* The rise of electronic information technology had a profound impact on the technology of money. With information systems, the need for physical tokens such as coins or bills was no longer as necessary; the tokens could instead be represented in a secure digital form. Cash still persists in the 21st century, but it is becoming obvious it will not persist into the 22nd.
* From the middle of the 20th century, innovations in money technology have arisen that are gradually undermining the long-standing domination of cash over financial transaction. The first such innovation was the "charge card", which evolved roughly in parallel with the computer.
The first modern charge card was issued by Diner's Club in 1950, being created in part by a financier named Frank X. McNamara, who as the story has it was embarrassed when he came up short for a restaurant bill. The original Diner's Club card actually made of pasteboard, with plastic not introduced until 1955. The Diner's Club card was only really honored by a network of restaurants, making it a convenience for the wealthy so they didn't have to carry around large amounts of cash or fumble with checks.
The charge card, as was the case for many items that started out as toys for the rich, was gradually democratized. American Express, established mostly on its traveler's checks, introduced a more general charge card in 1958. Banks saw what was happening and followed, with the Bank of America introducing its "BankAmericard" in the same year. The 1958 introduction of the BankAmericard was accompanied by a first-mass mailing campaign to get charge cards into the hands of consumers.
Charge cards began to take off. Other banks formed an association with Bank of America to get on board the BankAmericard. In 1960, about a quarter of a million BankAmericards were in use; by 1968, the number exceeded one million. Other organizations were getting into the act, with one group forming the "InterBank" association. By 1970, Americans were sold on "plastic", and other nations were following.
There was just one difficulty: the charge card organizations were losing money hand over fist. The wild promotion of charge cards had given a surprising number of people the idea that they were magic bottomless sources of money, and at the time delinquencies on credit purchases were running at over 20%, ten times the modern rate. There was also the problem of charge card crime, which of course shadowed the charge card from the outset: thieves are very quick to exploit new opportunities.
There were more fundamental problems as well. Charge card transactions involved much the same sort of paperwork as traditional checks, which made the transactions expensive to handle. Another issue was the fact that charge cards were "balkanized", with many competing charge card organizations and no one charge card recognized everywhere. Big retailers such as Sears had their own charge cards and wouldn't take anybody else's plastic. Fans of credit cards usually kept a stack of them in their wallets in those days.
BACK_TO_TOP* The key to making charge cards easier to use was to automate them. Work towards that end began in the late 1960s, not merely being pushed by banks, but also by airlines -- new "jumbo jetliners" were coming on the market, and that presented the threat of customer service counters being swamped by large numbers of passengers. Both banks and airlines had a need to streamline processes.
For banks, that meant automated teller machines (ATMs), while airlines could obtain a kiosk to track reservations and provide boarding passes. The only problem was providing customers with an easy and secure way to identify themselves to the machinery: nobody wanted strangers to get into their bank accounts, but nobody wanted to use clumsy security codes either.
At the time, leading-edge computer technology translated in the public's mind to "IBM", and Big Blue's Advanced Systems Division took on the task, investigating schemes on how to make a card, with the same form-factor as a charge card, that could be read by a machine. All vendors would have to use the same scheme, both to prevent customer confusion and to ensure that IBM didn't have to manufacture multiple, incompatible reader systems.
IBM engineers were constrained in what they could do with a format the same size as a charge card, which had dimensions of 5.4 x 8.6 centimeters (2.1 x 3.4 inches). The front of the card would carry the vendor's logo, while the machine-readable section would share the back of the card with information about the vendor and card issuer, along with a signature panel. On consideration, the engineers concluded they could count on having a strip across the card that was about a centimeter (0.4 inches) wide.
So how to encode data on the strip? Bar codes? Paper tape? Don't laugh, Citibank tried paper tape on their short-lived "magic middle" cards. In hindsight, if not necessarily at the time, the answer was obvious: magnetic recording technology, which was advanced enough by that time to do the job. Magnetic recording could cram all the data needed onto the strip, including alphanumeric information, such as customer name and address, as well as numeric information, such as bank account and routing numbers.
The result was the "magstripe" or "magstrip" card. Development was not at all trivial; while the magnetic medium used on the card was iron oxide, plain old rust, figuring out a workable binder to fix the iron oxide to the card was troublesome. There were also many technical details to work out, for example the track format. IBM settled on three tracks -- the first for airlines, the second for banks, and the third for writeable data.
Appropriate readers had to be designed, as well as the protocol for performing financial transactions with a magstrip card. When a card was swiped through a reader at the point of sale, the card reader grabbed the card data, then networked to the bank handling the card. The bank in turn networked to the card provider -- VISA or whatever -- with the provider then either approving or disapproving the transaction, and the bank forwarding the response back to the point of sale. Even if the transaction was authorized, the card provider still ran checks for fraud to see if the transaction should be then canceled. Eventually, the background checks would become extremely sophisticated.
IBM didn't patent the machine-readable card scheme, instead giving the technology away to anyone who wanted it. The trick was that the machine-readable cards implied computer systems to handle with them, and IBM was then the vendor of choice for such systems. It would turn out a wise decision on IBM's part.
In January 1970, American Express issued 250,000 magstrip cards to its Chicago-area customers, and installed self-service ticketing kiosks at the American Airlines counter at Chicago O'Hare International Airport. Cardholders could opt to get their tickets and boarding passes from the kiosk, or from a human agent. They liked the kiosks. In fact, United Airlines customers walked to American Airlines -- at the other end of the terminal -- to use the kiosks.
Other big bankers jumped on board, including BankAmericard (now Visa) and InterBank (MasterCard). In 1979, giant retailer JC Penny began to accept the Visa card, pointing the way towards the "universal" charge card. By 1980, magstrip cards had dropped from their initial cost of a few dollars each to a nickel apiece. The 1980s led to the rationalization of charge cards, with the traditional "credit card", in which transactions were made on credit to be paid up at a bill date, complemented by the "debit card", in which transactions were made against a balance in a checking account, just as with a traditional check.
Along with providing security, the software system backing up magstrip cards helped make credit cards increasingly profitable, by permitting ever more detailed credit background checks and elaborate arrangements of interest rates -- for example, to offer a credit card with a zero-percent interest rate up front, the interest then rising steeply if the user defaulted on payments. In the baroque world of credit-card finance, a user who always pays the bills on time is said to be called a "deadbeat" by the credit-card companies; not too surprisingly, there has been considerable consumer annoyance with some of the tricks employed by credit-card companies.
With the magstrip card in widespread use, ATMs and other reader-equipped devices, such as ticket kiosks, gas pumps, and vending machines, proliferated. Charge cards could also be used to perform transactions over the telephone, a transaction that would have been otherwise very clumsy.
BACK_TO_TOP* Along with credit and debit cards, magstrip technology led to phone cards and gift cards. They are essentially an update of the old notion of a "chit card" or "ration ticket", used to "purchase" a fixed sum of a resource until the sum is depleted. Phone cards and gift cards are identical except for what they buy, both providing access to a one-shot charge card account maintained by the phone service provider or retailer. There were some problems with gift-card fraud early on; although the cards were worthless until purchased, thieves would steal the cards from racks, get their serials, put them back on the racks, and monitor the online accounts for the cards using the serial numbers. When somebody bought a compromised card and the online account was set up, the thieves would immediately clean it out. The problem was quickly addressed by hiding the serial numbers under "scratch-off" strips, or encasing the card in a cardboard envelope.
While phone cards remain popular, gift cards are becoming less so since they are sold at a markup over their face value, meaning giving cash or a check as a gift is more cost-effective, if less convenient. In addition, they are often not completely depleted, and there has been a legal squabble over the disposal of those funds. However, governments find them very convenient for disbursing cash for tax refunds, entitlement payments, and social aid. Terrorists have also found them convenient, since a card can be bought over the counter and used anonymously by anyone, making its use difficult to trace. Incidentally, credit cards have been used as a form of terrorist funding. It must give a suicide attacker a certain grim amusement to run up large bills on a credit card when he knows he'll be dead before they come due.
* Another example of the dominance of plastic in financial transactions is the "rewards card" AKA "loyalty card", a major extension of traditional loyalty programs. There's nothing much to a loyalty card in itself: it looks like a charge card, but typically it uses a barcode instead of magstrip or chip, being used by passing it over a checkout counter laser scanner. Users typically will also get "mini-cards" that can be attached to a keychain and scanned at checkout. In either case, the loyalty card identifies the user to a computer system that tracks the user's buying habits and authorizes discounts. Users may also be able to set up an account on the retailer's website to find "virtual" coupons that can be linked to the loyalty card, to be cashed in at store checkout.
Loyalty cards are usually associated with a particular store chain, being presented with purchases to obtain discounts, either for what's being purchased at the time, or some class of later purchase. They tend to lock customers into a particular store chain through the accumulation of perks, but retailers love them more because they yield a trainload of data on the specific buying habits of each customer. Customers are glad to use them if they get a percent or two discount -- while they're still a bargain to businesses, since even a slight improvement in margin through targeted sales more than makes up for the loss of revenue from discounts.
Although there's public fuss over the idea of purchases being monitored by retailers, few customers actually worry about having their purchases recorded. There's no great worry over someone monitoring, say, a preference for chocolate over vanilla ice cream, or peanuts over pretzels. Unlike the chintzy old loyalty programs like S&H Green Stamps, loyalty card programs are easy to use, everything being done for the user by the retailer's systems, with the rewards targeted to things users are actually buying.
In some cases, a loyalty cards may be used by a range of businesses. Nectar, for example, is the biggest loyalty program in Britain, with at least 20 million subscribers. It was set up in 2002 and now covers hundreds of businesses, ranging from online travel portal Expedia to high-end UK supermarket chain Sainsbury's. Nectar tries to avoid overlap among the businesses it serves, but it's hard to accomplish, so customers who buy from one firm tied into Nectar might get discounts from another firm in the network. Some big British chains, like supermarket giant Tesco, prefer to lock in their customers, and have their own, proprietary cards, Tesco calling theirs the "Clubcard". No system of loyalty cards spanning across businesses has caught on in a big way in the US just yet.
Tesco is highly diversified, its business activities including selling car insurance. Insurers give variable rates to customers depending on the risk associated with a customer: someone who likes to booze it up, for example, is obviously a worse risk than someone who never touches a drop. That kind of information is hard for ordinary car insurers to get, but thanks to its Clubcard, Tesco knows if an applicant for car insurance likes to buy a lot of booze, or never does at all.
Tesco has refused to comment on how it mines Clubcards for data, but students at the London School of Economics performed an experiment in which they asked for car insurance quotes, using either brand-new Clubcards with no real history, or well-used Clubcards with plenty of history. With the new Clubcards, the discount on insurance ran to only about 1%; for well-used Clubcards, it varied widely, up to 18%. User complacency over the data collected by loyalty cards may not be entirely justified.
BACK_TO_TOP* The rise of the magstrip charge card was paralleled by the emergence of electronic commerce. From the 1970s, US government began to implement "electronic funds transfers (EFTs)", eliminating most of the physical exchange of paperwork. EFTs became common, providing a basis for internet commerce as the personal computers spread widely through the 1990s. Security was, and remains, a worry, and so online charge card transaction systems were implemented using the "Secure HTTP (https)" protocol to protect charge card numbers from theft.
The rise of the internet also saw the introduction of purely online financial transaction systems. The most popular at present is the "PayPal" system, which was founded in 1998, and as of 2022 had about 400 million accounts worldwide. PayPal users maintain an online money account that can accept charge-card transactions, or transfers from other PayPal accounts. All that's needed to perform a PayPal-to-PayPal transaction is an account name. PayPal automatically performs conversions between different currencies. The scheme tends to be secure because a recipient cannot take money from a PayPal account: the account owner must give the money to the recipient.
Of course, the rise of online charge card and PayPal transfers has led to a subculture of thieves trying to exploit the system. One popular scheme is "phishing", in which a thief mass emails ("spams") users of an online service, claiming their credit card information has been lost and linking them to a phony credit card entry site where their data can be stolen. Much the same sort of trick is employed against PayPal users.
Most users have become wise to such emails, which can be easily recognized from their contrived sense of urgency, and the fact that they rarely include the user's specific name; service providers are also careful to say they won't ever request data in such a fashion. However, given a large enough spam distribution, with the emails produced by a third-party computer that has been "hacked" and taken over so they can't be traced back to the thief, there will be a large enough number of naive users who will fall for the trick.
That number has been declining, fortunately, but it has led scammers towards more focused scams, targeting specific organizations or individuals. One particularly effective scam has been to target financial officers of organizations, and con them into what appear to be routine organizational money transfers. The money then disappears from where it is deposited, the money trail being lost in a confusing train of subsequent transfers. It is likely that safeguards are being implemented to put a stop to this particular scam.
With the rise of EFTs and other online payment systems, the use of paper checks has been on a steady decline. Even paper checks have become integrated into electronic media, with banks and other organizations that handle checks running them through check scanners, with the digitized image used for efficient processing of the checks.
* The magstrip card is effectively dead. In the mid-1980s, with the availability of cheap, sophisticated silicon electronics, work began on a competitor, the "smart card". The smart card is much more secure than the magstrip card, much harder to "skim". It incorporates a processor and uses cryptographic technology to validate itself, and protect information in a money transfer. Typically, users also must input a personal identification number (PIN) for validation.
In Europe and some other regions outside of North America, the smart card blew past the magstrip card early on, but the magstrip card remained dominant in North America due to momentum -- after setting up the system for handling magstrip cards, banks and vendors didn't want to start over with a new system. However, despite improvements in security software, scammers became ever more sophisticated, even developing skimmers that could be slapped over the top of readers on ATMs and gas pumps to steal magstrip card data.
The USA accounted for a disproportionate amount of global charge-card fraud. Ironically, it was MasterCard and VISA that did the most to push the global smart-card standard back in 1996, and they're doing a thriving business with smart cards elsewhere. In fact, the standard is known as "Europay, MasterCard, & VISA (EMV)" -- and Europay is now part of MasterCard.
The cards are known in different countries under the name of "IC Credit" or "Chip and PIN"; they can be either "contact" cards that are inserted in a terminal, or "contactless" ones that use a short-range "near-field wireless (NFW)' link. The near-field interface features an antenna embedded in the card that not only allows the card to communicate wirelessly with a card reader, but also powers the card from the electromagnetic energy emitted by the reader, eliminating the need for the card to be fitted with a battery. EMV cards and card readers are now effectively universal.
VISA finally managed to break the dominance of the magstrip card in the USA, initiating a campaign to switch over to smart cards. VISA came up with a tidy plan to break the "chicken & egg" circle that kept magstrip cards in power. VISA offered a carrot to merchants in advance of the introduction, saying that if they upgraded to EMV card readers, the company's requirement that card readers be checked annually would be dropped. The checkup was an expense to merchants; it wasn't needed with EMV cards. With the rollout of the scheme, VISA followed up with a stick, making merchants liable for fraud performed with the old magstrip cards. That was a carrot for banks, since they ended up swallowing much of the fraud with magstrip cards, and so banks had an incentive to hand out smart cards.
The rollout began in the fall of 2015. By 2018, the magstrip card had all but disappeared in the USA. It should be noted that the change-over didn't really make much change in the way online transactions with charge cards are conducted; customers still provide a charge-card number and PIN code as they did before. However, the systems handling charge card transactions have become smarter, screening the transactions for anomalies. For example, if a customer buys a product and wants it shipped to an unfamiliar address, the system may send an email, with a one-time number code, to the customer's registered email address to ask for validation. Increasing use of personal fingerprint readers and other biometric validation schemes is likely to further increase the security of online transactions. Incidentally, smart cards typically still have magstrips, at least for now, so they can in principle be used with older card readers.
While most smart cards currently use contact interfaces, contactless cards are gradually gaining market share. There are also technologies such as key fobs, rings, and even implanted chips with NFW that are being used for transactions, if on a small scale.
BACK_TO_TOP* Along with the domination of smart cards, phones have become a widespread means of performing transactions. Such "mobile money" schemes are of great interest to businesses in undeveloped countries, where there is a great deal of theft and counterfeiting. Cellphone operators in undeveloped countries are already offering services to allow workers in the cities or overseas to transfer funds cheaply back to their families in their home villages, with the operators disbursing prepaid cards where banks aren't available. One of the best-known of such schemes, named "M-Pesa", was set up in Kenya in 2007 -- the "M" meaning "mobile", "Pesa" being Swahili for money.
M-Pesa is now is widely used in the developing world for salaries, bills, donations, and every other kind of financial transaction. M-Pesa users like it for money transfers -- but possibly more importantly, it makes theft, skimming of pay by officials or intermediaries, and coercing bribes more difficult. On the minus side, it also makes it harder to dodge the taxman. Cellphone-based banking schemes have followed in the wake of transaction schemes like M-Pesa.
India has been particularly enthusiastic about the concept, having developed a national ID system, named "Aadhaar", to make all types of electronic transactions much more convenient, honest, and reliable. Financial services enabled by Aadhaar prominently include an "Immediate Payment Service" to support electronic funds transfer.
The global COVID-19 pandemic of 2020:2021 had a disastrous impact, but it also meant many changes in the way the world does business. One of the more significant was that it accelerated the decline of cash. Digital transfers by charge card or mobile money became much more popular, since they were perceived as safer. There was some fear of cash contaminated by the coronavirus, but the real issue was that using a charge-card reader meant no close contact with a sales clerk. Digital transfers may have saved lives.
* In developing countries, many users own cheap "feature phones" that only provide voice and short messaging service (SMS) communications -- with mobile money and other financial services conducted via SMS. However, many phones have NFW interfaces, allowing them to be used to conduct transactions with NFW-enabled terminals. That has led to schemes for mobile payments in developed countries, with competing schemes to provide "digital wallets".
One of the best-known is "Apple Pay", from tech giant Apple. Apple Pay, in effect, consolidates access to transaction accounts on a smartphone. To start working with Apple Pay, Alice just takes pictures of her charge cards with her smartphone, and selects one as the default. When she wants to make a purchase at a vendor, she holds up the smartphone, or conceivably a smartwatch, to a near-field wireless reader, with the Apple Pay app coming up automatically -- no need to log into the phone. She either uses the default card or selects an alternate; in any case, to complete the transaction, she presses her thumb to the thumbprint reader on the phone, and the transaction is completed.
The purchase is logged on her smartphone. The vendor never actually sees the charge card number; it's passed on to the card service company, the vendor only getting a one-time "dynamic code" -- meaning hacker break-ins to vendor computing systems won't yield lists of charge card numbers. Apple gets a small cut out of every transaction. In principle, Alice could scan a product in a store with her smartphone camera and make the purchase then and there; or she could order in advance from a restaurant from a menu displayed on the smartphone or tablet, pay for the order, then come in and pick it up.
Apple also worked to line up a set of payment apps with Apple Pay, and was careful to line up powerful allies in launching Apple Pay, including McDonald's, Walgreens, & Bloomingdales; Chase Bank and Bank of America; plus Visa, American Express, and MasterCard. It was particularly significant that Apple has lined up with the big charge card companies, ensuring that Apple would work with them and not against them. Indeed, it was the charge card companies that came up with the dynamic code scheme; they saw Apple as the player big enough to implement it. Apple Pay even supports PayPal.
Apple Pay originally didn't permit sending money to friends, but it does now. It also originally didn't integrate with loyalty card programs, but a number of companies have now hooked up their loyalty-card programs to Apple Pay. The number of competing is too confusing to list here; it seems that eventually, those that survive will be interoperable with each other.
However, while mobile money has become a powerhouse in the developing world, to date there hasn't been very much enthusiasm for using smartphones for payments. Mobile money got big in the developing world because it was a vast improvement over handling cash -- but charge cards are wired into the developing world, and improving on them is tricky.
One problem with using smartphones for transactions is the lack of NFW-enabled terminals; possibly a bigger problem is that a smartphone doesn't seem to add much value relative to an NFW-enabled smart card. Not only is the card more convenient for most purposes, it can also be used with contact or magstrip readers, while the smartphone cannot. Smartphone payments may still take off -- but the future may belong to a "universal" smart card, capable of being used with different accounts, with the smartphone or other computer being used for accounts management and not payments themselves.
BACK_TO_TOP* As a footnote to the subject of 21st-century money, one of the aspects of African enthusiasm for cellphone-based transaction systems such as M-Pesa, or more broadly for cellphones in general, is the widespread use of mobile phone airtime minutes as money. Even before M-Pesa and its copycats appeared, Africans were conducting business in airtime minutes, and the custom persists.
Prepaid minutes can easily be swapped for cash or spent in shops in a number of African countries. Airtime has a number of advantages:
In inflation-ravaged Zimbabwe, where the US dollar has become the de facto currency, there aren't enough dollars to go around, so Zimbabweans have become accustomed to performing transactions in airtime minutes. Shopkeepers have become enthusiastic for airtime, having previously used the classic informal currency, penny candies, to make change.
While the use of airtime minutes as currency is a testimony to human ingenuity and practicality, there are worries about the practice. The first is that mobile network operators are now effectively issuing a sort of currency, and can control its exchange rate by how much they charge for minutes. And of course, the anonymous nature of financial transactions in airtime minutes makes such schemes attractive to criminals and violent extremists. International regulators have looked into the matter and issued guidelines to suggest countries and companies to track buyers and sellers more carefully. Transfer caps on airtime minutes are likely to be lowered as well.
However, even if the rules ensure that airtime minutes can't be used for large transactions, they'll still be useful for small ones. It may well be a passing thing, as faster telephone services gradually spread their footprint, with users buying unmetered phone contracts.
* Using airtime minutes for financial transactions turns them into an informal "digital currency" scheme, transactions only being performed with an online "currency" that doesn't directly represent a national currency. There are a number of more formal digital currency schemes. Some are actually based on the gold standard, with users buying initial shares of a central gold deposit and trading among themselves with those shares.
The best-known, or possibly most notorious, digital currency scheme is "bitcoin". The basic concept first entered public circulation in a paper released by one Wei Dai in 1998, with Wei calling his scheme "b-money". Various experiments followed, with bitcoin introduced in 2009 by a mysterious figure, possibly a pseudonym of a group, named Satoshi Nakamoto. He was later fingered as an American physicist / computer systems engineer named Dorian Prentice Satoshi Nakamoto, who was a libertarian -- but Dorian Nakamoto denied any real knowledge of bitcoin, while the "real" Satoshi Nakamoto similarly denied, via email, that he was Dorian Nakamoto. There was actually no real evidence that Dorian Nakamoto had anything to do with bitcoin.
In any case, the bitcoin system is based on a decentralized network and has no central issuing authority. Servers in the network generate ("mine" in the somewhat quirky terminology) units of bitcoin by an algorithm that slows the release over time, to zero out at 21 million bitcoins by 2050. The bitcoin currency unit is of course the "bitcoin", though of course the system permits transactions in fractions of bitcoins, named "satoshis".
Anybody running an internet server can mine bitcoins by installing a free app named, of course, a "bitcoin miner". Transactions in bitcoins are handled by a secure cryptosystem -- with an ingenious scheme that successively layers previous transactions under a new layer of encryption, making transactions ever harder to backtrack as they get older -- and take place directly between the two parties in the transaction, with no bank or other organization in between. That makes transactions cheap and hard to trace, with bitcoin accounts hard to freeze. The transactions are performed using a free app named a "bitcoin wallet", functionally similar to an online banking app, with encryption to make the user hard to find.
All bitcoin operations are transmitted over the entire bitcoin network, turning attempts to trace their movements into a frustrating "shell game". All transactions are recorded in a "distributed ledger" called a "blockchain" that logs the payer, recipient, quantity, and sequence of each transaction, with encryption being used to validate the chain of entries.
Criminals became very fond of bitcoin, using it to perform transactions for illegal drugs and the like on the "dark net". In fact, bitcoin was almost never used for legal transactions. More visibly, it became the vehicle for a speculative bubble in late 2016 to multiply in value by a factor of 60 by 2018 -- to then decline in value just as rapidly. It is of course true of all money, as discussed earlier, that it's worth "what people think it's worth" -- but government-issued currency like the dollar is pegged in various ways to the national and global economic system. Bitcoin, by design, isn't pegged to much of anything.
Claims that bitcoin reflects the value of the energy invested in creating it were nonsense: although valuable things may require a lot of resources to create, it is not then equally true that using a lot of resources to create things grants them value. We could cook soup by burning a pile of hundred dollar bills, but it would still be soup; the energy used in creating bitcoin is squandered. Not incidentally, bitcoin mining proved to be a huge energy hog, some calling it an environmental disaster.
The obstacle to creating bitcoin does limit its supply, of course; and by the same coin, so to speak, passes much of what control there is over the currency into the hands of those who digitally "mine" it. Libertarians have been big advocates of bitcoin, since in principle it bypasses government control of currency. It appears that the main attraction for doing so is to allow a private faction to control it instead. There is some resemblance between bitcoin and the commercial banknotes of the 19th century, one big difference being that the banks that issued the notes weren't as anonymous.
The whimsical valuation of bitcoin made it ideal for speculation, traders working on the "greater fool" theory -- that it's worth buying at a high price, in hopes that a greater fool will buy it at an even higher price. By early 2019, bitcoin was generally established as a scam, billionaire investor Warren Buffett famously comparing it to "rat poison". In addition, bitcoin's security was not as impregnable as its advocates assumed. It turned out there was a slight statistical bias in the "shell game" used to conceal bitcoin transactions -- and it is such statistical biases that permit cryptosystems to be cracked. Once cracked, the bitcoin blockchain gave a full record of criminal transactions performed with bitcoins, with the result of dark net operators ending up behind bars for extended periods of time.
* Nonetheless, since that time bitcoin has repeatedly boomed and busted. Indeed, cryptocurrencies have proliferated, thousands of them having been created. A variation on the concept, called a "non-fungible token (NFT)", arose, in which a blockchain is used to trace the trading of some arbitrary item -- the best-known being a cartoon of a "bored ape". NFTs were, in effect, bitcoin without the troublesome mining, being used to play the same speculative games.
The persistence of cryptocurrencies hasn't made them more respectable. In 2021 Gary Gensler, head of the US Securities & Exchange Commission (SEC) that cryptocurrency markets were "rife with fraud, scams and abuse", and asked Congress for new regulatory powers. Gensler compared the scene to a "Wild West".
One particular concern is with "stablecoins", which are digital currencies pegged to the dollar, the euro, and often other mainstream assets. Since changing dollars and bitcoins is slow and troublesome, traders often prefer to switch between stablecoins and bitcoins instead. Stablecoins are not necessarily or even mostly backed by cash, however, also being backed by commercial notes, secured loads, corporate bonds, funds, and precious metals.
The fear is that a cryptocurrency crash might mean a rush to cash out stablecoins. Cryptocurrencies aren't a big player in the mainstream financial system, and so a crash would not have much effect except on those directly involved. Since stablecoins are derived from the financial system, a crash might have a ripple effect that could lead to a general financial slump.
Governments are cracking down on cryptocurrencies. China flatly banned them in 2021, though NFTs survived, if under government control. Why retain NFTs? Possibly because they can't be confused with real money; if people wanted to similarly trade up, say, rare postage stamps, there would be no reason to stop them. The US government is working towards a policy on cryptocurrencies.
Some cryptocurrency advocates believe that regulation will save cryptocurrencies. However, there is the issue that much of the point of creating cryptocurrencies was to evade government control -- or put more crudely, evade the law. Laws were not made to be evaded, certainly not in such a blatant way. If governments put a leash on cryptocurrencies, will there be much interest any more? Certainly, if the cryptocurrency system survives, it will not look so much like it once did.
BACK_TO_TOP* In this document, I have used the term "charge card" to designate both credit cards and debit cards. Although that sounds logical -- both are used to make a charge on an account -- that doesn't seem to be common usage, charge cards usually being synonymous with credit cards. I point out the distinction here lest it cause confusion.
The banner photo is of euro coins and bills, taken in 2006 by a photographer known only as "Ajiv", and released into the public domain.
* Sources include:
* Revision history:
v1.0.0 / 01 apr 05 / Originally one chapter.
v1.0.1 / 01 feb 06 / Added wallet phones, other small items.
v1.0.2 / 01 apr 06 / Minor corrections.
v1.0.3 / 01 apr 07 / Review & polish.
v1.0.4 / 01 jun 07 / Review & polish.
v1.0.5 / 01 apr 09 / Review & polish.
v1.0.6 / 01 jun 09 / Minor corrections.
v1.0.7 / 01 apr 11 / Review & polish.
v2.0.0 / 01 may 13 / Went to two chapters, North Korean counterfeits,
more on e-money, added bitcoin.
v3.0.0 / 01 apr 15 / Loyalty cards, Apple Pay, minor changes.
v3.1.0 / 01 mar 17 / Updates on euro, bitcoin.
v3.2.0 / 01 feb 19 / Review, update, & polish.
v3.2.1 / 01 jan 21 / Review, update, & polish.
v3.2.2 / 01 may 21 / Minor corrections.
v3.3.0 / 01 sep 22 / Updates on bitcoin and digital wallets.
v3.3.1 / 01 mar 23 / Review & polish.
BACK_TO_TOP
