Re: In Search of Genuine DigiCash

[rah@shipwright.com (Robert Hettinga)]

At 10:06 AM 8/21/94 -0700, Hal wrote:

>One difference between ecash and bonds is that bonds generally pay interest
>(to the bond holder, not to the lender!), while ecash may not.  I also
>suspect that most ecash will have a fixed maximum lifetime beyond which it
>is no good, due to technical problems in keeping lists of spent notes.  So
>it would not necessarily be callable in theway Bob describes.

We could equivocate back and forth about who the lender is in this case.
It's the behavior of the financial instrument I'm talking about. At some
point, the principal goes away and has to be called from wherever it is (a
bank account, the money market, etc.) to meet a cashed-out piece of
digicash. In the meantime it earns interest. Thus it has principal, and
interest, and it is called.  It's a callable bond.  If it has a fixed
maturity, it's still a callable bond. If it's a perpetuity, it's a callable
bond. It doesn't matter who gets the interest. It doesn't matter what the
exchange fees are, it still behaves like a callable bond.  The market will
pay discounts or premia on them, and thus price them, just like any other
fixed income instrument with a call provision. A callable bond, in other
words.

I'm not sure the lifetime issue is a big deal now, because the durations on
these instruments are probably going to be pretty short.  Like I said
before, people will eventually get used to hanging on to digital cash until
they need to spend it.  That keeps it out of circulation longer, and the
duration up. At some point in time people will spend a piece of digital
cash several times before it goes back to the bank.  That will keep the
duration up also.

>Fair?  Who cares?  The question is, is it useful?  Sure it is.  I'd rather
>use cash which bore interest than that which didn't!  Sure, it's a little
>more complicated to buy something with notes which are worth $1.05 - $1.10
>than $1.00, but that's what computers are for.  The value increase accrues
>to whomever holds the note during the time they hold it.

I think the complexity is probably not worth it. Suppose you get a piece of
digital cash that's been out there a while, say 10 years (it's not likely,
ever, but I'm using it to make a point).  1 dollar at say 10% compounded
for ten years is 2.59. It's like winning the lottery, for no reason except
the person you last transacted business with paid you old cash for what you
sold him. It's not fair. That's what I meant by not fair.

>>The solution is, keep the interest, use the money to fund the issuer's
>>operations. If that's not enough, charge exchange fees. A competitive
>>market will sort out who's got the most efficient operations, and thus
>>ecash users get ecash at its most efficient price.
>
>Sure; just don't say "the solution is".  You issue non interest bearing
>notes and live on the float; I issue interest notes and live off the
>exchange fees.  Let the market decide.

Agreed. "A solution is", then. There are many ways to skin a cat. I think
you'll find that the overhead of my system beats yours, and lets me price
my cash more competitively in an efficient market. That's why I said "the
solution is".

Cheers,
Bob Hettinga


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