Re: In Search of Genuine DigiCash

[rah@shipwright.com (Robert Hettinga)]

At  8:27 AM 8/23/94 -0400, Peter Wayner wrote:
>tcmay@netcom.com (Timothy C. May) wrote:
>>
>>I don't think any of us on this list is yet ready to present a plan to
>>real bankers. Eric Hughes has told me he agrees.
>
>Real bankers may be well ahead of everyone on this list. I'm told that
>Citibank has some very intriguing work pending at the patent office. It's
>for digital cash.

Thank you.  This is exactly the kind of stuff I've been talking about.

Real bankers aren't completely necessary.  This is why my thinking has
changed on the subject.  You need financial accumen to make sure you don't
spend down your suspension account, but that (cash portfolio management)
can be purchased from lots places besides real banks.  The technology of
digital cash is something that Citicorp thinks it has to reinvent.  That's
par for the course.  But you don't need a real banker to run a secure
www/Secure Mosaic node.  You barely need real bankers to hook in to the ATM
system as long as you can prove that nobody, including the underwriter,
sniff the user's card swipe and PIN number.  You don't need real bankers to
make sure that the fraud laws cover double spending of digital cash.  You
don't need bankers to make sure that you comply with cash reporting
requirements when money comes on and off the net. Wiring all the above
together to make a digital cash underwriter is doable at a relatively small
level, without bankers for the most part. This is why Citicorp, and other
banks like it, are going to shoot themselves in the foot when they try.

I 'm pretty sure, having worked for Citicorp myself, they spent big piles
of money trying to engineer around Chaum (or anybody else). Chaum almost
has a  viable product, which will cost a whole lot less (even if he gets
his cut of profits) to implement from the underwriter's standpoint.

Citicorp has tried this "We are The Technologists" tack in Travel (CIMS),
Point of Sale data collection (CPOS), Telephone Banking (they even invented
their own dial up terminal!) and several other unrelated businesses.  They
failed because of an institutional mentality of Not Invented Here and a
very centralized, top-down management style.  They're not much different
from most other very large banks, I'm afraid.

Citicorp's early success in bank Data Processing during the late 60's and
early 70's, first in ATMs (they aren't the largest any more by a long
shot), and the credit cards (same here), makes them, and some readers of
this list, think they are a 900lb gorilla when it comes to digital cash.
They aren't.  Neither is any bank, no matter how large they are.

I'd be real interested to see if Citibank can beat an onslaught of smaller
underwriters who can offer cash at smaller margins than they can.  Folks,
the costs of an operation like a digital cash underwriter aren't too
difficult to imagine. The entry cost for the average underwriter (if the
market is there to support one) is not nearly the amount that Citicorp is
going to spend putting up theirs, and so Citicorp will loose money on this
investment as well, and eventually back out. It's like people who go in to
see the machine The Well runs on. Their jaw drops at how small the box
really is.  If Citicorp did it the machine would be 10 times bigger and
cost 10 times as much, to justify their hockey-stick earnings estimate and
a cast of a thousand managers and analysts.

The thing that's important here is Grove's Law. Chips have an economic
half-life of 18 months, which drops the cost of any computer based business
accordingly, along with the costs of entry into those businesses.  I've
personally seen large companies go into a new high-tech service businesses
and kill their entry with overengineering and bloated middle management.
You see it in the Wall Street Journal all the time.

At some point, if the market is there, there will probably be a
consolidation in digital cash underwriting, and larger companies will
emerge as economies of scale become evident. But to think that any company
can come into a completely different operating paradigm and take over from
the start just because they're huge somewhere else is probably not going to
wash.

Think about railroads and airplanes. If the railroads seriously tried to
fund aircraft development, they would have gotten smeared. They would still
be trying to make a steam powered plane fly the day Douglas delivered the
first DC-3.

The banks aren't the big bad monsters we fear them for.  Their
participation in the market is necessary, as is the participation of most
financial instutions, but an Argumentum ad Bacculum with the Banks as the
threat of force is pretty much a waste of breath.

Sorry.
I promise not to turn blue next time.

Cheers,
Bob Hettinga

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Robert Hettinga  (rah@shipwright.com) "There is no difference between someone
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