From: "Perry E. Metzger" <perry@imsi.com>
Date: Wed, 22 Jun 94 05:03:48 PDT
To: rah@shipwright.com (Robert Hettinga)
Subject: Re: e$: Geodesic Securities Markets
In-Reply-To: <199406212332.TAA19688@zork.tiac.net>
Message-ID: <9406221203.AA02493@snark.imsi.com>
MIME-Version: 1.0
Content-Type: text/plain



Robert Hettinga says:
> I don't really want to thrash this out point by point, but I will anyway ;-).
> 
> >Perry Metzger says:
> >>Robert Hettinga says:
> >> Strong crypto accomplishes 1, and e$ protocols make 2 and 3 meaningless.
> >
> >Not really. Not all commodities are fungible.
> 
> Agreed. And?

And the result of that is that intermediaries are needed in such cases
to handle the transactions if the things being traded are complex
instruments. Its fairly easy to envision a system that directly
matches orders for shares in IBM. Trying to match up buyers and
sellers of swaps might not be that easy.

> >Not all entities are
> >willing to conduct all sorts of trades with all other sorts of
> >entities.
> 
> No, but buyers of a specific security might want to buy those securities
> from those who hold them...  Could you elaborate on your comment, please?

Certainly. In the foreign exchange market, for instance, most trading
is done on blocks of millions to hundreds of millions of dollars worth
of currency. In the current scheme of things people will only deal
with entities that they know because fails are devistating. It is
possible for third parties to guarantee credit to open up markets, but
they will expect to be paid for this. You can't get rid of the banks
-- someone has to guarantee that you have the money on hand.

> >Besides all that, someone has to hold physical goods,
> 
> Unless it is a stock, bond, derivative, call option, etc. Most of which
> are "held" in offsetting book entries at brokerage houses, banks, and
> clearinghouses.

Actually, even in the case of securities largely settled by book
entry, DTC still holds physical certificates. That is not, however,
the point. The point is that no matter what you hold, be it dollars,
shares of IBM, or futures contracts for dried silkworm cocoons (a
perfectly real commodity, by the way) you need a bank to hold the
account and guarantee the existance of the thing being held, be it a
figment of the computer's memory or a thing backed by a bar of gold.
The banks will expect to be paid for this service. Try imagining a
digital cash algorithm that DOESN'T involve a bank, and you will
swiftly see that there is a small problem involved...

This is not to say that transaction costs can't be radically reduced,
and the role of intermediation in fully fungible goods reduced.
However, transaction costs will not go to zero, and banks will not
disappear. (I suspect conventional interest bearing accounts may be
fully replaced by mutual funds at some point, however.)

Perry