A $3 Billion Waste of Time

Every time I’m asked to sign a credit card receipt, I’ve wondered “how much does this archaic practice cost?”.  I finally decided to do the math.

First, a few words on why signing receipts is completely pointless.  The reason we’re supposed to sign is so the merchant can verify the signature to reduce fraud.  If the customer charges back a transaction, the bank will ask the merchant to produce the signature.  If one exists, the bank eats the cost; if not, the merchant does.

That all makes sense… except no one ever checks the signature.  For pretty much my entire adult life, I’ve signed things with smiley faces or even written VOID in all caps.  I have never had the signature questioned, much less compared to the one on my card.  Caveat: this is true in America.  Overseas, I’ve had the signature checked.

So we all — merchants and customers — engage in this meaningless ritual.  How much does this pointless custom cost?  Let’s do the math!

2011 saw 20 billion credit card transactions, and 76% of those were card-present transactions (where you have to sign).

Let’s assume each signature takes 15 seconds, from waiting for the receipt to print, passing it back and forth, doing the signature, and putting the receipt away.

And let’s also assume the customer and cashier both make an average american wage of $25.  15 seconds is 1 / 240 of an hour, which costs roughly 20 cents.

So we get 20,000,000,000 billion transactions * 76 percent * 20 cents = about $3 billion per year.

This number is conservative in that it doesn’t account for the time wasted by everyone else in line, plus the cost of the receipt paper, plus the cost of storing the receipts.

So we could save a few billion dollars if credit card agencies would change their charge back policy around card present transactions.

How Should Society React to the Growth of Bitcoin?

Being the crypto currency nerd that I am, I watched the New York Department of Financial Services hearings on Bitcoin regulation.  The regulators came across as sincere and reasonably informed.  They’re really trying to create a regulatory framework that doesn’t inhibit innovation.

A couple things I took away from these hearings:

  • Bitcoin is a new technology, so when its supporters describe its benefits, it sounds very abstract.  Ex: “currency is only the first application”, “programmable money”, “it allows permissionless financial innovation”.
  • While the regulators agree that innovation is good, it’s nowhere near as important as preventing crimes.  In other words, stopping money laundering trumps allowing financial innovation.

As Bitcoin grows, I foresee greater conflict between the side that wants to innovate, and the side that wants to retain control over financial transactions.

This post lays out some thoughts on how we, as a society, should navigate this conflict.  But first, here are some facts around how Bitcoin is not so scary.

Bitcoin doesn’t have to Replace the Dollar

According to many economists, Bitcoin’s deflationary nature makes it a poor currency.  You can’t easily lend it, people will want to hoard it, and fractional reserve banking is more difficult.

They may be right, but Bitcoin doesn’t have to replace the dollar.  It could sit along side the dollar just like other assets (gold, for instance).

Bitcoin can be Taxed

Just as a waiter can evade taxes by not declaring all his tips, Bitcoin opens up some room to tax evasion.  For instance, a freelance graphic designer could take payment in bitcoins, and there would be no bank record of this transaction for the IRS to follow.

However, Bitcoin won’t lead to massive tax evasion.  The state still has plenty of ways to catch cheaters.

First of all, companies are required to keep books that record revenue and expenses.  If a company keeps income off the books or establishes a slush fund, that action is tax fraud and can lead to prison.  There are just too many people looking at the books in large companies to hide such activity.

Second, you can get caught if you visibly live beyond your means.  Or if you spend money on a purchase that can be linked to your identity.  Perhaps the easiest way to get caught is if someone who knows what you’re doing tells the IRS (and, as a whistleblower, receives 30% of the taxes you owe).

Bitcoin can be Banned

If Bitcoin turns out to be a really bad thing, we can always ban it.

It’s true that we cannot stop Bitcoin the protocol (at least, not without turning off the Internet).  But we can ban exchanges from converting bitcoins to dollars.  We can ban merchants from accepting them.  We can make it a crime to facilitate their use and transmission.

Since Bitcoin is a global phenomenon, we’d need widespread agreement across developed nations to enforce such a ban.  But there’s plenty of precedent for such coordination in international stances against drugs, human trafficking, and intellectual property violations.

The effect of such laws would be to drive the price of bitcoins to zero, or close enough to not matter any more.

However, Bitcoin will lead to Loss of Control

The essence of Bitcoin — and all crypto currencies — is they are decentralized.  They allow transactions without any central authority’s permission.  They allow financial freedom.

This freedom means I can store my money without worrying that the central bank will devalue my currency.  It means a bank cannot prevent me from accessing my funds.  It means I can send money to a gambling site, or a relative in Syria.

This freedom also means the state can’t seize my funds if I’m found guilty of a crime.  It means I can send money to a terrorist group.  Freedom isn’t always pretty.

The rise of Bitcoin will reduce the power of banks.  Right now, banks act as aggregation points for money, allowing the state to monitor and freeze assets.  The state will lose this tool.

Furthermore, technologies to anonymize transactions (such as ZeroCoin) are coming.  Their possibility is a mathematical fact, and there exists market demand, so they will happen.

The core issue that we, as a society, must grapple with in deciding whether to embrace or ban crypto currencies is whether their benefits are worth letting go of control.

On one side, you’ll find regulators and the vested interests protected by the current rules.  They’ll scare voters with the familiar boogeymen of drugs, terrorism, human trafficking and child pornography.

Those on the other side will point out that the vast majority of money laundering is related to drugs, and police can still prosecute drug dealers (they’ll just lose the tools of financial tracking and seizing).  And furthermore, perhaps if we just handled drug abuse as a medical and not a criminal issue — which seems to work pretty well for Portugal — we wouldn’t have to worry about all this money laundering.  And we could also free about half our current prisoners.  But I digress…

Those of us who are older could also point out that money laundering wasn’t even a federal crime until 1986, yet pre-1986 society held together just fine.

Money beats Fear beats Logic

In the end, this issue will be decided by voters, and I’m not convinced logic and abstract promises of innovation will overcome fear in an argument.  But Bitcoin supporters have another weapon that might be even more powerful than fear.  Money.

Any legislation that bans Bitcoin will cause financial harm to those who hold bitcoins.  If enough people own bitcoins — and if those coins are worth enough — they’ll be able to exert political influence sufficient to counter the voices of fear that seek to ban it.