When the Missing Link is the Missing Link, aka: Using Digital Assets At The Bar When There Are No Bars
By Eric E. Cohen, CPA
There is a community that believes Bitcoin (and/or any of the other cryptocurrencies and tokens out there) will replace “fiat” currency (including coins and bills) as we know it. Indeed, there are more than 50 listings at CoinGecko.com with market shares in excess of $1B US; the top dozen account for more than 80% of the current $1.04 Trillion market cap. Enthusiasts hope for 100x increases in value, pointing to the crazy increases many of the top cryptos went through in the past.
The recent International Telecommunication Union (ITU) conference, “DC³ Conference – From Cryptocurrencies to Central Bank Digital Currencies” featured many important issues necessary to facilitate the adoption of digital currencies and CDBC's, as well as talk about the possible constraints and bottlenecks, including security, scalability, and my topic for this blog entry: offline payments.
Most of today’s (or yesterday’s, depending on your perspective) common payment methods can be used in a pinch with no technology at the point of sale. There are risks to be assumed, of course, but cash, checks (cheques) and credit cards can be used when batteries have run down, the power is out and there is no phone or Internet. Checks and credit card can be used over the Internet as well. Can the same be said for crypto and central bank digital currencies?
Focusing On Retail Payments to Begin
There are many wonderful treatises out there on the nature and evolution of “money” used for personal exchange. There is the whole system of barter. Precious metals and gems were used. I will not bore you on how payment went from pelts to pennies, but there you go.
Over time, paper promissory notes and financial intermediaries became more involved in the retail payment process. The first pre-printed checks and a system much like today’s can be traced to the 1700s. Diner’s Club in the 40s, BankAmericard in the 50s and the interbank Master Charge in the 60s are just a few points on the chronology of charge cards.
The following table compares some basic issues related to currency, checks and credit cards in use. In particular, it discusses offline and online issues, which will become important when we discuss crypto/CDBCs.
|
Currency and Coins |
Checks/Cheques |
Credit Card |
|
|
Can be used without a computer |
Absolutely – has nothing to do with technology |
Yes, but fakes and bounced checks can be a problem. Cashier’s checks and money orders are more reliable. The vendor can call the bank to verify there is sufficient balance, although double spending may still be a problem. |
Credit card information can be captured on paper and submitted later. In the past, batch processing was not unusual. The vendor can call the credit card company merchant support line to determine there is sufficient credit, although double spending may still be a problem. |
|
Can be used remotely |
No |
Yes, sharing routing/account information or sending a picture of the check. |
Easily … sometimes too easily. |
|
Risks to customer |
Potentially difficult to get a refund if there is a problem |
Providing banking information to a third party exposes that information for abuse. Any usage can be tracked through the financial institution. |
Providing credit card information to a third party exposes that information for abuse. Any usage can be tracked through the financial institution. |
|
Risks to vendor |
Few |
Insufficient balance, stopping check |
Insufficient credit, stop charges |
Bitcoin had as a design goal getting around some of the risks of existing payment methods. Removing a centralized financial institution helps with privacy issues. Cryptography and providing new addresses based on a new private key for each transaction limits the potential for privacy-related and other uses. The blockchain validation process was defined to minimize the double-spending problem. Although later options arose that compromise the goal, vendors would not have to worry about the customer reversing the payment.
However, for this to work efficiently, the systems must minimize any manual entry (automation) and allow for online checking (communication). Although some groups are looking at scrip-based payments or some other means of having a token that can be passed from one party to another, just about every currency today involves the vendor providing information on a cryptographic address for the customer to send their currency to. The vendor cannot receive information from the customer to follow up with online at a later time.
This leaves a series of open questions:
- How do you trigger the financial transfer?
- How can information between partners be shared securely and accurately?
- How can you verify available funds and validate transactions without being online or having a very recent shared offline ledger?
- How can you trust someone else’s wallet on their phone to tell the truth about available holdings or that amounts are queued to be sent?
- Can stored value (offline, token, scrip-based) work without requiring users to commit too much?
- Can any of this work when there are no bars (no signal) and no battery left?
- Can any of this work without tech?
You will find presentations on offline payments at the DC³ Conference. The presentations from the 2023 conference are available to stream at https://www.itu.int/en/ITU-T/Workshops-and-Sinars/2023/0124/Pages/programme.aspx, and those from the first, 2022, conference are available at https://www.itu.int/en/ITU-T/Workshops-and-Seminars/2022/0125/Pages/programme.aspx.
The missing link between online and offline use may be the missing link – a way where paper can help span the gap to keep tech in touch for all. That way, even if you have “no bars,” you can exchange those sports NFTs at the sport bar.
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