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11.7 Digital and Virtual Currencies 353

4. Start using the reader and application. For each transac- us not only to pay friends but also merchants for lower priced
tion, the amount and description of the product or service products and services. The closing case at the end of this
is input, then the card is swiped. The app transmits the chapter discusses in detail Kenya’s M-Pesa system, which is
information to Square’s proprietary card service (via the an exceptional success story of how a mobile P2P system
Internet) for approval. Once approved, the customer signs provides benefits of these sorts and much more.
with their finger. The receipt is then delivered by text
message or e-mail to the customer. If the reader happens
to fail, the information can be put into the application SECTION 11.6 REVIEW QUESTIONS
manually.
1. What are the four types of mobile payment?
Square has a simple pricing policy. The reader is free and 2. Who are the key players in a mobile payment system?
so is setup. There is a 2.75% fee “per swipe for Visa, 3. What is mobile wallet? Devised-based wallet? Cloud-
MasterCard, Discover, and American Express.” based wallet? Wearable wallet?
The Square Magstripe Reader is used by major vendors 4. Describe closed-loop payment systems? What is a good
such as AT&T, Walgreens, FedEx Office, Walmart, Starbucks, example of this type of system?
and Whole Foods. For example, Starbucks use the Square 5. What is a mobile POS? Who is the leading provider of
mobile POS in-store as well as allowing customers to pay these systems?
with Square Wallet. Likewise, Whole Foods has Square 6. What is a person-to-person payment?
checkout stands at the food venues (e.g., sandwich counters,
juice and coffee bars, and beer and wine bars), see media.
wholefoodsmarket.com/news/square-and-whole-foods- 11.7 DIGITAL AND VIRTUAL CURRENCIES
market-partner-to-create- faster-easier-payment-and-c.
More recently, Square has added additional input devices In some discussions the terms digital currency, virtual cur-
including a combined contactless NFC and EMV chip card rency, and e-money are often used interchangeably. In other
reader and an iPad POS stand with a card reader (called discussions, they are recognized as being different, although
Square Stand). there seems to be little consistency about which is which. In
Square’s success has generated a raft of competitors this discussion, the definitions that are used come from the
including various offerings from the major POS players like Financial Action Task Force (FATF 2014). This is an inter-
Oracle Micros and NCR. PayPal has essentially cloned government body with 35 member countries (including all
Square’s hardware and application with a service called the major players in EC) charged with examining and
PayPal Here. Just like Square, they provide a dongle and addressing anti-money laundering and countering the financ-
EMV chip card reader along with a mobile wallet app. They ing of terroism (AML/CFT) worldwide. They are one of the
also have the same fee structure. For details, see paypal. few official bodies that has a critical stake in defining the
com/webapps/mpp/credit-card-reader. differences among the concepts so they can craft language to
be used by legal and regulatory bodies.
Person-to-Person (P2P) Payments

Financial transactions among individuals—friends, col- Types of Digital Currencies
leagues, family members, and the like—occur all the time.
We lend money to a friend, we pay somebody back for lunch, To understand the differences among these three concepts,
we send or receive money from home, or we send money as let’s start at the other end of the currency spectrum—fiat cur-
a birthday present. Most of the time, these transactions rency. Fiat currency (aka real currency, real money, or
involve cash or check. national currency) is the “coin and paper money of a country
Increasingly, these person-to-person (P2P) transactions that is designated as legal tender; circulates; and is customarily
are being handled by online payment systems using either a used and accepted as the medium of exchange in the issuing
computer, tablet, smart phone or even prepaid cards. Many country.” Electronic money (abbreviated e-money) is a digital
of the more popular P2P systems are actually provided by the representation of fiat currency used for purposes of electronic
major payment gateways (like PayPal) either as a component transfer (e.g., the digital representation funds used to settle a
of the larger payment system or as a separate application. merchant account after an EC purchase is made). In contrast,
These online P2P systems transcend distance and time, elim- virtual currency is the “digital representation of value that
inate the need carry cash and checks for smaller transactions can be digitally traded and functions as (1) a medium of
of this sort, and in some cases offer the “unbanked” and exchange; and/or (2) a unit of account; and/or (3) a store of
“underbanked” an entry into the larger financial. They enable value, but does not have legal status in any jurisdiction.”