver the service to merchants and consumers and Apple have already announced that Stripe will be the first payment platform to offer SoftPOS on iPhone to their business customers, including the Shopify POS app. Additional payment platforms and apps will follow later this year.

Swerve

Why do payments people see this as such a big deal? After all, there have been SoftPOS solutions on Android for a while (eg, Phos). Well, it’s because, as always, it’s not just because of Apple massive market share because Apple’s entry into the market validates the segment. Small businesses, micro enterprises, gig economy workers around the world are going to see this and start using their mobile phones to take card payments.

Apple Pay is pretty widely used (by eg, me) on the consumer side. Rather interestingly, Apple Pay use is much higher in the UK than it is in the US, which is presumably related to the general popularity of contactless payments in the UK, where more than 90% of all card payments are already contactless. There are half a billion Apple Pay users worldwide (half of all the iPhones out there, basically) and they are people with money to spend. Having said that, not all of them use it. US figures seem to show that only around one in twenty Apple Pay-enabled iPhone owners actually bother to use it in store.

But what if Apple succeeds in getting traction on the merchant side as well as the consumer side? The guy who fixed my Mac recently probably takes half a dozen payments per day and his iPhone is never far from his hand. Why not just tap my Apple Pay on his Apple Paid (or whatever they will call it) and whether the payment is for £1 or £1,000… that’s it. No need for dongles or PIN pads.

(Tapping phones together to pay isn’t new either. Anyone here remember Bump? Back in 2010, PayPal used the Bump API to allow PayPal app users to initiate transfers by physically colliding their phones. PayPal later dropped the functionality from its app and Bump — funded by Y Combinator, Sequoia Captial, Andreessen Horowitz and many others — went on to launch a standalone BumpPay app a decade ago.)

Next

Looking ahead, of course, it might be that Apple are playing contactless chess and are a few moves ahead. Right now, contactless payment run over the decades-old card rails to implement decades-old payments that were invented in a time when consumers, banks and merchants were not permanently connected. I might wave my Apple Pay, contactless card or payment ring over a terminal and feel like I’m living in the future, but deep down below there are ISO 8583 messages, clearing and settlement.

Extending this thought further, you have to wonder whether Apple will eventually just why not forget about the hello-1950s payment cards and hello-1970s terminals completely? As has been clear from the day of the Mobeewave purchase, if Apple have both the consumer and merchant side, they could in theory bypass traditional payment schemes and banking infrastructure, and process their own payments.

Now that’s where things get interesting. Remember, this is all about identity: when you know who the counterparties to transactions are, the rest of the payments industry is just some messing around with spreadsheets (or blockchains).

As Alastair Johnson wrote here in Forbes a couple of year ago,  merging payments and ID gives the industry a means to solve a number of significant problems in the payments sector as well as opening up the doors to a major new wave of innovation.

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Owning an NFT doesn’t confer any rights in the intellectual property underlying the thing owned, which anybody can download for themselves. Those who purchase NFTs end up with nothing but a digital record—the deed for a thing that can be copied at zero cost, with zero repercussions.

From The Sick, Refreshing Honesty of Web3 – The Atlantic.

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Because there’s no escaping creeps on the Internet, Meta (formerly known as Facebook) has launched a new “Personal Boundary” feature for its virtual reality platforms to combat harassment.

This Personal Boundary establishes an invisible barrier between avatars that spans almost four feet, Horizon Vice President Vivek Sharma explained in a blog post.

From Meta Brings ‘Personal Boundary’ to Horizon Worlds and Venues to Keep Creeps at Arm’s Length:

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Last month, the IRS said it would start requiring people logging into their accounts on the IRS website to use ID.me to verify their identities. The agency is considering alternative providers, but if the deal goes through, it would likely add millions to the company’s user base, which already exceeds 60 million members. The technology is now used for identity verification to access benefits in 27 states.

From Logging Into the IRS May Soon Require Sharing Way More Personal Data:

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The approximate daily volume of bitcoin that PayPal processed in January ranged from $7 million to $71 million, according to Coinglass, a cryptocurrency analytics platform. Assuming trading volume hovers around the midpoint of that range for the rest of the year, the value of annual bitcoin trading volume would be roughly $14.2 billion in 2022. PayPal earns a transaction fee of up to 2.3% on the value of cryptocurrency transactions, meaning it would take in approximately $327 million in bitcoin-related revenue this year at the high end of that fee range.

Based on the $29 billion in revenue analysts estimate the company will earn in 2022, according to S&P Global Market Intelligence, bitcoin-related revenue would account for just over 1% of revenue. 

That percentage may expand over time. Executives said Wednesday the company was shifting its strategy to focus less on growing the number of PayPal accounts, and more on encouraging existing customers to use the platform more. The booming trade in cryptocurrencies could certainly be part of that strategy. 

But for payments companies, cryptocurrencies simply aren’t that profitable. Block (formerly Square), for instance, attributed nearly 60% of its revenue to bitcoin transactions in the 12 months trailing September, but that segment accounted for just 5% of its gross profit. Shares of Block are down more than 30% this year, compared to the S&P 500, which sank 4%.  

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Cash is no longer king in the U.S., but will it ever go away?

From Cash is no longer king in the U.S., but will it ever go away? | American Banker:

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When Francois Reihani opened La La Land Kind Café in Dallas three years ago, he knew immediately that it would be cashless.

“The main reason was for sanitary purposes,” Reihani said. “I’m a bit of a germaphobe, and cash is a very dirty thing. I wanted to keep it away from where we prepare food and drinks.”

Fewer than two miles away at the edge of Dallas’ nightlife neighborhood of Deep Ellum, Sky Rocket Burger had a different reason for refusing cash earlier this year. The place had two break-ins when the register was taken both times.

A nearby pizza joint, Serious Pizza, a common late-night spot wedged into a string of bars, has also switched to cashless payments in part to move the line of club goers along at a quicker pace.

From Cash is no longer king in the U.S., but will it ever go away? | American Banker:

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