From: Alex Strasheim <alex@omaha.com>
Date: Sun, 4 Dec 94 20:30:18 PST
To: cypherpunks@toad.com
Subject: backing ecash
Message-ID: <199412050431.WAA00176@omaha.omaha.com>
MIME-Version: 1.0
Content-Type: text


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[Standard disclaimer:  all of this may be based on some misunderstanding 
of the underlying situation on my part.]

I've been thinking about what Eric and others have written about the
apparent problems Digicash is having hooking up with financial 
partners.  I agree that it would be encouraging if some large banks or a 
credit card company were on board, but I'm not sure their absence is as 
big of a problem for a digital currency system like Digicash as it would 
be for other types of systems.

If a transaction system uses credit card numbers to process purchases,
then you need to have either a credit card company that's willing to
participate, or someone with a merchant account to submit purchases to the
system.  Obviously, if the credit card company doesn't want to allow the 
online system, they can prevent people with merchant accounts from 
participating, so it's important to have them onboard.

But digital currency is a commodity, or at least an incredibly lifelike 
simulation of one.  If someone's willing to make a market for it, it will 
have value, assuming the system's secure and the mint behaves responsibly.

Suppose Digicash opened up a digital currency exchange in Amsterdam.  They
agree to make a market in edollars.  Specifically, they agree to sell
edollars for $1US, and they agree to buy edollars for $0.99.  This prices
are good for all time, for all comers.  The promise to sell is easy to
keep, because they can mint as many edollars as they want.  The promise to
buy is backed up by cash reserves, which they create with revenues from
sales. 

Let's suppose, just for the sake of argument, that the currency exchange 
doesn't even conduct business over the net.  You have to walk into a 
storefront in Amsterdam with a floppy disk to buy or sell edollars.  
Edollars would still have value here in Lincoln, NE USA.

I could find a partner and set up a local currency exchange here in
Lincoln;  my partner would set up shop in Amsterdam.  We'd offer to sell
edollars for $1.01 and buy them for $0.98.  We'd keep reserves of both
edollars and US dollars on hand, from which we'd do our trading.  If we
started to run low on edollars, my partner would go to the storefront and
buy some more.  If we started to accumulate too many, he'd sell.  The 
prices are set up so that we'd always make a profit, assuming our volume 
was high enough to cover expenses.

Now suppose that Bob, who runs a local business here in town, wants to
sell widgets over the net.  He decides to use digicash software.  Alice
lives in Hoboken, and she wants to buy a widget.  She goes to a digital
currency exchange in Hoboken and buys some edollars, and then she uses her
digicash client to transfer the funds to Bob at Widgets 'R Us.

Every day, Bob goes to the bank and deposits the day's checks at the drive
through window.  Once he started selling online, he stops at my drive 
through window every day on the way to the bank.  He gives me the 
edollars, and I give him a check.  Then he deposits my check along with 
all the others at the bank.

If my check is good, the bank can't say much about things one way or
another.  You don't need Visa or Citibank or anyone else onboard.  They're
not part of the loop.  You just (just?) need the government to agree to
stay out of the way. 

Now obviously, things would work a lot more smoothly if you didn't need me
or my digital currency exchange.  It would be nice if Bob and Alice could
buy and sell edollars from their banks online.  But it's not essential.  I
could extend credit to Alice so that she could buy edollars from me
online, without having to go out and physically buy them.  If Bob and I
have been doing business for a while, maybe he'll trust that I'll mail him
a check after he transfers edollars to me online.  I suspect that if I
started to make money, banks would decide to put people like me out of the
business by moving into it themselves.

It seems to me that one of the main strenghts of the digicash system is
that it can take off slowly as more and more people decide to use it.  It
doesn't need to be embraced by anyone except the regulators.  If it's 
cheaper and provides a better service, it will win.

==
Alex Strasheim | finger astrashe@nyx.cs.du.edu
alex@omaha.com | for my PGP 2.6.1. public key

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