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Apple details secure 'touchless' e-wallet strategy in patent filing

post #1 of 26
Thread Starter 
Apple has been coy in revealing its plans for a touchless payment solution, but a patent filing discovered on Thursday gives clues as to where the company is headed.

Payment


Tech companies like Google are looking to streamline real world payments with so-called "e-wallet" solutions based on touchless technology like NFC. Despite a market heavily saturated with smart devices that would serve as optimal platforms for such systems, a clear frontrunner has yet to emerge.

While Apple is said to be working on a mobile payments solution, it has taken a "go slow" approach to the still nascent market. Over the past months, the company has been quietly laying groundwork for a possible reveal, however, first with Passbook, and more recently iBeacon. At this point, the endgame is unknown, but a patent filing discovered today may play a role in Apple's grand design.

The U.S. Patent and Trademark Office published Apple's application for a "Method to send payment data through various air interfaces without compromising user data," which details a readily deployable digital system based on existing mobile hardware technology. Prior to today's filing, most of Apple's payment-minded patents have focused on use case scenarios, not backend infrastructure.

Payment


The patent language notes that the invention covers a commercial transaction method in which a purchasing device, such as an iPhone, finds and establishes a secure connection to a point of sale system via a first wireless interface. Following link up, the device identifies a second, different wireless interface to connect to a backend server for transaction completion.

According to the document summary, the first secure connection can be accomplished via near-field communications modules -- or like technology -- and is provided to initiate the sales process. Here, NFC is used as an example and the patent points out that other wireless protocols can be used as necessary. In addition, the invention notes that a "bump" may be used to start the connection sequence.

It should be noted that Apple has shown more interest in Bluetooth than NFC, especially given the introduction of iBeacon technology, which rolled out in Apple Stores across the U.S. in December. Based on the Bluetooth Low Energy protocol, iBeacon has the potential to combine the benefits of NFC's limited proximity operation with increased range if needed. Bandwidth is also higher than NFC, allowing for more complex security implementations and data transfer.

Because holding a phone next to a cash register may be uncomfortable, a second more robust wireless interface is used to complete the transaction.

Along with Wi-Fi, the patent application names Bluetooth as a candidate wireless protocol for the second secure link with a store's backend server. This secondary connection does the heavy lifting in Apple's invention, including credit card handling, transfer of cryptogrphical data and user verification.

Passing sensitive credit card information stored on board a device through to a POS or backend server is dangerous as rogue apps may steal the data as it moves through the applications processor. Instead, the invention calls on a "secure element" located on-board a device to generate an alias for customer account information, which is then sent to the server along with a shared secret, or crypto key.

Mentioned multiple times in the patent language, the "secure element" appears to operate in a similar fashion as the "secure enclave" found in the iPhone 5s' A7 system-on-a-chip. In its current form, the enclave serves to protect Touch ID fingerprint data from snooping apps, but the system could potentially be used to safeguard payment information as well. As it is, both the patent and the existing secure enclave create aliases for outgoing data.

Touch ID


Once the alias is received at the backend server, it is verified by crypto data. Examples of viable secure solutions include a digitally-signed combination of one or more aliases, random numbers, merchant identifiers or other values.

To verify that the alias and crypto data match, the purchase device and server may communicate a shared secret. A shared secret can be a symmetric key stored in the secure element when the device is manufactured, then transmitted to the server backend behind a secure firewall. Another example is a specific counter value known independently on the device and server.

When a transaction request is received at the server, it generates crypto data from its own version of the shared secret and compares it to the crypto data sent over by the purchasing device to confirm the alias. If a match is found, the transaction is allowed to go through. In the case of a no-match, the transaction is cancelled and the wireless connection is terminated.

A simplification of the process is as follows: A purchase device initiates a transaction with a POS device via a close-proximity wireless protocol like iBeacon or NFC. The phone then sniffs out and connects to the server backend via a second wireless protocol, sending an alias for credit card information alongside a crypto key generated from a shared secret. These sensitive assets are stored in a secure element on the phone. On the server end, the backend generates a crypto key based on the shared secret and compares it with the data provided by the phone. If everything matches, the transaction is a go.

Payment


At this point, it is unclear if Apple will ever institute the above described system in a payments solution, though the company's most recent hardware and software advancements do point in that general direction.

It can be speculated that users may one day be able to use Touch ID to complete transactions by accessing credit card or banking information stored in an on-board secure enclave. Of course, merchants would have to agree to modifications to POS and backend systems for the solution to work. From what can be gathered by early iBeacon adoption, however, it appears that retailers may be ready for an Apple-made answer to mobile payments.

Apple's wireless interface payment patent application was first filed for in 2012 and credits Ahmer A. Khan, Brian J. Tucker, David T. Haggerty and Scott M. Herz as its inventors.
post #2 of 26
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Originally Posted by AppleInsider View Post

In addition, the invention notes that a "bump" may be used to start the connection sequence.

Bummer
Quote:
^ article

Sounds like a secure system. Amazing that we have a mobile device that can do all the processing. How far we've come.
Quote:
Of course, merchants would have to agree to modifications to POS and back-end systems for the solution to work.

And there's the problem. I wonder what this will entail, exactly. Specialized software? From Apple, requiring a Mac? (Implementation) costs?

It's 'easy' to design some method on paper, but with all ramifications I have no doubt there are many great ideas, never to see the light of day because of the amount of work or costs involved.
post #3 of 26
In 2012 this filling was mentioning a secure device, released as touchid over a year later. Payment design is probably much more detailed by now at Apple's labs. Imho, this will turn out to be the biggest thing for Apple in the coming years. This is why they are piling so much cash.
post #4 of 26
Quote:
And there's the problem. I wonder what this will entail, exactly. Specialized software? From Apple, requiring a Mac? (Implementation) costs?

There are some iPad POS on the market.
post #5 of 26

Isn't this somewhat how Airdrop works? The BT link establishes connection, and the WiFi link does the high throughput. In this case, both links can be used for extra security (shared key). This dual link is a novel approach to throughput AND security. Can't wait to see how TouchID plays out with this.

post #6 of 26
Quote:
Originally Posted by mieswall View Post

In 2012 this filling was mentioning a secure device, released as touchid over a year later. Payment design is probably much more detailed by now at Apple's labs. Imho, this will turn out to be the biggest thing for Apple in the coming years. This is why they are piling so much cash.

I agree that making the world's commerce easier and more secure could be a very big market for Apple (or anyone else), but where's the need for the big cash pile? Serious question.

I can see that Apple is going to need data centers around the world for this and other services like FaceTime, iMessage, iCloud, Siri, but e-commerce? Where's the need for large capital?
post #7 of 26
I still don't see Apple doing this. As I posted before, this is how I think Apple will do things.

Everybody is stuck in the current paradigm of passing payment information like CC or debit card information from your device to the merchants POS terminal. I think Apple will "reverse" things and your device will be the POS terminal and the merchant will pass information to you. This way no sensitive data ever gets passed over the airwaves for a crook to intercept. This is my method:

- You buy something that cost $59.99 and need to pay for it.
- The merchant POS terminal passes their merchant ID# and the dollar amount to your device.
- Your device connects to iTunes Payment Processing (IPP or whatever Apple calls it) to verify the Merchant ID, then displays the merchant name along with a request to authorize the purchase.
- Your device requests you to ID yourself (Touch ID) to approve the purchase.
- Once you approve IPP sends back an encoded string which contains the merchant ID, dollar amount and reference number.
- Your device passes this to the merchant which shows them payment information is received.
- Merchant system checks the data from you to make sure they got paid.
- You take your goods.

No sensitive data ever gets passed between you and the merchant. Apple is the processor and uses information on file to pay the merchant. The advantage for Apple? They get a cut of each transaction just like payment processors do. The advantage for the merchant? With Apple's pull and huge CC database they can negotiate a better rate with CC companies than a small merchant could ever hope for. Advantage for me? No more possibility if someone scanning the airwaves to get sensitive data. Better security for everyone.

Now done of you might look at this and point out possible flaws, but I have those covered too. Just didn't want to type a huge post so if anyone asks I'll provide the answer.

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post #8 of 26
Quote:
Originally Posted by EricTheHalfBee View Post

I think Apple will "reverse" things and your device will be the POS terminal and the merchant will pass information to you. This way no sensitive data ever gets passed over the airwaves for a crook to intercept.

Interesting "reverse" concept but note that NFC creates a secure loop that is very short. Even this patent lists the devices as needing to be 3 to 6 centimeters apart.


PS: I can't see any flaws with your "reverse" concept so I'd like to know what obstacles you've thought of.

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post #9 of 26
Quote:
Originally Posted by SolipsismX View Post


Interesting "reverse" concept but note that NFC creates a secure loop that is very short. Even this patent lists the devices as needing to be 3 to 6 centimeters apart.


PS: I can't see any flaws with your "reverse" concept so I'd like to know what obstacles you've thought of.

 

What if someone writes an App to try "fool" the merchant that the transaction was approved? The App intercepts the data from the Merchant and sends back a string that tries to fake the approval from iTunes?

 

There are two ways I can think of to get around this.

 

1. The merchants POS terminal has an internal ID number that gets written only once when bought, and never gets transmitted. When iTunes sends back the reference number, it's encrypted. The POS terminal uses this internal ID number as the hash. Hashing the purchase amount with your internal ID should match the reference number. Since the crook would never know this internal ID number they could never fake the reference number.

 

2. The merchant POS terminal contacts iTunes (over their wired network) using the reference number and iTunes responds if it's valid or not. Again, the internal ID of the POS terminal is used to hash the result so even if there was a man-in-the-middle attack (or if a hacker got onto your wired network) they still wouldn't be able to fake the reference number.

 

 

With NFC, a hacker could still get data just like they do now. For example, crooks often modify POS terminals to capture swiped cards and PIN numbers. It would be easy to place another NFC antenna on the POS terminal or stand to capture data. And there are different levels of "security". NFC isn't very high up the chain.

 

With this system, actual CC data is never passed around between anyone. All that's exchanged are payment amounts and reference numbers. The CC data is retained on Apple's servers and is never released to anyone.

 

 

Again, Apple is too big not to become an actual payment processor. Having an iPhone pass CC data to a merchant offers no actual benefits to Apple or customers (why tap your phone when you can tap your CC card?). There has to be some incentive for Apple to get into this and I think the reasons I mentioned above are pretty good incentives.

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post #10 of 26

Loooooong story short ..... Larry was getting tired waiting for Apple to come up with something .... anything .... so the boys of goofle can begin copying it!

....the lack of properly optimized apps is one of the reasons "why the experience on Android tablets is so crappy".

Tim Cook ~ The Wall Street Journal - February 7, 2014

Inside Google! 

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....the lack of properly optimized apps is one of the reasons "why the experience on Android tablets is so crappy".

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post #11 of 26
Quote:
Originally Posted by Flaneur View Post

I agree that making the world's commerce easier and more secure could be a very big market for Apple (or anyone else), but where's the need for the big cash pile? Serious question.

I can see that Apple is going to need data centers around the world for this and other services like FaceTime, iMessage, iCloud, Siri, but e-commerce? Where's the need for large capital?

Apple iBank.

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post #12 of 26
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Originally Posted by SpamSandwich View Post

Apple iBank.

Aha, headquartered in Ireland.
post #13 of 26
I love it when people ask why Apple needs so much capital. 😒 They do not run and maintain a successful multi-national corporation to give Apple the wisdom they have attained with not having so much capital. I look forward to the day someone in Tim Cook's position does this.
post #14 of 26
Quote:
Originally Posted by leavingthebigG View Post

I love it when people ask why Apple needs so much capital. 😒 They do not run and maintain a successful multi-national corporation to give Apple the wisdom they have attained with not having so much capital. I look forward to the day someone in Tim Cook's position does this.

If you're referring to me, you're making an unwarranted assumption. I was asking the original poster and anyone else who wanted to speculate why or how in particular Apple's cash reserve would be helpful in e-commerce.

I've never used a phrase like "Apple's sitting on their cash hoard" because I know very well that it represents an enormous head of actual and intellectual capital that is going to allow them to think big, very big, now and in the future.

For comparison, I heard the other day that the International Space Station has only cost 100 billion. I look forward to Apple's own space program, as I've said a few times here before, somewhat seriously. Not to mention their own global data network.

Other things you're saying I truly could not decipher.
post #15 of 26
Quote:
Originally Posted by Flaneur View Post

Aha, headquartered in Ireland.

Henceforth known as iReland.
post #16 of 26
Quote:
Originally Posted by EricTheHalfBee View Post

I still don't see Apple doing this. As I posted before, this is how I think Apple will do things.

Everybody is stuck in the current paradigm of passing payment information like CC or debit card information from your device to the merchants POS terminal. I think Apple will "reverse" things and your device will be the POS terminal and the merchant will pass information to you. This way no sensitive data ever gets passed over the airwaves for a crook to intercept. This is my method:

- You buy something that cost $59.99 and need to pay for it.
- The merchant POS terminal passes their merchant ID# and the dollar amount to your device.
- Your device connects to iTunes Payment Processing (IPP or whatever Apple calls it) to verify the Merchant ID, then displays the merchant name along with a request to authorize the purchase.
- Your device requests you to ID yourself (Touch ID) to approve the purchase.
- Once you approve IPP sends back an encoded string which contains the merchant ID, dollar amount and reference number.
- Your device passes this to the merchant which shows them payment information is received.
- Merchant system checks the data from you to make sure they got paid.
- You take your goods.

No sensitive data ever gets passed between you and the merchant. Apple is the processor and uses information on file to pay the merchant. The advantage for Apple? They get a cut of each transaction just like payment processors do. The advantage for the merchant? With Apple's pull and huge CC database they can negotiate a better rate with CC companies than a small merchant could ever hope for. Advantage for me? No more possibility if someone scanning the airwaves to get sensitive data. Better security for everyone.

Now done of you might look at this and point out possible flaws, but I have those covered too. Just didn't want to type a huge post so if anyone asks I'll provide the answer.

 

Only thing I see that might be an issue is I don't think a CC company would go for this.  Due to Apple's cut, the CC could always simply lower their off to the merchant in order to cut out Apple.  

 

For example: CC company initially charges a merchant 5% which is too high for the small merchant.  Merchant goes through Apple where Apple has a negotiated rate with the CC Company for 3% + 1% for Apple.  Now this rate is lower than the original offer to the merchant (4% vs 5%), but all the CC Company has to do is drop their offer to down to 3.5%.  CC Company gets a higher cut than they would going through Apple and merchant gets a lower percentage as well.

post #17 of 26
Quote:
Originally Posted by mistercow View Post

Only thing I see that might be an issue is I don't think a CC company would go for this.  Due to Apple's cut, the CC could always simply lower their off to the merchant in order to cut out Apple.  

For example: CC company initially charges a merchant 5% which is too high for the small merchant.  Merchant goes through Apple where Apple has a negotiated rate with the CC Company for 3% + 1% for Apple.  Now this rate is lower than the original offer to the merchant (4% vs 5%), but all the CC Company has to do is drop their offer to down to 3.5%.  CC Company gets a higher cut than they would going through Apple and merchant gets a lower percentage as well.

Maybe Apple drops their fee to 2% or 1%, but this also requires Apple to become a full-fledged credit company. Those billions in the bank are suddenly very handy.

Hello, iBank / AppleCredit.

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post #18 of 26
I'm not clear on the enrolment process envisioned by either the patent or your ideas above.

If Johnny grabs his iphone and wants to put his existing credit card into the "wallet", even if the secure enclave stores it and creates a proxy for it (like Johnny's fingerprint), at some point the credit card number needs to be passed to the merchant or the merchant's processor.

Is the credit card number being "securely" entered into the phone number by hand? and "securely" injected into the secure element?
post #19 of 26
Quote:
Originally Posted by formosa View Post

Isn't this somewhat how Airdrop works? The BT link establishes connection, and the WiFi link does the high throughput. In this case, both links can be used for extra security (shared key). This dual link is a novel approach to throughput AND security. Can't wait to see how TouchID plays out with this.

Exactly. The "shared secret" mentioned in this story could in one or both cases be a TouchID scan.

I sure hope Apple's future Wallet includes crypto-coin integration. As some may be aware Apple has rejected some Bitcoin apps for undefined reasons. I was hoping they were rejected because Apple was developing something similar.

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post #20 of 26
Quote:
Originally Posted by PhilBoogie View Post

And there's the problem. I wonder what this will entail, exactly. Specialized software? From Apple, requiring a Mac? (Implementation) costs?

It's 'easy' to design some method on paper, but with all ramifications I have no doubt there are many great ideas, never to see the light of day because of the amount of work or costs involved.

This is very straightforward to implement and it can be done on any server. The data they are talking about is say 10-20 strings of text being encrypted in some way. It would take less than a single working day to implement and test a one-to-one transaction. Payment processing already does this, it's just changing the order things are done.
Quote:
Originally Posted by EricTheHalfBee 
iTunes Payment Processing (IPP or whatever Apple calls it)

While getting a cut of the money, I would doubt that Apple wants to be the single point of failure for every single retail transaction. If they wanted to do that, they could just use iTunes IDs because the credit card data is already in iTunes. They'd never get widespread adoption either if they tried this. There's no way Amazon would let another payment processor take a cut of transactions when they are trying to get prices as low as they can. Apple has to allow people to set this up their own way. Apple profits from the hardware sale.

That's not to say they couldn't offer an option to use Apple as the payment processor and smaller retailers would probably be happy with that but not exclusively.
Quote:
Originally Posted by SpamSandwich 
The "shared secret" mentioned in this story could in one or both cases be a TouchID scan.

It has to exist on the server. They keep fingerprint data in an isolated piece of hardware on the phone, they won't transmit scan data over a network. The shared secrets are described as symmetric or public/private keys.

The shared secret has to be something they can replace easily in the event of a security breach. TouchID would at most be used to authorize the use of the phone for a transaction but not to verify the transaction.

The ideal setup is not to transmit credit card data at all but the main issue has always been storing it. Someone has to store it at some point, the card-issuing bank has to. But no one else outside of the bank should need to store the card data. The reason they do is for faster transactions so that you don't have to enter card details every single time. With a computer validation process, entering card details manually isn't required so intermediates have no reason to store card data.
Quote:
Originally Posted by SpamSandwich 
I sure hope Apple's future Wallet includes crypto-coin integration. As some may be aware Apple has rejected some Bitcoin apps for undefined reasons. I was hoping they were rejected because Apple was developing something similar.

The thing with crypto-currency is that it's unregulated and unstable. It is used in illegal activity and lots of it can be stolen very quickly:

http://www.theverge.com/2013/12/2/5167670/sheep-marketplace-bitcoin-heist-nets-at-least-5-million-owners-blamed

Given that the transactions are designed to be anonymous, it makes them hard to trace and almost impossible to prove original ownership. They are being banned from trading in a few places:

http://rt.com/business/alibaba-bitcoin-ban-taobao-353/

I think that the rise of crypto-currencies is a very clear indicator that some of the public now realise how valueless normal currency is and how it can be replaced by something almost equally worthless. However, normal currency works because it is backed by a guarantee of the government. At some level, the value in government-approved money comes down to a form of production. Their own securities are guaranteed by their ability to tax people. Crypto-currencies are not brought into circulation as a result of human labor and have nothing to back them - they are brought about by the processing power of computers and people have to assume that the algorithms generating them are sound.

It's basically, my computer made a random string of digits, how about you give me $1000 for it? It's ok, someone else will give you $1000 for it too.

But when everybody else says 'nah, it's not worth $1000, it's worth maybe $20', you have nothing to justify its value. The strength of a currency is in a central authority backing its value. This can't exist with crypto-currency because it's decentralized. There is zero correlation between the cost of goods and labor and crypto-currency. Maybe this can change by increasing the amount of transactions that happen using it and thereby giving it some stability but it has to be taxed like every other asset and the government won't accept a non-government backed currency for that.

The one thing crypto-currency has going for it is actually the illegal markets because for now at least, they can do illegal trades, not worry about taxes or money laundering. It's certainly not something Apple needs to be involved with though.

I'm not suggesting that I like the government-backed setup particularly as it's debt-based and financial institutions are allowed to be over-leveraged by crazy amounts:

http://www.washingtontimes.com/news/2013/nov/13/bill-would-outlaw-us-dollar-russia/
http://www.bloomberg.com/video/67122488-madoff-says-entire-u-s-government-a-ponzi-scheme.html

There shouldn't really be so much inflation in currency. If you bought a house in 1950 for $50k, today it would be $480k if it retained it's value just because of how the currency changed. Economists have said this is a good thing because it gives people a positive feeling that their assets are increasing in value but it's fraudulent. If the relative value hasn't changed then the price should stay largely the same, at least over the course of a lifetime.

http://en.wikipedia.org/wiki/Inflation

"Song Dynasty China introduced the practice of printing paper money in order to create fiat currency during the 11th century and, according to Daniel Headrick, "paper money allowed governments to spend far more than they received in taxes... in wartime, and the Song were often at war, such deficit spending caused runaway inflation." The problem of paper money inflation continued after the Song Dynasty. Peter Bernholz writes that "from then on, nearly every Chinese dynasty up to the Ming began by issuing some stable and convertible paper money and ended with pronounced inflation caused by circulating ever increasing amounts of paper notes to finance budget deficits."

During the Mongol Yuan Dynasty, the government spent a great deal of money fighting costly wars, and reacted by printing more, leading to inflation. The problem of inflation became so severe that the people stopped using paper money, which they saw as "worthless paper." Fearing the inflation that plagued the Yuan dynasty, the Ming Dynasty initially rejected the use of paper money, using only copper coins. The dynasty did not issue paper currency until 1375.

Historically, infusions of gold or silver into an economy also led to inflation. From the second half of the 15th century to the first half of the 17th, Western Europe experienced a major inflationary cycle referred to as the "price revolution", with prices on average rising perhaps sixfold over 150 years. This was largely caused by the sudden influx of gold and silver from the New World into Habsburg Spain.

By the nineteenth century, economists categorized three separate factors that cause a rise or fall in the price of goods: a change in the value or production costs of the good, a change in the price of money which then was usually a fluctuation in the commodity price of the metallic content in the currency, and currency depreciation resulting from an increased supply of currency relative to the quantity of redeemable metal backing the currency.

This relationship between the over-supply of banknotes and a resulting depreciation in their value was noted by earlier classical economists such as David Hume and David Ricardo, who would go on to examine and debate what effect a currency devaluation (later termed monetary inflation) has on the price of goods (later termed price inflation, and eventually just inflation).

The adoption of fiat currency by many countries, from the 18th century onwards, made much larger variations in the supply of money possible. Since then, huge increases in the supply of paper money have taken place in a number of countries, producing hyperinflations – episodes of extreme inflation rates much higher than those observed in earlier periods of commodity money. The hyperinflation in the Weimar Republic of Germany is a notable example.

Economists generally agree that in the long run, inflation is caused by increases in the money supply."

This may be one area where crypto-currencies excel because they appear to be designed to slow the easy injection of new money into supply over time. They will always be ultimately traded for fiat currency though so I'm not sure how that will play out in the long term. I guess the idea is to create a digital equivalent of gold, silver, diamonds etc.

A limited supply does have the problem that the population grows. If everyone owns some of a limited supply then it runs out eventually. The money supply has to keep increasing to balance out with increased population and production. The downside with what happens now is that there's too much debt-creation. It doesn't get paid off aggressively enough and is given out too casually. The interest on it also goes to private funds, which has made certain groups very wealthy:

http://www.celebritynetworth.com/richest-businessmen/rothschilds-net-worth/

http://en.wikipedia.org/wiki/Rothschild_family

"the new kind of international bank created by the Rothschilds was impervious to local attacks. Their assets were held in financial instruments, circulating through the world as stocks, bonds and debts. Changes made by the Rothschilds allowed them to insulate their property from local violence: "Henceforth their real wealth was beyond the reach of the mob, almost beyond the reach of greedy monarchs."

Another essential part of Mayer Rothschild's strategy for future success was to keep control of their banks in family hands, allowing them to maintain full secrecy about the size of their fortunes."

There's a quote attributed to one of them "Let me issue and control a Nation's money and I care not for who writes it's laws". Even if it's not accurately linked to them, the statement is true. Any entity that has control over currency that can be traded for any kind of assets or labor has ultimate power. If this control lands in the hands of private individuals motivated by greed then it has devastating effects.

The problem with the major banks for example. No punishments handed out, trillions exchanged on their own authority, they say publicly it was net zero effect but if you gave me $1t and I leverage it and pay it back and profit, how is that net zero? It's a reward for criminal activity. Maybe it's a case for decentralized currency but it won't fix it as long as the law-makers are backing them.

I think rather than crypto-currency, we just need to have a currency backed by a central authority that is regulated strongly. Low inflation, very tightly controlled leveraging and debt shouldn't be compoundable. If you make a loan, someone shouldn't be able to use that as capital for issuing a loan to someone else. Every loan given out by a business should be regulated so that it's only leveraged by a reasonable amount relative to their assets - Lehman's debt-to-equity ratio was over 30:1 when they collapsed, which is insane. When it's unpunished (because it's lawful of course), it just encourages it because if they win, they win big; if they lose, the losses are too big that it becomes someone else's problem.

Having a global currency isn't a bad thing either IMO. I know some people get very patriotic about currency and how great countries shouldn't be saddled by weaker ones but if everyone has the same guidelines for low inflation, reasonable leveraging etc then a low producing country just has less money. If they don't stick to the guidelines then the remaining group of countries takes measures to prevent them from trading in that currency. Crypto-currencies have no borders so act like a global currency but again, their value is held against fiat currency.
post #21 of 26
Marvin, it's interesting that you both defend and undermine your own argument in the defense of the Federal Reserve and central banking in your own examples.

The Federal Reserve was one example, of many, of the US government colluding with banks to circumvent their constitutional restrictions against creating a fiat currency.

Fiat currencies backed by magical thinking ARE worthless and time is proving this to be the case. Bitcoin and other associated crypto-currencies have value because they are not centrally controlled. They are essentially 'distributed' open-source currency that gain in value because of their utility. The less valuable ones will flop, the better ones will succeed (we're seeing this with both Bitcoin and Litecoin). One of the central reasons for the design of Bitcoin (I refer to the Bitcoin network) was to remove the corruption of currency from the hands of the few bankers and their political counterparts and incentivize the miners with mathematically planned rewards and inflation and incentivize users with liquidity and low or no cost fees that existing money transmitters can't touch.

By the way, the price of Bitcoin plummeted when China announced their banks could not get involved in any form, but it has recovered nicely as the value has been discovered and is rapidly rising as it continues to be adopted everywhere else, whether or not governments have a say so.

Central banks have lost the world's confidence. Bitcoin is the "currency competition" we need to keep people honest.

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post #22 of 26
Quote:
Originally Posted by SpamSandwich View Post

Marvin, it's interesting that you both defend and undermine your own argument in the defense of the Federal Reserve and central banking in your own examples.

Present central banking undoubtedly has to be fixed but I don't think decentralized currency is going to work. While it's not perfect, I think the best way forward is more regulation on centrally controlled currency.

Governments are here to stay and need to be paid for. They will never accept taxes in bitcoins. They also won't pay staff in bitcoins. There won't be mortgage lenders using bitcoins nor will they accept mortgage payments in bitcoins.

The supply is going to be limited - maximum 21 million coins - so they have to split the coins. I think it will be a very long time before it becomes stable and at its present value, that's a limit of $21b for everyone using it or if 1 million people use it, $2100 each. It's not enough. Either the value of the coins has to increase another 100-1000x within 10 years or it's going to have very limited use.
Quote:
Originally Posted by SpamSandwich View Post

The less valuable ones will flop, the better ones will succeed (we're seeing this with both Bitcoin and Litecoin).

This will result in lost confidence in virtual currency as people see their investments disappear. Bitcoin is heavily dependent on computing power. If someone maps a mining algorithm onto a quantum computer, it can screw the whole thing up. They say they can adapt to this but it's not guaranteed.

The other thing is that it's not backed by insurance. People need to feel security over their money. Banks cover savings up to $250k:

http://www.bankrate.com/finance/savings/fdic-insures-bank-deposits-to-250-000-1.aspx

Nobody is going to insure your quarter of a million dollar stash stored on a laptop and it can be stolen in an instant. You would never keep your life savings in your house, having the option to put them on a volatile storage drive that can be put into someone's pocket is not an improvement.
Quote:
Originally Posted by SpamSandwich View Post

One of the central reasons for the design of Bitcoin (I refer to the Bitcoin network) was to remove the corruption of currency from the hands of the few bankers and their political counterparts and incentivize the miners with mathematically planned rewards and inflation and incentivize users with liquidity and low or no cost fees that existing money transmitters can't touch.

Central banks have lost the world's confidence. Bitcoin is the "currency competition" we need to keep people honest.

It doesn't keep people honest though. It takes away regulation.

http://www.businessinsider.com/report-ceo-of-major-bitcoin-exchange-arrested-2014-1

I get that to some people governing bodies are the cause of all of society's ills and their solution is to get rid of this in order to create markets that compete on their own terms and no one else's. However, governments don't cause society's problems, they are an effect of them. When the free market fails to regulate itself adequately in the best interests of the people who the governing body represent, they pass laws in their best interests. If they could avoid getting involved in issues, they would. The free market however does very stupid things sometimes:

http://abcnews.go.com/Health/HeartFailureNews/newborns-family-learns-pre-existing-conditions-apply-birth/story?id=10218514&singlePage=true

There are some things like people's lives that you can't just throw under expenses on a balance sheet nor can you just wait until companies make the mistakes and people gradually over the course of decades migrate to the companies that don't. Sometimes there aren't enough options. Every step of the way, the more that the free market and the public fail, the larger governing bodies become to sort it out.

You can say in some cases it's ineffective and more damaging but not in most cases and undoing it just reinstates the problem. This is most evident in the financial industry, which is not nearly as regulated as it should be. Taking away any form of regulation is the worst thing to do. There's a TV series American Greed that highlights some of the big frauds:

http://en.wikipedia.org/wiki/List_of_American_Greed_episodes

Time after time it's 1 person or a handful of people convincing dozens of investors to part with their money and most of them live it up while paying back small amounts and lying that their money is growing - they feed on the fear that inflation devalues their savings. When the money inevitably runs out, you have these people, many retired, who have lost everything and sometimes the punishments are very small. The main character in the recent Wolf of Wall Street movie had a very small punishment of 22 months, his partner 34 months for their $200m scheme:

http://www.dailymail.co.uk/news/article-2543561/I-wonderful-life-Partner-crime-real-life-Wolf-Wall-St-boasts-luxury-lifestyle.html

That's what happens with too little regulation - they put everything in their wives' names. I can't see how it would improve with a decentralized currency with no insurance, people ready to inflate or deflate its value at a moment's notice, able to avoid taxes, do illegal trades with it. At least with banks, there's some kind of a paper trail when fraud happens.
post #23 of 26
Marvin, since you come from the point of view that freedom of choice and a free market are almost always bad, why aren't you arguing that no individual choice and complete control by government central planners are good...you know, like in the old Soviet Union or in the China of yesteryear? Oh, that's right. It's because central planning and corrupt markets don't actually work.

Every time regulation is piled on and free market principles are undermined, corruption and stagnation set in.

By the way, our economic and business environment today is NOT free market capitalism. It's more akin to crony capitalism and corporatism, with a number of recent examples bordering on fascism (where the state controls the means of production in the interest of "saving jobs"). Major difference. The system you decry is the one already corrupted by government involvement. More corruption won't make a bad system better.
Edited by SpamSandwich - 1/28/14 at 8:10am

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post #24 of 26
Quote:
Originally Posted by SpamSandwich View Post

Marvin, since you come from the point of view that freedom of choice and a free market are almost always bad, why aren't you arguing that no individual choice and complete control by government central planners are good...you know, like in the old Soviet Union or in the China of yesteryear? Oh, that's right. It's because central planning and corrupt markets don't actually work.

Why does it have to be black and white? Some regulation is good, some freedom is good and not in the same ratio in every area. If my ebooks cost 10% more, I can deal with it. If there are 10% more nutjobs running around the streets ready to shoot me in the face or stab me, more regulation would be preferred.

Everyone with any decent quality of life is wholly dependent on the monetary system and it needs to be heavily regulated so that the system doesn't get skewed heavily in favor of people in control of it at the expense of people who aren't.
Quote:
Originally Posted by SpamSandwich View Post

Every time regulation is piled on and free market principles are undermined, corruption and stagnation set in.

When reasonable regulation is removed, the free market causes harm to people such as when regulations in the financial industry were reduced or removed. Here's an article that would back up what you're saying although I'm not entirely sure what the conclusion is - if the failure happened regardless of any missing regulation then it was caused by the free market alone so they'd have to be advocating regulation where there wasn't any. Either that or they somehow think what happened was a good thing and shouldn't have been prevented:

http://www.forbes.com/sites/objectivist/2012/11/12/why-the-glass-steagall-myth-persists/

The two regulations mentioned were Glass Steagall and debt to equity allowance. The first is dismissed as not being relevant and that's fine but the second is ignored.

If you have an unregulated financial system where the government can't track what you're doing inside your business, you can lie to people. This is happening with bitcoin transactions just like with cash. If you had an unlimited debt to equity allowance, you would be able to leverage your assets by 100:1 or more. You can wrap up loans and sell them to people with a false rating and then make a bet on them failing.

Now you might say that's fine, let it fail and people won't use them again. But you aren't putting any restrictions on the collateral damage.

For every Enron, Madoff, Worldcom, AIG, Lehman, there are hundreds/thousands of victims. When you see the example of the guy linked earlier with sports cars, an expensive home, a luxury lifestyle as a reward for fraudulent activity, that came at the expense of victims and it's going to encourage other people to do the same. Why work a crappy job when you can scam people out of the money they earned and live in luxury? Promote the luxury of the few while creating misery for the many.

With just enough freedom, you can keep the government away from what you're doing so they don't know about the scam, you can create a safety net for when it goes wrong like putting assets in the names of relatives or off-shore accounts.

It sounds great when you are the one perpetrating the scam. But if you ever become the victim, then the cry comes out 'why did no one protect me from it?'. This thought doesn't cross the minds of wealthy people often because money's their safety net. As long as there's money, lawyers can be paid, workers can be paid, family can be supported.
Quote:
Originally Posted by SpamSandwich View Post

The system you decry is the one already corrupted by government involvement. More corruption won't make a bad system better.

I disagree with the assumption that more regulation automatically means more corruption but describe your better system. I assume it will involve almost no taxation of any kind. Money, goods and services are exchanged directly and no profit/loss records need to go to a 3rd party as long as the company is private. Almost everything would be private right? Schools free to teach whatever they want, the wealthiest kids go to the best schools. Healthcare all private and if you have enough health issues, then they are free to deny you treatment as it conflicts with their profit motive without government telling them otherwise. Law enforcement can't be private as there's the potential for conflicting factions but less regulation means they won't deal with traffic violations, go whatever speed you want, drink and take drugs. Run around the park naked, everybody get naked, everybody have a smoke indoors/outdoors, right next to a baby being breastfed in public, wherever. All freedom, no government.

I'm pretty sure it's all been tried, the laws and regulations that exist today are there as a response to the failure that happened when they weren't there. The regulation that has existed over the monetary system was there to prevent it failing and creating too many victims. Some regulation is ineffective, some of it is circumvented but removing all of it is not the solution because it's been done and it failed.
post #25 of 26

I'm seeing a lot of assumptions and pointers to many sources as if they were gospel, so I'm going to have to address a few items at a time.

 

You said:

Some regulation is good, some freedom is good and not in the same ratio in every area. If my ebooks cost 10% more, I can deal with it. If there are 10% more nutjobs running around the streets ready to shoot me in the face or stab me, more regulation would be preferred.

 

 

I believe in constitutional government. Nowhere in the Constitution does it allow for our government to be involved in the creation of a fiat currency. Nowhere. The Fed was formed as a means of circumventing our very own Constitution. Government is restricted from issuing fiat currency for good reason. They are only allowed to mint gold coins for use as currency, not fraudulent paper money backed by the (alleged) "full faith and credit of the United States...what does that even mean, anyway? The massive corruption of the Federal Reserve (a privately owned institution, incidentally) is what has contributed to the decline of this country and to the ruin of our economy. The dollar has lost something like 95% of its "value" since 1913.

 

I have no idea how you think "regulations" are going to keep someone from stabbing you, but if you chose to arm yourself you could have a chance to defend yourself in such an event.

 

You said:

If you have an unregulated financial system where the government can't track what you're doing inside your business, you can lie to people. This is happening with bitcoin transactions just like with cash.

 

Bitcoin is essentially an "open ledger" so the perspective that "you can lie to people" is strange. "Lie" in what sense? Bitcoins are designed to act like cash and to remove the central bank from the currency. It's doing exactly what it was designed to do.

 

You also said:

When reasonable regulation is removed, the free market causes harm to people such as when regulations in the financial industry were reduced or removed.

 

 

The only functions of government that are allowed are those described in the Constitution. All other functions are left to the people and the states. This is difficult to understand and comprehend because we have become a nation of out-of-control government and regulation, which (to us in our present day and age) seems "normal". I'm for minimal, Constitutional government (sometimes called "Minarchism"), which is in line with the original intent of the founders of this country. In a constitutional government, taxation still exists. Enough to carry out their only legitimate functions. If you check Wikipedia for a definition of "Minarchism" you'll see what I'm talking about.


Edited by SpamSandwich - 1/28/14 at 3:24pm

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post #26 of 26
Quote:
Originally Posted by SpamSandwich View Post

Government is restricted from issuing fiat currency for good reason. They are only allowed to mint gold coins for use as currency, not fraudulent paper money backed by the (alleged) "full faith and credit of the United States...what does that even mean, anyway? The massive corruption of the Federal Reserve (a privately owned institution, incidentally) is what has contributed to the decline of this country and to the ruin of our economy. The dollar has lost something like 95% of its "value" since 1913.

The problem with using metals as I noted above is that the supply is limited and the population and production grows so there has to be a way to split it. This leads to fractional reserve banking and loans with interest. It has to or the supply runs out. This is going to be the same with bitcoins. It's harder to do with bitcoins because some people will have a hard time trusting a 3rd party bitcoin proxy but there are already different coins and they can easily issue fiat currency as a proxy as that will always be legal tender.

In order for bitcoins to replace standard currency, they have to be cumulatively worth at least as much as $1.2 trillion:

http://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html

Right now, bitcoins are at 12 million coins worth $800-900 so $10.8b. There will be 21 million produced so they have to go up in value by about 50-100x to match the USD alone.

The meaning behind fiat currency being backed by a government is their ability to tax the people. Ultimately the value is in production. That doesn't mean that production is entirely controlled, it means that if the entire country stops producing, the government fails and it's not likely that's going to happen. Crypto-coins on the other hand have no such backing. The only value is in the trust of the people investing in it and this can fluctuate wildly:

http://www.huffingtonpost.com/georges-ugeux/the-bitcoin-is-victim-of-_b_4676132.html
Quote:
Originally Posted by SpamSandwich View Post

Bitcoin is essentially an "open ledger" so the perspective that "you can lie to people" is strange. "Lie" in what sense? Bitcoins are designed to act like cash and to remove the central bank from the currency. It's doing exactly what it was designed to do.

Lie in the sense that you can exchange something for bitcoins, take the bitcoins and don't follow through on what you are offering. You can't do chargebacks and you can't prove original ownership. Being able to trace transactions is good but there are ways round it using tumblers:

http://www.newstatesman.com/future-proof/2013/12/theres-£60m-bitcoin-heist-going-down-right-now-and-you-can-watch-real-time
http://www.theguardian.com/technology/2013/dec/09/recovering-stolen-bitcoin-sheep-marketplace-trading-digital-currency-money

Computers are fast and people are slow. There's no way you'll be able to trace every transaction that happens. You can call the police if someone steals your fiat currency, they won't do anything if someone steals your bitcoins, mostly because they can't.
Quote:
Originally Posted by SpamSandwich View Post

Minarchism

At some point in history, this will have existed. Laws and regulations are brought in over time as a response to the failure of those systems. The last couple of centuries have brought about a huge rise in life expectancy and overall quality of life and it's been regulated all the way. When the regulation didn't exist, there were poor working conditions, education, healthcare and so on. That's not to say the growth of a governing body is inevitable and should be promoted. It should only be enough to fix the problems it is there to solve. Taking away its governance over a problem reverts to the original problem left by the free market's inability to fix it on its own so it's not the solution. If government's involvement makes it worse, it's a better option to reduce it and in some cases this is true but I wouldn't say it's true in most cases.
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