From: dlv@bwalk.dm.com (Dr. Dimitri Vulis)
Date: Mon, 20 Nov 1995 02:59:32 +0800
To: cypherpunks@toad.com
Subject: Re: Anonymity and Intellectual Capital
In-Reply-To: <Pine.3.89.9511182108.B25524-0100000@tesla.cc.uottawa.ca>
Message-ID: <BXqTeD51w165w@bwalk.dm.com>
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s1113645@tesla.cc.uottawa.ca writes:
> Barring escrow services, I don't see how contracts (or a lot of
> other laws) could be enforced against these entities when they can simply pop
> in and out of existence (unless they have some physical counterpart, like
> a storefront and merchandise. But then these are easily linkable to True
> Names, unlike software companies, financial services or any other part of
> the info economy.)
>
> The value of a reputation is not particularly high in lots of cases or is
> occasionally worth throwing over for a big one-time scam. (Pyramid scams
> for "reputable" banks)

I think this setup would be totally appropriate for the kinds of services or
merchandize where the buyer may determine at the time of payment whether the
product is what it's billed to be; and needs no warranty or service. In other
words, forger any implied warranty of merchantability and go back to Roman
Law's "caveat emptor".

E.g., if you buy an office chair with a 90-day money back guarantee, you have
90 days to discover defects and return it; you want to be able to get hold of
the seller if you have to. On the other hand, if you buy some shares of IBM,
once you're satisfied that these really are IBM shares and the other party can
sell them, I don't think you need to know anything more about the seller. In
fact, in the real stock market most investors go through 2 brokers and usually
have no idea who you're buying these shares from.

> Ps. I know I could probably look this up, but exactly what are bearer bonds?
> I frequently hear them mentioned when market anonymity and money laundering
> come up.

I haven't seen anyone respond, so I'll ramble on.

A bond is general is an instrument that you buy from an organization that's
trying to raise capital (e.g., a company or a municipality). For example, you
might buy for $600 a bond issued by some, who promises to pay you $50 twice a
year for the next 20 years, and then pay you another $1000 in 20 years (at
maturity). Thus, the organization that issues the bond is borrowing money from
the investor and then pays interest on it. There are slight variations, like
zero-coupon bonds, which don't make a periodic payments, but pay the lump sum
at maturity. I heard that in Europe they have perpetual bonds, which never
mature. (When you buy bonds, you take certain risks: the issuer may default and
not make the promised payments; the interest rates may go up, so you would have
gotten better return in a CD; etc; but that's besides the point.)

Obviously, there's an aftermarket in bonds. An investor may want a $700 now,
rather than $1000 in 20 years, so s/he sells the bond to another investor
(generally, the less time is left to maturity, the smaller the discount from
the par value). How does the organization that issued the bonds know who is
supposed to receive the periodic coupon payments?

In the past, many bonds were "bearer instruments". The owner of the bond had in
his or her physical posession a piece of paper entitling him to the periodic
payments, and transferred the piece of paper to the new owner when the bond was
sold. To collect the payments due the owner, someone had to present the piece
of paper to the bond issuer's agent. The agent would remove a physical coupon
from the piece of paper and give the bearer some money.

(Think of a movie ticket -- its bearer is admitted to see a movie and doesn't
have to identify himself beyond presenting the ticker.)

The problem with this system, from the point of view of the Internal Revenue
Service and other U.S.Gov't agencies, was that the bearer could be anonymous
and did not have to identify his/herself beyond presenting the piece of paper
entitling him/her to the payment. This, they could in principle not declare
these payments on their income tax return and the IRS would have a tough time
tracking them down.

So, about 20 or so years ago, the U.S.Congress required bond issuers to tell
the IRS who received their bond payments. No more anonymity, no more bearer
bonds. (My papers are in the office, so this could in fact be more draconian --
U.S. people prohibited from owning bearer bonds issued by European companies.)

In comparison, if you own stock in a company, your stock certificate is never a
bearer instrument. The corporation knows its shareholders of record, sends them
their dividends, and tells the IRS whom it sent the dividends. When you have an
interest-bearing account at a bank, a SS# is associated with it (or else you
pay penalties) and the IRS is informed about any interest you've earned.

The fact that bearer bonds were outlawed suggests that if and when new ways are
invented to conduct financial transactions that are conductive to tax evasion
(e.g., using anonymous electronic payments), they too may become outlawed.

---

Dr. Dimitri Vulis
Brighton Beach Boardwalk BBS, Forest Hills, N.Y.: +1-718-261-2013, 14.4Kbps