Retail and payment intermediaries

In recent months there have been multiple instances where a major retailer has had their data infrastructure breached. This has resulted in millions of customer’s credit card information being compromised and stolen by some variety of criminal organization. It’s likely that the organization used skilled computer experts to hack into the system in some fashion. I also would not be surprised if some type of social engineering was used to ease their access to the data systems. Furthermore, if their Point of Sales devices were not fully secure that information could be gathered using a credit card that could also read information from the system.

This is the problem that applications like Google Wallet and Paypal are trying to solve. They are trying to position themselves as an intermediary between the customer and the retailer to protect the consumer and provide a common transaction method for many platforms including in person point of sales. I think the fact that I’m just now thinking about this has really shown that companies like Google and Starbucks have failed at showing where the true value in their product is.

I didn’t come to this conclusion without help though. Truthfully, it’s because of PalPal ads that I’ve been seeing on Huluplus. This ad walks through how unsafe we are using our credit cards with online retailers and that they protect your creditcard and bank account information from ever being seen by the retailer. Which, is a really powerful argument to use their services. Of course, that’s if you trust PayPal as an organization.

Personally, I’m concerned about using PayPal as they’ve had their own networks hacked with some account information stolen. They aren’t perfect, and honestly it’s likely going to be impossible to maintain and prevent any data breaches, but a company like PayPal should have that as their goal.

With that in mind, it’s kind of helped me think of the true value of both cash and a BitCoin like solution. At this point, it’s pretty clear that BitCoin has been compromised at least on some level. It’s not truly anonymous any more. Cash is still though. It’s the best way to buy anything from a store. It also reduces the rate that you spend your money compared to buying everything with a card. As you actually see the money disappear. Although, some times it doesn’t feel that way, especially when you’re out drinking at a bar.

I’m not sure I truly trust any of the large companies that offer these intermediary services. PayPal, Google, Apple, Samsung, Starbucks, and etc… all have their own version and all of these companies make money by locking you into their services. Google, Apple, and Samsung have the most incentive and potentially access, as they are selling you the only other thing you’ll have with you besides your cards, your phone. Locking you into not just their device but payment methodology is powerful. Not because it keeps you on their network, but also because it provides them with a huge amount of information about the rest of your life. Google likely will already have a lot of it based on your search history, but they don’t know what you’re actually buying. At this point they don’t have the full data to connect search results to purchases. Using Google Wallet closed that gap and provides a really valuable set of data for their customers.

Intermediaries are going to be really important moving forward because they will help reduce customer risk. It’s going to be important to figure out how to balance the risk of not using an intermediary with using one and providing them with massive amounts of data as well as extremely personal data that if all your eggs in one basket could be devastating.

Bitcoin, what’s the point?

Digital currency is the biggest new thing on the market. It’s not a new idea at all, however the fact that someone was able to get it up and going is something new. The first time I’d heard of a cyrptocurrency and the potential impact it could have on the economy was in the Cyrptonomicon a 1999 book written by Neal Stephenson, but the idea is clearly much older than that. In fact, Paypal likely was something of a precursor itself to cryptocurrency. It filled a whole for money transferring on the internet, which was difficult in many cases. Paypal and eBay co-evolved as Paypal became the default transaction tool on the site – otherwise every seller would have needed to be able to accept credit cards. Paypal offered a safe way to transfer money directly from one account to another without messing with banks or credit card companies.

After the crash in 2007 and Paypal and other services refusing to transfer funds to Wikileaks people felt it was important to have another option. Fortunately, for those folks Bitcoin was already on the market, having been created in 2009. Bitcoin is essentially a digital version of gold in that users of the currency mine the coins and there is a set limit of 21 million Bitcoins. This has lead to a massive explosion in both awareness and usage of the currency. Currently, many locations accept Bitcoin as a currency so you can buy stuff with it.

Yesterday, Paul Krugman, wrote an op-ed arguing that Bitcoin, like gold, is a foolish standard to adhere too. Essentially, we mine gold and then bury it in a safe and never use it. According to Krugman, Keynes argued that the government should bury printed money and then let private enterprise mine the money – as it’s more desirable to allow private enterprise to spend money rather than government. However, in times where demand is low there’s no incentive for private enterprise to spend that money, unless they can spend it to pull it out of the ground. He then goes to argue that we’re essentially doing the same thing with a Bitcoin mine in Iceland.

This got me thinking a little bit last night. I’m not really sold on Bitcoin, I think that if anything it really points out that the only value in any thing is what people assign to it. Either paper currency, digital, or “precious” metals. Diamonds are artificially high in price because of a cartel. For instance, you can buy a set of lab created diamond earrings weighing in total 2.5 carats for $482 (12/24/2013) but if you were to buy two 1.25 carat diamonds to make those earrings it would put you back over $30,000. There’s a lot of diamonds out there and it’s impossible to tell the difference between lab created and those pulled out of the ground. Yet we put more “value” on the “real” diamonds from the ground. There is nothing intrinsically valuable about diamonds or gold. What both of them are though, are standards for trade, similar to the dollar and Bitcoin.

There is one cyrptocurrency that does have a more altruistic motive though. That one is called Primecoin and it’s encryption algorithm is based upon prime numbers. As the number of Primecoins increase in the market the number of prime numbers eventually discovered will increase. However, this was is mined differently from the other cryptocurrencies so it’s not as easy to switch to this cyrptocurrency. This coin does have an underlying value as every new prime number discovered typically has some sort of prize associated with it as it provides value to the mathematical and scientific communities. What they do with it from there is anyone’s guess. However, it provides value completely disconnected to it’s “value” in the market place.

Could we develop a cryptocurrency that instead of requiring increasingly complex solutions to an encryption key, but one that solves difficult problems at the same time? There are a large number of places where this would be useful such as SETI, (folding proteins for science), and researching molecules for big Pharma. I’m sure there are many more options. However, then we take Bitcoin a digital gold and convert it into something more useful to everyone than Primecoin and potentially solve problems as well as mine usable moneys.

Edit: Originally said 40 Million Bitcoins, actually 21 Million