Re: What backs up digital money?

[Hal <hfinney@shell.portal.com>]

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From: tcmay@got.net (Timothy C. May)
> At 1:46 PM 3/27/96, Scott Schryvers wrote:
> >Question.
> >If e-cash were backed by gold would that make it more reliable than say the
> >dollar?
> 
> This question, and much of the debate that appears here about digital money
> in its many and confusing forms (e-cash, digicash, bitmarks, e$,
> cypherfrancs, chaums, etc.), displays a "type error" in thinking about
> digital money.
> 
> No form of digital money extant is an actual currency in the conventional
> sense. Nor does this seem likely. Nor necessary. Nor useful. Nor important.
> 
> Rather, think in terms of _checks_ or _wire transfers_ and the like. An
> order to transfer funds from one account or place of holding to another.

Tim is right when he goes on to say that digital money is not exactly
like any of the traditional financial instruments.  However I think it is
more like cash, and for that matter more like currency, than like other
things.

Here are some of the ways it is like cash.  It is basically anonymous,
with neither buyer nor seller able to learn the identity of the other,
even with the help of the bank.  It is untraceable; there is no way to
know, given a piece of cash, under which transaction it was withdrawn
from the bank.  It is a bearer instrument; anyone can hold it, and
whomever presents it gets the value (that is, it is not "made out" to a
certain individual).  A piece of dcash is an asset, a claim on the
bank.  When dcash is withdrawn, the bank must debit (reduce) the
customer's account immediately.  Likewise, when it is deposited, the
depositor's account gets credited.  Between those times the net amount
of money in bank accounts was reduced, by exactly the amount of
circulating dcash.  When the money supply is counted, circulating dcash
will need to be included with traditional currencies like cash and
coins (I think that is M1), since it is not counted in the bank
accounts.

The difference with checks and wire transfers is that in those cases
there is a direct transfer of assets from one account to another.  These
are not bearer instruments; in fact wire transfers aren't really
financial instruments at all, and do not carry value.  There is normally
no anonymity or untraceability either, with these kinds of transactions.
So I see them as being very different from dcash.

The best analogy to dcash is the private currency which was issued by
banks and other financial institutions prior to about 1850 (in the US).
Until that time the US government did not issue paper money, it was all
private.  A bank would issue bank notes, which would circulate in its
local area as money.  They were backed up by "real money", specie,
metallic coins, which the bank kept in its vaults.  The digital cash
issued by Mark Twain bank is in many ways a throwback to these old bank
notes.

There are differences, of course.  A lot of attention is focussed on the
non-transferrability, the fact that you have to deposit the cash at the
bank after each transaction.  Some people say that this means that the
cash doesn't circulate, hence is not a currency, hence must be more like
checks, etc.  But I disagree.  I view this aspect of dcash as superficial
and unimportant.  First, it may not be technically necessary.  Some cash
systems have been proposed which allow for transferrability.  But second,
even if it is necessary to exchange cash after each transaction, that can
be done completely automatically.  In fact, the agency which does so
doesn't even have to be the bank, as far as the financial aspects go.
The exchange has no financial impact on the bank's accounting procedures.
And it can be completely automated for users.  They don't even have to be
aware of it.  Their software can turn in received dcash at the bank for
fresh banknotes, anonymously and automatically.

So I view dcash as a circulating currency, where the act of transfer in
some implementations requires some technical assistance from an agent
of the bank able to make digital signatures on its behalf.  It is more
than simply a mechanism for transferring funds from one account to
another (unless you think of government currency in those terms).  I
view it as possessing real value, as being a genuine asset in the same
sense as other forms of cash.

Hal

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