From: hughes@ah.com (Eric Hughes)
Date: Mon, 30 May 94 21:47:02 PDT
To: cypherpunks@toad.com
Subject: IMP (was Re: ecash-info (fwd))
In-Reply-To: <199405301945.PAA11305@zork.tiac.net>
Message-ID: <9405310454.AA00788@ah.com>
MIME-Version: 1.0
Content-Type: text/plain


   1.) Chaum's e-cash coupled with WWW/Mosaic is a de facto internet
   mercantile protocol.

Hardly.  The announcement just says it's available, not that anybody's
using it.  Since the information came from a press release, we can
assume that lack of mention of an important customer, like a bank,
means that there are no such customers right now.  What that says to
me is that DigiCash has looked for customers, and not found any.
They've certainly had the time.

Furthermore, it's not clear that this software can be both legally and
usefully deployed in the USA.  The Foreign Bank Secrecy Act of 1974
requires the microfilming of all checks of value over $100, with
administrative provisions for extending the required recording
keeping.  Other check-like transaction accounts have since been added.

So can a bank avoid this?  First, they can limit transaction amounts
to less than $100.  That violates my criterion of usefulness; it would
have some utility, to be sure, but just as surely would be a severely
crippled utility.  Second, they might be able to record the
transaction as a "cash purchase".  The problem here is that this
accounting technique may be ruled non-compliant by the regulators,
which would make the transaction _illegal_ (since there's not way to
comply by recording both parties).  The regulators have been
authorized to move activities across the boundary of legality by
legislative action.  Now, one cost of deploying any such system would
be the expected (negative) value of the risk taken in losing the whole
development investment to an adverse regulatory decision, let alone
possible actual penalties.

Even beyond this, there's the IRS $10K cash reporting limit, and the
attendant restrictions on structuring.  Detection of structuring
becomes much more difficult, and banks are held responsible for at
least some of the enforcement.  Here's another set of risks, like
above.

Just how big is the potential Internet market (in, say, two years),
compared to other banking segments?  Precious small right now, really.
Just plain profitability is also an issue.  Add to that costs of
licensure and costs of risk and you're left with some significant
barriers to USA deployment.

   2.) It seems to me that that e-cash, contrary to the status quo's thinking,
   is *critical* to internet commerce. 

No, it's not critical.  Some form of transaction mechanism is
critical.  Privacy is not critical to the bulk of the economy, though.
Face up to it.  If it were, it would be so obvious that we wouldn't be
discussing it on a mailing list.  In fact, _we_ wouldn't be discussing
it, but rather a whole bunch of bank vice presidents.

   An anonymous cash market is most
   unrestricted and efficient market there is, because privacy/security (more
   than trust, I think) is the capstone of any serious transaction mechanism.

Is anonymous cash really the most efficient?  No, not in all cases.
When no one is looking, the anonymity is irrelevant, and
identifier-based schemes work fine.  Is, for example, anonymity the
most efficient for the Federal funds transfer network?  No, because
the values of money are so large that default on a transaction would
case serious systemic problems.

Cash does have some advantages, in particular its immediate and final
clearing.  These can reduce transaction costs in certain markets.
Anonymity, however, is not a panacea.

Characterizations of where anonymity is _already_ practiced indicate
potential places for initial deployment.  Negotiation for trades in
the foreign exchange market are frequently anonymous, even though the
trades themselves are not.  There is a gold and silver exchange in
Shanghai, I think it is, where the exchange keeps no records and all
transactions are settled between traders.  Motivated list members may
wish to hit the libraries and look for more.

   3.) Since a big pile of the discussion on this group lately has been about
   our collective concerns about an RSA-approved version of PGP, I think there
   is a real parallel here in e-cash.  

PGP only requires the cooperation of your email correspondent in order
to function.  The risk of a patent infringement suit is small, since
the parties involved are small.  Digital cash requires the
participation of many more parties, some of whom have, almost of
necessity, deep pockets.  

The parallel does not extend very far.  Without the creation of an
entirely black market which can remain completely unexposed (and this
is more difficult that it appear even on second or third thought), it
is unlikely that digital cash technology will be usefully deployed
independently.

Eric