Big payment companies are facing revolutionary pressures from the development of a new money.
Cryptocurrency, which has been called a Ponzi scheme by critics, is officially attracting the attention of a mainstream credit card company.
Big Card Association Joins the Party
Mastercard, one of the big players looking at this new money, is starting a cryptocurrency team.
“Do you have the desire to work at the cutting-edge intersection of payments and cryptocurrencies,” MasterCard asks. Those hired will “monitor crypto currency ecosystem trends” and “develop new products and solutions.”
Mastercard is doing this because “it wants to be known as more than a card company; it wants to be a technology company,” says Ted Rossman, an analyst with CreditCards.com.
Another card expert called it “a smart move.”
Bill Hardekopf, CEO of LowCards.com, says Mastercard “sees there’s a lot of activity in this area. Even if it isn’t going to offer its own cryptocurrency, they know it’s important to have people who understand the subject.”
Others Already Playing the Money Game
Many big companies are already involved.
Mastercard is part of the Libra Association, which includes Pay Pal, Visa and other big players. Libra intends to create “a globally, digitally native, reserve-backed crypto currency built on the foundation of blockchain technology.”
A Mastercard official said the company seeks new ways to create value.
“Looking at blockchains and cryptocurrencies is part of these activities,” said senior vice president Seth Eisen.
What is a cryptocurrency and why is it becoming a factor?
It is a digital money. Born about a decade ago, cryptocurrency supporters say it is a digital asset that is a medium of exchange, the same as euros or dollars.
Cryptography is used to complete financial transactions, control the creation of new units and verify trades.
Becoming More Popular
There were between 2.9 million and 5.8 million users of a cryptocurrency wallet in 2017, according to a Cambridge University study. Most used bitcoin. Four years before that there were between 300,000 and 1.3 million users.
Today there are hundreds of cryptocurrencies. Bitcoin is the biggest.
But these currencies’ value is volatile. Some investors make millions. Others lose big.
Economist Paul Krugman compares them to a “Tulip Mania.” Regulators criticize transaction costs and warn cryptocurrencies are highly vulnerable to fraud.
Some countries ban them. Others embrace them or acknowledge them and tax them. In 2014 the IRS ruled bitcoin will be treated as property, subject to capital gains taxes.
Central Banks Pushed Out
Cryptocurrencies are decentralized because there is no intermediary; transactions are party to party through electronic addresses without central banks.
In fact, they are a vote of no confidence by central banks critics. They see central banks as consistently devaluing money through currencies that aren’t backed by anything or what critics call “fiat money.”
One of the pioneers of cryptocurrency, Satoshi Nakamoto, wrote in a white paper that, “The root problem with conventional currencies is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”
A Cryptocurrency Pioneer
Another link to the development of cryptocurrencies was the economist F.A. Hayek’s 1976 book “Denationalisation of Money.”
Hayek argued the “government monopoly of money must be abolished to stop the recurring bouts of acute inflation and deflation.”
Cryptocurrencies work through distributed ledger technology, a blockchain.
“Mastercard,” says Panda Analytics CEO Bill Xing, is “trying to build a crypto wallet solution, possibly an alternative to Facebook’s Calibra cryptocurrency, which is supposed to begin next year. It is preparing for the situation when crypto (peer-to-peer transaction) is adopted as the mainstream payment solution.”
Direct Transactions without Intermediaries
Peer to peer means that the middleman in today’s traditional transaction could disappear if cryptocurrencies revolutionize money.
As in any revolution, today’s top dogs have the most to lose.
“In theory,” Xing says, “if these payment companies don’t study new technology around bitcoin or explore new business models, they could be out of business in the next decade.”
Central Banks in Danger
So, a revolutionary money is developing. Some governments may want to stop it for an obvious reason—governments love monopolies. They love legal ones such as legal tender laws that make their monies required.
This is the same kind of thinking the government monopoly post office in which they can make it a crime to compete even when the would be competitor can do a better job (By the way, here in New York, where we have the egregious state run New York City subways, all major pols agree that the state system, no matter how bad it is as millions of subway riders will attest, must be continued and no privatization allowed. That’s even though the earliest period of the subway, when they were considered “an engineering marvel,” was one that included private transportation companies. They were later driven into bankruptcy by government price controls. The subway fares, under private companies, were never allowed to raise above a nickel, something that changed fast once the government took over).
More Money Screw-ups
Why alternative currencies? History.
There is a sad story of government central banks and monetary disasters. For example, no monetary historian disagrees that the Federal Reserve’s disastrous monetary policies after the crash of October 1929 drove the country and much of the West into a prolonged depression.
And most monetary historians agree that the explosion of the money supply just before the election of 1972, designed by Fed chairman and President Nixon appointee Arthur Burns to help bolster Nixon’s re-election, created a Potemkin village effect. The economy grew in the short term, then blew up creating the stagflation of the 1970s that ruined millions of lives. Easy money led to growth along with high inflation rates. That was something that Keynesian economists, backed by the Philips curve, had previously said was never supposed to happen.
So it is logical that many want to take away the money making monopoly away from central banks. Their records of frequent recessions and sometimes depressions, inevitably seems to lead to a boom and bust cycle. Those governments that want to ban these new money developments may be fighting those who have come up with a better mouse trap. Canute like, the central bankers and their political allies may be trying to stop an inevitable wave.
