The monetary system is changing beyond recognition and America’s central bank, the Federal Reserve, is ignoring the paradigm shift in payment technologies. That might put America behind in financial technology; put our economy at risk for severe disruption, and make government far less efficient effective and efficient than it should be.
The long-predicted death of cash is already at hand in China, and beginning in America. Beggars in Putonghua, China, are using apps to collect the proceeds of their panhandling, The South China Morning Post reported. Waitresses in Shanghai no longer ask for cash or check instead they request Zhifubao (Alipay) and Weixin (WeChat Pay), China’s two most popular payment apps.
Nor is it just cash that’s dying, PayPal’s (NASDAQ: PYPL) CEO predicted that plastic payment cards will be history within 20 years. Dan Schulman forecast the death of plastic in a talk at The Street’s Investor Boot Camp on May 5, 2018.
Schulman believes digital-payment methods like apps will replace plastic cards. The recent experience in China where quick-read (QR) code apps are becoming the preferred payment method supports Schulman’s hypothesis.
A new payment system that will utilize neither paper cash nor plastic is being born before our eyes. What is truly frightening is that the Federal Reserve which is supposed to control our monetary system does not seem to care. It has failed to acknowledge the existence of payment apps which are a direct threat to paper money.
Is the Federal Reserve Shirking its Duty?
That runs counter to the Reserve Bank of India which set up an initiative called the United Payments Interface (UPI) and the National Payments Corporation of India to implement digital payments. The UPI works with all major banks and it is collaborating on Alphabet (NASDAQ: GOOG) on a payment called Google Tez.
That gives the Reserve Bank some control over the new payment technologies; something that the Federal Reserve has failed to even try to establish. The Fed’s mandate includes monitoring, and regulating the payment system, and preventing or at least alleviating dangerous monetary experimentation.
The Fed has surrender control of portions of the US payments infrastructure to private companies including Visa (NYSE: V), MasterCard (NYSE: MA), and PayPal. To make matters worse it now appears poised to surrender control to tech companies like Alphabet (NASDAQ: GOOGL) and Apple (NASDAQ: AAPL) by refusing to assert authority over Google Pay and Apple Pay.
This is potentially dangerous because it might give those the companies the ability to deliberately or accidentally expand or contract the money supply. That might lead to inflation or deflation, or create dangerous new classes of investments that might be as destructive as the securities and derivatives that triggered the 2007 to 2008 financial meltdown.
The Fed is Clueless about Cryptocurrency
If that was not bad enough, the Federal Reserve seems to be clueless about cryptocurrency. Cryptocurrency is a financial technology that has the potential to be every bit as disruptive and destructive as paper money and credit cards. Yet important fed officials are treating altcoins like a joke.
Federal Reserve Bank of Minneapolis President Neel Kashkari compared cryptocurrency to Beanie Babies in December 2017, Bloomberg reported. Atlanta Fed President Raphael Bostic was a little wiser he admitted cryptocurrency was dangerous and speculative but claimed it was not money on 27 March 2018.
The problem with Bostic’s claim is that cryptocurrency is money. Any instrument that people use like cash is money, and the creation of vast amounts of it can have the same effect on the economy as printing vast amounts of cash.
Contrary to popular belief, money can be created without a government mandate. Any medium of exchange that citizens accept can function as money and create all the problems that money can such as inflation.
The Fed is ignoring the Cryptocurrency Menace
Cryptocurrency is extremely dangerous because anybody with sufficient computer power who is willing to run up an exorbitant electric bill can create or “mine” vast amounts of it.
A cryptocurrency is a piece of software that functions like money; it is created by running complex mathematical formulas on computers, including many of the PCs found in our homes. It is possible to mine cryptocurrency with rigs built from old X Boxes, and parts bought at Blockbuster (NYSE: BB).
The Fed would never allow private citizens; or residents of foreign countries, to print vast amounts of paper cash in their basements and flood America with it. If somebody was counterfeiting hundreds of millions of dollars, the Fed’s governors would be demanding the President deploy the military to stop it. Yet, that is exactly what is happening with cryptocurrency and nothing is being done.
There is a very good reason why the People’s Bank of China (PBOC) has shut down cryptocurrency exchanges and limited the creation of new altcoins through initial cryptocurrency offerings (ICOs) in that nation. The PBOC’s governors understand how dangerous cryptocurrency can be.
Likewise, the Reserve Bank of India has blocked cryptocurrency businesses access to bank accounts. India’s central bankers like their brethren in China, understand the cryptocurrency menace and are trying to deal with it.
Cryptocurrency is not an obnoxious toy; it is a dangerous new technology that poses a dire threat to the financial system we all rely upon. Yet the Fed refuses to take any notice of it, just as the organization ignored mortgage-backed securities at the turn of the 20th Century.
The Fed must take sort of control of cryptocurrency either by banning or restricting it or by issuing its own cryptocurrency. Ignoring the problem and hoping it goes away will only make things worse. Investment bankers and hedge fund managers; the same geniuses who engineered financial crisis of 2007 are beginning to play around with cryptocurrency and the Fed seems to be doing nothing.
The Federal Reserve needs its Own Cryptocurrency
An obvious solution would be for the Fed to issue its own digital currency – which would give it control of the cryptocurrency markets.
That’s exactly what former Fed Governor Kevin Warsh wants the Federal Reserve to do. Warsh wants the Federal Reserve System to create what he calls “Fed Coin” which would facilitate payments between banks, The New York Times reported.
That would give the Fed control of the cryptocurrency markets; because FedCoin would be the most popular, most widely used, and most lucrative altcoin. Most investors would use FedCoin, giving the Fed the leverage to set the value and control the supply of altcoins. Many banks and business would use Fed Coin as a money transfer mechanism which would generate vast amounts of profit for the Fed.
“Not that it would supplant and replace cash but it would be a pretty effective way when the next crisis happens for us to maybe conduct monetary policy,” Warsh told The Times. Not surprisingly Warsh; who served as a Fed governor from 2006 to 2011, was passed over for the top job of Fed Chairman by President Donald J. Trump (R-New York) last year.
“Congress gave the Fed a monopoly over money,” Warsh said. “And if the next generation of cryptocurrencies look more like money and less like gold; and have less volatility associated with them so they would be not just a speculative asset but could be a reliable unit of accounting, as a purely defensive matter I wouldn’t want somebody to take that monopoly from me.”
Warsh’s demand might be far too late the Fed has dropped the ball on cryptocurrency and allowed India and China to take the lead on the issue. The People’s Bank has been researching cryptocurrency for years; it even has its own R&D organization for the technology; the Hangzhou or Zhongchao Blockchain Research Institute.
The Federal Reserve’s cryptocurrency response has consisted of snide remarks to reporters about altcoins. The Fed needs to respond to cryptocurrency with aggressive enforcement and extensive research.
America’s Broken Payment System
Disturbingly, cryptocurrency is only the latest example of the Fed’s dereliction of duty. An even greater national embarrassment is America’s outdated, slow, highly-vulnerable, confusing and clunky payments processing system.
I witnessed a perfect example of this the other day at my local grocery store. When I walked in the regular payment system was down. A few years ago that would have been a major inconvenience because I was not carrying any cash. Instead, my transaction got processed faster because the backup system; something like Square and a Tablet computer worked better than the regular payment interface on the cash register.
My transaction went smoothly, but if I had been a poor person that relied on Colorado’s archaic benefit infrastructure I would have been out of luck. The supermarket was unable to process electronic benefit transfer (EFT) payments which meant it was not taking food stamps and WIC (welfare). Those cards only work through the traditional payment infrastructure which had crashed.
A person who relied on those systems; such as a single mother, would have had to drive 30 miles to find another grocer or go begging to the food bank to feed her family. Nor is welfare, the only government payments interface that lacks basic connectivity. Individuals have to pay a $3 fee to use a credit to pay taxes to the Internal Revenue Services (IRS), yet neither my auto-insurance company nor my wireless provider charges such a fee for the same service.
Equally troublesome are the Medicare and Medicaid systems which can take months to pay healthcare providers. A big reason why many doctors have stopped taking those insurance products is that it can take several months to get paid for the services covered by them.
The answer to this dilemma is obvious America needs a uniform national payment solution like India’s UPI. Such a solution would provide seamless connectivity for all government payments and benefits and ensure a higher level of security.
An obvious use for such would be to create an app similar to Apple Pay that would give all Americans instant access to government payments; such as Social Security, Social Security Disability, Unemployment Insurance, tax credits, tax refunds, Medicare and Medicaid payments to healthcare providers, and Veterans pensions. Individuals would be able to make direct payments with that money without a bank account using the app.
The obvious organization to create and enforce a standard for payments is the Fed. The obvious organization to build a national payment app is also the Fed.
Is the Fed Allowing Google and Apple to offer Unsecured Payment Apps?
Most big retailers such as Walmart, refuse to take near-field communications (NFC) payment solutions like Apple Pay and Google Pay. Retailers are leery of NFC because it uses a wireless signal to communicate with cash registers, which creates a massive vulnerability to hacking.
The Fed can rectify that by mandating that Apple and Google add the more secure QR (quick-read) code connectivity to their apps. Alphabet has already done that in India with its Google Tez; as I noted above. QR code offers far more security because it uses a phone’s camera to scan a barcode to gain access to a payment system.
That is more secure because the barcode changes instantly and can be updated to deal with new security threats. It would make payment apps more handy for average people, Walmart (NYSE: WMT); offers its own QR code solution Walmart Pay but says no to Apple Pay and other NFC solutions.
Another security feature the Fed can mandate would be to require blockchain-type encryption on all payment apps. At a bare minimum, the Fed could at least audit the payment apps for security, and block any that did not meet a basic security standard from the banking system. Apple and Alphabet’s “trust us we know what we’re doing attitude” to security is not good enough.
What will take to force the Fed to crack down on payment apps? The theft of hundreds of millions of dollars from average Americans through a security breach in Apple or Google Pay?
What the Federal Reserve needs to do
New leadership at the Fed is needed now. We need Federal Reserve presidents; and a chairman, that understand new technologies and appreciate their disruptive potential.
A national payments interface and a national cryptocurrency are needed in the United States. The payments interface should be North America wide; news reports indicate that Canada’s payments system is worse than America’s streetcars in Toronto do not take payment apps that beggars accept in China. Collaborating with the Bank of Canada and the Banco de Mexico on a uniform payment system for North America is a vital duty for the Fed.
An obvious step would be to set up a finance-industry equivalent of the Defense Advanced Research Projects Agency (DARPA). DARPA has been highly successful in creating communications and other technologies for the Pentagon, its past successes include a little thing called the internet – perhaps you have heard of that system and the millions of jobs it has created.
Such an entity perhaps called the Financial Technology Research Agency (FTRA) or Institute would conduct research into new financial technologies. It would fund private and university research and development in Fintech. An obvious project for FTRA would be to develop and deploy a national payment app. Another would be to create and deploy Fedcoin.
Americans need to wake up to the fact that the Federal Reserve System is not doing its job. We need a Federal Reserve dedicated to securing, protecting, and modernizing our monetary system. If the present neglect continues; our economy and monetary system are in grave danger of failure and obsolescence, and America will find itself totally dependent on other nations’ financial technologies.