Re: What backs up digital money?

[Black Unicorn <unicorn@schloss.li>]

On Wed, 27 Mar 1996, Hal wrote:

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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.

So are bearer bonds, stock warrants, coupons...

  It is untraceable; there is no way to
> know, given a piece of cash, under which transaction it was withdrawn
> from the bank.

Ditto above.

> 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).

There are any number of bearer instruments that are not "currency."

> A piece of dcash is an asset, a claim on the
> bank.

Not technically true unless it is specifically structured this way.  It's 
more of a bearer draft.  Because digital cash is a token used by the bank 
to represent currency, which is backed by a government, digital cash, in 
it's current form, is a second tier bearer instrument.

> When dcash is withdrawn, the bank must debit (reduce) the
> customer's account immediately.

This is so of checks too, but the processing time gets in the way.

> Likewise, when it is deposited, the
> depositor's account gets credited.

See above.

> Between those times the net amount
> of money in bank accounts was reduced, by exactly the amount of
> circulating dcash.

Ditto uncashed checks.

> 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.

Actually, it looks more like circulating dcash is a subset of outstanding 
obligations.  Same as, e.g., letters of credit.

> 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.

Making a check payable to "cash" makes it, for practical purposes, a bearer 
instrument.

> 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.

But instead of backing in gold, or some tangible asset, dcash is still 
ultimately backed by the full faith and credit of the government who's 
currency the dcash is denominated in.

> 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.

I still think the essential issue here is the manner in which the ecash 
is based.  If it is based on government currency, the U.S. dollar, then 
it is still just a second tier bearer instrument.

I think that the diet coke backed cash I tried to promote back when was 
closer to a "currency" than d/ecash issued by a bank and drawable on 
government currency.  (Maybe this is why no one was interested?)

Real solid ecash, and the kind of cash I would like to see out there, 
would be limited to a non-dilutable one time issuance and backed in some 
precious commodity held on reserve.  A closed-ended share of a stock of 
gold, for instance.  That would require no intermediation of a "currency" 
based on the full faith and credit of an issuing sovereign.

Private currencies are not private currencies at all if they have to be 
linked to a government issued denomination.

> Hal
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