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12. Digital Cash and Net Commerce

THE CYPHERNOMICON: Cypherpunks FAQ and More, Version 0.666, 1994-09-10, Copyright Timothy C. May. All rights reserved. See the detailed disclaimer. Use short sections under "fair use" provisions, with appropriate credit, but don't put your name on my words.

12.2. SUMMARY: Digital Cash and Net Commerce

12.2.1. Main Points

  • strong crypto makes certain forms of digital cash possible
  • David Chaum is, once again, centrally involved
  • no real systems deployed, only small experiments
  • the legal and regulatory tangle will likely affect deployment in major ways (making a "launch" of digital cash a notrivial matter)

12.2.2. Connections to Other Sections

12.2.3. Where to Find Additional Information


12.2.4. Miscellaneous Comments

  • a huge area, filled with special terms
  • many financial instruments
  • the theory of digital cash is not complete, and confusion abounds
  • this section is also more jumbled and confusing than I'd like; I'll clean it up in fufure releases.

12.3. The Nature of Money

12.3.1. The nature of money, of banking and finance,

is a topic that suffuses most discussions of digital cash. Hardly surprising. But also an area that is even more detailed than is crypto. And endless confusion of terms, semantic quibblings on the list, and so on. I won't be devoting much space to trying to explain economics, banking, and the deep nature or money.

12.3.2. There are of course many forms of cash or money today (these terms are not equivalent...)

  • coins, bills (presumed to be difficult to forge)
  • "ontological conservation laws"--the money can't be in two places at once, can't be double spent
  • this is only partly true, and forgery technology is making it all moot
    • bearer bonds and other "immediately cashable" instruments
    • diamonds, gold, works of art, etc. ("portable wealth")

12.3.3. Many forms of digital money.

Just as there are dozens of major forms of instruments, so too will there be many forms of digital money. Niches will be filled.

12.3.4. The deep nature of money is unclear to me.

There are days when I think it's just a giant con game, with value in money only because others will accept it. Other days when I think it's somewhat tied to "real things" like gold and silver. And other days when I'm just unconcerned (so long as I have it, and it works).

12.3.5. The digital cash discussions get similarly confused by the various ideas about money.

Digital cash is not necessarily a form of currency, but is instead a transfer mechanism. More like a "digital check," in fact (though it may give rise to new currencies, or to wider use of some existing some point, it may become indistinguishable from a currency).

12.3.6. I advise that people not worry overly much about the true and deep nature of money,

and instead think about digital cash as a transfer protocol for some underlyng form of money, which might be gold coins, or Swiss francs, or chickens, or even giant stone wheels.

12.3.7. Principle vs. Properties of Money

  • Physical coins, as money, have certain basic properties: difficult to counterfeit, pointless to counterfeit if made of gold or silver, fungibility, immediate settling (no need to clear with a distant bank, no delays, etc.), untraceability, etc.
  • Digital cash, in various flavors, has dramatically different properties, e.g., it may require clearing, any single digtital note is infinitely copyable, it may allow traceability, etc. A complicated mix of properties.
  • But why is physical money (specie) the way it is? What properties account for this? What are the core principles that imply these properties?
  • hardware (specie like gold) vs. software (bits, readily copyable)
  • immediale, local clearing, because of rational faith that the money will clear
  • limits on rate of transfer of physical money set by size, weight of money, whereas "wire fraud" and variants can drain an account in seconds
  • My notion is that we spend too much time thinking about the principles (such as locality, transitivity, etc.) and expect to then derive the properties. Maybe we need to instead focus on the objects, the sets of protocol- derived things, and examine their emergent properties. (I have my own thinking along these lines, involving "protocol ecologies" in which agents bang against each other, a la Doug Lenat's old "Eurisko" system, and thus discover weaknesses, points of strength, and even are genetically programmed to add new methods which increase security. This, as you can guess, is a longterm, speculative project.)

12.3.8. "Can a "digital coin" be made?"

  • The answer appears to be "no"
  • Software is infinitely copyable, which means a software representation of digital money could be replicated many times
  • this is not to say it could be spent many times, depending on the clearing process...but then this is not a "coin" in the sense we mean
  • Software is trivially replicable, unlike gold or silver coins, or even paper currency. If and when paper currency becomes trivially replicable (and color copiers have almost gotten there), expect changes in the nature of cash. (Speculation: cash will be replaced by smart cards, probably not of the anonymous sort we favor.)
  • bits can always be duplicated (unless tied to hardware, as with TRMs), so must look elsewhere
  • could tie the bits to a specific location, so that duplication would be obvious or useless
  • the idea is vaguely that an agent could be placed in some location...duplications would be both detectable and irrelevant (same bits, same behavior, unmodifiable because of digital signature)
  • (this is formally similar to the idea of an active agent that is unforgeable, in the sense that the agent or coin is "standalone")

12.3.9. "What is the 'granularity' of digital cash?"

  • fine granularity, e.g., sub-cent amounts
    • useful for many online transactions
    • inside computers
    • add-on fees by interemediaries
    • very small purchases
  • medium granularity
    • a few cents, up to a dollar (for example)
    • also useful for many small purchases
  • close equivalent to "loose change" or small bills, and probably useful for the same purposes
    • tolls, fees, etc.
  • This is roughly the level many DigiCash protocols are aimed at
    • large granularity
      • multiple dollars
      • more like a "conventional" online transaction
  • the transaction costs are crucial; online vs. offline clearing
  • Digital Silk Road is a proposal by Dean Tribble and Norm Hardy to reduce transaction costs

12.3.10. Debate about money and finance gets complicated

12.4. Smart Cards

12.4.1. "What are smart cards and how are they used?"

  • Most smart cards as they now exist are very far from being the anonymous digital cash of primary interest to us. In fact, most of them are just glorified credit cards.
  • with no gain to consumers, since consumes typically don't pay for losses by fraud
    • (so to entice consumes, will they offer inducements?)
  • Can be either small computers, typically credit-card-sized, or just cards that control access via local computers.
  • Tamper-resistant modules, e.g., if tampered with, they destroy the important data or at the least give evidence of having been tampered with.
    • Security of manufacturing
  • some variant of "cut-and-choose" inspection of premises
    • Uses of smart cards
      • conventional credit card uses
      • bill payment
      • postage
      • bridge and road tolls
  • payments for items received electronically (not necessarily anonymously)

12.4.2. Visa Electronic Purse

12.4.3. Mondex

12.5. David Chaum's "DigiCash"

12.5.1. "Why is Chaum so important to digital cash?"

  • Chaum's name appears frequently in this document, and in other Cypherpunk writings. He is without a doubt the seminal thinker in this area, having been very nearly the first to write about several areas: untraceable e-mail, digital cash, blinding, unlinkable credentials, DC-nets, etc.
  • I spoke to him at the 1988 "Crypto" conference, telling him about my interests, my 'labyrinth' idea for mail-forwarding (which he had anticipated in 1981, unbeknownst to me at the time), and a few hints about "crypto anarchy." It was clear to me that Chaum had thought long and deeply about these issues.
  • Chaum's articles should be read by all interested in this area. (No, his papers are not "on-line." Please see the "Crypto" Proceedings and related materials.)
  • [DIGICASH PRESS RELEASE, "World's first electronic cash payment over computer networks," 1994-05-27]

12.5.2. "What's his motivation?"

  • Chaum appears to be a libertarian, at least on social issues, and is very worried about "Big Brother" sorts of concerns (recall the title of his 1985 CACM article).
  • His work in Europe has mostly concentrated on unlinkable credentials for toll road payments, electronic voting, etc. His company, DigiCash, is working on various aspects of digital cash.

12.5.3. "How does his system work?"

  • There have been many summaries on the Cypherpunks list. Hal Finney has written at least half a dozen, and others have been contributed by Eric Hughes, Karl Barrus, etc. I won't be including any of them just takes too many pages to explain how digital cash works in detail.
  • (The biggest problem people have with digital cash is in not taking the time to understand the basics of the math, of blinding, etc. They wrongly assume that "digital cash" can be understood by common-sense reasoning about existing cash, etc. This mistake has been repeated in several of the half-assed proposals for "net cash" and "digi dollars.")
  • Here's the opening few paragraphs from one of Hal's explanations, to provide a glimpse:
  • "Mike Ingle asks about digicash. The simplest system I know of that is anonymous is the one by Chaum, Fiat, and Naor, which we have discussed here a few times. The idea is that the bank chooses an RSA modulus, and a set of exponents e1, e2, e3, ..., where each exponent ei represents a denomination and possibly a date. The exponents must be relatively prime to (p-1)(q-1). PGP has a GCD routine which can be used to check for valid exponents.. "As with RSA, to each public exponent ei corresponds a secret exponent di, calculated as the multiplicative inverse of ei mod (p-1)(q-1). Again, PGP has a routine to calculate multiplicative inverses. "In this system, a piece of cash is a pair (x, f(x)Adi), where f() is a one-way function. MD5 would be a reasonable choice for f(), but notice that it produces a 128-bit result. f() should take this 128-bit output of MD5 and "reblock" it to be an multi-precision number by padding it; PGP has a "preblock" routine which does this, following the PKCS standard. "The way the process works, with the blinding, is like this. The user chooses a random x. This should probably be at least 64 or 128 bits, enough to preclude exhaustive search. He calculates f(x), which is what he wants the bank to sign by raising to the power di. But rather than sending f(x) to the bank directly, the user first blinds it by choosing a random number r, and calculating D=f(x) * rAei....(I should make it clear that ะป is the power operator, not xor.) D is what he sends to the bank, along with some information about what ei is, which tells the denomination of the cash, and also information about his account number." [Hal Finney, 1993-12-04]

12.5.4. "What is happening with DigiCash?"

  • "Payment from any personal computer to any other workstation, over email or Internet, has been demonstrated for the first time, using electronic cash technology. "You can pay for access to a database, buy software or a newsletter by email, play a computer game over the net, receive $5 owed you by a friend, or just order a pizza. The possibilities are truly unlimited" according to David Chaum, Managing Director of DigiCash TM, who announced and demonstrated the product during his keynote address at the first conference on the World Wide Web, in Geneva this week." [DIGICASH PRESS RELEASE, "World's first electronic cash payment over computer networks," 1994-05-27]
  • DigiCash is David Chaum's company, set up to commercialize this work. Located near Amsterdam.
  • Chaum is also centrally invovled in "CAFE," a European committee investigating ways to deploy digital cash in Europe
    • mostly standards, issues of privacy, etc.
    • toll roads, ferries, parking meters, etc.
    • People have been reporting that their inquiries are not being answered; could be for several reasons.

12.5.5. The Complexities of Digital Cash

  • There is no doubt as to the complexity: many protocols, semantic confusion, many parties, chances for collusion, spoofing, repudiation, and the like. And many derivative entities: agents, escrow services, banks.
  • There's no substitute for thinking hard about various scenarios. Thinking about how to arrange off-line clearing, how to handle claims of people who claim their digital money was stolen, people who want various special kinds of services, such as receipts, and so on. It's an ecology here, not just a set of simple equations.

12.6. Online and Offline Clearing, Double Spending

12.6.1. (this section still under construction)

12.6.2. This is one of the main points of division between systems.

12.6.3. Online Clearing

  • (insert explanation)

12.6.4. Offline Clearing

  • (insert explanation)

12.6.5. Double spending

  • Some approaches involve constantly-growing-in-size coins at each transfer, so who spent the money first can be deduced (or variants of this). And N. Ferguson developed a system allowing up to N expenditures of the same coin, where N is a parameter. [Howard Gayle reminded me of this, 1994-08-29]
  • "Why does everyone think that the law must immediately be invoked when double spending is detected?...Double spending is an informational property of digital cash systems. Need we find malicious intent in a formal property? The obvious moralism about the law and double spenders is inappropriate. It evokes images of revenge and retribution, which are stupid, not to mention of negative economic value." [Eric Hughes, 1994-08-27] (This also relates to Eric's good point that we too often frame crypto issue in terms of loaded terms like "cheating," "spoofing," and "enemies," when more neutral terms would carry less meaning-obscuring baggage and would not give our "enemies" (:-}) the ammunition to pass laws based on such terms.)

12.6.6. Issues

  • Chaum's double-spending detection systems
  • Chaum went to great lengths to develop system which preserve anonymity for single-spending instances, but which break anonymity and thus reveal identity for doublespending instances. I'm not sure what market forces caused him to think about this as being so important, but it creates many headaches. Besides being clumsy, it require physical ID, it invokes a legal system to try to collect from "double spenders," and it admits the extremely serious breach of privacy by enabling stings. For example, Alice pays Bob a unit of money, then quickly Alice spends that money before Bob can...Bob is then revealed as a "double spender," and his identity revealed to whomver wanted it...Alice, IRS, Gestapo, etc. A very broken idea. Acceptable mainly for small transactions.
    • Multi-spending vs. on-line clearing
  • I favor on-line clearing. Simply put: the first spending is the only spending. The guy who gets to the train locker where the cash is stored is the guy who gets it. This ensure that the burden of maintaining the secret is on the secret holder.
  • When Alice and Bob transfer money, Alice makes the transfer, Bob confirms it as valid (or verifies that his bank has received the deposit), and the transaction is complete.
  • With network speeds increasing dramatically, on-line clearing should be feasible for most transactions. Offline systems may of course be useful, especially for small transactions, the ones now handled with coins and small bills.

12.6.7. "How does on-line clearing of anonymous digital cash work?" - There's a lot of math connected with blinding,

exponentions, etc. See Schneier's book for an introduction, or the various papers of Chaum, Brands, Bos, etc.

  • On-line clearing is similar to two parties in a transaction exchanging goods and money. The transaction is clearled locally, and immediately. Or they could arrange transfer of funds at a bank, and the banker could tell them over the phone that the transaction has cleared--true "on-line clearing." Debit cards work this way, with money transferred effectively immediately out of one account and into another. Credit cards have some additional wrinkles, such as the credit aspect, but are basically still on-line clearing.
  • Conceptually, the guiding principle idea is simple: he who gets to the train locker where the cash is stored first gets the cash. There can never be "double spending," only people who get to the locker and find no cash inside. Chaumian blinding allows the "train locker" (e.g., Credit Suisse) to give the money to the entity making the claim without knowing how the number correlates to previous numbers they "sold" to other entities. Anonymity is preserved, absolutely. (Ignoring for this discussion issues of cameras watching the cash pickup, if it ever actually gets picked up.)
  • Once the "handshaking" of on-line clearing is accepted, based on the "first to the money gets it" principle, then networks of such clearinghouses can thrive, as each is confident about clearing. (There are some important things needed to provide what I'll dub "closure" to the circuit. People need to ping the system, depositing and withdrawing, to establish both confidence and cover. A lot like remailer networks. In fact, very much like them.)
  • In on-line clearing, only a number is needed to make a transfer. Conceptually, that is. Just a number. It is up to the holder of the number to protect it carefully, which is as it should be (for reasons of locality, or selfresponsibility, and because any other option introduces repudiation, disavowal, and the "Twinkies made me do it" sorts of nonsense). Once the number is transferred and reblinded, the old number no longer has a claim on the money stored at Credit Suisse, for example. That money is now out of the train locker and into a new one. (People always ask, "But where is the money, really?" I see digital cash as claims on accounts in existing money-holding places, typically banks. There are all kinds of "claims"-- Eric Hughes has regaled us with tales of his explorations of the world of commericial paper. My use of the term "claim" here is of the "You present the right number, you get access" kind. Like the combination to a safe. The train locker idea makes this clearer, and gets around the confusion about "digimarks" of "e$" actually being any kind of money it and of itself.)

12.7. Uses for Digital Cash

12.7.1. Uses for digital cash?

  • Privacy protection
  • Preventing tracking of movements, contacts, preferences
  • Illegal markets
    • gambling
    • bribes, payoffs
    • assassinations and other contract crimes
    • fencing, purchases of goods
  • Tax avoidance
    • income hiding
    • offshore funds transfers
    • illegal markets
  • Online services, games, etc.
  • Agoric markets, such as for allocation of computer resources
  • where programs, agents "pay" for services used, make "bids" for future services, collect "rent," etc.
  • Road tolls, parking fees, where unlinkablity is desired. This press release excerpt should give the flavor of intended uses for road tolls:
  • "The product was developed by DigiCash TM Corporation's wholly owned Dutch subsidiary, DigiCash TM BV. It is related to the firm's earlier released product for road pricing, which has been licensed to Amtech TM Corporation, of Dallas, Texas, worldwide leader in automatic road toll collection. This system allows privacy protected payments for road use at full highway speed from a smart card reader affixed to the inside of a vehicle. Also related is the approach of the EU supported CAFE project, of which Dr. Chaum is Chairman, which uses tamper-resistant chips inserted into electronic wallets." [DIGICASH PRESS RELEASE, "World's first electronic cash payment over computer networks," 1994-05-27]

12.7.2. "What are some motivations for anonymous digital cash?" + Payments that are unlinkable to identity, especially for things like highway tolls, bridge tolls, etc.

 - where linkablity would imply position tracking
  • (Why not use coins? This idea is for "smart card"-type payment systems, involving wireless communication. Singapore planned (and perhaps has implemented) such a system, except there were no privacy considerations.)
    • Pay for things while using pseudonyms
  • no point in having a pseudonym if the payment system reveals one's identity
    • Tax avoidance
      • this is the one the digicash proponents don't like to talk about too loudly, but it's obviously a time-honored concern of all taxpayers
  • Because there is no compelling reason why money should be linked to personal identity
    • a general point, subsuming others

12.8. Other Digital Money Systems

12.8.1. "There seem to be many variants...what's the story?"

  • Lots of confusion. Lots of systems that are not at all anonymous, that are just extensions of existing systems. The cachet of digital cash is such that many people are claiming their systems are "digital cash," when of course they are not (at least not in the Chaum/Cypherpunk sense).
    • So, be careful. Caveat emptor.

12.8.2. Crypto and Credit Cards (and on-line clearing)

  • Cryptographically secure digital cash may find a major use in effectively extending the modality of credit cards to low-level, person-to-person transactions.
  • That is, the convenience of credit cards is one of their main uses (others being the advancing of actual credit, ignored here). In fact, secured credit cards and debit cards don't offer this advancement of credit, but are mainly used to accrue the "order by phone" and "avoid carrying cash" advantages.
  • Checks offer the "don't carry cash" advantage, but take time to clear. Traveller's checks are a more pure form of this.
  • But individuals (like Alice and Bob) cannot presently use the credit card system for mutual transactions. I'm not sure of all the reasons. How might this change?
  • Crypto can allow unforgeable systems, via some variant of digital signatures. That is, Alice can accept a phoned payment from Bob without ever being able to sign Bob's electronic signature herself.
  • "Crypto Credit Cards" could allow end users (customers, in today's system) to handle transactions like this, without having merchants as intermediaries.
  • I'm sure the existing credit card outfits would have something to say about this, and there may be various roadblocks in the way. It might be best to buy off the VISA and MasterCard folks by working through them. (And they probably have studied this issue; what may change their positions is strong crypto, locally available to users.)
  • (On-line clearing--to prevent double-spending and copying of cash--is an important aspect of many digital cash protocols, and of VISA-type protocols. Fortunately, networks are becoming ubiquitous and fast. Home use is still a can of worms, though, with competing standards based on video cable, fiber optics, ISDN, ATM, etc.)

12.8.3. Many systems being floated. Here's a sampling:

  • Mondex
  • "Unlike most other electronic purse systems, Mondex, like cash, is anonymous. The banks that issue Mondex cards will not be able to keep track of who gets the payments. Indeed, it is the only system in which two card holders can transfer money to each other. ""If you want to have a product that replaces cash, you have to do everything that cash does, only better," Mondex's senior executive, Michael Keegan said. "You can give money to your brother who gives it to the chap that sells newspapers, who gives it to charity, who puts it in the bank, which has no idea where it's been. That's what money is."" [New York Times, 1994-09-06, provided by John Young]
    • CommerceNet
      • allows Internet users to buy and sell goods.
  • "I read in yesterday's L.A. Times about something called CommerceNet, where sellers and buyers of workstation level equipment can meet and conduct busniess...Near the end of the article, they talked about a proposed method for exchanging "digital signatures" via Moasic (so that buyers and sellers could know that they were who they said they were) and that they were going to "submit it to the Internet Standards body"" [, 1994-0623]
    • NetCash
  • paper published at 1st ACM Conference on Computer and Communications Security, Nov. 93, available via anonymous ftp from PROSPERO.ISI.EDU as /pub/papers/security/netcash-
  • "NetCash: A design for practical electronic currency on the Internet ... Gennady Medvinsky and Clifford Neuman "NetCash is a framework that supports realtime electronic payments with provision of anonymity over an unsecure network. It is designed to enable new types of services on the Internet which have not been practical to date because of the absence of a secure, scalable, potentially anonymous payment method. "NetCash strikes a balance between unconditionally anonymous electronic currency, and signed instruments analogous to checks that are more scalable but identify the principals in a transaction. It does this by providing the framework within which proposed electronic currency protocols can be integrated with the scalable, but non-anonymous, electronic banking infrastructure that has been proposed for routine transactions."
    • Hal Finney had a negative reaction to their system:
  • "I didn't think it was any good. They have an incredibly simplistic model, and their "protocols" are of the order, A sends the bank some paper money, and B sends A some electronic cash in return...They don't even do blinding of the cash. Each piece of cash has a unique serial number which is known to the currency provider. This would of course allow matching of withdrawn and deposited coins...These guys seem to have read the work in the field (they reference it) but they don't appear to have understood it." [Hal Finney, 1993-08-17]
    • VISA Electronic Purse
  • (A lot of stuff appeared on this, including listings of the alliance partners (like Verifone), the technology, the plans for deployment, etc. I regret that I can't include more here. Maybe when this FAQ is a Web doc, more can be included.)
  • "PERSONAL FINANCE - Seeking the Card That Would Create A Cashless World. The Washington Post, April 03, 1994, FINAL Edition By: Albert B. Crenshaw, Washington Post ... "Now that credit cards are in the hands of virtually every living, breathing adult in the country-not to mention a lot of children and the occasional family pet- and now that almost as many people have ATM cards, card companies are wondering where future growth will come from. "At Visa International, the answer is: Replace cash with plastic. "Last month, the giant association of card issuers announced it had formed a coalition of banking and technology companies to develop technical standards for a product it dubbed the "Electronic Purse," a plastic card meant to replace coins and bills in small transactions." [provided by Duncan Frissell, 1994-04-05]
  • The talk of "clearinghouses" and the involvement of VISA International and the Usual Suspects suggest identity-blinding protocols are not in use. I also see no mention of DigiCash, or even RSA (but maybe I missed that- -and the presence of RSA would not necessairly mean identity-blinding protocols were being planned). Likely Scenario: This is not digital cash as we think of it. Rather, this is a future evolution of the cash ATM card and credit card, optimized for faster and cheaper clearing. Scary Scenario: This could be the vehicle for the long- rumored "banning of cash." (Just because conspiracy theorists and Number of the Beast Xtian fundamentalists belive it doesn't render it implausible.)
  • Almost nothing of interest for us. No methods for anonymity. Make no mistake, this is not the digital cash that Cypherpunks espouse. This gives the credit agencies and the government (the two work hand in hand) complete traceability of all purchases, automatic reporting of spending patterns, target lists for those who frequent about-to-be-outlawed businesses, and invasive surveillance of all inter-personal economic transactions. This is the AntiCash. Beware the Number of the AntiCash.

12.8.4. Nick Szabo:

  • "Internet commercialization in itself is a huge issue full of pitfall and opportunity: Mom & Pop BBS's, commercial MUDs, data banks, for-profit pirate and porn boards, etc. are springing up everywhere like weeds, opening a vast array of both needs of privacy and ways to abuse privacy. Remailers, digital cash, etc. won't become part of this Internet commerce way of life unless they are deployed soon, theoretical flaws and all, instead of waiting until The Perfect System comes along. Cryptoanarchy in the real world will be messy, "nature red in tooth and claw", not all nice and clean like it says in the math books. Most of thedebugging will be done not in any ivory tower, but by the bankruptcy of businesses who violate their customer's privacy, the confiscation of BBS operators who stray outside the laws of some jurisdication and screw up their privacy arrangements, etc. Anybody who thinks they can flesh out a protocol in secret and then deploy it, full-blown and working, is in for a world of hurt. For those who get their Pretty Good systems out there and used, there is vast potential for business growth -- think of the $trillions confiscated every year by governments around the world, for example." [Nick Szabo, 1993-8-23]

12.8.5. "What about non-anonymous digital cash?"

  • a la the various extensions of existing credit and debit cards, traveller's checks, etc.
    • There's still a use for this, with several motivations"
  • for users, it may be cheaper (lower transaction costs) than fully anonymous digital cash
    • for banks, it may also be cheaper
    • users may wish audit trails, proof, etc.
  • and of course governments have various reasons for wanting traceable cash systems - law enforcement - taxes, surfacing the underground economy

12.8.6. Microsoft plans to enter the home banking business

  • "PORTLAND, Ore. (AP) -- Microsoft Corp. wants to replace your checkbook with a home computer that lets the bank do all the work of recording checks, tallying up credit card charges and paying bills... The service also tracks credit card accounts, withdrawals from automated teller machines, transfers from savings or other accounts, credit lines, debit cards, stocks and other investments, and bill payments." [Associated Press, 1994-07-04]
  • Planned links with a consortium of banks, led by U.S. Bancorp, using its "Money" software package.
  • Comment: Such moves as this--and don't forget the cable companies--could result in a rapid transition to a form of home banking and "digital money." Obviously this kind of digital money, as it is being planned today, is very from the kind of digital cash that interests us. In fact, it is the polar opposite of what we want.

12.8.7. Credit card clearing...individuals can't use the system

  • if something nonanonymous like credit cards cannot be used by end users (Alice and Bob), why would we expect an anonymous version of this would be either easier to use or more possible?
  • (And giving users encrypted links to credit agencies would at least stop the security problems with giving credit card numbers out over links that can be observed.)
  • Mondex claims their system will allow this kind of person- to-person transfer of anonymous digital cash (I'll believe it when I see it).

10.8.1. "What's the legal status of digital cash?"

  • It hasn't been tested, like a lot of crypto protocols. It may be many years before these systems are tested.

10.8.2. "Is there a tie between digital cash and money laundering?"

  • There doesn't have to be, but many of us believe the widespread deployment of digital, untraceable cash will make possible new approaches
  • Hence the importance of digital cash for crypto anarchy and related ideas.
  • (In case it isn't obvious, I consider money-laundering a non-crime.)

10.8.3. "Is it true the government of the U.S. can limit funds transfers outside the U.S.?"

  • Many issues here. Certainly some laws exist. Certainly people are prosecuted every day for violating currency export laws. Many avenues exist.
  • "LEGALITY - There isn't and will never be a law restricting the sending of funds outside the United States. How do I know? Simple. As a country dependant on international trade (billions of dollars a year and counting), the American economy would be destroyed." [David Johnson,, "Offshore Banking & Privacy," alt.privacy, 1994-07-05]

10.8.4. "Are "alternative currencies" allowed in the U.S.? And what's the implication for digital cash of various forms?

  • Tokens, coupons, gift certificates are allowed, but face various regulations. Casino chips were once treated as cash, but are now more regulated (inter-casino conversion is no longer allowed).
  • Any attempt to use such coupons as an alternative currency face obstacles. The coupons may be allowed, but heavily regulated (reporting requirements, etc.).
  • Perry Metzger notes, bearer bonds are now illegal in the U.S. (a bearer bond represented cash, in that no name was attached to the bond--the "bearer" could sell it for cash or redeem it...worked great for transporting large amounts of cash in compact form).
  • Note: Duncan Frissell claims that bearer bonds are not illegal.
  • "Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), any interest payments made on new issues of domestic bearer bonds are not deductible as an ordinary and necessary business expense so none have been issued since then. At the same time, the Feds administratively stopped issuing treasury securities in bearer form. Old issues of government and corporate debt in bearer form still exist and will exist and trade for 30 or more years after 1982. Additionally, US residents can legally buy foreign bearer securities." [Duncan Frissell, 1994-08-10]
  • Someone else has a slightly different view: "The last US Bearer Bond issues mature in 1997. I also believe that to collect interest, and to redeem the bond at maturity, you must give your name and tax-id number to the paying agent. (I can check with the department here that handles it if anyone is interested in the pertinent OCC regs that apply)" [, 1994-08-10]
  • I cite this gory detail to give readers some idea about how much confusion there is about these subjects. The usual advice is to "seek competent counsel," but in fact most lawyers have no clear ideas about the optimum strategies, and the run-of-the-mill advisor may mislead one dangerously. Tread carefully.
    • This has implications for digital cash, of course.

10.8.5. "Why might digital cash and related techologies take hold early in illegal markets? That is, will the Mob be an early adopter?"

  • untraceability needed
  • and reputations matter to them
  • they've shown in the past that they will try new approaches, a la the money movements of the drug cartels, novel methods for security, etc.

10.8.6. "Electronic cash...will it have to comply with laws, and how?"

  • Concerns will be raised about the anonymity aspects, the usefulness for evading taxes and reporting requirements, etc.
  • a messy issue, sure to be debated and legislated about for many years
  • split the cash into many this "structuring"? is it legal?
  • some rules indicate the structuring per se is not illegal, only tax evasion or currency control evasion
  • what then of systems which automatically, as a basic feature, split the cash up into multiple pieces and move them?

10.8.7. Currency controls, flight capital regulations, boycotts, asset seizures, etc.

  • all are pressures to find alternate ways for capital to flow
  • all add to the lack of confidence, which, paradoxically to lawmakers, makes capital flight all the more likely

10.8.8. "Will banking regulators allow digital cash?"

  • Not easily, that's for sure. The maze of regulations, restrictions, tax laws, and legal rulings is daunting. Eric Hughes spent a lot of time reading up on the laws regarding banks, commercial paper, taxes, etc., and concluded much the same. I'm not saying it's impossible--indeed, I believe it will someday happen, in some form--but the obstacles are formidable.
    • Some issues:
  • Will such an operation be allowed to be centered or based in the U.S.?
  • What states? What laws? Bank vs. Savings and Loan vs. Credit Union vs. Securities Broker vs. something else?
  • Will customers be able to access such entities offshore, outside the U.S.?
  • strong crypto makes communication possible, but it may be difficult, not part of the business fabric, etc. (and hence not so useful--if one has to send PGP- encrypted instructions to one's banker, and can't use the clearing infrastructure...)
    • Tax collection, money-laundering laws, disclosure laws, "know your customer" laws...all are areas where a "digital bank" could be shut down forthwith. Any bank not filling out the proper forms (including mandatory reporting of transactions of certain amounts and types, and the Social Security/Taxpayer Number of customers) faces huge fines, penalties, and regulatory sanctions.
  • and the existing players in the banking and securities business will not sit idly by while newcomers enter their market; they will seek to force newcomers to jump through the same hoops they had to (studies indicate large corporations actually like red tape, as it helps them relative to smaller companies)
    • Concluson: Digital banks will not be "launched" without a lot of work by lawyers, accountants, tax experts, lobbyists, etc. "Lemonade stand digital banks" (TM) will not survive for long. Kids, don't try this at home!
  • (Many new industries we are familiar with--software, microcomputers--had very little regulation, rightly so. But the effect is that many of us are unprepared to understand the massive amount of red tape which businesses in other areas, notably banking, face.)
  • As both Perry Metzger and Eric Hughes have said many times, regulations can make life very difficult. Compliance with laws is a major cost of doing business.
  • ~"The cost of compliance in a typical USA bank is 14% of operating costs."~ [Eric Hughes, citing an "American Banker" article, 1994-08-30]
  • The maze of regulations is navigable by larger institutions, with staffs of lawyers, accountants, tax specialists, etc., but is essentially beyond the capabilities of very small institutions, at least in the U.S.
  • this may or may not remain the case, as computers proliferate. A "bank-in-a-box" program might help. My suspicion is that a certain size of staff is needed just to handle the face-to-face meetings and hoop-jumping.
    • "New World Order"
  • U.S. urging other countries to "play ball" on banking secrecy, on tax evasion extradition, on immigration, etc.
  • this is closing off the former loopholes and escape hatches that allowed people to escape repressive taxation...the implications for digital money banks are unclear, but worrisome.

12.10. Prospects for Digital Cash Use

12.10.1. "If digital money is so great, why isn't it being used?"

  • Hasn't been finished. Protocols are still being researched, papers are still being published. In any single area, such as toll road payments, it may be possible to deploy an application-specific system, but there is no "general" solution (yet). There is no "digital coin" or unforgeable object representing value, so the digital money area is more similar to the similarly nonsimple markets in financial instruments, commercial papers, bonds, warrants, checks, etc. (Areas that are not inherently simple and that have required lots of computerization and communications to make manageable.)
  • Flakiness of Nets. Systems crash, mail gets delayed inexplicably, subscriptions to lists get lunched, and all sorts of other breakages occur. Most interaction on the Nets involves a fair amount of human adaptation to changing conditions, screwups, workarounds, etc. These are not conditions that inspire confidence in automated money systems!
  • Hard to Use. Few people will use systems that require generating code, clients, etc. Semantic gap (generating stuff on a Unix workstation is not at all like taking one's checkbook out). Protocols in crypto are generally hard to use and confusing.
  • Lack of compelling need. Although people have tried various experiments with digital money tokens or coupons (Magic Money/Tacky Tokens, the HeX market, etc.), there is little real world incentive to experiment with them. And most of the denominated tokens are for truly trivial amounts of money, not for anything worth spending time learning. No marketplace for buyers to "wander around in." (You don't buy what you don't see.)
  • Legal issues. The IRS does not look favorably on alternative currencies, especially if used in attempts to bypass ordinary tax collection schemes. This and related legal issues (redemptions into dollars) put a roadblock in front of serious plans to use digital money.
  • Research Issues. Not all problems resolved. Still being developed, papers being published. Chaum's system does not seem to be fully ready for deployment, certainly not outside of well-defined vertical markets.

12.10.2. "Why isn't digital money in use?"

  • The Meta Issue: what digital money? Various attempts at digital cash or digital money exist, but most are flawed, experimental, crufty, etc. Chaum's DigiCash was announced (Web page, etc.), but is apparently not even remotely usable.
    • Practical Reasons:
      • nothing to buy
      • no standard systems that are straightforward to use
  • advantages of anonymity and untraceability are seldom exploited
  • The Magic Money/Tacky Tokens experiment on the Cypherpunks list is instrucive. Lots of detailed work, lots of posts-- and yet not used for anything (granted, there's not much being bought and sold on the List, so...).
  • Scenario for Use in the Near Future: A vertical application, such as a bridge toll system that offers anonymity. In a vertical app, the issues of compatibility, interfaces, and training can be managed.

12.10.3. "why isn't digital cash being used?"

  • many reasons, too many reasons!
    • hard issues, murky issues
      • technical developments not final, Chaum, Brands, etc.
    • selling the users
  • who don't have computers, PDAs, the means to do the local computations - who want portable versions of the same
  • The infrastructure for digital money (Chaum anonymous- style, and variants, such as Brands) does not now exist, and may not exist for several more years. (Of course, I thought it would take "several more years" back in 1988, so what do I know?)
  • The issues are familiar: lack of standards, lack of protocols, lack of customer experience, and likely regulatory hurdles. A daunting prospect.
  • Any "launches" will either have to be well-funded, well- planned, or done sub rosa, in some quasi-legal or even illegal market (such as gambling).
  • "The american people keep claiming in polls that they want better privacy protection, but the fact is that most aren't willing to do anything about it: it's just a preference, not a solid imperative. Until something Really Bad happens to many people as a result of privacy loss, I really don't think much will be done that requires real work and inconvenience from people, like moving to something other than credit cards for long-distance transactions... and that's a tragedy."[L. Todd Masco , 1994-08-20]

12.10.4. "Is strong crypto needed for digital cash?"

  • Yes, for the most bulletproof form, the form of greatest interest to us and especially for agents, autonomous systems
  • No, for certain weak versions (non-cryptographic methods of security, access control, biometric security, etc. methods) - for example, Internet billing is not usually done with crypto
  • and numbered Swiss accounts can be seen as a weak form of digital cash (with some missing features)
    • "warehouse receipts," as in gold or currency shipments

12.10.5. on why we may not have it for a while, from a non-Cypherpunk commenter:

  • "Government requires information on money flows, taxable items, and large financial transactions...As a result, it would be nearly impossible to set up a modern anonymous digital cash system, despite the fact that we have the technology...I think we have more of a right to privacy with digicash transactions, and I also think there is a market for anonymous digicash systems. " [Thomas Grant Edwards. talk.politics.crypto, 1994-09-06]

12.10.6. "Why do a lot of schemes for things like digital money have problems on the Net?

  • Many reasons
  • lack of commercial infrastructure in general on the Net...people are not used to buying things, advertising is discouraged (or worse), and almost everything is "free."
  • lack of robustness and completeness in the various protocols: they are "not ready for prime time" in most cases (PGP is solid, and some good shells exist for PGP, but the many other crypto protocols are mostly not implemented at all, at least not widely).
  • The Net runs "open-loop," as a store-and-forward delivery system
  • The Net is mostly a store-and-forward netword, at least at the granularity seen by the user in sending messages, and hence is "open loop." Messages may or may not be received in a timely way, and there is little opportunity for negotiaton on a real-time basis.
  • This open-loop nature usually works...messages get through most of the time. And the "message in a bottle" nature fits in with anonymous remailers (with latency/delay), with message pools, and with other schemes to make traffic analysis harder. A "closed- loop," responsive system is likelier to be traffic- analyzed by correlation of packets, etc.
  • but the sender does not know if it gets through (return receipts not commonly implemented...might be a nice feature to incorporate; agent-based systems (Telescript?) will certainly do this)
  • this open-loop nature makes protocols, negotiation, digital cash very tough to use--too much human intervention needed
  • Note: These comments apply mainly to mail systems, which is where most of us have experimented with these ideas. Non-mail systems, such as Mosaic or telnet or the like, have better or faster feedback mechanisms and may be preferable for implementation of Cypherpunks goals. It may be that the natural focus on mailing lists, e-mail, etc., has distracted us. Perhaps a focus on MUDs, or even on ftp, would have been more fruitful...but we're a mailing list, and most people are much more familiar with e-mail than with archie or gopher or WAIS, etc. -...The legal...and regulatory obstacles to a...real...system, used for real...transactions, are formidable....(The...obstacles to a "play"...system are not so severe, systems tend not to get much developer attention.)

12.10.7. Scenario for deployment of digital cash

  • Eric Hughes has spent time looking into this. Too many issues to go into here, but he had this interesting scenario, repeated almost in toto here:
  • "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 nondollar 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 Hughes, Cypherpunks list, 1994-08-03]

12.11. Commerce on the Internet

12.11.1. This has been a brewing topic for the past couple of years.

In 1994 thing heated up on several fronts:
  • DigiCash announcement
  • NetMarket announcement
  • various other systems, including Visa Electronic Purse

12.11.2. I have no idea which ones will succeed...

12.11.3. NetMarket

  • Mosaic connections, using PGP
  • "The NetMarket Company is now offering PGP-encrypted Mosaic sessions for securely transmitting credit card information over the Internet. Peter Lewis wrote an article on NetMarket on page D1 of today's New York Times (8/12/94). For more information on NetMarket, connect to or, telnet" [ Guy H. T. Haskin, 1994-08-12]
  • Uses PGP. Hailed by the NYT as the first major use of crypto for some form of digital money, but this is not correct.

12.11.4. CommerceNet

  • allows Internet users to buy and sell goods.
  • "I read in yesterday's L.A. Times about something called CommerceNet, where sellers and buyers of workstation level equipment can meet and conduct busniess...Near the end of the article, they talked about a proposed method for exchanging "digital signatures" via Moasic (so that buyers and sellers could know that they were who they said they were) and that they were going to "submit it to the Internet Standards body"" [, 1994-06-23]

12.11.5. EDI, purchase orders, paperwork reduction, etc.

  • Nick Szabo is a fan of this approach

12.11.6. approaches

  • send VISA numbers in ordinary mail...obviously insecure
  • send VISA numbers in encrypted mail
  • establish two-way clearing protocols
  • better ensures that recipient will fulfill a receipt that customer signs (instead of the "sig taken over the phone" approach)
    • various forms of digital money

12.11.7. lightweight vs. heavyweight processes for Internet commerce

  • Chris Hibbert
  • and the recurring issue of centralized vs. decentralized authentication and certification

12.12. Cypherpunks Experiments ("Magic Money")

12.12.1. What is Magic Money?

  • "Magic Money is a digital cash system designed for use over electronic mail. The system is online and untraceable. Online means that each transaction involves an exchange with a server, to prevent double-spending. Untraceable means that it is impossible for anyone to trace transactions, or to match a withdrawal with a deposit, or to match two coins in any way. "The system consists of two modules, the server and the client. Magic Money uses the PGP ascii-armored message format for all communication between the server and client. All traffic is encrypted, and messages from the server to the client are signed. Untraceability is provided by a Chaum-style blind signature. Note that the blind signature is patented, as is RSA. Using it for experimental purposes only shouldn't get you in trouble. "Digicash is represented by discrete coins, the denominations of which are chosen by the server operator. Coins are RSA-signed, with a different e/d pair for each denomination. The server does not store any money. All coins are stored by the client module. The server accepts old coins and blind- signs new coins, and checks off the old ones on a spent list." [ of excellent summary elided...highly recommended that you dig it up (archives, Web site?) and read it] [Pr0duct Cypher, Magic Money Digicash System, 1992-02-04]
    • Magic Money
  • (or something like that) <Derek Atkins, 4-7-94>
  • ls <Michael Paul Johnson, 4-7-94>

12.12.2. Matt Thomlinson experimented with a derivative version called "GhostMarks"

12.12.3. there was also a "Tacky Tokens" derivative

12.12.4. Typical Problems with Such Experiments

  • Not worth anything...making the money meaningful is an obstacle to be overcome
  • If worth anything, not worth the considerable effort to use it ("creating Magic Money clients" and other scary Unix stuff!)
    • robustness...sites go down, etc.
  • same problems were seen on Extropians list with "HEx" exchange and its currency, the "thorne." (I even paid real money to Edgar Swank to buy some thorned...alas, the market was too thinly traded and the thornes did me no good.)

12.13. Practical Issues and Concerns with Digital Cash

12.13.1. "Is physical identity proof needed for on-line clearing?"

  • No, not if the cash outlook is taken. Cash is cash. Caveat emptor.
  • The "first to the locker" approach causes the bank not to particularly care about this, just as a Swiss bank will allow access to a numbered account by presentation of the number, and perhaps a key. Identity proof may be needed, depending on the "protocol" they and the customer established, but it need not be. And the last thing the bank is worried about is being able to "find and prosecute" anyone, as there is no way they can be liable for a double spending incident. The beauties of local clearing! (Which is what gold coins do, and paper money if we really think we can pass it on to others.)

12.13.2. "Is digital cash traceable?"

  • There are several flavors of "digital cash," ranging from versions of VISA cards to fully untraceable (Chaumian) digital cash.
  • This comes up a lot, with people in Net newsgroups even warning others not to use digital cash because of the ease of traceability. Not so.
  • "Not the kind proposed by David Chaum and his colleagues in the Netherlands. The whole thrust of their research over the last decade has been the use of cryptographic techniques to make electronic transactions secure from fraud while at the same time protecting personal privacy. They, and others, have developed a number of schemes for UNTRACEABLE digital cash." [Kevin Van Horn, talk.politics.crypto, 1994-07-03]

12.13.3. "Is there a danger that people will lose the numbers that they need to redeem money? That someone could steal the number and thus steal their money?"

  • Sure. There's the danger that I'll lose my bearer bonds, or forget my Swiss bank account number, or lose my treasure map to where I buried my money (as Alan Turing supposedly did in WW II).
  • People can take steps to limit risk. More secure computers. Dongles worn around their necks. Protocols that involve biometric authentication to their local computer or key storage PDA, etc. Limits on withdrawals per day, etc. People can store key numbers with people they trust, perhaps encrypted with other keys, can leave them with their lawyers, etc. All sorts of arrangements can be made. Personal identification is but one of these arrangements. Often used, but not essential to the underlyng protocol. Again, the Swiss banks (maybe now the Liechtenstein anstalts are a better example) don't require physical ID for all accounts. (More generally, if Charles wants to create a bank in which deposits are made and then given out to the first person who sings the right tune, why should we care? This extreme example is useful in pointing out that contractual arrangements need not involve governmental or societal norms about what constitutes proof of identity.)

12.14. Cyberspace and Digital Money

12.14.1. "You can't eat cyberspace, so what good is digital money?"

  • This comes up a lot. People assume there is no practical way to transfer assets, when in fact it is done all the time. That is, money flows from the realm of the purely "informational" realm to the physcial realm Consultants, writers, traders, etc., all use their heads and thereby earn real money.
    • Same will apply to cyberspace.

12.14.2. "How can I remain anonymous when buying physical items using anonymous digital cash?'

  • Very difficult. Once you are seen, and your picture can be taken( perhaps unknown to you), databases will have you. Not much can be done about this.
  • People have proposed schemes for anonymous shipment and pickup, but the plain fact is that physical delivery of any sort compromises anonymity, just as in the world today.
  • The purpose of anonymous digital cash is partly to at least make it more difficult, to not give Big Brother your detailed itinerary from toll road movements, movie theater payments, etc. To the extent that physical cameras can still track cars, people, shipments, etc., anonymous digital cash doesn't solve this surveillance problem.

12.15. Outlawing of Cash

12.15.1. "What are the motivations for outlawing cash?"

  • (Note: This has not happened. Many of us see signs of it happening. Others are skeptical.)
    • Reasons for the Elimination of Cash:
      • War on Drugs...need I say more?
  • surface the underground economy, by withdrawing paper currency and forcing all monetary transaction into forms that can be easily monitored, regulated, and taxed.
  • tax avoidance, under the table economy (could also be motive for tamper-resistant cash registers, with spot checks to ensure compliance)
  • welfare, disability, pension, social security autodeposits - fraud, double-dipping
  • reduce theft of welfare checks, disability payments, etc...a problem in some locales, and automatic deposit/cash card approaches are being evaluated.
    • general reduction in theft, pickpockets
  • reduction of paperwork: all transfers electronic (could be part of a "reinventing government" initiative)
  • illegal immigrants, welfare cheats, etc. Give everyone a National Identity Card (they'll call it something different. to make it more palatable, such as "Social Services Portable Inventory Unit" or "Health Rights Document").

12.15.2. Lest this be considered paranoid ranting, let me point out that many actions have already been taken that limit the form of money (banking laws, money laundering, currency restrictions...even the outlawing of competing currencies itself)

12.15.3. Dangers of outlawing cash

  • Would freeze out all transactions, giving Big Brother unprecedented power (unless the non-cash forms were anonymous, a la Chaum and the systems we support)
    • Would allow complete the cellular phones that got Simpson
    • 666, Heinlein, Shockwave Rider, etc.

12.15.4. Given that there is no requirement for identity to be associated with money, we should fight any system which proposed to link the two.

12.15.5. The value of paying cash

  • makes a transaction purely local, resolved on the spot
  • the alternative, a complicated accounting system involving other parties, etc., is much less attractive
  • too many transactions these days are no longer handled in cash, which increases costs and gets other parties involved where they shouldn't be involved.

12.15.6. "Will people accept the banning of cash?"

  • There was a time when I would've said Americans, at least, would've rejected such a thing. Too many memories of "Papieren, bitte. Macht schnell!" But I now think most Americans (and Europeans) are so used to producing documents for every transaction, and so used to using VISA cards and ATM cards at gas stations, supermarkets, and even at flea markets, that they'll willingly--even eagerly-- adopt such a system.

12.16. Novel Opportunities

12.16.1. Encrypted open books, or anonymous auditing

  • Eric Hughes has worked on a scheme using a kind of blinding to do "encrypted open books," whereby observers can verify that a bank is balancing its books without more detailed looks at individual accounts. (I have my doubts about spoofs, attacks, etc., but such are always to be considered in any new protocol.)
  • "Kent Hastings wondered how an offshore bank could provide assurances to depositors. I wondered the same thing a few months ago, and started working on what Perry calls the anonymous auditing problem. I have what I consider to be the core of a solution. ...The following is long... [TCM Note: Too long to include here. I am including just enough to convince readers that some new sorts of banking ideas may come out of cryptography.] "If we use the contents of the encrypted books at the organizational boundary points to create suitable legal opbligations, we can mostly ignore what goes on inside of the mess of random numbers. That is, even if double books were being kept, the legal obligations created should suffice to ensure that everything can be unwound if needed. This doesn't prevent networks of corrupt businesses from going down all at once, but it does allow networks of honest businesses to operate with more assurance of honesty." [Eric Hughes, PROTOCOL: Encrypted Open Books, 1993-08-16]

12.16.2. "How can software components be sold, and how does crypto figure in?"

  • Reusable Software, Brad Cox, Sprague, etc.
    • good article in "Wired" (repeated in "Out of Control")
  • First, certainly software is sold. The issues is why the "software components" market has not yet developed, and why such specific instances of software as music, art, text, etc., have not been sold in smaller chunks.
  • Internet commerce is a huge area of interest, and future development.
    • currently developing very slowly
  • lots of conflicting information...several mailing lists...lots of hype
    • Digital cash is often cited as a needed enabling tool, but I think the answer is more complicated than that.
      • issues of convenience
  • issues of there being no recurring market (as there is in, say, the chip doesn't get bought over and over again, in increasing unit volumes)

12.17. Loose Ends

12.17.1. Reasons to have no government involvement in commerce

  • Even a small involvement, through special regulations, granted frachises, etc., produces vested interests. For example, those in a community who had to wait to get building permits want others to wait just as long, or longer. Or, businesses that had to meet certain standard, even if unreasonable, will demand that new businesses do so also. The effect is an ever-widening tar pit of rules, restrictions, and delays. Distortions of the market result.
  • Look at how hard it is for the former U.S.S.R. to disentangle itself from 75 years of central planning. They are now an almost totally Mafia-controlled state (by this I mean that "privatization" of formerly non-private enterprises benefitted those who had amassed money and influence, and that these were mainly the Russian Mafia and former or current politicians...the repercussions of this "corrupt giveaway" will be felt for decades to come).
  • An encouraging sign: The thriving black market in Russia- -which all Cypherpunks of course cheer--will gradually displace the old business systems with new ones, as in all economies. Eventually the corruptly-bought businesses will sink or swim based on merit, and newly-created enterprises will compete with them.

12.17.2. "Purist" Approach to Keys, Cash, Responsibility

  • There are two main approaches to the issue:
    • Key owner is responsible for uses of his key
    • or, Others are responsible
  • There may be mixed situations, such as when a key is stolen...but this needs also to be planned-for by the key owner, by use of protocols that limit exposure. For example, few people will use a single key that accesses immediately their net worth...most people will partition their holding and their keyed access in such a way as to naturally limit exposure if any particular key is lost or compromised. Or forgotten.
    • could involve their bank holding keys, or escrow agents
    • or n-out-of-m voting systems
  • Contracts are the essence...what contracts do people voluntarily enter into?
  • And locality--who better to keep keys secure than the owner? Anything that transfers blame to "the banks" or to "society" breaks the feedback loop of responsibility, provides an "out" for the lazy, and encourages fraud (people who disavow contracts by claiming their key was stolen).