The original vision that the creators of PayPal had in mind was a system that would permit people around the world not only to be able to pay each other via the Internet, but also to be able to protect themselves when their governments were inflating their currencies. The system survived the dot com boom-bust, intense competition, and the attempt by many governments to crush it. [Full Article]
Source link: http://blog.mises.org/2915/the-genius-and-struggle-of-paypal/
The Genius and Struggle of PayPal
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PayPal is a monumental step towards ending fractional reserve banking and perhaps even fiat currency. Currency and payment systems are going to go almost completely digital for the same reasons that pictures, mail and numerous other forms of information have gone digital. The problem for the frac res banking system is that since currency is going digital they are going to be subjected to extreme competition. The entry barriers for setting up alternative digital currency payment systems on the Internet are extremely low. The digital currency industry is in its infancy but we have already witnessed numerous digital currency sites pop up. Some of them are based on fiat currencies, while others are based on precious metals. Probably 99% of these sites will go by the wayside or fail, but a few of them will eventually hit critical mass. I believe that the next big step towards this revolution will be when broadband Internet goes wireless (do a google search for “WiMax” to read more about this), and these alternative payment systems become viable at point of sale with familiar devices (PDAs & cellphones). Over the next decade or two we could very well witness the end of fractional reserve banking and fiat currency being made irrelevant. Personally, I long for the day when the Federal Reserve building is turned into a mesuem. Long live the digital revolution.
Steven, I agree with you 100 percent and believe that PayPal-type technoloies linked with smartcards and private, precious-metal-backed digitial currencies like GoldMoney are the future, ultimately putting an end to the fraud of central banking and fractional reserve counterfeiting: http://www.cipe.org/publications/fs/ert/e32/e32_02.htm
David,
Richard Rahn has created an important rough outline of the future of currency but that article and his book “The End of Money” are outdated. I do not believe that smart card technology will be the new medium of currency. The problem with these smart card technologies is that they are proprietary and would have a huge installed base cost for businesses. Unfortunately, the fiat currency regime is way ahead in that category. No, I think that the new medium of currency will be the Internet combined with technologies that are being developed in parallel and have uses beyond that of currency transactions.
I wrote an article recently in which I tried to update Rahn’s thesis. Strangely it was featured on a left libertarian site I had never heard of before called freeliberal.com.
http://anti-state.com/article.php?article_id=433
Unfortunately, the digital currency industry that I discuss in the article has a long way to go. Many people are still skeptical and wary of these currencies, including Lew Rockwell, president of the Mises Institute. Perhaps someday soon one of them will sprout up that meets mass approval, however.
One thing to remember when talking about all these electronic money transactions is this: as I understand it, most internet traffic is routed through a very small number of Big Honking Routers. Every year, hardware and software technology makes it easier and easier to eavesdrop on internet traffic. When government tax revenues are down due to the high number of financial transactions occuring on the internet (avoiding sales tax and income tax), they will inevitably pass laws to make it illegal to make financial transactions which are not monitored. There will be plenty of excuses made, such as the War on Terror, War on Drugs, War on Benedict Arnold corporations, and so on. Encrypted transactions will probably be outlawed as well (as I believe they are in France), or else you will be required to provide a decryption key which will be held by the government.
One thing to remember when talking about all these electronic money transactions is this: as I understand it, most internet traffic is routed through a very small number of Big Honking Routers. Every year, hardware and software technology makes it easier and easier to eavesdrop on internet traffic. When government tax revenues are down due to the high number of financial transactions occuring on the internet (avoiding sales tax and income tax), they will inevitably pass laws to make it illegal to make financial transactions which are not monitored. There will be plenty of excuses made, such as the War on Terror, War on Drugs, War on Benedict Arnold corporations, and so on. Encrypted transactions will probably be outlawed as well (as I believe they are in France), or else you will be required to provide a decryption key which will be held by the government.
http://paypalwarning.com/
The problem with PayPal is that part of its model is the defrauding of its customers. It can and will arbitrarily freeze your account, then YOU have to figure out how to contact them, often send them more information than most would be willing to expose – often to a fax machine that seems to be always either busy or turned off, and even then it doesn’t always work, while they keep the money. It is a small fraction, but enough to discourage most people (at least after the 2nd horror story to someone they know).
The idea in general is reasonable, but they haven’t made it “work” in a reasonable sense of that word. If I could arbitrarily seize accounts of my customers without reasonable cause (and make them go through years of arbitrarion while I held on to the money), my “bank” would be nearly failure proof too.
Credit cards seem to be working well too, even better.
The specie-backed payment systems don’t seem to be doing as well. Nor the other “honest” systems where you don’t run a risk of having your account seized (and/or having the “linked” bank account raided).
Henry,
The Internet has major arteries, but montioring those would be almost impossible. Those arteries handle a huge amount of traffic, and the sites we are talking about only need to send a very small amount of data, hence, they use a very small amount of bandwidth. Trying to find out who was accessing these sites would be looking for a needle in a haystack. As for outlawing encryption, that wouldn’t fly either. Assuming people obeyed these laws (they most certainly wouldn’t), encryption is already used extensively for e-commerce that is completely legitimate, and such a move would be extremely politically unpopular. Nor would people want to hand the encryption keys over to the government. Frankly, if people started to use one of these offshore sites for point of sale transactions and it hit critical mass, the government would have to do something drastic to shut it down. It will be interesting to see what the government does. So far it has done nothing, and said nothing about these sites, probably because they haven’t been perceived as a threat to the fiat currency regime yet.
Steven,
I’m not a techie, so I can’t dispute your claim about smart cards vs. the Internet. I find your last post very encouraging, however, and believe that whatever the exact route taken, the government will not be able to keep up with private, digital money. Technology is simply advancing too rapidly and is becoming more and more decentralized in the process. Which is to say that however much technology has favored the state in the past, it is increasingly on the side of the individual, who I believe will prevail in the end.
This is funny. Just today I mailed away a story to a contest that had an option for e-submission–but I couldn’t use the e-submission form because payment was via PayPal and PayPal is now known to be untrustworty. I even put a note in with my mailed submission that said: “Please end association with PayPal, for they are untrustworthy.”
Besides, I came out with a non-fiat e-currency years before PayPal was ever dreamed up. Back then people called my ideas “idiotic.”
It’s not “the Ukraine” that PayPal co-creator Max Levchin is from. He’s from “Ukraine”. No “the”.
“Steven,
I’m not a techie, so I can’t dispute your claim about smart cards vs. the Internet.”
Actually, that is more of a matter of economics than tech. The Internet is something that has already been established. Smart cards would have to be developed, installed and then mass distributed. It could happen, but I think my scenario is more likely.
Paypal is no longer run by a small nimble creative firm – it is just a part of ebay these days and a larger firm has many of the same incentive problems as a government. The people working on paypal fraud now are probably more concerned with competing with the ebay fraud group than in creating better conditions for customers suspected of defrauding paypal (Or for whatever other reason the account was frozen). Now that it isn’t a matter of life and death for the company and their jobs they can just coast unless given some incentive to fix these problems.
Disclaimer: Ebay is of course a much more managable bureaucracy than government and of couse it doesn’t commit aggression in the same manner.
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