Understand the importance and drawbacks of our current payment infrastructure


For the avid believer, Bitcoin is a rival to fiat currencies. But ironically, the second most popular application of blockchain technology beyond Bitcoin is the US dollar. There is currently $150 billion of the world’s reserve currency on platforms such as Ethereum and monthly volumes exceed those of PayPal. To see the appeal, it helps to consider both the pros and cons of our current payment infrastructure.

Payments are the most important activity that no one ever thinks about. Virtually all types of economic interactions require payment, whether it’s earning a salary, buying groceries, or trading stocks. A payment is what Abraham had to do to buy a burial plot for his wife, what Jesus asked his disciples to do when taxes were due, and what too many borrowers couldn’t do during the crisis. financial year of 2008.

Most of the convenience improvements that have defined the evolution of money through the ages have revolved around the ease of making a payment, sometimes at the expense of the overall trust framework. There is a natural tension between the scarcity of money and the ease with which it can be poured out to someone else. Giant stones, like those used on the Micronesian island of Yap until the last century, were quite rare, but so difficult to transfer that some stones were never moved, even after being used in a payment. Gold coins were also unruly as gold is a heavy metal. Paper is much easier to circulate, but also easier to devalue. Accounting entries are even easier, on both counts.

The simplest types of payment are made with token money. Transferring a coin or paper note is free, instant and private: I give you a $20 note and you consider yourself paid. There are no fees involved and no one but the two of us needs to know the transaction has taken place. But token money is cumbersome for large sums, expensive to transfer over long distances, and useless online. Ledger money is more convenient, at least for the types of transactions that increasingly matter, but require an intermediary. This important need for a third party is the opening salvo of the Bitcoin whitepaper, and the rest of the paper’s introduction is an exploration of the drawbacks of payments made through centralized ledgers – and notably not a critique of fiat currency.

The inconvenients

Payments passing through an intermediary are no longer irreversible as the intermediary may be called upon to arbitrate disputes – a fact that anyone who has ever disputed a credit card charge knows well. The intermediary is happy to provide this service but must be paid for it. To be effective, it must also be able to exclude the types of customers it does not want, which makes the system censorable.

The consequences of these additional costs and restrictions are profound, especially when measured globally. All other industries must now be designed around the availability (or lack thereof) of electronic payments. Impact is everywhere once you know what to look for. Petrol stations with different prices in cash or on credit. Cafes with minimums for card purchases. Restaurants with discounts for paying cash. Direct deposits that take days to arrive. Transfers that get lost in the opacity of the banking system. Unbanked workers who pay high fees to cash a check, and migrants who pay even more to send money home.

Perhaps even deeper are the things we can’t see and the industries that don’t exist. The lack of cheap, universally available micropayments is one of the reasons that much of the internet is consumed by surveillance capitalism or disappears behind paywalls. Content creators wouldn’t have to resort to scary ads or monthly fees if they could just charge for each article, or even each word. Alas, charging a few cents a word isn’t viable when every payment costs ten cents.

The Growing Electronic Payments Industry

On the other side of this growing economic divide is a growing electronic payments industry. A criticism of the original bitcoin article is the way the role of the middleman is portrayed as reluctant. Today we know the opposite is true. Example: Visa, the largest payments company in the world, is also one of the largest financial companies by market capitalization. It is more valuable than most banks, although it provides fewer services and has only a fraction of the employees. Owning a proprietary and popular payment platform is one of the most profitable businesses in the world.

These benefits are everyone’s expenses. If the current pace of digitization continues and liquidity dwindles further, payment spending will eventually become a de facto tax on every economic interaction. Imagine a world where a handful of companies can charge a fee for every paycheck, purchase, or trade. These companies will also be able to veto the types of economic activity they dislike, as PayPal once did when it threatened to evict bookstores that sold certain types of books, or various banks tried to do to OnlyFans if it continued to allow adult content. Then there’s the data collection angle. If you thought the surveillance capitalism of companies like Facebook and Twitter was scary, consider all the sensitive information credit card companies collect. Unlike social media platforms, payment providers know your real name and address.

As with any other type of centralized platform, the Unholy Trinity – the separation of user, operator, and owner in any network interaction – leads to poor results. Unlike platforms designed for social media or carpooling, payment platforms such as credit card networks or mobile payment solutions are increasingly essential, especially in the aftermath of a global pandemic that has transformed even the simplest economic interactions in remote interactions. Given the current pace of digitization, it’s only a matter of time before cash disappears from the economy, turning today’s centralized payment providers into our new economic overlords. Never has the economic vitality of so many led to the profit margins of so few. Fortunately, there is now a blockchain for this.

Extract of Rebuild trust: The Curse of History and the Crypto Cure for Money, Markets and Platforms.

Written by Omid Malekan.
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