Is a 'democratic' crowd based cryptocurrency just as fair as the traditional ones?

Having gone through my daily portion of Bitcoin-reads (and being somewhat sceptic), it struck me that one of the compelling arguments of collective currencies: 'money to the people' is highly flawed. It is the strong resentment against governments and financial institutions that makes many people believe that it would be good to take the power of money-creation out of governments' hands. But what would happen if we would indeed forget for a moment about the governments?

Crowd based currencies: exclusive and leading to private gains
As nice as it appears, these new currencies will then not be as evenly spread as the current ones in existence. There is quite bit of knowledge and expertise involved in obtaining, developing and working with new crowd-based currencies. So the 'democratic' nature of these currencies is not as democratic as we may think. The amount of people that may vote and can use cash is considerably wider than the amount of people able to use or make virtual currencies. 

We should realise ourselves that in essence, any currency, whether it is a government-owned or private in nature, leads to a certain distribution of value and wealth for the issuer and among the user base. And the question that is not being asked, at present, is whether the new crowd-based currencies will distort the distribution of value and wealth in society? Nor do we ask ourselves the question if we would prefer to be subject to the consequences of behaviour of (collective) private entities, manipulating a currency while we can't influence them, instead of a government structure (however flawed it may appear).

The redistribution of value that can occurs with these new currencies may look democratic, but that is a wolfe in sheep' s clothes. Effectively the new currencies are and will be the domain of private individuals trying to seek private gain rather than anything else. And there is no guarantee whatsoever that this constellation will have the interests at heart of all people in society. It will be Darwins' survival of the fittest all over again, which will exclude certain groups of citizens from participating fully in society. As democratic as a crowdbased currency looks: you will still be a puppet but on a different string, with unknown gains being made by unknown players in the value chain of this collective currency.

Currencies should be as fair as possible
Thus, the claim that crowd-based exchange mechanisms or digital currencies are more democratic than the existing ones must be strongly rejected. They are not and they lead to a very uneven an undemocratic redistribution of value in society. The central question in this debate should be which institutional design prevents the most harm from being done. 

Despite all the existing flaws that may be present in our governments or current monetary situation, the truly democratic currencies and those that may do the least harm are those operated by the governments that we can vote in or out.

The art of Reserve Banking (at the Zuidas Amsterdam)

Reserve Banking is an art. While Draghi and Bernanke are highly qualified and professional economists, they must also master the art of performance. As true actors, they use their voice, their remarks, eyebrows and somewhat vague statements to provide hints and indications that the market then swiftly responds to. It is something you can't learn from the books. It's an art that can only be mastered in practice.

Since this year, the Zuid-As in Amsterdam is also home to the art of reserve banking. But it's a bit different. I heard about it yesterday, when visiting the Holland Financial Centre. From high up in the nearby Symphony building I looked down onto a small rectangular area of the Art Reserve Bank, well fenced, with cameras and three small office buildings. One is the minting press, the other is the teller and the third one was hard to identify. It looked like this:

The Art Reserve Bank: an experiment
What happens there is a unique experiment. A group of artists have set up, without any monetary funding, a so-called Art Reserve Bank. The plan was there for some time, but as the financial crisis came along, it became easier to convince sponsors to join a project that questions the value basis of money. The main idea is that there is far too much money circulating in the world and that the crisis demonstrates that we need a new approach towards money and debt. And in the experiment, art (or: the intrinsic value of human artistic expression) becomes the money. And thus helps to freshen up or minds and stimulate us to re-think our concept of money.

The idea is that for a period of five years, each month 400 coins are minted. These are 4 series of 100 coins per week, costing 100 euro each. For each month: a different artist is asked to design the coins, which all bear the same backside with the motto: ARS PECUNIA MAGISTRA: Art is the teacher of money. A nice motto and also a tongue-in-cheek reference to the Amsterdam Zoo that bears the motto: Natura Artis Magistra (Nature is the teacher of Art).




Anyone can buy coins and thus becomes a member of the Cooperative Art Reserve Bank (Kunstreservebank). All holders of the coin are thus the collective owner of the bank. Of the 100 euro costs, 90 % is used to pay for the operational cost of the experiment and 10 % is withheld as a 'cash reserve'. Should a buyer not appreciate his/her work of art, he can return it to the bank and get the original value back with a 10% interest fee. There is also a dealing room on the site of the bank, for those who wish to buy or sell their coinst. And at the end of the five years, all owners of coins can collectively decide what will happen with accumulated capital (if there is any and if the bank stil exists).

Money, dreams and art
The experiment challenges one to consider: what is happening in our world of money and value?

For me, the Art Reserve Bank made me realize that there may now be so much difference between their coins and the official legal tender in circulation. Both coins are the product of our imagination, dreams and creativity. Which is quite clear for the Art Reserve Bank currency, but may be less clear for the euro. So let me try to explain.

What happened over decades is that we moved from a mentality of: save first, spend later, to a mechanism of: spend first, repay later. If your story about the future would be probable enough (having a job, education etc) some bank would lend you money. And the same thing was true for businesses. Essentially this is a mechanism where tough choices are made. If you don't have the job or a solid story explaining how you can repay in the future, you don't get money. Which all sounds very realistic.

Fact is however, that with hindsight we can now see that banks, consumers and companies have on a large scale lived in dream worlds with expectations of future income, growth that were not realistic after all. Money was created, lent on the basis of these dreams and imagination. And part of that money is now in our pocket. And we also know that some of the debts are definetely not going to be repaid in the future.

So wouldn't it be fair to state that some of our euros are just as much the result of our imagination, as the Art Reserve Bank coins?

Fed issues rules to debit card interchange...

After a lot of thinking, the FED issued its rules for debit card interchange. Essentially they've outlined the borders beteen which the outcome in the market is acceptable. And it's a smart solution for a tricky debate, because at some point it looked as if the FED didn't really knew what they were up to.

An interesting element is that 3 party networks are excluded from the regulation (which is legally inevitable). And that a sort of competition appears to be forced upon the issuer. In any case, the markets reaction in terms of increasing share price was quite clear. Although it might also have been the short-squeeze in US treasuries that did the trick.

Interchange fees: do the FED know what they're up to...?

I've just read the FED's speech on interchange fees. Most striking, in my view, was the conclusion that this is a complex issue. Now, the FED are good thinkers, and if they say something is complex, it means that even they can't make something out of it. So if I read the text below with that in mind:
In light of the novelty and unusual complexity of the issues raised in this rulemaking effort, my colleagues and I are very interested in reviewing the full range of comments offered on our proposed rule and are reserving judgment on the terms of the final rule until we have the opportunity to benefit from these comments.

This just looks as if the FED are saying: Sorry, but even we don't know what to do here. So my guess would be that they go for an easy, less controversial solution. Because in the meantime, I noticed in the SEC filings that Visa and Mastercard are already preparing for a large legal battle (and have agreed how to share the burden between them). And from the above, I reckon the FED is not looking forward to more complexit or novelty.

US cops now heavy after e-gold; seize gold assets

Ian Griggs reports that US Cops now have come in for the gold at e-gold. See also my previous post on the indictment of the founders.

July FED Kansas conference on Consumer behaviour in payments

See this page and beyond.

Fed won' t set interchange fees

Nice article here at ATM Marketplace News:
The Federal Reserve said last week it won’t intervene in the growing market of card interchange fees, now as much as $30 billion a year.

A Fed official said the United States’ central bank should not get involved in the conflict going on between the two major card companies, Visa USA and MasterCard International, and the merchants.

...

Speaking at Washington, D.C.’s Credit Union National Association Payment Systems Conference last week, Weiner acknowledged that the Fed has been asked by various groups to referee the ongoing battle. But, he said, the Fed would only intervene if a crisis or other emergency arises.

Central bank director goes commercial...?

In a move which highly contrasts the good old central banker conduct, newly appointed DNB-director Klopper did not spend any time on regulatory or fundamental constitutional deliberations that we are so used from central bankers. Rather he gave this motivational (?) speech on 'Payment Innovation beyond SEPA'.

Do note the high frequency of the terms mobile (13) and contactless (9) in this speech. And do note as well that he seriously dislikes the product Chipknip (whereas his predecessors were keen to point out that Chipknip was by far the cheapest of all non-cash point of sale payments).

There is no mention of the need to make pricing of payments more transparent for costs in society to become as low as possible.... and no sign of the consideration that this means that essentially also cash should be priced rather than subsidized.

We may thus conclude that in this brave new (SEPA) world even central bankers are no longer central bankers. In this realm where the force of logic and analysis used to reign, the only concern now seems to be that the public will not like the conclusion of the analysis: direct pricing of payment instruments.

And if the above is a reflection of a general trend within central banks, it will not be the new payment instruments that will make central banks redundant in the far future (see Mervyn Kings prediction of some years ago). Rather this will be the result of annoyed politicians and citizens who are fed up with highly paid central bankers that acts as politicians while pretending to be central bankers.

Antitrust Activity in Card-Based Payment Systems: conference papers available

The papers and presentations from last week's NY Fed conference on "Antitrust Activity in Card-Based Payment Systems: Causes and Consequences" are now available online.

My personal favorite is a paper by Guerin-Calvert and Ordover, which contains goodies such as:
This accelerating focus on cost-based regulation of interchange fees is also quite perplexing in view of the common recognition among economists and policy makers that heavy-handed price regulation is rarely desirable and risks unintended consequences (such as suppression of incentives to invest and innovate, and shifting of cost burdens to consumers) that can distort markets.

This focus on direct ex ante price regulation as a policy instrument to address perceived inefficiencies in the marketplace is at odds with the broadly accepted principles that the standard antitrust enforcement “toolbox,” which has historically been used to address concerns about non-competitive pricing, barriers to entry, or other impediments to competitive functioning of the marketplace, provides a better approach than price regulation to achieving efficient functioning of markets (other than natural monopolies, perhaps) such as the credit card and debit card markets.

The trend toward direct regulatory intervention is thus questionable given the nascent stage of empirical work on estimates of benefits to merchants from debit and credit card networks, and the complex inter-relationships between network-level investments, card usage, and the delivery of such benefits. Indeed, much of the available literature and policy pronouncements define “benefits” to merchants too narrowly and thus tend to understate these by confining them to transactional gains, while omitting from the assessment the broader benefits provided by credit card and debit card networks.

But the other stuff is good stuff as well of course...

Datadump at ESCB: P&S news 22

Issue No 22 of Payments and Settlements News is a major linkdump which covers (1) payment and settlement systems oversight issues; and (2) financial stability issues; and which provides (3) links to payment statistics.

To balance all the central banking oriented stuff (claiming that oversight is required for financial stability... bla bla bla) I'd like to point the readers to these remarks made at the St. Louis Banking Conference by Professor George Kaufman:
I also come from the perspective that "systemic risk" in banking is not a threat and has not been a great danger in world history. It is a scare term, much like the use of the word "fire" in a crowded theater. Systemic risk is used shamelessly by regulators to justify their own actions, and by novelists and movie script writers to provide plots for horror stories. This is my bottom line, and if I had two hours I could go on and give you all the evidence.