From: hughes@ah.com (Eric Hughes)
Date: Wed, 3 Aug 94 17:06:37 PDT
To: cypherpunks@toad.com
Subject: My light bulb goes on... (was:Re: Tuna fish...)
In-Reply-To: <9408031238.AA12045@snark.imsi.com>
Message-ID: <9408032336.AA11878@ah.com>
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   > Is this not the killer app that would get ecash off and running?

   The problem is not a need for a killer app -- there are dozens. The
   obstacle is regulatory problems, and finding a large and reputable
   sponsoring organization (like a big bank).

And these two issues are related.  Bank regulations in this country
are kept deliberately somewhat vague.  The regulator's word is the
deciding principle, not a detailed interpretation of statute.  The
lines are fuzzy, and because they are fuzzy, the banks don't press on
them nearly as hard as when there's clear statutory language available
to be interpreted in a court.

The uncertainty in the regulatory environment _increases_ the hold the
regulators have over the banks.  And the regulators are known for
being decidedly finicky.  Their decisions are largely not subject to
appeal (except for the flagrant stuff, which the regulators are smart
enough not to do too often), and there's no protection against
cross-linking issues.  If a bank does something untoward in, say,
mortgage banking, they may find, say, their interstate branching
possibilities seem suddenly much dimmer.

The Dept. of Treasury doesn't want untraceable transactions.

Need I say more?

Probably.  It's very unlikely that a USA bank will be the one to
deploy anonymous digital dollars first.  It's much more likely that
the first dollar digital cash will be issued overseas, possibly
London.  By the same token, the non-dollar regulation on banks in this
country is not the same as the dollar regulation, so it's quite
possible that the New York banks may be the first issuers of digital
cash, in pounds sterling, say.

There will be two stages in actually deploying digital cash.  By
digital cash, here, I mean a retail phenomenon, available anybody.
The first will be to digitize money, and the second will be to
anonymize it.  Efforts are already well underway to make more-or-less
secure digital funds transfers with reasonably low transaction fees
(not transaction costs, which are much more than just fees).  These
efforts, as long as they retain some traceability, will almost
certainly succeed first in the marketplace, because (and this is
vital) the regulatory environment against anonymity is not
compromised.

Once, however, money has been digitized, one of the services available
for purchase can be the anonymous transfer of funds.  I expect that
the first digitization of money won't be fully fungible.  For example,
if you allow me to take money out of your checking account by
automatic debit, there is risk that the money won't be there when I
ask for it.  Therefore that kind of money won't be completely
fungible, because money authorized from one person won't be completely
identical with money from another.  It may be a risk issue, it may be
a timeliness issue, it may be a fee issue; I don't know, but it's
unlikely to be perfect.

Now, as the characteristic size of a business decreases, the relative
costs of dealing with whatever imperfection there is will be greater.
To wit, the small player will still have some problem getting paid,
although certainly less than now.  Digital cash solves many of these
problems.  The clearing is immediate and final (no transaction
reversals).  The number of entities to deal with is greatly reduced,
hopefully to one.  The need and risk and cost of accounts receivables
is eliminated.  It's anonymous.  There will be services which will
desire these advantages, enough to support a digital cash
infrastructure.

Eric