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The Payment System Revolution, Courtesy of Cryptography

By Ed Moy,

Significant advances in the science of cryptography are planting the seeds for a revolution in how payments will be made. The implications are profound.

The science of secure communications has made a quantum leap forward with the development of asymmetric cryptography and cryptographic hash functions, which basically are coded messages that are almost impossible to crack without tens or hundreds of millions of dollars of sophisticated computer equipment, a team of top computer scientists and lots of time. This technology enables two individuals/entities to have transactions directly with each other and cut out the middleman.

These advancements will dramatically improve the security and speed as well as lower the cost of transmitting digital assets over the Internet. Examples of digital assets could include stocks and bonds, car titles, home ownership, contracts, passwords, digital keys and digital signatures.

But the obvious and most consequential use would be for money. Here are three possible applications.

First, it could be a very low-cost alternative for transferring money. Instead of relying on banks or a broker to transfer funds, person A could transfer money to person B directly and skip the intermediary and the big fees. Those of us who have used wire transfers or sent money overseas know the hefty costs involved and would welcome an inexpensive competitor. Also, the transfer would take seconds regardless if it was a neighbor or someone halfway around the world, instead of the typical wire transfers taking hours domestically and sometimes a week internationally.

Not only would businesses benefit, but imagine the impact on a family in the United States sending money to family in Central America or Asia. Overnight, their net income would increase and help them up the next rung on the economic ladder.

Second, it may be a nominal cost competitor to credit card companies. The same principles that apply to money transfers would apply to credit card transactions. Retailers and restaurateurs could accept payment directly from customers and not have to pay 3 to 4 percent to the credit card companies to run the transaction through their systems.

All businesses accepting credit cards would benefit, with the largest impact accruing to low-margin businesses. They would become more robust and thus boost the economy and enable more hiring. Also many small businesses that do not accept credit cards because of the cost or were excluded because their small dollar transactions were cost prohibitive could now participate. This could spur the aggressive private sector-driven growth that might lift our economy out of its doldrums.

Further, identity theft and stolen credit card numbers would be a thing of the past because of the direct peer-to-peer transaction. There would be no intermediary to steal the information from. Consumers would be protected and businesses’ high costs from credit card fraud would disappear. The peer-to-peer aspect also eliminates expensive chargebacks, which would be a boon to retailers, restaurants and bars.

Third, the unbanked or underbanked third of the global population could participate in the modern global economy. Banks or new competitors could take advantage of cryptography’s reduced transaction costs and offer low-cost products to low-volume potential customers currently priced out from the traditional banking system.

Up to 2.5 billion people around the world (100 million alone in the United States) could benefit. The impact of billions of people accessing credit, starting savings, buying insurance, making investments, managing money, reducing risks and planning for the future for the first time cannot be overstated.

There are many more possible applications to money, some which have not been even dreamed of yet. Simply, there are few technological advances that would have a greater positive impact on more people in the near future than a new payment system powered by the advances in cryptography.

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