Virtual Currencies – Where Next?

Introduction

There’s a rush and excitement around virtual currencies.  Much of it is being driven by social media giants, and the expected virtualization of everyone’s wallet that NFC will soon bring.  But which virtual currencies have the greatest potential and do these pose any threat to the fiat currency regimes of the physical world?  This article looks at these topics in more detail.

Growth

“Measured in real-world U.S. dollars, virtual transactions total $2.1 billion a year in the U.S. and $7.3 billion globally, according to Sometrics’ founder and chief executive, Ian Swanson. That is up 61% since 2008.” ~from Bank Technology News.

Many companies, not just start-ups, are getting into the virtual currency market.  Facebook, Visa, American Express and even the big banks see the possibilities of owning, controlling and growing private digital currencies.         But what’s fueling this rise?  What is everyone getting so hopped up about?

Arbitrage –  The most obvious eye popping opportunity is exemplified by the rise and fall of BitCoin.  The graphic below comes from Wired Magazine, and shows the phenomenal investment opportunity you had for in 2010.

Tax Shelters –  Corporations, the rich, pension funds, hedge funds, and others with too much money are always looking for some way to hide their capital gains from the taxman.  What better way than to invest in digital assets using a virtual digital currency?  Talk about off the books.  But wait…. is that legal?  Well it’s not regulated, at the moment, but governments around the world are aware of this phenomenon and many are watching it closely.

Deflation/Inflation Hedge –  Particularly pertinent today, the potential for fiat currency de-valuation or appreciation in the face of mounting debts and uncontrolled deficit spending has given everyone with significant wealth an interest in finding a liquid, hedge to the big 3 ( dollar, yen, euro ).  Gold has been the traditional favorite in this spot, but with gold prices soaring and the threat of a bubble looming….the need for alternatives is strong.

Power – Less obvious on the radar is the sheer power that comes from managing an entire economy’s money supply.  A currency in isolation isn’t much.  The dollar without the U.S. economy is little more than paper.  What people find valuable in the dollar is the ability to buy goods and services from the single largest economy on earth.  For that reason the dollar provides a very stable store of value and means of exchange.  Similarly if a private virtual currency were to achieve such economies of scale…..say….dominating the global internet commerce business, then one could imagine the influence available.  Even large physical economies like the EU and Japan ( and their respective central banks ) would need to listen to the issuer of such a currency.

Who Will Lead?

So there are three types of virtual currency players in the market today:

The Wildcats  – These are the Ven and Bitcoin makers ( among others ).  They’ve built their virtual currencies and are asking people to adopt it.  It’s a hard road, with little incentive to convert your hard earned dollars, euros, or yen outside of arbitrage….it seems unlikely they’ll gain wide adoption.

The Closed Social Media Economies – With a captured market that has goods only purchasable using their currencies, these companies have modeled the very structure and incentives that make our modern physical economies today.  The challenge is extending this concept outside of Facebook ( or whoever ) to other sites.  But, the base is there.

The Banks – Ah….the banks.  Long ago, private currencies were common place in Scotland and the Wild West of America.  But when a bank went belly up…so did its currency….leaving all its depositors and paper holders staring down an empty well.  Banks have a ready made market in their dealings with the wealthy, corporations, hedge funds, pension funds, etc.

The Transaction Grabbers – This is PayPal, Google, and maybe Isis. They’re seeking a sliver of the transaction fee market from their mobile payment platforms.  But there’s no reason these players couldn’t introduce a virtual currency of their own.

So which group has the highest potential?  My money would be in Google Dollars and Goldman Sachs Coins.  This isn’t to say innovative new players won’t spring up, but the transaction grabbers and the banks already have the real audience needed to leverage a virtual currency and the financial wherewithal to make it a reality.  Clout is important here.

Challenge to Fiat Currency

Private digital currencies at the moment pose no threat to the world’s central banks.  But innovation has a way of challenging commonly held assumptions….especially ones as stodgy and long standing as government issued currency.  The internet has flattened the economic landscape and opened opportunities for global domination.  The digital, internet economy is owned by no country, no government.  There are no regulations guiding which currency an e-commerce site should use.  There’s nothing to stop someone from trying to capture this global digital economy and manage its money supply.  Therein lies the opportunity for those quick enough, connected enough and risk-averse enough to realize it.

Summary

Virtual currencies are still evolving, but growing fast.  Watch for the Transaction Grabbers and Banks to start making big moves in this space as near field communication and e-wallets become ubiquitous. Historically wildcat banking thrived in the lawless west….today it is thriving in the unregulated digital frontier.

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Identity – The Killer App for NFC and Social Media

If you’ve seen recent articles about Google+ and Google’s moves to acquire handset maker Motorola…then it should be clear that Google’s vehemence and focus on NFC and tying it together with Social Media are not just about mobile payments or competing with Facebook and Apple.

There’s a bigger focus and it becomes more apparent after relfecting on some of  my older posts  The Externet and  NFC is about the eWallet Right? and Social Networks or Virtual Countries? 

Identity is the killer app.  Why?  In order to accept and transact payments ( or any piece of information/data ) you need TRUST.   Trust comes from knowing someone’s identity is real.

If Google can secure and hold your identity, YOUR REAL IDENTITY, then they’ve become a trusted global store / directory of people.  Tie that together with NFC and your identity ( or the parts your willing to share with others: credit card numbers, names, phone numbers, pictures, really anything you share with people and businesses today ) becomes easily transferable between mobile devices, nfc readers and computers.

Ok, so what?  What’s the big deal?  For starters Google will make gobs of money off this through marketing, advertising, security, finance & banking, and academic research.  They’ll do this the same way that they do through search advertising: minute transaction fees spread across monstrous volumes.

But more importantly NFC and Social Media will solve one of the biggest problems the internet has today.  What is it?

Security.

It’s great to browse websites, but how many ids and passwords do you have?  50? 100?  You’ve left a trail of different identity signatures over a myriad of databases across the world.  As time goes on and you continue to use different sites; your security becomes increasingly likely to be stolen by hackers.

Not only is it insecure, but it’s down right annoying.  Why can’t i just save my identity once.  Then, while I’m on the internet it reveals the necessary parts to any website?   Believe it or not…many have tried to solve this problem ( remember Microsoft Passport ?? ), but there’s no vested reason for me to sign up for OpenID other than “I”m sick of having so many ids and passwords.”   That’s where social media comes in.  There is a vested interest in things like Facebook or LinkedIn.

But before you think this is a problem relegated to the web….take a look around your brick and mortar neighborhood.  The same problem exists.  How do I know who you really are…quickly and reliably!!!!??  So that it doesn’t hold up a line and anger my other customers.  This is where NFC comes in.

By tying together your real identity through a Social Media service like Google+ and an NFC enabled handset; I can now quickly transact pieces of your identity ( health, financial, personal, legal, or otherwise ) to third parties through NFC readers, other NFC phones, or even on the web once your laptop has an NFC reader too.  ( Yes, it’s coming Jim Bob ).  Your Android device and Google+ would be the gatekeeper to you.

Effectively, Google or Facebook or Twitter or Apple, would be a bank of identities, a directory with ancillary services tied to that identity.  They could charge other businesses to access that directory on a transaction fee basis and provide services.  This is a powerful business model and shouldn’t be discounted.

Within 6-9 months, if my post is accurate, I’d expect to see a headlong rush into identity services as global handset manufacturers proliferate NFC technology across the globe.

NFC is About the eWallet Right?

Who is this article for?

Technologists, investors and business professionals that see opportunity in near field communications will find interest in this article.  The primary purpose of this article is to help broaden the vision of near field communication and its impact on our world.

Just the electronic wallet?

So near field communication is all about electronic wallets like the Google Wallet or Square right?  Partly.

Near field communication is more than this.  The eWallet is the first, and potentially one of the more profitable, applications that near field communication makes possible.  But the killer opportunity that sits within reach of Google, Apple, Facebook, Twitter, RIM, Microsoft and others is your identity.

The fundamental flaw in the world wide web

Jump in the time machine for a second and go back 20 years.  The internet was just starting to be adopted, but there was a major flaw that no one took seriously at the time.  That flaw was security or more appropriately: reliable identification of users on the internet.  The flaw was intentional.  The original creators of the standards that now comprise the internet didn’t envision a world of interconnected web applications.  Their vision was isolated to viewing, sharing, editing, and preserving documents in electronic medium.

As the web evolved web applications became common place but each site had its own authentication and authorization mechanisms.  There was no common way to identify a user across the many different websites being published.

In time, attempts were made to set standards, and some organizations promoted their identification technologies as a standard that other sites could use.   But all of these solutions required scale and size.  Even with the means to promote a security standard many of these organizations hesitated in opening it up to other sites, developers for fear of hacking attempts.

Sites were loathe to accept the standards promoted by others because they weren’t “open” and tied the web site to a particular security standard that couldn’t be easily shared or transferred.

This all led to the common problem each of us has today: a laundry list of user ids and passwords for each web site.

How does NFC solve the multiple user id and password issue?

Your mobile device is becoming an abstraction of you.  They’re not just phones but small computers that can contain all key information about you and your possessions.

In any given day you may need to transmit this type of data to other people, companies, employers, organizations, web sites, governments, or healthcare providers.  But today you have to transmit this information manually by writing, typing or speaking.  What is the problem with this?  Well…some of that data is hard to remember or gets lost easily.  Another problem is that this data can change, but you can’ t remember everyone that needs an updated record….so some of your accounts have bad data.  Still another issue is that the data is all over the place…increasing the chance it will be subject to identity theft and driving up the cost for an organization storing such data.

Near field communication will change all this.  You can keep all your personal identification data securely on your device and then share it with an organization by simply tapping it on a reader and then entering you passcode on the device’s software to authorize and select data to transmit.   The key to security in this case is that your ‘account’ is stored on your device and can only transact data with a reader when you authorize it through entering your passcode.   It can’t be lifted by someone walking by with a really strong antenna and good hacking skills as some have suggested.

Think about how that changes applying for a loan, authenticating to a computer, registering for a 5k race, setting up an account to play World of Warcraft?

Killer app?  You bet and worth 10s of billions.  Whoever holds the identities of the world will know how, what, when, where, and glean why those identities do what they do.  That’s marketing data.  That’s security and homeland defense data.  That’s research and university study data.

Summary

So near field communication along with other mobile technologies ( GPS for example ) turns your device into….well….YOU.  It will connect you to everything  and in turn will identify you to all the things, organizations, and people around you.  This has the potential of reducing wait times and account authorization.  Further benefits might include greater security and trust as we begin to know that  there is one trusted identity for every person.  Google’s Wallet may be the start of the NFC revolution…but there are more fantastic applications coming.  As I posted in my last article, The Externet,  mobility and NFC are bringing our real and virtual worlds closer together.

About the Author

Christopher R. Goldsbury is a software development professional who has played the roles of developer, architect, scrum master, development manager, project manager and quality assurance manager  throughout his career.  Chris writes on his experiences and ideas at his blog: http://www.anagilestory.com.

The Externet

The internet connected our computers together and created a virtual world along with a tsunami of change and innovation.  The externet will connect the physical world to the virtual one and complete the circle.  Everything will be connected, communicating, updating, and aware.

How will this happen?

Near field communication will bridge the two worlds together.   Most notably NFC is bantered about in the media as a way to enable the ‘eWallet’.  While it does this, there are competing technologies that could do this today without NFC.  Check out Square’s card case for instance.

Regardless of who wins the eWallet race, NFC enables much more.

What are the implications?

Let’s take an ordinary Saturday in my home town of St. Louis.  Waking up to the alarm on my Android or iPhone device at 7:30 am, I jump in the shower and get my son up for soccer practice.

When I get to my car I put my device in the NFC holster and my car’s app opens up.  It knows its me since my identity app conveys this to the car app.  All system diagnostics for this trip will be recorded with me as the driver.  My virtual keys are differernt from my wifes.  I press start and the engine is running a little rough.  The car app now gives me a menu:

1. Owner’s Manual

2. Diagnostics History

3. Music

4. Video

5. Climate

6. Navigation

7. Maintenance

8. Insurance

9. Trade In

I check the Owner’s Manual and it says I may be using the wrong oil.  The remedy is to let it run for a few minutes before driving.

After letting the car warm up a bit, I head to the soccer field.  I’m feeling jovial so I choose ‘Music’ at the stoplight and start playing one of my favorite 80s playlists.  I hardly notice the police lights behind me.  Apparently, I was feeling too jovial.

The police officer conveys that I was exceeding the speed limit by 20 miles an hour.  He asks for my license & registration, so I pop those apps open and tap his NFC reader to download that data to his device.   Within a couple of seconds his device verifies that I’m not a wanted criminal and that my insurance data is up to date and paid.  He then tells me the speeding ticket is $50.00.  I pay right there by tapping his reader.

At the field,  I notice Owen’s soccer shoes are looking a little old, so I tap the NFC chip to see the receipt, which tells me these were bought 2 years ago for $49.97 at the online Adidas store.  Furthermore, due to a small pedometer powered by a battery and tiny solar panel….I know that Owen has taken 224,321 steps in these shoes.  A link allows me to look at newer models and sizes.  But wait, I don’t know Owen’s shoe size.  I take his shoe off and take a picture of his foot and then ask the photo app to measure it.  It tells me he’s grown a size and now requires a 9.  I let Owen choose the style he likes after he models it on his foot picture, and then we purchase.

When the coach shows up he asks everyone to sign in.  He puts his tablet on the bench and enables the NFC registration app.  I tap the app and sign Owen & myself in using the Soccer League app.   Later the coach will use the registrations to post notes about each child’s progress, fees owed, and the upcoming schedule.  All of which I can view from my device.  Furthermore I’m banking on the notion that a solid record of Owen’s progress as a soccer player will make him a shoe in for the English Premier League.

During practice I strike up a conversation with one of the parents.  We have similar technology interests and he might make a good business partner some day, so I ask to exchange business cards with him.  He says sure, and we tap our phones together to do the exchange.

After practice we go to McDonald’s, Owen’s favorite.  We look at the menu and tap the selections we’d like to purchase.  As a bonus the menu also downloads the nutritional data into my Health app and registers the calories Owen and I will consume.  To get a 10% discount McDonald’s asks me to share some of my personal demographic information with them, so I press yes on the device, and the data is downloaded from my Identity application.  Anything to save a buck.

But wait did I pay with Visa, Mastercard, PayPal or AMEX?  Turns out I paid with a totally new virtual credit card called GOOG-EX.  Mobile payments made issuing credit and competing with existing credit card companies easier and lowered the barriers to entry against the major providers.  I chose Google’s brand new credit card because they tied my interest rate to my credit score.  Since I have one in the 800s they gave me a low interest rate of 5% and a penalty rate of only 7%.

After McDonald’s, Owen and i left and I started feeling bad.  In fact, I felt horrible. I drive to the hospital, and they ask me to tap my phone on the NFC reader to register at the hospital Emergency Room.  Instantly my health insurance is verified, my identity registered in all the downstream systems of the hospital, and my visit is appended to my health records on my Health Record App.

As I go through each triage station in the hospital they update my health record with their findings, lab results, x-rays, and notes.  All of this I can share with any healthcare provider.  Rather than the medical record database being housed with individual hospitals that never talk to each other…the data is stored with my Health Record App and I can share it with anyone I want….a distributed database of sorts.  At the end of my visit, my doctor notes that I ate at McDonald’s and he had several patients come from the same McDonald’s today with similar conditions.  He thinks it is food poisoning.

Conclusion

That’s a small smattering of the Externet.  Realize the technology change standing before us will move quickly.   The devices are there, the apps are being built, and the profits are ripe for companies and individuals who see the vision and can make it happen.  Other technologies, like NXP Semiconductor’s GreenChip will couple these worlds closer.

In time we’ll be able to schedule, monitor and control our physical world from our favorite Android or iPhone device.  NFC, while currently riding the wave of Mobile Payments, will open the gates to a truly connected world.  The Externet is the next logical step to wiring our universe.