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MAG Sponsor Spotlight: Turning the Digital Currency Revolution to Merchants’ Competitive Advantage (MAG Quarterly- Volume Seven, Issue Three)

Scott-David
By Scott Moeller, CEO, mSHIFT Inc. & David Tcheau, Blockchain Analyst, mSHIFT Inc. 

September 5, 2019

“Facebook and JP Morgan’s recent blockchain initiatives have brought cryptocurrency payments to the mainstream. With the rise of blockchain technology, merchants can now change the rules for a new payment ecosystem. –Scott Moeller, CEO mSHIFT Inc.

The digital currency revolution is already underway.
This transformation of money was highlighted in Caitlin Long’s recent US Senate Banking Committee testimony regarding Facebook’s Libra Project.  “…since the genie is out of the bottle—digital currencies cannot be uninvented, and they offer significantly more efficient payment systems relative to those of the status quo.” 2  For decades, payment professionals have been focused on the means and tools to move currencies created by central banks, not optimizing currencies per se. However, digital currencies are rapidly gaining mainstream status as evidenced by both JP Morgan and Facebook cryptocurrency initiatives. Consumers will be able to choose competing digital currencies and use them for everyday transactions. This revolution in money was predicted in the 1970’s by Nobel Laureate F. A. Hayek, who wrote about “PUTTING PRIVATE TOKEN MONEY INTO CIRCULATION” 3

In theory, multiple approaches can create stable digital currencies for daily use.  JP Morgan implements a Fixed Exchange Rate approach: “J.P. Morgan this month became the first U.S. bank to create and successfully test a digital coin representing a fiat currency.” 4 Facebook’s approach with Libra is to implement a narrow range Floating Exchange Rate: “Rather, as the value of the underlying assets moves, the value of one Libra in any local currency may fluctuate.” 5 Both JP Morgan’s JPM Coin and Facebook’s Libra derive intrinsic value from fiat currencies issued by central banks, such as the Dollar, Euro and Yen, which consequentially inherit the 2% annual inflation target of these central banks and will lose purchasing power accordingly overtime.6

A desirable currency, whether issued by central banks or private entities, has constant purchasing power as described by Hayek 7. In an emergent world of multiple private-issued digital currencies, the merchant community can effectively increase the purchasing power of a digital currency through issuance of merchant-issued loyalty/coupons/rewards tied to the digital currency. When a consumer receives an added merchant benefit by transacting with a private-issued digital currency, the purchasing power of the digital currency increases. Merchants directly benefit from this new blockchain based mode of rewards and marketing. Instead of paying online advertising giants (such as Facebook and Google) a cost per click or impression, merchants will have a new option with blockchain technology to deliver incentives directly to interested consumers without fees.  As the digital currency user base grows, conventional marketing expenses are reduced, and these funds can be redistributed directly to the merchant’s proven customers through this new blockchain based marketing platform. Merchant incentives broadcasted through the blockchain, directly translate into increased purchasing power for the consumer.  Increases in purchasing power gained from the redemption of merchant loyalty/coupons/rewards allow for inflation of the digital currency through monetary policy. The digital currency’s purchasing power remains stable as the impact of inflation on purchasing power is offset through the increased value added in aggregate by merchant loyalty/coupons/rewards. Newly minted digital currency generated as a result of inflation is sufficient to cover the maintenance and operation costs of the digital currency, making it possible for the network to deliver zero cost payments for merchants and enable a new zero cost method for broadcasting merchant incentives. Merchant and consumer benefits work synergistically, creating a virtuous cycle that encourages mass adoption and use of the digital currency in preference to other payment types. This virtuous cycle is showcased in the diagram below. Once mass adoption of the ecosystem is reached, it will be possible for merchants to hold and use the digital currency as a medium of exchange, viable for accounting and stored value, with low conversion risk. 

Investment capital is readily available from worldwide cryptocurrency markets to cover all the initial cost of building the blockchain infrastructure needed for a new digital currency, including POS upgrades, education and training costs 8

Mainstream commercial use of private-issued digital currencies may still be a few years away, but the rule making and agenda setting for this new arena is happening now. “This set of lawmakers has been trying to understand Libra for some time…Many mentioned the importance of the United States' leadership on developing a framework for managing cryptocurrencies and future fintech innovations.” 9 Given what’s at stake, it is critical that the merchant community is included alongside Facebook and JP Morgan in the ongoing discussions with Congress on the matters of compliance, including data protection, Know Your Customer, Anti-Money Laundering legislation and other regulatory concerns.

Digital Currency

2 Caitlin Long’s Senate Banking Testimony regarding Facebook's Cryptocurrency Libra, https://www.forbes.com/sites/caitlinlong/2019/07/15/facebooks-cryptocurrency-libra-senate-banking-testimony/#7d6774ae1378
3 [Denationalisation of Money], first published in 1976, Page 46, https://mises.org/library/denationalisation-money-argument-refined
4 https://www.jpmorgan.com/global/news/digital-coin-payments
5 Libra Whitepaper, page 7, https://libra.org/en-US/wp-content/uploads/sites/23/2019/06/LibraWhitePaper_en_US.pdf
6 https://www.federalreserve.gov/faqs/economy_14400.htm,
https://www.ecb.europa.eu/mopo/html/index.en.html, https://www.boj.or.jp/en/mopo/outline/qqe.htm/
7 [Denationalisation of Money], Page 106
8 Market cap is hundreds of billions of US dollars, https://coinmarketcap.com/
9 https://www.cnn.com/2019/07/16/tech/libra-facebook-senate-hearing/index.html