From: Hal <74076.1041@CompuServe.COM>
Date: Sat, 16 Jan 93 17:48:21 PST
To: CYPHERPUNKS <CYPHERPUNKS@TOAD.COM>
Subject: Digital cash legality...
Message-ID: <930117014230_74076.1041_DHJ26-1@CompuServe.COM>
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I've continued to try to learn about what laws might restrict the issuing
of electronic money.

Banking is controlled at both the state and the federal level.
One question was whether one could engage in bank-like activities
without calling yourself a bank.  Denning's California Codes, Financial,
has this definition:

------
Section 102.  "Bank"

The word "bank" as used in this division means any incorporated
banking institution which shall have been incorporated to engage in
commercial banking business or trust business.  The soliciting, receiv-
ing, or accepting of money or its equivalent on deposit as a regular
business shall be deemed to be doing a commercial banking business
whether such deposit is made subject to check or is evidenced by a
certificate of deposit, a passbook, a note, a receipt, or other writing;
provided, that nothing herein shall apply to or include money or its
equivalent left in escrow, or left with an agent pending investment in
real estate or securities for or on account of his principal.  It shall be
unlawful for any corporation, partnership, firm, or individual to
engage in or transact a banking business within this state except by
means of a corporation duly organized for such purpose.
------

This seems to say that it's illegal to do these bank-like activities
unless you either are a corporation specifically chartered to be a bank
(in which case the many banking laws apply to you), or unless you are
an escrow agent or a real estate or securities agent (in which case
many other laws apply to you).  The California financial codes are
three volumes long, so there is a considerable body of law that one
would have to be familiar with to consider engaging in such activies.

Another approach I have thought of would be to buy and sell digital
cash, calling it something else.  It's legal to buy and sell other
bit patterns, such as computer-readable pictures and software, so
it should be legal to buy and sell these cryptographic items.  The
idea would be that for $1.00 you will sell someone a #1.00 crypto-
cash file, either through email or over the counter if you wanted
(on a floppy).  Then, if someone comes to you with one of these #1.00
digital cash files, you will buy it back for $1.00.  At one level
you are simply buying and selling items just like the local dealer
in baseball cards, but at another level you are a "money changer",
converting between U.S. dollars and crypto-credits.  The credits
thus receive backing through your willingness to redeem them for
dollars at any time.

One issue is how certain people can be that you actually will buy
back this crypto-cash for its "face value".  Given that you're not
actually a bank, not actually a money dealer, and therefore not
bound by any regulations, there is nothing to compel you to continue
to accept the crypto money.  You could arbitrarily decide at any time
not to buy it back any more, just like the local baseball card dealer.
This, I think, is what makes this whole activity legal - you're not
making any promises to "depositers" that they can get their money back.
But, by the same token, it may prevent the digicash from being accepted.
It would basically come down to your reputation for being trustworthy
and committed.

Another problem is the issue of sales tax.  Using this "seller of
bit patterns" model, you will have to collect sales tax from your
customers who are within the state.  From my experience selling software,
you don't have to collect it for out-of-state customers.  I don't
know whether the state would also expect another "cut" when you buy
the bit patterns back.  But it sounds like there will be at least
a 7% transaction cost to turn dollars into digital cash, which is
probably prohibitive.  One solution might be to do this from a state
which doesn't collect sales tax.

(Coin dealers here in California have some exemptions from the sales
tax requirements, but I doubt whether these exemptions could be
stretched to cover what I am proposing here.  In other respects, though,
that business is rather similar to what I am talking about, in that
they do a lot of selling and buying back.)

A related issue is whether this should be thought of as a business
at all, or whether it could be a hobby.  The fact is, you could
actually make a lot of money at this, even though you buy and sell
at the same price, by investing the dollars you are paid until you
have to use them to buy the digital cash back.  Still, given the apparent
need to infringe or license both RSA's and Chaum's patents, I think
running it on a "non-commercial" basis would be more acceptable, if
that could be done.  I suppose if you were careful to segregate the
dollars used to purchase crypto-cash into a non-interest-bearing
account, so you didn't make any money on them, you could call it non-
commercial.  (Actually, it's not 100% clear to me that RSA's patents
would apply to a digital cash implementation, since their patent is
for a communications machine, even though the algorithm is the same.)

I'll let people know as I continue to learn more.

Hal