Source
Automatically imported from: http://commons.somewhere.com:80/rre/1998/digital.bearer.settlemen.html
Content
| | | | --- | --- | | Red Rock Eater Digest | Most Recent Article: Mon, 22 Jan 2001 |
digital bearer settlement
``` [I have taken the liberty of formatting much of this to 70 columns.]
---
This message was forwarded through the Red Rock Eater News Service (RRE). Send any replies to the original author, listed in the From: field below. You are welcome to send the message along to others but please do not use the "redirect" command. For information on RRE, including instructions for (un)subscribing, send an empty message to rre-help@weber.ucsd.edu
---
Date: Sat, 21 Mar 1998 16:18:11 -0500
From: Robert Hettinga
[...]
Issue Date: March 23, 1998
Call for Presenters
The Philodox Market Development Conference on Digital Bearer Settlement
The Mount Washington Hotel and Resort, Bretton Woods, New Hampshire, USA August 10-13, 1998
Philodox Financial Technology Evangelism, a business started by Robert Hettinga to promote the advancement of digital commerce, financial cryptography, and digital bearer settlement technologies on open public networks, plans to hold the world's first market development conference on digital bearer settlement at the Mount Washington Hotel, Bretton Woods, New Hampshire, from August 10th through 13th, 1998.
Towards that end, Philodox is searching for 6 expert presenters in the history, technology, economics, finance, and law of physical and digital bearer settlement to discuss their fields of expertise with the conference attendees.
The Conference
The Conference itself will be run in four morning sessions, from 8:30 AM to 12:45PM, Monday through Thursday, August 10-13, 1998. These sessions are designed to:
** acquaint financial professionals with the ability of some cryptographic technology to create bearer certificates in digital form, which could used to effect extremely low-cost transactions on ubiquitous public internetworks,
** acquaint technical professionals and entrepreneurs in the digital bearer technology area of the financial cryptography business with the requirements of the investment and financial transaction community for their products and services,
** brainstorm new applications for these technologies, and,
** brainstorm solutions to legal, regulatory, and market obstacles to the successful implementation of digital bearer settlement technology in capital markets and elsewhere.
Afternoons on conference days will be available for promotional presentations, for sponsored activities, and, most important, for informal discussions and business networking among the Conference attendees. Some exhibition space may be available.
Conference attendees, keynoters, presenters, sponsors and staff will be encouraged to bring their families and take advantage of the many recreational opportunities afforded by the Mount Washington Hotel and Resort, including golf, tennis, hiking, swimming, horseback riding, day trips to nearby locations, including the top of Mount Washington itself. Special one-week vacation package pricing with the Hotel and surrounding Resort properties has been arranged by Philodox to facilitate as much informal contact among the Conference community as possible.
A network room will also be provided with direct access to the internet, including lots of ethernet ports for laptop connections.
The Presentions
In addition to having four well-known daily keynote speakers -- who are already being recruited individually -- Philodox would like to have 6 expert presenters in the history, technology, economics, and law of physical and digital bearer settlement in the capital markets, and in its use in other areas where bearer technology has been or may be used.
Presenters will receive round-trip travel -- including international travel, if necessary -- to Bretton Woods, with single-occupancy accommodation at the Mount Washington Hotel including all meals, and, of course, a badge to the rest of the conference, including any sponsored events which may occur. Presenters who bring their families will receive reimbursement equal to the above towards their trip and stay at the conference, plus an extra conference badge for a guest. In order to be on hand as a resource to the rest of the conference attendees, presenters will be required to attend all conference sessions, however.
Presentation Requirements
Only one presenter will be selected for each presentation, and no presenter will give more than one presentation. Each presentation should be 90 minutes in length, and will be presented in the order listed below. They should be targeted to an audience of management and senior technology professionals in financial transaction settlement and information technology, including entrepreneurs and investors in the field of digital bearer settlement. Once selected, the presenters will be able to correspond with each other in order integrate their presentations into a more coherent conference program.
It is expected that the presenters already know the material they plan to present, have probably discussed and/or presented it elsewhere before, and that no new research would be required on their part to develop their informal 90 minute talks on the subject in question.
In order to assure this, this Call for Presenters will expire exactly one week from its date of issue, found at the top of this message, and Philodox will individually recruit any presenters as necessary to fill out the program after the expiration date.
The topics of the presentations required for the Conference are detailed below.
The History of Transaction Settlement Technology
A fairly broad -- and entertaining -- history of bearer settlement technology, starting with paleolithic trading, through the invention of money and other abstractions of value, the advent of book-entry settlement, settlement mechanisms currently prevalent in modern industrial financial markets, and recent developments in internet transaction settlement technology, with a focus on digital bearer settlement.
The Technology of Digital Bearer Settlement
A very good layman's introduction to cryptography, to financial cryptography, and to the technology of modern digital bearer settlement, including some discussion of the mechanics of blind signatures, hash collisions, and other ways of creating unique unforgeable binary objects. Finally, some descriptions of the commercially available protocols in use today, some of the experimental protocols being tested, and a look at possible avenues for new developments in the financial cryptography of digital bearer settlement. Since this is a business conference, significatnt attention should be paid to the operating costs of these technologies in a commercial setting.
The Economics of Digital Bearer Settlement
A business-level discussion of the possible economic consequences of digital bearer settlement, including transnationality and its effects on national financial institutions, effects on liquidity and the velocity of financial transactions, the effect of Moore's Law and digital bearer settled auctions on the potential granularity of tranaction size, of firm size, and the flexibility and scope of financial activity in digital bearer settled markets.
The Regulation of Digital Bearer Settlement
A brief history of the regulation of transactions, up to and including the virtual abolition of physical bearer settlement by the US government and the IRS in the 1980's. A survey of current US and international laws and requlations on bearer transactions, with an eye toward the specific regulations which would hinder digital bearer settlement markets the most.
Digital Bearer Settled Capital Markets
An extremely creative discussion of the use of digital bearer settled transactions in the capital markets, including how to use the technology to implement all forms of financial instruments: debt, equity, and all derivatives thereof, including the bundling of digital bearer certificates to form bonds, anonymous voting protocols and secret sharing for control of equity, including limited liability using software alone, and ways to create bearer held contingent claims on assets of all forms. Finally, ways to integrate these technologies into the current financial infrastructure on the status quo's own regulatory and legal terms.
Other Markets for Digital Bearer Technology
A more speculative discussion of other applications of digital bearer settlement technology on open public networks, including gaming and collectibles, and, possibly most important in the long run, the efficient cash-auction of internet resources in real time using digital bearer micropayment.
Presentation Submissions
To submit your presentation for consideration, please send the
following, via email, in ASCII text, to Robert Hettinga
** a single-paragraph biography of yourself,
** a single-paragraph description of the talk you're giving (especially if it's better than the one above :-)),
** a 100-word informal biography of yourself, including an email address and any URLs to other information about yourself,
** a 250-word informal abstract of your talk, including URLs to other information about your talk.
The above materials will be used to promote the Conference and your talk in particular, and, as such, become the property of Philodox if your presentation is accepted. Otherwise, they will remain in confidence.
Please set your email message for a return receipt if you would like confirmation of the receipt of your submission.
All presentation candidates will be notified by email of the final status of their submission, accepted or declined, by Midnight, Eastern Standard Time, Wednesday, April 1st, 1998.
Good luck to all presentation candidates!
For More Information
For further information about presenting at, sponsoring, or
participating in The Philodox Market Development Conference on
Digital Bearer Settlement, please contact Robert Hettinga at
A formal Call for Participants for the Conference, including pricing, payment, program, and travel and lodging information will be sent by Philodox to most appropriate financial, crytographic, economic, and legal listservers and newsgroups on Midnight, Eastern Standard Time, April 1st, 1998.
In addition, there is now an email discussion list, dbs@philodox.com, which is devoted to to the discussion of digital bearer settlement, this conference, and a proposed peer reviewed conference on digital bearer settlement to be held in New York's financial district sometime this winter.
Sign up for the digital bearer settlement list with this URL:
And, for those of you without MIME URL processors in your mail readers:
Send email to:
requests@philodox.com
With a subject:
subscribe dbs
Finally, A Personal Note
Thanks to everyone who responded to the Call for Founders for the Digital Bearer Settlement email list. We now have more than a hundred people from every dicipline that digital bearer settlement will effect, including some well respected experts in those fields. It is the quality of this response which inspired me to make this forthcoming Conference happen, and I thank all of you for your enthusiasm and support.
See you all at Bretton Woods!
Cheers, Robert Hettinga, Philodox Financial Technology Evangelism
---
Robert Hettinga (rah@shipwright.com), Philodox e$, 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire' The e$ Home Page: http://www.shipwright.com/
Date: Sun, 15 Mar 1998 18:43:54 -0500
From: Robert Hettinga
Call for Founders: An Email List (and Subsequent Conferences) on Digital Bearer Settlement
(or, Hettinga Fires Up a New Toy...)
Boston, Massachusetts Sunday, March 15, 1998
Since the invention of the telegraph, financial transaction settlement has had a problem: How do you transact business at a distance when the simplest way to execute, clear and settle a transaction is with an exchange of bearer certificates? For instance, you have a bearer bond, and I have cash, and we're in the same place, say the City of London, or in front of a buttonwood tree on Wall Street. Since we're standing face to face, we can simply agree on a price, exchange one kind of paper for another, and the trade is over. Execution, clearing, and settlement are all the same action.
Unfortunately, because of telecommunication, that isn't how we trade financial assets anymore. If I'm in Boston, and you're in Atlanta, and we telegraph/telex/telephone/modem our trades through our various brokerage offices to the New York Stock Exchange, then how and when do we arrange that physical exchange of bearer certificates? The answer is, of course, we don't.
The Book-Entry Ziggurat
Our current system of so-called "book-entry" transaction settlement was invented in order to handle the problems caused by remote transaction execution and the subsequent need to physically exchange bearer certificates for settlement. It can easily be said that the entire structure of modern capital markets has been built around this communication architecture of hierarchically "wired" charts of accounts. At the top of all markets is some kind of geodesic "face-to-face" auction market, be it an exchange of some sort, or an open-outcry pit, or, more recently, overgrown bulliten-boards like the NASDAQ or Reuter's currency system. But, until a trade gets to where it is actually executed, it's either climbing up or down this extensive financial ziggurat we've built to move our money around. And, especially after the trade is executed, it still has to clear and settle in the same kind of system.
All of this bookeeping and shuffling of paper takes a long time. Tansactions requiring bearer settlement would take weeks, and then, with improvements in transportation (Brinks became an air cargo business as well), days, to settle. Within living memory, even pure book-entry transactions on the New York Stock Exchange would take up to 5 business days to settle, and that was with all stock certificates locked down in a vault at the Depository Trust Company in New York. NYSE transactions now clear with offsetting accounts on the respective books of the buyer, seller, and the DTC, and they settle when the buyer's funds arrive in the seller's bank account.
Book-entry settlement is not just confined to transactions in the financial markets. Virtually all forms of money except physical cash is in book-entry form now. A check is a request to your bank to move money up, and then back down, another financial ziggurat of offsetting book-entries called the automated clearinghouse system, eventually landing in the bank account of the person you wrote the check to. A credit card transaction is simply an instruction to borrow money from a bank, or from Diner's Club or American Express, and send it over the financial clearing ziggurat to the vendor in question, with your implicit promise to pay the lender back later. Even a "foriegn" ATM transaction is effectively a loan settled over the finanancial ziggurat. That's what those "inflated" ATM fees pay for, for the most part: the time value of the money "lent" to you by the owner of the machine plus, the cost of running the machine itself, and the opportunity cost of not lending it elsewhere. Even though global currency transactions are executed geodesically -- directly between bank to bank -- the transactions still settle on a book-entry basis over SWIFT, or other international funds transfer systems, and thus move hierarchically to settle, especially for smaller banks.
Note, finally, that communications networks these days are becoming more geodesic (defined: "the straightest line across sphere") and less hierarchical, because Moore's Law makes the cost of switching information fall by half every 18 months. The internet is the mother of all geodesic networks. It's now almost always cheaper to add an automated "switch" and break up information into more immediately usable pieces for the people who need it most than it is to aggregate information and pass it up and then down through a hierarchical organization/market/network. That goes for financial information as well: cash, equity, debt, or any derivative thereof. So, how do you clear and settle transactions even if you can now execute them geodesically? With digital bearer settlement.
The Invention of Digital Bearer Settlement
In the mid 1980's cryptographer David Chaum invented a cryptographic protocol which would change all that, at least it would when a ubiquitous geodesic internetwork made the technology practical. Chaum's invention was the blind signature protocol. Using blind signatures and on-line reissuance to prevent "double spending", it became possible to create unique unforgeable binary objects which could be exchanged anonymously and which could still be assigned any financial value, as long as the issuing party honors the object's implicit promise at redemption. Since Chaum's invention of blind signatures there has been an explosion of new cryptographic digital bearer settlement protocols, created by some of the best minds in cryptography, ranging in designed scale from large macroproject financing technology to micro-, or possibly even pico-payment systems.
Put simply, it is now technologically possible to create digital bearer certificates representing cash, debt, equity, or any derivative thereof. These systems will probably be able to handle transactions from very large gigadollar bond issues down to bandwidth-purchase transactions in the thousandth or maybe millionth of a cent range. These cryptographic objects are true digital bearer certificates, which, like the paper bearer certificates of old, can be traded, cleared, and settled instantly, without years of audit trails to prevent non-repudiation, without clearinghouses -- though requiring on-line validation/reissue in higher-value cases -- and with the minimum possible number of financial intermediaries. For instance, in a secondary market transaction for a digital bearer bond, the buyer, the seller, and the underwriters of the bond and the cash exchanged for it can all effect the trade instantly, with completely manageable transaction risk, without either party needing to know anything about the other except the reputation of the bond and the cash traded for it. All with a cryptographic protocol which unmasks any forger mathematically before any fraudulent trade can finish execution.
A comparable book-entry bond transaction, taking place in "meatspace", would require up to 6 or 7 different financial intermediaries besides the buyer and the seller, and would still take at least 24 hours to clear at a minimum. And, of course, it would also require the implicit physical force of a nation-state to prevent repudiation of the trade until everything cleared and settled. Not to mention 7 years of audit trails for various regulatory agencies -- including the tax man. Oddly enough, the closer you get to instant settlement, the more costly, and risky, all this becomes relative to digital bearer settlement.
Hence my persistant -- but still unvalidated :-) -- claim that digital bearer settlement will prove to be at least 3 orders of magnitude cheaper than even electronic book-entry settlement. Divide the transaction cost by a thousand, in other words, and that might be cost of digital bearer settlement compared to even the most advanced book-entry methods possible. That's why I think this technology is so important, and not just because of its remarkable implications for our own personal financial privacy. Economic reality is never optional, just like it wasn't when the New York Stock Exchange transaction glut in the late 60's resulted in the eventual death of physical bearer settlement in the early 1980's. If digital bearer settlement actually works, the entire financial landscape is going to change. Tectonically.
Back to the Future of Financial Technology
Let's look at fraud, for instance. Because of the immediacy and information-rich environment in which they're traded, bearer settled markets, digital or not, rely much more on reputation than legal sanction for fraud prevention. Like J. Pierpont Morgan said, "...Character. I wouldn't buy anything from a man with no character if he offered me all the bonds in Christendom." In digital bearer markets, that persistance of reputation is enabled by cryptographic digital signature protocols, of which Chaum's blind signature protocol is a special case. One's digital signature then becomes one's financial identity, having its own hard-won reputation separate from one's "biometric" physical identity. So, the old cypherpunk saw is now in fact true: Biometric identity can be completely orthogonal to reputation in "cypherspace". One person can have many digital signatures, but each signature has its own reputation, and a new or untrustworthy reputation is a hard thing to hide in a ubiquitous online environment.
Remember, the primary reason biometric identity is required for book-entry settlement is the lack of security of the actual book-entries themselves. At their heart, book-entries are simply database fields which require strong access controls, physical biometrics, an extensive legal and requlatory apparatus, and, of course, police to enforce those laws and regulations against the fraudulent "revision", shall we say, of data. The consequence of not following all of those procedures to the letter can be disasterous, as the Leeson affair at Barings can attest. The costs of such a system, not only in terms of simple administration and processing, but in the actual required presence of the nation-state in every facet of our financial lives, is, again, quite large, but, since you couldn't shove a bearer certificate down a wire, there wasn't much we could do about it. Until now.
And So, Hettinga Starts Yet Another Mailing List
What I'm about to do is a continuation of the personal journey I
started when I became interested first in digital commerce on the net
when commercialization of the net was finally allowed, but frowned on
In that vein, I am now starting an email group dedicated to the discussion of the business of, the research and development of, the finance and economics of, and the law and policy of, something which I now think is the most important form of financial cryptography itself. Something which, like all the other times I took off hell bent for leather about a particular technology, causes much consternation with people who disagree with me about its existance, much less its importance to the way the world will work: Digital Bearer Settlement.
The List's Charter and Projects
Except for explanations of what their effects are, I would like to leave technical discussions of the actual cryptography of bearer settlement protocols to the various cryptographic mail and news groups, not to mention Financial Cryptography conference itself. But, everything else, especially the cost/benefit of digital bearer settlement financial cryptography, and the effect of digital bearer settlement on finance, economics, and policy, should be considered open for discussion on this new list.
The list, like others, will have a charter, or at least a rant, :-), and, of course, you're reading it. Put more specifically, the charter of this new list is to actively promote the development of businesses which will sell either digital bearer settlement technology and services or will require those technologies and services in order to function themselves. Toward that end, I'm going to propose a series of conferences on digital bearer settlement, starting as soon as there is enough interest on this new list to do so.
A Market Development Conference on Digital Bearer Settlement
The first conference, which I propose to occur in the Boston or New
England area this summer, either in Boston itself, or, maybe more
symbolically, at the Mount Washington Resort at Bretton Woods in New
Hampshire
A Peer-Reviewed Financial Conference on Digital Bearer-Settlement
The second conference, a full-time two-day event, probably on a Monday and Tuesday, will be history's first peer-reviewed financial conference on digital bearer settlement, and its focus will be the possible financial, economic, and policy implications of digital bearer settlement cryptography. But not the cryptography itself, which again belongs in the various extant cryptography conferences. I'm hoping to have this financial conference in New York City, and, of course, as physically close to the Depository Trust Company as it is economically possible for me to do so :-). I'm planning to have it within the year, possibly in the late fall or in the early winter, depending on my ability to recruit an appropriate program chair, and that person's ability to assemble a committee and get the papers read on time. I'm hoping to have the proceedings of this conference published in an archival volume, hopefully under a well-known financial nameplate, in the same way that Springer-Verlag publishes the proceedings of the Financial Cryptography conferences in its Lecture Notes in Computer Science series. This event will also be sponsored, but, of course, sponsorship will in no way affect the selection of papers for presentation in the conference. Again, talk to me directly for details, as I get them figured out.
Taking The Show On The Road
Eventually, I want to combine the conference with an exhibition, like we did at FC98 this year, for annual meetings at various financial capitals around the world, with the peer-reviewed sessions happening in the morning, and the business sessions happening in the afternoon of a combined four-day event. The exhibition would include an exhibit floor, sponsored talks and events, and other things. And, no, I don't think I want to take all this to Anguilla. :-). In fact, the point of taking these two events on the road after starting them out together in New York will be to evangelize digital bearer settlement technology to the rest of the world's financial community, to empirically demonstrate that it is the cheapest way to clear a trade since the invention of the telegraph, and, finally, to demystify it of both its technological complexity and, of course, its real or perceived threats to the regulatory status quo. Frankly, I believe that digital bearer settlement will be an internet-only phenomenon, at least in the earliest stages. If and when economic necessity dicatates that all transactions are digital-bearer settled, or, sooner, that a very large portion of financial assets stay permanently on the net in bearer form, the world will have many more interesting things to think about besides whether FinCEN can see where everybody's money goes. Obviously, these "interesting phenomena" will only occur if digital bearer settlement is in fact radically cheaper and more economically useful than book-entry settlement, which is, of course, still just a wild and unproven assertion on my part. :-).
So? What is Philodox.com?
To do all this, and to do a couple of other projects I'm working on, I'm starting a new business called Philodox. "Philodox", if you look it up in the Oxford English Dictionary, is a rarely used perjorative word meaning, most recently, "lover of one's own opinions". :-).
I've jokingly used it as my job "title" for years. A few days ago, I decided to create a business dedicated to financial technology evangelism projects like this one. I had Fearghas McKay register the domain name philodox.com with InterNIC, so I could use it as an umbrella for things like this digital bearer settlement list and conference series I'm doing.
Fair Warning...
So, folks, fair warning. I'm doing all this stuff for the money, now, instead of free carribbean travel, reputation capital, and elbow room at an open bar. :-). Financially, it means that Philodox will take in money in the form of sponsorships, conference fees, and occasional public domain software development syndicate subscriptions (more on that later, as I figure it out), and, out of that money, it will hire whatever goods and services it requires to get a given event or project off the ground. After it pays me first. :-).
It also means that these conferences will be branded events, as in "The Philodox Market Development Conference on Digital Bearer Settlement", or something. Maybe, if I have enough chutzpah, I'll name this new list "The Philodox Digital Bearer Settlement List", or something apropriately meglomaniacal. Yup, I'm getting out of control all right. I can see it now. The most dangerous place in the world is going to be between me and a reporter. Actually, that's nothing new, now, is it? :-).
More seriously, it has become apparent to me that lots of the value I add to the business of digital commerce, to financial cryptography, and, hopefully, to digital bearer settlement, is in promoting a given financial technology to the wider world, and, more important, in getting that technology's major players together to conspire to create the future. I did that with the Digital Commerce Society of Boston, and with the e$/e$pam lists, and with the FC97/98 conferences. In order to keep doing stuff like this in the future, I'm going to need to get paid, and, more important, own the assets I create, and Philodox is how I propose to make that happen. The name "Philodox" is sufficiently unfocused that I can use it as a handle for most of what I do, which I couldn't really do even with a name like "Shipwright Development Corporation". Of course, "Philodox" is not nearly as much as fun as "Virgin", but it'll do. :-).
DBS List Sign-Up Details
So, there you have it, mostly. If you're interested in an email
discussion list on the technology and business applications of
digital bearer settlement, sign up for the digital bearer settlement
list with this URL:
And, for those of you without fancy URL processors in your mail readers:
Send email to:
requests@philodox.com
With a subject:
subscribe dbs
Summer Market Development Conference Details
If you're interested in participating in the world's first market development conference on digital bearer settlement, stay tuned, or, better, get on the dbs@philodox.com list and help us create it. I'm hoping to have that conference this summer, so look for an announcement on it within the next month or so in most of the usual places, if you don't want to subscribe to dbs@philodox.com just yet.
I'll be doing a call for presenters for this conference very soon now, and I'll be issuing personal invitations to my preferred daily keynote speakers as well, so keep an eye out for one (or both :-)) of those things in the mail. For the moment, all I'll be able to do for compensation is to waive fees for presenters, plus, in a few instances, help a few with room and board and, possibly, travel, for the more indigent folks who I'd like to have on the conference program. All of this depends on audience size, of course, and where I can afford to hold it based on the indications of participation I get, as well. Keynoters I'm going to have to do a bit more for, including paying all their expenses. Which should be an interesting proposition, as I just got off the phone with the conference manager at Bretton Woods. :-).
Peer-Reviewed Winter Conference Details
If you're interested in presenting your financial, economic, or policy research on digital bearer settlement for peer-reviewed presentation and publication, keep your eyes open for a call for papers for the finance conference I want to do in New York this winter. And, of course, you can get on the list and tell us what you think, if you'd like, in the meantime.
I'm also going to put out a call for the winter finance conference's program chairman sometime soon, once I've started things rolling on this summer's market development conference. So, if anyone's interested in chairing the program committee, please contact me directly. Once the chair's picked, the program chair will pick a program committee, the committee will then put out a call for papers, and we'll meet in New York to hear them all.
Further!
So, this should be an interesting next few months. I'm extremely nervous, but very excited. This is about the scariest thing I've tried to do, because I'm about to go back and talk directly to people in the financial transaction business, after having long ago given up on it all and gone off to learn something else which was much more fun to me. :-). However, the last three years of thinking about nothing but digital commerce and financial cryptography seems to have brought me full circle, with a knapsack full of absolute financial heresy to evangelize to the financial community. And, since I've been evangelizing absolute financial heresy to my friends on the net for years, it's something I'm at least cofortable with, if not pretty good at by now. :-).
Certainly most new businesses like Philodox.com fail. However, like most congenital entrepreneurs, I've had more than my share of businesses go under, and so failure's not as scary a prospect as it used to be. Nonetheless, I can console myself with the fact that this idea of evangelizing digital bearer settlement is completely in line with the successful things I've done lately. So, I'm pretty sure I'm going to make something happen again here. It's just the audience which is going to be a little different, a mixture of old friends and new ones.
In the meantime, thanks to all of you who have helped me in the past, and who are helping me still on the other projects that I'm still working on besides Philodox and evangelizing digital bearer settlement.
And, of course, thanks in advance to those who are helping me put this new idea together as I write this.
As it used to say on the front of a schoolbus, a long time ago: "Further!"
(Or was it "Furthur"?) :-).
Cheers,
Robert Hettinga
---
Robert Hettinga (rah@shipwright.com), Philodox e$, 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire' The e$ Home Page: http://www.shipwright.com/
Date: Mon, 2 Mar 1998 19:42:47 -0400
From: Robert Hettinga
Having just help run last week's Financial Cryptography 1998 Conference and Exhibition (complete with a high-speed catamaran ride down to see a total solar eclipse looming over the smoldering Montserrat volcano :-)), I'm sufficiently recovered today to talk about the more focused, financial settlement rant I want to do here on the gis-ec list, before your own conference starts.
First of all, I'd like to thank Tatsuo Tanaka for the privilege of getting to correspond with you all about something he and I both think will be a very important, if not the most important component in the emerging digital economy: The impact of instantaneous, (and I think bearer), digital settlement on transaction cost, and, more important in my opinion, its impact on the whole idea of non-repudiation as practiced in current book-entry settlement methods.
Put into plain language, I like to claim that, soon enough, the era of book-entry settlement -- that is, our way of representing money as offsetting debits and credits exchanged between the two parties of a trade through a hierarchy of trusted intermediaries -- will be over.
I think that the social and economic impact of the new alternative to book-entry settlement, digital bearer settlement, will be quite large, because, at the root of the status quo's book-entry transaction protocols is the need to involve government and regulation at the most intimate levels. Essentially, "...and then you go to jail" is the penultimate error-handling step in a book entry transaction. This eventually leads, I claim, to more, shall we say, friction, in the transaction process than currently available with advanced techniques in financial cryptography.
I claim, that, historically, bearer settlement, particularly at the time of a trade's execution, barely required legal enforcement of non-repudiation (the inability of someone to renege on a transaction) at all. Finally, I claim that secure digital bearer settlement cryptographic protocols, operating on insecure public networks like the internet, will reduce transaction costs enormously over insecure book-entry settlement debit/credit swaps, operating on strongly secure private transaction networks like ACH, or SWIFT, or the old NIDS, or whatever.
"Three orders of magnitude cheaper than book-entry" (dividing the cost by a thousand) is my favorite, and quite plausible, design mantra for such new systems based on modern cryptographic transaction protocols. We'll see why in a bit.
In the old days, before telegraphy (but after barter :-)), most financial transactions were done by trading bearer certificates, or tokens, of one form or another. Exchanging cash for a bearer bond would be a good 19th century example. Even trading bearer forms of equity was trivial -- and instantanous: the offer, the acceptance of the offer, and the settlement of the transaction occured almost all in one operation.
With the advent of telegraphy and eventually telephony, it was possible to make the offer and accept the offer at a distance, but settlement had to wait until bearer certificates were physically relocated, sometimes over long distances and then exchanged. After all, you couldn't very well send them over a wire.
The solution was to move all the certificates to a central trusted location, called a clearinghouse, and for the trading parties to swap debits and credits between themselves and the clearinghouse. It's pretty apparent that having the certificates physically locked down in the clearinghouse's vault becomes superfluous in such a scheme, because what really matters is the impartial arbitration of the clearinghouse in the case of a transaction dispute. All except for one thing. If someone lies or reneges on a book entry transaction, there isn't much that the other two parties can do except bar them from trading, which, of course, works in bearer certificates, but not nearly as well in book-entry settlement.
So, we need several things to cope with non-repudiation in book-entry settlement. First, we need the ability to determine who physically made what book-entry so we can find them and send them to jail for fraud if necessary. That's because book entries are inherently unstable, insecure, digits sitting in a database somewhere. Many people in Asia are familiar with commodities and derivatives traders who were capable of hiding fraudulent book-entries for long enough periods of time to bring down their respective firms, for instance. In cryptography we call this an authentication problem. :-).
So, besides authentication of the book-entries themselves, we need to secure the links between various charts of database accounts, first by authenticating the users of those electronic links, originally with passwords, then with cryptographic keys and signatures, and now with some combination of biometrics (finger or retinal prints, say) and digital signatures. And, second, by actually encrypting the links themselves so that no one can see what they are even if they can't change the authenticated data without someone noticing.
Sorry for the long-winded explanation, but it's long-winded stuff, as most people who clear trades on the net for a living will tell you. Anyway, for all intents and purposes, you now know everything there is to know about the guts of electronic commerce on the internet. When you punch your credit card number into a secure web page, pretty much all of the above happens, plus or minus the retinal scan. :-). (You can even do other book-entry transactions like checks in the above fashion, and a bunch of us are working on a simple but very effective public-domain protocol to do exactly that, which we're calling Internet Deposit Box, or IDBX for short. Coming soon to an internet bank near you...)
However, if you'll excuse me, I think all this stuff about moving book-entries down encrypted pipes on the internet, including the much-heralded SET protocol for credit cards, is so much financial "shovelware". It's the equivalent of a major corporation's promotion department scanning in one of their brochures into a giant .GIF picture and putting it on a web page without any interactive features at all. Much less taking orders :-).
Fortunately, there is so much more that can be done with financial cryptography. There's a whole string of cryptographic protocols out there, beginning with David Chaum's blind digital signature patent in the middle 1980's (and ending, say, last Saturday night :-)). You can actually create unique digital objects which can't be forged if you handle them right (if you only exchange them on-line, for instance). You can attach any arbitrary financial value you want to these cryptographically secure objects as long as everyone else agrees with you, and, most important, you honor your agreements concerning their exchangibility into some other financial instrument. So, I call these objects "digital bearer certificates", after the paper bearer certificates of yore, which I claim these crypto-blobs behave like, more or less.
The fun part comes when you actually start to trade these things. The first thing you notice is that they settle instantly. I give you digital cash certificates, you give me digital bearer bond certificates. Trade over. Elapsed time, thousandths of a second. I can turn right around and take that bearer bond and sell it again, if I want. More to the point, I don't have to wait for my broker work out how to move my money to your broker through the clearinghouse, for their banks to arrange to pay each other, all of which takes days and costs lots of money. Remember that "three orders of magnitude" I was talking about. If what I claim is true, then the cost of even your on-line Schwabb or E-trade transaction could move from being measured in dollars to somewhere in the sub-penny range, and probably less over time. Actually, these aren't account based protocols at all. So there ain't no Schwab, or Merrill Lynch, or Morgan Stanley, required. Well, not completely true. You still need financial financial intermediaries, no matter how small, to "rent" repuatation to a given transaction. Anyway, you don't keep digital bearer certificates in an account, you just keep them on your hard drive. Or, in some more interesting cryptographic protocols, on pieces in many hard drives all over the net, in such a fashion that you only need, say, 7 of 12 to reconstruct any given bearer certificate.
What may be the most efficient protocol I've seen is a digital cash protocol invented by Ian Goldberg just this past Saturday, after the FC98 conference here in Anguilla. Ian's calling it HINDE (for HINDE Is Not DigiCash's Ecash). From our back-of-the envelope calculations, this particular bearer settlement mechanism got us into the hundredth of a penny range of transaction cost, even after throwing in a few cursory orders of magnitude in imagined administrative fudge factors.
As far as non-repudiation goes, I know that what you gave me is real because I can test it with the issuer. You can do the same thing. It's so trivial that I equate the act with the physical inspection each of us does, unconciously or not, when we're handed a piece of cash. If I don't like what I "see" (determined by the calculation of the cyptographic protocol, of course), I don't trade with you. I'd say it's much better than detecting fraud after the fact, finding who made the offending book-entry, and apprehending, trying, and jailing the miscreant. Frankly, I'd go one further and say book-entry settlement is so complicated an unwieldy that the only reason we have book-entry settlement now is because we couldn't shove paper down a wire back when telegraphy was invented.
Finally, there's no real recordkeeping of transaction logs with digital bearer settlement. Like a pile of cash, you count it up, and that's what you have. There is no need for seven years of audit trails at up to six different transacting parties because you don't have to hunt someone down and send them to jail for reneging on a trade before it settles, and more frequently, to prove you're innocent should you be suspected of something untoward. You don't need a lawyer or an accountant to keep you out of jail at tax time for making the wrong book entry somewhere.
In fact, you don't care who gave you what money as long as they're happy with what you gave them in exchange for it. Reputation becomes the most important thing there is, because damaging someone's reputation is your only recourse in a world where your digital signature is your only identity. The threat of blackballing is in fact a very effective fraud deterrent, and once a digital reputation is trashed, it takes time -- and higher transaction risk premia -- to build a new one. To quote J. Pierpont Morgan on the subject, "I wouldn't buy anything from a man with no character if he offered me all the bonds in Christendom." With apologies for Mr. Morgan's 19th century Episcopalian sexism, of course. ;-).
But, you might say, what about taxation? Indeed, what about it at all? Most of our taxes are collected on book-entries (income, sales, value- added, capital gains), but I claim that the reason we have book-entry taxation is because we have book-entries, and not the other way around. For instance, in the early 1980's the government of the United States apparently legislated paper bearer bonds out of existence by declaring interest paid on them to be non-tax-deductible. Of course, if a concerted effort to make paper bearer instruments obsolete because of their high handling cost hadn't occured prior to that, such a legislation of economic reality by the US government would have been laughed out of any room in which it was proposed. I like to say that physics creates economics, which creates politics and law, and not the reverse. Or, as Thomas Sowell likes to say, "Reality is not Optional". I expect that since aristocrats figured out how to extort economic rents from farmers, and nation-states figured out how to extort economic rents from industry, that something close enough to a government for government work will figure out how to extort economic rents from whatever the producing unit of a geodesic society is, probably pieces of code. As the crypto professor says, "I leave that to the student as an exercise for further study." :-).
Finally, what about laws? Aren't there laws applicable to this kind of stuff? Laws about money laundering for instance? While there are lots of cypherpunks out there who say, like I even do on occasion, "Write Software, not Laws", there is nothing wrong with doing digital bearer settlement, as long as it stays on the net. In the earliest stages, there will be bearer cash, which can be traced when it goes on and off the net through a bank account, no matter how many hops it goes through before it comes out. So, it's pretty simple in that scenario to "Render unto FinCEN" (FinCEN: the Financial Crimes Enforcement Network). Everything's traceable, which should keep them happy. At least until people start keeping money on the net and never taking it off. Then, of course, the world will have more interesting things to think about than whether or not FinCEN can do it's job anymore, and they've said as much.
Once we get to digital bearer bonds, stocks, and derivatives thereof, the world starts to change considerably. However, I still claim that reality is not optional. If you reduce the cost of settling a transaction to effectively zero (okay, past the last basis point but not zero), then the financial markets are going to figure out how to use the technology. Not only is it cheaper, but by being cheaper, it allows for smaller and smaller publically held entities. And automated financial intermediaries. Those little personal bearer bond 'bots' I was talking about in my Geodesic Society rant before I went to Anguilla, for instance. The asset sizes of verious trades could get much smaller, but, in addition, I claim, that because trading of financial instruments can happen so quickly, efficiently, and by so many self-interested actors, it'll probably be the way money is raied very large security issues and for very large projects. Maybe Intel's inevitable $10billion chip fab, for instance, will be floated into a market "swarm" of financial intermediaries. Microintermediation, instead of disintermediation, in other words...
Okay. I've now walked you up the edge of the abyss, and pushed you over the cliff, and, you'll notice, you didn't get hurt at all. That's important to think about, because sometimes being quantitatively cheaper has qualative effects, but, for modern society at least, the future is no different from the past, except that we've figured out how to live better. I expect if we can blow the doors of the cost of financial with digital bearer settlement, the world will be a much better place to live in, indeed.
Cheers, Robert Hettinga
---
Robert Hettinga (rah@shipwright.com), Philodox
e$, 44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'
The e$ Home Page: http://www.shipwright.com/
Ask me about FC98 in Anguilla!:
| | | --- | | ProcessTree Network TM For-pay Internet distributed processing. | | Advertising helps support hosting Red Rock Eater Digest @ The Commons. Advertisers are not associated with the list owner. If you have any comments about the advertising, please direct them to the Webmaster @ The Commons. |