Re: In Search of Genuine DigiCash

[rah@shipwright.com (Robert Hettinga)]

At  2:24 PM 8/21/94 -0700, Hal wrote:

>Well, I still don't follow this analogy.  By this reasoning virtually every
>commodity that someone is willing to buy and sell is a callable bond.  The
>local gold dealer may sell me gold coins for cash, take the cash, put it in
>the bank and collect interest, then buy my coins back from me later.  Is the
>gold a bond?  Am I "calling in my bond" when I sell the gold to him?  I don't
>get it.

OK. I'll try again. The difference between digital cash and your examples
of gold and cash is that that gold really *is* a commodity. It can be
melted down, and recombined with other gold into any unit of measure you
want, as long as the purity of the metal is the same, and that's a
scientifically verifiable process. An ounce of gold is utterly
indistinguishable from another ounce of gold. In the case of cash, there's
a certificate number on each one, issued by the issuer. Thus it has a set
of specifically identifiable future cashflows associated with it. Since it
is directly related to a "risk-free" security (the US dollar) and it is
collateralized with a pool of money which accretes interest, it acts just
like a bond. If it walks like a bond, and quacks like a bond, it's a bond,
yes?

Anyone can dig up more gold but when it's melted with other gold, who's to
tell which one's the gold they dug up?  Only the issuer can issue an
issuer's certificates, be they cash (in the old banknote days), bonds,
stock, whatever.  A bond is a unique discrete entity. More to the point,
it's a promise to pay a specific cash amount at some specified time, or
upon redemption by the purchaser. So is digital cash. Gold, on the other
hand, is a continuous commodity.  Different stuff.

Probably not much help, but I'm trying here. I really am. Is that any better?

By the way, "calling the bond" is actually exercising an option, and yes,
the finance guys will tell you that there is no difference. You can use
option pricing methods to price lots of stuff, and some people do it with
commodities.  Remember my goofy (but true) statement that a bond is really
a string of embedded call options?  It's in the book I referred to
(Fabozzi, Fixed Income Mathematics, Probus Press, 1993, isbn 1-55738-423-1,
pp 249-315).


>Let's see, I'm selling spindles for $2.59 and you come up with a piece of
>ecash you bought ten years ago for $1.00, which is now worth $2.59, and I
>sell my spindle to you for it.  I deposit the cash in the bank and it's worth
>$2.59.  Now who isn't this fair to?  How is it different from you putting
>$1.00 into your interest-bearing checking account ten years ago and writing
>me a check for $2.59 today, the amount your $1.00 grew to?

The problem is, you have to price the cash before you use it to buy
something, and then you and the seller has to agree that that's the value
of it. To do that, you or the person you're offering the cash to need to
somehow communicate with the underwriter, thus destroying the anonymity of
the cash transaction, and also increasing it by the communication costs,
and creating an on-line cash system when we wanted an off-line one. Of
course, the issuer could publish the prices based on the compounded
interest accrued *for each certificate*, for the time period it's
outstanding, possibly complete with the compounding factors for each
compounding period used. (a day, a month, a year, or even continuous over
the life of the instrument)  Lot of overhead there, but mutual funds do it
all the time. You'd want to just take their word for it, I suppose, and
trust their price, right?

Mutual funds are priced in exactly this way. A mutual fund share has a
specific value at purchase. It is specifically identified and compounded
over the time it is held, in theory, anyway, because there are accounting
and programming tricks to get the same result with less overhead and still
maintain the audit trail. Those values are computed and accumulated as if
they were on an individual share basis. Really. I swear. I've priced mutual
funds and their returns and used them to compile data used in portfolio
managers' performance evaluations.

I didn't say that that you couldn't do it your way.  I just said it costs
more than just dumping the certificate numbers into a redemption database,
keeping the interest, and pricing the e-cash at issuance to reflect your
costs of operation and your competitive pressures from the marketplace.

>
>Sorry, I guess I'm missing a lot of your points.

I'm also sorry. I'm doing the best I can here. I hope I took a better shot
at it this time.
>
>Hal


There's nothing awful about keeping the interest, folks. (Unless you're a
moslem, of course :-) )  It's really just a type of liquidity premium paid
to the underwriter to offset whatever risk (business risk, and legal risk
at this point) taken to issue e$ for use in internet commerce.  As more
people get into internet commerce and underwriting it, then the premium
goes down because the risk goes down.

I think this whole discussion about where the money gets made is beside the
point.  The fact is that some combination of exchange fees and interest on
the "suspension" account balance will offset the costs of underwriting
ecash. People can make money underwriting e-cash. If the market's there,
anyway...


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