From: hughes@ah.com (Eric Hughes)
Date: Fri, 19 Aug 94 12:45:34 PDT
To: cypherpunks@toad.com
Subject: In Search of Genuine DigiCash
In-Reply-To: <199408161439.KAA10429@zork.tiac.net>
Message-ID: <9408191920.AA13293@ah.com>
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   A piece of ecash is basically a callable bond.

A raw, non-modal "is"??  Digital cash doesn't exist yet, so saying
that it "is" something, is, well, premature.  The real question is
"What happens if we set up a digital cash system as a callable bond?"

And my answer to that is, "You really _want_ the SEC involved?"

   The issuer gets to
   keep the interest accrued on that money while the ecash is in circulation.

Perhaps in some systems this is so, but not all.  The unit of account
must be fixed, but the unit of account may not be constant currency,
but rather currency at a fixed interest rate.

   The underwriter looses money if the duration, and thus the total return, of
   his portfolio of ecash is less than the total return of the principal he's
   holding in escrow [...]

Why do you assume that the only source of income for the "underwriter"
is the return on investment from the float?  Sure, that's one business
model.  Transaction and participation fees can also be levied.

   When the ecash
   comes back, it's like a bond is called, and the issuer has pony up the
   principal.

The issuer has a debt mediated by an instrument, yes.  There are,
however, more instruments than bonds available for use.  Is the debt
secured or unsecured?  What happens during bankruptcy of the issuer?
These and similar issues determine the nature of the instrument.

   He then has to unwind a piece of his offsetting portfolio,
   incurring transaction costs and losing whatever future income those
   investments might yield. 

Any reasonable cash management system includes a segment in liquid
assets for this case, since the income not taken for this segment is
much less than paying for portfolio manipulations.  Remember, cash is
coming in as well as going out.

   If you thought that
   the ecash duration was 3 days and it stayed out there 3 months, 	

It's unlikely that these sorts of figures are not going to be known
shortly after rollout, during which phase the cash management function
for income is much smaller.

   In
   theory, if the fees are high, the money may never come back, and stay in
   circulation forever.

I think you may be getting confused here between "on-us" transactions
and a first class currency, which does circulate.  Digital cash cannot
"circulate forever".

I should note, however, that I agree with the basic point, that the
portfolio management problem for digital cash is not unusual.

Eric