Let’s start with a quick question…
What type of money goes on this card?
For the most part, it's either “Credit or Debit.” The terminology serves to distinguish who pays at the time of sale.
Debit, me, now. Credit, them, later.
Card issuers like Mastercard and Visa issue these cards that work at most point-of-sale terminals around the world.
But what about this card?
This is a Gnosis Pay Card.
The card functions the same way any other debit card works. If you lose it you can order a new one. It has NFC technology for tap-to-pay and KYC is needed to sign-up.
Except… It's the first self-custodial Visa debit card that draws collateral from a Safe on Gnosis Pay Network’s L2. All funds stored on it are stablecoins, backed by short term bonds and paper. No more exposure to banks or owning bank deposit liabilities. “Bankless” as they say.
Gnosis Safe is the first truly crypto friendly debit card for on-chain netizens.
And this is why it's illegal in America to issue it.
Just last week Raul Carillo testified before the House Financial Committee in a hearing called “Digital Dollar Dilemma: The Implications of a Central Bank Digital Currency and Private Sector Alternatives.” Later that day, his colleague Nathan Tankus posted a highlight reel of his prepared testimony and answers to questions.
Raul’s politics are progressive and left-leaning. He and his other colleagues Rohan Grey and Nathan Tankus believe that money by definition can and should only be issued by the state. Private money is prone to failure and the risks of issuing it far outweigh any perceived benefits it provides its holders. I’m broadly generalizing here, but what was interesting about Raul’s line of thought and political beliefs is how it clashes with the paradox of digital cash.
Cash is a near-perfect means of payment. It’s private, anonymous, leaves no paper trail, and can be stored in any location for long periods of time. In most countries, there’s no limit on how much cash you can have or transact with, so long as you declare it under the rules of the Bank Secrecy Act. Cash is also largely apolitical as well, both left and right-leaning persons see the benefits of it, even as digital payments dominate.
Unfortunately, cash usage is on a decline in most developed countries. Credit and Debit cards are prolific, offering valuable incentives like cash back or airline miles. Some businesses even refuse to deal with cash, as it's expensive to transfer coins and bills to and from the bank. With everyone having a smartphone equipped with NFC tap-to-pay technology, carrying cards and a wallet around is just a fashion statement.
Arguably, digital payments have been hijacked by extractive middle-men and banks masquerading as leveraged long bond funds.
In the name of consumer convenience, we’ve allowed Visa and Mastercard to extract a 1-5% fee on billions of transactions daily. Credit card interest rates have never been higher. Sure we get points, but only at the cost of merchant subsidization.
Banks on the other hand are just as questionable. In the wake of the multitude of bank failures this Spring, why must bank investment activity and its ultimate losses be subsidized by socialized loss enabled by the US Fed?
When using the Gnosis Pay Card, all of the funds secured in the Safe are known. Currently, the only asset available for depositing into the Card is EURe, a Euro-denominated stablecoin.
According to the EURe website, “the bulk of users’ funds in the AAA rated State Street EUR Liquidity LVNAV Fund which holds a diversified portfolio of short duration assets.” Additionally, it is overcollateralized by 102%, user funds are safeguarded either as bank deposits or in high-quality, liquid securities and are kept in segregated accounts, separate from the issuer funds, ensuring additional protection. Unlike bank deposits, EURe represents a transferable claim, making it ideal for on-chain transactions. It is also a priority claim, meaning users will be paid out first in case of insolvency.
State Street publishes weekly reports on its fund asset makeup.
Compare that to a bank that invests its asset portfolio in a variety of short and long-duration bonds and loans, and then only provides reports for retail customers after the end of each quarter. If your bank is having issues, internal bank monitors are expected to share the information with regulators. In case of failure, the assumption is retail customers will be protected with deposit insurance, so radical transparency isn't necessary.
Radically Transparent Crypto Money
In crypto, we’ve pushed ahead with tokenized, ledger-based, USD-denominated money issued by companies like Tether, Circle, and Paxos. These tokens are bought through third-party crypto exchanges and then they can flow freely on-chain and into DeFi.
Paxos, the issuer of the newly launched PYUSD, invests all of its dollar collateral 1:1 in cash and cash equivalents (US Treasuries with a maturity of less than 90 days and overnight loans secured only by US Treasuries). The funds are held in fully segregated, bankruptcy remote accounts. Paxos is also regulated by the NYDFS which limits their collateral investment choices to only high-quality short-term assets.
It’s funny that deposit insurance is the only reason keeping money in a bank is arguably warranted versus holding stablecoins.
JP Koning wrote a great piece about the “fragmented” and “piecemeal” rules we’ve created for banks and financial institutions:
This illustrates the absurdity of some of the rules we've created surrounding monetary instruments. The fact that one type of PayPal dollar has robust protections while the other is only haphazardly protected, and only because the first is managed with a crypto database and not a traditional database, seems incredibly arbitrary to me.
Financial regulations exist, in part, to protect retail customers against shoddy financial providers. Shouldn't all PayPal customers, no matter what database technology they select, get to benefit from the same standard protections? What's the logic behind stipulating that one type of PayPal customer is to have the benefit of monthly attestation reports, for instance, while limiting the other type of customer to a black void of information?
Private money issued by Paxos has measurably greater safety than any bank could provide. And this might be the draw for large depositors who hold more than $250,000 in an account. Why take the risk of exposure to another Silicon Valley Bank, when Paxos is offering a “narrow bank” like tokens?
The threat of stablecoins is billions of dollars might flow out of banks and into stablecoins if more bank collapses occur. Drawdowns in deposits put further strain on banks holding billions in unrealized bond losses. The Fed would yet again have to bail out our failing banks at the cost of American taxpayers.
Money doesn’t need banks. It’s a fallacy we’ve been fed by statist money issuers for a century now. Banks are government supported and subsidized long bond funds functioning at the cost of the US dollar.
One of my favorite Macro commentators Jeffrey Snider literally wrote the book on emergent financial systems and is the premier expert on the Eurodollar system. In the video above, he speaks about how banks have taken on a dual role of both money creators and providing intermediation for their clients. And in doing so, it perverted the function of the bank, shifting incentives to ever increasing money creation at the cost of the global economy.
Returning money to Paxos’ narrow bank model would diminish commercial banks' abilities to abuse money creation through loan issuance and leverage. Instead, they would have to return to intermediation of money through traditional client services to earn profit.
But is this the best system?
Blockchains are public, transparent, and there are few controls enacted to prevent widespread data sharing and surveillance by companies like Chainalysis. In fact, the government has most likely started to tap these companies to build wide-ranging associative lists to track all addresses globally and pair them with KYC information.
Once Chainalysis collects and parses the data, nothing is stopping them from selling that data back to the government or other third party companies. Without strong consumer privacy regs, we’re heading towards a pseudonymous future of cat-and-mouse in which these massive data collection companies can assign scores and sell on tracking data. Nothing like this exists in the banking sector.
Another issue at hand for crypto is that it's relegated to the digital realm. Without an internet connection, peer-to-peer token transfers are impossible. Crypto relies on a distributed set of validators to include transactions into blocks. During emergencies where the power goes out, it's impossible to transact without access to high-end satphones or Starlink access.
Good ol’ hard cash is great because it leaves no paper trail, shields the identities of the transacting parties and has only one counterparty, the US Treasury. We have no analog to it in crypto. Arguably Tornado Cash brought the same privacy features on-chain, but its public usage by Lazarus Group and North Korea brought the OFAC banhammer down as a result.
So what is their answer? E-Cash.
On March 28, 2022, US Rep. Stephen Lynch (MA-08), the Chair of the House Committee on Financial Services' Task Force on Financial Technology, unveiled H.R. 7231, known as the Electronic Currency and Secure Hardware (ECASH) Act. The act was co-sponsored by fellow committee members: Rep.'s Jesús G. “Chuy” García (IL-04), Rashida Tlaib (MI-13), Ayanna Pressley (MA-07), and Alma Adams (NC-12). Moreover, the act received notable endorsements from prominent organizations such as Americans for Financial Reform, Demand Progress, the Action Center on Race and the Economy (ACRE), and Public Money Action.
The ECASH Act directs the Secretary of the Treasury to mandate the development and piloting of digital dollar technologies with privacy attributes synonymous with physical cash.
What does the ECASH Act do?
The ECASH Act encompasses several vital directives:
- Mandates the Secretary of the Treasury to fashion an offline-capable, privacy-respecting digital dollar termed as "e-cash."
- Promotes the exploration of hardware-based e-cash devices, emphasizing interoperability and accessibility.
- Constitutes a Monetary Privacy Board ensuring privacy preservation in the development of digital dollar technologies.
- Allocates a specialized Treasury account to fund the development and piloting of E-Cash.
What is E-Cash?
E-Cash, as defined in the ECASH Act, represents:
- A legal tender issued by the U.S. Treasury.
- A bearer instrument, accessible and usable directly by the general public, enabling direct, offline transactions.
- Compatible with existing financial systems and other public payment programs.
- Designed to emulate the anonymity of physical cash, ensuring equity, and inclusivity for marginalized communities.
It's essential to note that E-Cash is not a Central Bank Digital Currency (CBDC). It's intended to run parallel to and in tandem with other digital public finance forms, including CBDCs, FedAccounts, Postal Banking, and Public Banking.
E-Cash is also not a stablecoin, it does not exist on a ledger, rather its hardware based. When two people transact using E-Cash there is no digital record of their transaction and it should remain fully private.
Hardware solutions fo E-Cash
E-Cash Devices are government approved/authorized hardware built for “receiving, holding, and transferring e-cash balances.” These devices directly hold funds that can be verified with a dedicated or trusted computing environment in the device itself.
As all the logic is contained within the device, there is no need for a blockchain to prevent double-spending. Additionally, all of the transaction history is recorded within the device and not shared with third parties.
One of the companies making these Devices is WhisperCash. They have created a NEC/Bluetooth enabled E-Cash device that can either attach to a sim card and reside in a telephone or fit in a wallet like a credit card.
The larger card has a keyboard and electronic ink display. Payments can be sent using bluetooth or by entering the receiving party’s 10-digit hash.
Coming back to the paradox of digital cash, it's nearly impossible today to incorporate the actual properties of cash into electronic form. If cash had not been a part of common life for the past 5,000 years, it would be banned today for AML and terrorism concerns.
All new digital cash systems will be plagued with intrusive mass surveillance and reporting requirements to satisfy BSA regulations and laws. Even the above-mentioned E-Cash device has built-in BSA/AML rules that could prevent transactions above a certain amount and flag those deemed suspicious. Cards would need to be updated constantly to block accounts flagged by monetary authorities.
While the cards do address privacy concerns, the biggest knock against these cards is where does the demand come from? Without incentives, these cards would have to be legislated into existence by the federal government and could cost taxpayers billions to test PMF and usage.
The argument here is that E-Cash is somehow materially better than stablecoins, which already have global market fit and growing demand, versus an untested money system that is antithetical to bank cards. The belief is that the government should build a competitive solution to diminish the fee extraction of of Visa and Mastercard on US businesses.
Regulators think differently about private market solutions. The BIS calls stablecoins that hold only collateral at the Central Bank "Synthetic CBDCs." It criticizes them for "profit objectives" and raises concerns that market opaqueness could lead to "doubts on the value of the liabilities and result in users selling them at a discount to the par value of the currency." This last point is the matter that Central Bankers care most about, we've covered this before in Money Moves, how "par on demand" or the ability to swap $1 across all money types is the core problem they are solving.
Remember back to the Silicon Valley Bank collapse, before the bailout from the FDIC, Raul and his colleagues were calling for the US government to guarantee all dollar deposits at the failing bank to prevent a systemic collapse of the banking system. It's the same cry heard every time banks run into trouble, as the commercial banking system is responsible for money creation. If banks are perceived as risky, depositors would move funds into stablecoins like PYUSD with better investor protections, transparency, and legal structures. Outflows would further strain banks and eventually require bailouts from the Fed. The house of cards must be protected at all costs and we pay dearly for it as US taxpayers.
And this is the problem with modern finance, private market solutions that could reduce the cost of money and protect user funds are balkanized by a fragmented web of laws and regulations. Each money type, E-Cash, bank deposits, stablecoins, lobbies for carve outs and restrictions to monopolize and maximize their addressable market. Banks benefit the most from the continued existence of this system.
The only way out of this mess is to vastly reduce the arbitrary restrictions for money issuers and let the market compete for deposits. The days of a Public monopoly on money must end and the commercial banking cartels should be relegated to intermediation once again. Petty solutions like E-Cash are but a symptom of a bigger problem we're fighting against today.
We cannot settle for "Cash... but non-anonymous, non-private, BSA restricted, etc." It's time for market based solutions that push the boundaries of what money is and can achieve.