Say that the local lottery system has decided to innovate. Lottery tickets
can now be used as money. A ticket with a face value of $x can be used to buy
$x worth of stuff at any checkout counter in the country. Or they can be held
in digital form and transferred instantaneously across the lottery's new
payments system to friends, the utility company, or the government tax
department.
With the payments infrastructure in place, will people actually use lottery tickets
to pay their bills, transact with friends, or settle their taxes? Can lottery
tickets become money-like?
I'm skeptical. Here's my thinking. Say that Jane has just bought $10 worth of
digital lottery tickets. She's chosen to leave $10 in her bank account (she
likes the fact that they aren't risky). She spies a coffee stand and suddenly
has an urge to buy a $2 coffee. When she arrives at the till, how will she
decide to pay? With lottery tickets or deposits?
By paying for the $2 coffee with a bit of both—$1 in lottery tickets and $1
worth of deposits—she could end up with $9 of each, re-attaining her
pre-coffee 50/50 allocation. But let's assume that every transaction is a bit
costly to make, both in terms of time to completion and the small fixed fee
associated with each payments network. So paying both will be too expensive.
She'll have to choose one or the other.
A lottery ticket is more than just a bet. Jane is investing in a fantasy in
which she is fabulously rich. So from Jane's perspective, swapping her
lottery ticket for a mere cup of coffee would be silly. Once she owns it, her
ticket is worth more than hundreds of cups of coffee. A form of Gresham's law
kicks in. Given that the coffee seller accepts lottery tickets and deposits
at their face value, Jane will only spend her deposits, which she perceives
as being overvalued, while hoarding the lottery ticket, which she thinks are
being undervalued by the coffee seller. If every lottery player is like Jane,
than 'undervalued' lottery tickets will never circulate as money.
Jane could of course consider buying the coffee with lottery tickets only to
purchase replacement tickets in time for the draw. But there's always a risk
that she'll forget, or not have enough time because something unforeseen suddenly
occurs. By paying with a boring deposit, she doesn't have to fear missing out
on a jackpot.
If it seems unlikely that Jane will want to purchase the coffee with a
lottery ticket, what about Jim, who owns the coffee stand? Would he prefer to
receive lottery tickets or bank deposits?
Again, a mix of the two instruments would be costly for him to accept given a
doubling up of fees. In the unlikely event that Jim is also a lottery player
and hasn't yet bought his tickets yet, then he may prefer that Jane buys a
coffee with lottery tickets.
Consider that Jim has a constant stream of business expenses ahead of him,
but rarely knows precisely when he'll have to make a purchase. Because the
lottery tickets will most likely expire worthless in the future, they don't
provide him with a suitable means of solving for his future uncertainty.
Deposits, on the other hand, will always retain their value. As long as he
keeps them on hand, he knows that he can meet his bills. So I think that Jim
will probably prefer that Jane pays with deposits. (See more here).
In the unlikely event that Jane insists on paying with lottery tickets, Jim
will probably acquiesce—the customer is always right. Since he doesn't want
to be exposed to the uncertainty of lottery tickets, he will probably try to
exchange them as quickly as possible for deposits, absorbing the conversion
fee. Anticipating this problem, Jim could very well decide at the outset to
incentivize Jane to pay with deposits. This could involve placing a small
surcharge on lottery ticket payments, or offering her a small discount if she
pays with deposits. He might even pretend that his lottery payments terminal
is broken.
The combination of Jane's reticence to pay with lottery tickets, a form of
Gresham's law, and Jim's preference to avoid them will doom lottery tickets
as money. Even though the infrastructure is in place for lottery tickets to
be transported instantaneously from one person to the other, the incentives
just aren't present. Investing in the infrastructure turned out to be a waste
of money.
I think this setup also explains why bitcoin has never been adopted as a form
of money. Like Jane's lottery ticket, a bitcoin owner's bitcoins aren't just
bitcoins, they are a dream, a lambo, a ticket out of drudgery.
Spending them at a retailer at mere market value would be a waste given their
'destiny' to hit the moon. Sure, a bitcoiner can always spend a few precious
bitcoins on a coffee, only to replenish his stock of bitcoins later in the
day. But this would be dangerous, since bitcoin's price could spike at any
moment. Far safer to spend one's deposits and hoard one's bitcoins.
Even when they claim to be accepting bitcoins, retailers like Jim actually
rely on intermediaries like BitPay to step in and purchase the bitcoins while
relaying dollars to the retailer.For instance, see last
month's post on Ohio tax payments.
I also wonder how well my story fits with other examples of volatile media
being used as money. For instance, John Cochrane has
blogged about a world where one might trade an "S&P500 index
share for a candy bar." If lottery ticket buyers and bitcoin owners are
consuming a dream, then perhaps an owner of an equity ETF is doing the
same. In which case, no one would bother buying candy bars with stocks, and
so building out the payments infrastructure necessary to facilitate this
would be pointless.
