Breaking the Visa/Mastercard Duopoly

Later: One of the criticisms of cryptocurrencies is that they do nothing that cannot be done better by other means. For example, money can quickly be transferred within the United States via the ACH network and internationally via the SWIFT network. Cryptocurrencies are more expensive and slower at these transfers (unless you’re a criminal). As the crypto-exchanges like Coinbase show, cryptocurrency does not even deliver decentralization.

The Visa/Mastercard duopoly has, in fact, been challenged by companies like Square, Stripe, and Paypal.

In retrospect, this post was not clearly thought out.

Monopolies Stifle Innovation

Monopolies and their oligarchy cousins stifle competition and allow monopolists to extract excess profits from their customers.

The Visa and Mastercard transaction networks have close to monopoly control over credit card merchant transactions. Small merchants often have to pay high fees or associate with large portals like Amazon (who extract their own fees). Visa and Mastercard decide which companies they will clear transactions for. They have a long history of cutting off vendors with controversial products like pornography. The only recourse these vendors have is to pay higher fees to have their transactions processed, even though their products are completely legal.

The Visa and Mastercard network are barriers to financial innovation. They serve the interests of their member banks are unlikely to support any innovation that significantly competes with their member banks or their own business.

Challenging the Monopoly with Cryptocurrency

Distributed blockchain-based cryptocurrency offers the promise of challenging the Visa/Mastercard duopoly. To do this the cryptocurrency must include the following characteristics:

1. The cryptocurrency should be based on an open-source blockchain so no single entity can control the currency. A transaction cryptocurrency fails if one oligarchy is exchanged for another.
2. The network should support a high transaction rate (to complete with Visa and Mastercard) without the complexity of a “side chain” (e.g., Lighting).
3. The currency must be stable. The currency should have no more volatility than major currencies like the Dollar, Euro or Japanese Yen. A payment transaction network will fail if the underlying currency has the kind of volatility that exists with cryptocurrencies like Bitcoin or Etherium.
4. The amount of the currency must expand or contract as demand changes. This means that the currency must be a type of “stable coin” where a unit of the currency is directly pegged to a government-backed currency like the dollar. The currency will expand as currency units are purchased and contract as the currency units are exchanged for a government currency like dollars.
5. Verification of transactions in the distributed ledger should be widely distributed to promote security and to avoid having large entities controlling the transaction network.
6. The public ledger should offer privacy (e.g., Monero is an example). A transaction network can quickly associate a person with their public key. Observers should not be able to determine how much wealth someone has in the currency or what transactions they have completed.
7. The fees charged for transactions should, ideally, be lower than the fees charged by Visa and Mastercard and certainly not significantly higher.

Existing Transaction Cryptocurrencies

The USD Coin (USDC) is a stable coin that can be exchanged for dollars. USDC appears to support a high transaction rate, so it can be used for merchant transactions. The exchange of USDC is controlled by a consortium. The coin is based on the Etherium blockchain and currently uses a proof-of-work algorithm for blockchain security. It is unclear how closely the USDC blockchain will follow the Etherium source base and whether they will transition to a proof-of-stake model in the future.

I have been unable to find a reference on the cost of USDC transactions.

USDC is not an anonymous network and it should be possible to data-mine the network to discover transactions and holdings.

Transaction Networks

The Stellar Network

Stellar is an open-source network for currencies and payments. Stellar makes it possible to create, send and trade digital representations of all forms of money — dollars, pesos, bitcoin, pretty much anything. It’s designed so all the world’s financial systems can work together on a single network.

Stellar has no owner; if anything it’s owned by the public. The software runs across a decentralized, open network and handles millions of transactions each day. Like Bitcoin and Ethereum, Stellar relies on blockchain to keep the network in sync, but the end-user experience is more like cash — Stellar is much faster, cheaper, and more energy-efficient than typical blockchain-based systems.

Stellar appears to provide many of the features needed for a stable transaction network. Looking at the Stellar documentation it is unclear what the interface to banks is. For example, can I send dollars from my US bank account to a foreign bank account that only accepts SWIFT transactions?

Stellar does not offer anonymity and it may be possible to data-mine the Stellar blockchain to discover transactions and holdings.

The Devil is in the Details

Writing a list of features for cryptocurrency transactions is easy, actually building a transaction currency and getting it accepted is much more difficult. Between the aspiration of building a Visa/Mastercard competitor and the realization of a transaction currency, there is a vast amount of work. Fortunately, technology and implementation lesions can be drawn from existing open-source currencies like Etherium and Monero.

In addition to the myriad of technical issues in implementing a transaction currency, there is the challenge of marketing the transaction network and getting it adopted by merchants.

Governments could also be a barrier to the successful adoption of the transaction network. The “stable coin” nature of the network means that there must reliable government-backed currency reserves that act as the reserve for transaction currency exchange. An exchange that stores government-backed currency and supports the exchange of the transaction currency to government-backed money looks much like a bank and would be subject to government regulation and control. Like a bank, the reserves of the currency exchange should be regularly verified and audited.

This network proposed here, by design, provides anonymous transactions. Most of these transactions will be simple vendor transactions. Some of these transactions will, unfortunately, involve illegal activity (e.g., ransomware, weapons, drugs, and illegal services). This is, however, true of government-backed cash, which is the common medium for illegal transactions.