Thursday, April 30, 2009

Robert Hettinga and Digital Bearer Settlement

The path-breaking work of Robert Hettinga was published in a series of newsletters issued by FT Virtual Finance Report during 1998-1999. Bob is well-known for starting the famous e$ and e$pam mailing lists, to which I was an early subscriber, and as the founder of the Internet Bearer Underwriting Corporation (IBUC). Along with fellow privacy stewards, Vince Cate and Ray Hirschfeld, he launched the world's first conference on financial cryptography, FC97, on the island of Anguilla.

Table of Contents
FT Virtual Finance Report (and related private articles):
  • "Digital Bearer Settlement" - April 1998
  • "The Geodesic Market" - June 1998
  • "How to Underwrite a Digital Bearer Security"- July 1998
  • "'All the bonds in Christendom': Digital Bearer Bonds"- September 1998
  • "Russell's Revenge: Digital Bearer Equity"- October 1998
  • "Digital bearer derivatives - mathematics of polite fiction" - November 1998
  • "One-Way Hash and Micromoney Mitochondria: Digital Bearer Micropayment"- December 1998 (private)
  • "Hit 'em where they ain't': deploying digital bearer transactions"- February 1999
  • "Internet bearer underwriting: it's time"- April 1999
  • "Endpiece: How to build a bearer underwriting revenue model"- May 1999 (private)
  • "How will the regulators work in the new net economy?"- July 1999
  • "Divine Providence - Internet content without transfer pricing"- September 1999
  • "The Geodesic Economy" - December 1999 (private)
For further reading:
"The Ricardian Contract", Ian Grigg, July 6, 2004
"Formalizing and Securing Relationships on Public Networks", Nick Szabo, September 1997
"Money and Currency in the 21st Century", Geoffrey Turk, July 1997
"The Internet as Buttonwood Tree", Robert Hettinga, Wired, August 1996

Wednesday, April 29, 2009

How DigiCash Blew Everything

By Unknown Author
NEXT! Magazine
January 1999

In September 1998 the high-tech company DigiCash finally went bankrupt. The office in Palo Alto, California remained open for a while but it was merely a stay of execution. Two months ago the company filed for Chapter 11.

Nobody realises, but with the "pending failure" of DigiCash, a bit of Dutch Glory died. The company made a brilliant product. Even Silicon Valley was jealous of the avant garde technology invented in the Amsterdam Science Park. Internet "guru" Nicholas Negroponte went so far as to call the electronic payment system, ecash1, "the most exciting product I have seen in the past 20 years." The rise and fall of DigiCash: a story of paranoia, idealism, amateurism and greed.

David Chaum

The name of one man stands out way above anyone else in the history of DigiCash: David Chaum, US citizen, born into a wealthy family, brilliant mathematician and one who had to always have things his own way2. After travelling around the world he ended up in Amsterdam in the late 80's. Here, he became head of the cryptography department of the CWI (Centre of Mathematics and Information Science). Cryptography is the science of encoding and decoding of data, in order to maintain privacy. Chaum had built a big reputation in this field in the previous few years. Insiders estimated he was in the top 5 of the world at the time.

And at the CWI, they also worked on electronic payment systems. In the early 90s, Rijkswaterstaat3 became interested as they were thinking about introducing automatic toll-collection roads. Chaum got together a few researchers, mainly from earlier contacts with the university of Eindhoven. All guys who knew each other through a "young researchers" programme sponsored by Philips. They had all spent their youth programming behind a computer. Enthusiastically they started, and within little over a week the job was done.


Rijkswaterstaat was satisfied and the team got another assignment. That was the moment when Chaum smelt money. Why couldn't he turn the patents he claimed in the 80s into money? On the 21st of April, 1990, the company DigiCash first saw light of day. Unfortunately Rijkswaterstaat decided to put the advanced system on the shelf and to continue with the old standby, number plate recognition. Chaum could have divested himself of the company and continued his work at the CWI, but he had apparently tasted the forbidden fruit of business. He decided to market his research other ways: smart cards, point-of-sale applications, cash registers and tele-banking. Of course, he had to quit his job at the CWI because of the risk of conflict of interest.

Financing of the company was done privately by the American. Former DigiCash employees agree that Chaum and his wealthy family had at least contributed a few million.

It all started out quite nicely. The brand new company sold a smart card for closed systems which was a cash-cow for years. It was at this time that the first irritants appeared. Even if you are a brilliant scientist, that doesn't mean you are a good manager. David Chaum was a control freak, someone who couldn't delegate anything to anyone else, and insisted upon watching over everybody's shoulders. "That resulted in slowing down research," explains an ex-DigiCash employee who wished to remain anonymous. "We had a lot of half-finished product. He continuously changed his mind about where things were headed."

This drove a few people crazy and it didn't take long before the first few turned their back and started their own company. In 1992 Boudewijn de Kerf and Eduard de Jong quit the company and went to Silicon Valley where they invented and sold an operating system to Sun Microsystems for a substantial sum.


Annoying as he was, David Chaum had brilliant ideas. In 1993 he invented the digital payment system ecash. According to insiders, it was a technically perfect product which made it possible to safely and anonymously pay over the Internet. This was a field in which a lot of work needed to be done, according to the ever-paranoid cryptographers. They considered that to pay with your credit card was extremely insecure. Someone only had to intercept the number to be able to spend someone else's money. Credit cards are also very cumbersome for small payments. The transaction fees are simply too high. Ecash however was perfectly suited to sending electronic pennies, nickels and dimes over the Internet.

It was especially this idealism that prevented people from leaving the stubborn Chaum. Enthusiasm waxed for the elegance of his perfect inspirations. There were even people flying in from the US to witness the birth of something this beautiful, which was unusual, as this is usually only associated with big pay checks plus leased Mercedes in the parking lot4. An ex-employee: "And no nonsense like 'We are going to make this company as big as possible, as soon as possible, and cash out'. No, we really wanted to make this product as big as possible." People who visited and walked around the Matrix building of the Amsterdam Science Park acknowledged that there was a young and dynamic atmosphere. No fast suits, but more like a school-yard gang. Real whiz kids who got coffee from the machine with their own electronic gadgets.

Legendary Suspicion

But even this enthusiasm was unable to withstand the bad feelings generated out of decisions made by CEO David Chaum. Almost every ex-DigiCash employee who you ask is able to tell you a story of his legendary suspicion. "Paranoid" is a word frequently heard. Raymond Stofberg, nowadays owner of the Internet company EURO RSSG Interactive, was responsible for DigiCash financial affairs until August 1996. He explains the story from the beginning. A few years ago Stofberg came to an agreement with Henderson Investment Management. They would invest two tranches for a total of 10 million dollars. When Chaum saw the agreement, he immediately faxed it to all the other venture capitalists which he was negotiating with. Via message drums, word leaked out to Henderson, and the agreement was cancelled.

A little later ING Investment Management was interested. This deal was about twenty million guilders5. The plans were all laid out. ING Barings together with Goldman Sachs would also bring DigiCash to the stockmarket within two years. "The day we were all set to sign, David didn't want to", tells Stofberg. "He was so paranoid, that he always thought something was wrong. There were 8 people from ING, including the CEO, and David simply refused to sign!"

Earlier Chaum was contacted by the unavoidable Bill Gates of Microsoft. He would integrate ecash in every copy of Windows 95. Rumor had it, the giant from Seattle offered something like 100 million dollars. David Chaum refused to sell it for less than 1 or 2 dollars per sold copy and that stubborn attitude killed another agreement. "A really sad story," reflects Stofberg. Chaum killed an agreement with another American company, Netscape, in the same way, by insisting straight away that everybody sign non-disclosure agreements, even before negotiations had started. Exit Netscape.

DigiCash was also involved in the first version of I-Pay6. The contracts were there, just the signatures were missing. But a week before the deal was made Chaum decided to tell a large Dutch newspaper that the Chipper and Chipknip systems7 were absolutely insecure. "The smartcard is broken," he said. The banks had just invested 250 million guilders in the system, so it wasn't surprising that ABN-Amro executive De Ribourdouille personally killed the DigiCash deal.

David Chaum always bailed out at the last moment. Early 1996 there were negotiations with credit card company Visa. The Americans wanted to invest forty million dollars in the company. "But David suddenly demanded 75 million," Raymond Stofberg recalled. "Get lost," was Visa's reply. Retrospectively, a lot of ex-DigiCash employees understand why Chaum was so paranoid. As a cryptographer you have to assume the whole world is trying to rip you off. A certain amount of paranoia is part of the job. Chaum had also worked for intelligence agencies, and that didn't fortify his faith in the good intentions of humankind. His vision of the privacy of the individual was almost an obsession. In 1996 he said, in the relations magazine of Honeywell-Bull: "The difference between a bad electronic cash system and well-developed digital cash will determine whether we will have a dictatorship or a real democracy."

Whilst David might have had little faith in humankind, the employees were getting annoyed with their director. In the beginning they forgave him if another promising deal didn't go through, because David always said there were bigger fish to catch. The world was at their feet. It had to be, because in the whole world there was no product that could even come close to DigiCash. It was this feeling of technological superiority and arrogance that would kill DigiCash. The employees weren't only annoyed with the deals that were cancelled a few days before being closed, but also about the work environment. "David is a real nice guy and you can have a lot of fun with him, but at the same time he abused this employees," tells an ex-employee who wants to stay anonymous. "He always expected an enormous commitment8; once every few weeks you had to work for nights on end." "And there was nothing to compensate for that. Once you were lured inside, you never received pay rises, no extras, nothing. That was very frustrating, but they kept the carrot in front of the donkey9 with the promise that 'once we make that big deal, we'll all be rich.' " "But we never got any shares. It was a hollow promise."

The Coup

In March 1996, tensions had reached a critical level. The irritation over a series of blunders led to a meeting of eleven important employees. They decided to give David a simple choice: "You're out or we're out." "That was the only way David could no longer fuck up the company," said one of them. The plan was to set up their own company, it had been done before, ex-DigiCash people had set up their own company with success. Accepted tradition10 has it that two out of the eleven members - Jelte van der Hoek and Wouter Habraken - went to David who panicked and immediately made them interim-managers. He then disappeared into the background, and eventually returned to the US a year later.

The remaining nine co-conspirators were not happy, but they accepted it for the moment. They had achieved their objective of getting rid of Chaum. But this acceptance was soon replaced with anger at the two new managers. "Jelte was a technical guy, who had been programming since he was seven, he couldn't manage at all. And Habraken wasn't suited either. He was too much a deal-maker, not a manager," according to an ex-employee.

Wouter Habraker wasn't impressed with the criticism. From Australia he emailed: "DigiCash was founded by crypto-people, and good crypto-people are a bit paranoid. That's why it's not surprising there are different views on the Jelte's and my reasons. That's a pity, but our objective was to get investment and find a new manager. And that's what we did." Nonetheless frustrations grew. "Three weeks later, I found out they wanted to bypass me and get rid of me," said Raymond Stofberg. "From that time on I knew for sure that Chaum had trusted the wrong people." Other employees shared that belief and hardly 3 months after things had settled down there was a exodus of employees. Since then there is an in-joke that goes: "If you can survive DigiCash, you can handle anything that life throws at you." Amazingly enough DigiCash was still a very sexy company for the rest of the world. A rising star in a world where Internet companies like Netscape and Yahoo showed there were enormous risks, but also enormous benefits. DigiCash was hot and venture capitalists were stampeding to invest in it. Early in 1997 it received an investment of a total of sixteen million guilders from Gilde Investment, a daughter company of the Rabobank, and also Nicholas Negroponte, director of the Media Lab of MIT and writer of visionary books about the Internet. Also included was the well-known venture capitalist, David Marquardt, general partner at August Capital.

A new CEO

The new investors immediately appointed a new Chief Executive Officer: Michael Nash, an American from the credit card company Visa. Most employees didn't really like Nash. "Fast guy, smooth talker, but no content," said one. Nash came from a big bureaucratic company and had no clue on how to run a small company that had to fight in the front line. There were also angered at the fact that Nash immediately opened an office in Palo Alto. You could justify the decision from a marketing point of view, but the result was that the development was split. The costs sky-rocketed to a completely new heights, because the communications between the two departments was slow and cumbersome. The salaries in Silicon Valley were of course much higher than in the Amsterdam Watergraafsmeer11. And the American programmers absolutely didn't do a better job then their Dutch colleagues. According to an ex-employee, Nash had his head in the clouds12. Everyone had to work on avant garde products like ecash, for which there was only a very slowly growing market. Real products, with which good money could be made, like smart cards and road-toll systems, were left to slowly die. "Mike would rather talk to Swatch, because he wanted ecash in watches. That didn't help us at all, because ecash is made for a PC. You are allowed to shout about futuristic things, but you should not believe in the hype you have yourself created." DigiCash did have a very impressive board with, for example, David Chaum - who had disappeared into the background - and the influential Nicholas Negroponte. But what good did those names do for the company? "A guy like Negroponte is only there for his image," says yet another ex-employee. "For relatively little money he had a share in a high profile company. But that doesn't help with the management of the company itself. Negroponte is just like any ordinary rock star, he gets out of the plane and when he walks down the stairs he still doesn't know which country he is in. That's been very destructive."

The Credit Card Triumphs

Meanwhile the management tried very hard to sell the ecash system to banks and was more or less successful in it. The Mark Twain Bank, in America, was the first to experiment with ecash. Later, another 7 banks followed, banks like Deutsche Bank and Credit Suisse. Banks are very conservative, they did business with DigiCash to prevent them from falling behind, not to storm ahead and be the first. DigiCash never dealt with the "normal" departments but always with a "special product" department. And why would the banks be in any hurry to implement the revolutionary new systems of DigiCash? The electronic payment market was dominated by credit cards, and plenty of money was made off them.

Neither were consumers so unhappy with the current situation. They weren't too convinced about the possibilities of fraud; even if something did go wrong, they weren't the ones to pay, the credit companies were. No worries there. They didn't really care about anonymity either, and certainly with the delivery of physical products this was completely irrelevant.

Everything was in stalemate. The banks were not in a hurry, the consumers didn't see any advantages. Although providers were the ones who would profit mostly from micropayment systems like ecash, they couldn't do anything but wait and be patient. Imagine: CNN receives millions of hits on their website every day. If you could ask one cent every time someone requests a page, that would make millions every year.

Halfway through 1998 everything seemed lost. The high salaries - estimates were that they were shelling out a million a month - quickly ate away reserves and there were no revenues to compensate for that. The company never had a clear marketing strategy. It wasn't till June 1998 that the sales manager at the time, Jan Kees Dunning, chose to change tactics. The dogma of Chaum, that DigiCash should aim for the virtual world, was abandoned. It was no use trying to compete against the credit card companies; they would squash you if you upset them.


Jan Kees Dunning explains that from now on, ecash should be offered as a part of a complete range of payment methods. "No longer as the money maker for banks, because it was never that. All banks suffer losses on the traditional payment systems, and with a much cheaper system you could only minimize those losses." "Nowadays, a consumer isn't that loyal anymore. He demands from his bank that it offers all services, if they don't he'll just switch to another bank. Ecash has to be one of those services."

At least that was a clear strategy. But once again things were ruined, this time because of never-ending negotiations with the big American CitiBank. Citibank was a very attractive partner for DigiCash. In the first place, there was a large amount of clients: seventy million. Just as important, the backing of Citibank might convince the other, more skeptical, banks. Citibank is known as very aggressive. In the 70s they introduced a universal payment system which enabled them to have very competitive fares and services. If they had started with ecash, none of the other banks could have afforded to lag behind.

But at the crucial moment Citibank decided to merge with the Traveler Group, which focused attention away from DigiCash. At the same time, the stock market valuation of CitiBank dropped to about half of recent values and at times like that, knee-jerk management rules in the US. So much for DigiCash.

Jan Kees Dunning is convinced that the business could have turned out differently to the fatal chain of events that seems to have happened. He estimates that DigiCash needed only another six months to secure a breakthrough. But the American venture capitalists had had enough at this point. They first pulled the plug on the Amsterdam team, and the Palo Alto team is currently floating between life and death13. Only six people remain with the company, and the one thing the new CEO Scott Loftesdale [sic]14 - Mike Nash was fired in August of 1998 - has left to do is announce the firesale of the DigiCash patents. Which are getting cheaper every minute, because the people who developed the product have all found work elsewhere. The ecash project now conjures up a feeling of history, dead and buried15. There has not been any product maintenance, and that's fatal in an environment where everything is changing this rapidly. The future of especially ecash is very uncertain. Either it is sold for a maximum of five million guilders to a company like IBM, who has lagged two years behind with a similar product, according to Dunning, or it disappears. A sad fate for a path-breaker in a digital technique which will have completely eliminated regular cash in, say, twenty years. Everybody is convinced of that; the days of cash are numbered. It's too expensive, too cumbersome and too old-fashioned. David Chaum has since been seen around Berkeley, walking with his soul under his arm16. He was far ahead of his time. Too far.

Translators Notes

1 In the original article, the two words "e cash" were used.

2 "Tot op het bot."

3 Dutch Department of Public Works. Responsible for waterways and roadways.

4 "Lease-bak" is a derogative term in Dutch.

5 About 10 million dollars. The guilder trades at 1.8 to 2 per dollar.

6 A Dutch payment system operated by a cartel of all major Dutch banks.

7 Smartcard systems operating competitively in the Dutch market.

8 "Inzet."

9 "Hielden aan het lijntje."

10 "Volgens de overlevering."

11 Suburb in Amsterdam where the Science Park was located.

12 "Met zijn hoofd in de wolken."

13 "Zweven tussen leven en dood."

14 Scott Loftesness.

15 (German) "Das war einmal."

16 "Lopen met zijn ziel onder de arm."

Editor's note. This was translated by some Dutch natives, and then edited by myself for style. Tricky job really as translation should be done into one's native language. No promises as to accuracy! --Ian Grigg

For further reading:
"Past currency", Steve Bowbrick, Guardian, February 25, 2003
"Digging Those Digicash Blues", Declan McCullagh, Wired, June 14, 2001
"DigiCash: Failure is Interesting", Felix Stalder, December 1999
"Behold the Automated Till", Peter Cassidy, December 1999
"FM Interviews David Chaum", Jens-Ingo Brodesser, First Monday, July 5, 1999
"Digicash files Chapter 11", Tim Clark, CNET News, November 4, 1998
"E-Money (That's What I Want)", Wired, December 1994

The Siege on the Greenback

By Josh McHugh
Monday, September 8, 1997

IN A BUREAU OF ENGRAVING & PRINTING building just across the Potomac's Washington Channel from the Jefferson Memorial, printing presses the size of moving vans grind out sheets of dollar bills. Ink-spattered workers tend the machinery with screwdrivers and oilcans.

That operation, along with the green paper it produces, may soon fall victim to the computer age. If so, the federal government will lose a lucrative source of revenue. "The Federal Reserve is the most profitable business there is," says Walter Wriston, former Citibank chairman. "They don't have to pay for their inventory." Here's why: As long as the public holds paper money, it is, in effect, giving the federal government an interest-free loan. The dollars are simply a non-interest-bearing IOU issued by the Federal Reserve.

For most of recorded history monarchs and central banks have considered it their divine right to control the money supply. When they succeed in doing so, they can finance their operations in part by skimming some of the money. "Seigniorage" is what the economists call the process. In the old days seigniorage took the form of coin clipping;the royal mint would issue a sovereign with less than a sovereign's worth of gold in it. Nowadays seigniorage takes place when the government issues bills that erode with inflation.

In a digital world cybermoney becomes an ever-greater threat to the government's monopoly over dollar issuance.

Over the last three decades it has become easier to move and hold money in noncash forms. American Express first stole away some of the government's float by persuading tourists to replace paper money with travelers' checks. Later, instead of holding a no-interest checking account at a bank, which in turn holds a no-interest account at a Federal Reserve bank, you could own shares in a money market fund and use those shares like money.

Credit cards, too, cut down on the need to carry paper money.

Frequent-flier miles could be next. If the airlines made these mileage accounts freely transferable, they would turn into a dollar alternative that would hold their value much better than a greenback.

Next in the evolution of the dollar competitors: digital cash, exchanged over the Internet and stored on disk drives or microchip-enhanced smart cards. In principle the technology gives anyone with a server, a network connection and a command of cryptographic protocols the ability to mint money. Your unit of account doesn't have to be non-interest-bearing dollars; it could be a claim on a pile of interest-bearing Treasury bills or shares in the Magellan Fund.

The Internet's global reach solves the acceptance problems that private currencies used to encounter in the 19th-century days of free banking. And the Web is the perfect place to post a rating newsletter that could tell potential users whose currency is the most trustworthy or widely accepted.

Robert Hettinga, who runs the Boston Digital Commerce Society, predicts that digital cash will first gain currency as a medium for small on-line transactions, such as payments for downloading inexpensive software. Once people gain confidence in the banks that issue digital money and the software that moves it, they will trust them with larger sums.

Among the companies working on digital cash systems: Citicorp, Microsoft, Digital Equipment Corp. and Nomura. The systems all have one thing in common: The U.S. Treasury gets cut out of the float.

Could the federal government attempt to regulate or tax competing money systems away? The issuers could simply relocate to Zurich or Singapore.

Politics for the Really Cool

By Josh McHugh
Monday, September 8, 1997

"THIS IS A COOL HOLIDAY," says Sameer Parekh over a July 4 breakfast in a cafe near the University of California at Berkeley. "It's the day we celebrate overthrowing the government."

A disheveled 22-year-old, 135 pounds, shirttails down to the knees of his jeans, with a 4-inch black goatee hanging from a cherubic face, Parekh is no violent revolutionary out to establish a dictatorship of the proletariat. Parekh is a libertarian of a new sort. His weapon: software.

Parekh traffics in a substance known among his peers as "strong crypto," cryptographic software massively stronger than the stuff American companies are allowed to export. Cryptography is the science of scrambling messages so they cannot be read by prying eyes. It is the lifeblood of telephone commerce;credit card verifications, bank teller machine transactions, wire transfers. It is useful to crooks. And it is magnificently antiauthoritarian.

Encrypted with a sufficiently powerful code, a cellular phone conversation becomes untappable, a written message or computer file indecipherable. Federal authorities are attempting to limit the spread of this technology abroad. But they are no match for Parekh and other rebels with his programming skills.

For the last three years Parekh has been mixing sophisticated computer science with libertarian philosophy, selling a cryptographic product made in an undisclosed foreign country through an Anguillan subsidiary. His company, C2Net, thereby skirts U.S. export restrictions.

Looking further out, cryptography's challenge to Washington's authority;indeed, to that of all governments;is daunting. Even if the federal government can somehow keep strong crypto out of the hands of Muammar Qaddafi; extremely doubtful at this point;it would still have all manner of domestic users to worry about.

"I realized that protection of privacy on the Internet couldn't be viable without a viable business behind it."-Sameer Parekh

Cryptography is very useful to anyone who can't afford to leave behind a paper trail. That could be someone running an illegal gambling business or doing insider trading or distributing child pornography or arranging the details of a cocaine shipment. It could also be someone who is a perfectly legitimate business operator except that he doesn't want to pay income taxes or otherwise submit his transaction to the prying eyes of increasingly intrusive governments.

Parekh envisions a revolution in which federal buildings don't burn to the ground but rather just run out of money. There would still be a government, but it would not be the expansive welfare state we have today. It would be a minimalist version of the sort seen in a place like Hong Kong;strong on law and order, sanctity of contract and minimal social security but that's about it.

Walter Wriston, former chairman of Citibank, devoted a chapter of his brilliant 1992 book The Twilight of Sovereignty to the history of cryptography. Wriston foresaw the weakening of national governments through the power of technology and recognized that cryptography would play a key role. He knew something about it from personal experience. During World War II he was responsible for the electromechanical devices used by the Allies to encrypt their messages. Wriston sees encryption technology as a key ingredient in the transfer of social and economic power from the governments of nation-states to the PC-packing populace. Since the success of Internet commerce depends on strong cryptography, its proliferation is inevitable. "The government can't do much about it," says Wriston. "It's another thing slipping through their fingers."

Rejoice, libertarians. Lament, Hillary Clinton and partisans of the nanny state. If you want to participate in the cryptographic revolution against Big Government, you don't have to traffic with an arms merchant in a dark alley. Go to the Internet. Pretty Good Privacy (PGP), from $99 to $249, is a popular program. Another one is SynCrypt, by SynData Technologies Inc., just out.

Using this off-the-shelf stuff you can transact business in total privacy. Don't worry about spies. With what is presently known about code cracking, it would take a supercomputer a billion years to divine your message.

There is another dimension to the spread of crypto. The same mathematical tricks used to encode a message can be run in reverse, to generate a so-called digital signature. This is a computer stamp of authenticity. It can be used to prove that an electronic document originated with a particular sender, such as a bank depositor or a bank officer. Assemble a few digital signatures in a clever fashion and you have created a mechanism for digital cash;a system of electronic payments akin to Visa or MasterCard but with the added feature that it can be made anonymous.

Think about that. Money transfers that are genuine but untraceable. Anonymous, secure E-cash could give rise to a blossoming of commerce on the Internet and a reduction in the billions of dollars spent annually processing paper checks and paper credit-card chits.

Bad news, of course, for the Internal Revenue Service and its 3,570-page maze of a tax code. And what happens to the Fed's control of the money supply when more and more money takes the form of digital blips on a satellite in the sky? How do you stop money laundering once cash is invisible and leaves no paper trail?How do you catch tax dodgers?

"It's easily the most important privacy issue of the decade, and perhaps the most important policy issue."-David Friedman

The IRS figures that it is already losing $120 billion a year on income that goes unreported. When E-cash becomes commonplace, that number is going to get larger. The underground economy, after all, does surface at times. Dogs can sniff the traces of cocaine in a satchel of bills. In the ionosphere economy there is no odor for dogs to sniff.

For the libertarian set, today's encryption technology is the best thing to come along since the right to bear arms. After all, why risk getting arrested for dumping tea into the harbor when you can just order the tea from a tax-free jurisdiction over the Net, encrypt the purchase order and pay with anonymous digital currency? Libertarians see encryption technology as the weaponry for a bloodless grassroots revolution in which revenue streams replace street barricades as the fields of battle.

"We are looking at kidnappers, we are looking at terrorists, we are looking at banking integrity, we are looking at propriety interests and economic secrets," Louis Freeh, director of the Federal Bureau of Investigation, told members of the International Cryptography Institute two years ago. Freeh has been stumping for tougher government controls on encryption technology. He wants a "key escrow" bureaucracy that would hold cryptographic keys that could, if law enforcement deemed it necessary, be used to unscramble any encrypted message.

But do we want to put that much power in the hands of bureaucrats? "Back in England, when the king wanted to smoke out people we'd call terrorists today;the people we see in retrospect as patriots;he wanted to steam open envelopes," scoffs Wriston. "Nothing has changed;now governments want to steam open your E-mail. If I were the national drug czar, I'd want to, too. The problem is, none of us trust the government to limit that interception to those particular messages."

If the FBI is threatened, that doesn't entirely dismay the libertarian crowd that seems to be overrepresented in the hacker community. "With the Internet being ubiquitous and crypto being cheap and easy to get, it's going to be more and more difficult for governments to control transactions between people," declares Adam Shostack, a 24-year-old cryptography consultant whose clients include Fidelity Investments. In February he instructed attendees at a financial cryptography conference in the finer points of using encryption to protect large networks from attackers and con men. Site of the conference: the Caribbean tax haven of Anguilla.

It's too early to give it a name, but computer technology and modern communications are at the threshold of creating a new kind of political movement. Talk to David Friedman, a professor of economics at the University of California at Santa Clara. Friedman espouses an anti-big-government philosophy a little stronger even than that of his famous father, Milton Friedman. He calls the set of questions raised by encryption "easily the most important privacy issue of the decade, and perhaps the most important policy issue." He concedes the downside to a technology that will be useful to lawbreakers. But he says the advantages of pervasive privacy outweigh the disadvantages: "On the whole, it'll be a change to a freer and more interesting society."

Cryptography, the craft of secret writing, has been around almost as long as writing itself. Bad guys have always used it. So have rebels. Its better-known applications through the ages have been in making secure military plans and espionage communiques. Today's biggest user is, if not the government, the bank industry. Encryption safeguards the more than $1 trillion a day that flows over the Fedwire and the Chips systems.

Modern cryptography was born two decades ago at Stanford University with the invention of so-called public key encryption by Whitfield Diffie and Martin Hellman. In classic cryptography, keys were kept private. The sender would use a key, or formula, to encode a document; the receiver would use a closely related formula to decode. To communicate, the sender and receiver would have to share a key. This was usually the weak spot. A messenger sent to transfer the key could be intercepted or compromised.

With public-key encryption, this problem is finessed. The receiver of confidential messages simultaneously creates an encoding and a decoding key. The peculiar arithmetic of these keys, perfected by a trio of MIT mathematicians, is such that the one cannot be divined from the other: Knowing the encrypting formula tells you absolutely nothing about how to unscramble a message. So the receiver need not be particular about his choice of messenger to deliver the encrypting key. Indeed, he can afford to publish the key for all the world to see. Modern-day practice is to dump the key onto an Internet home page or server.

What makes encryption a killer application just now? The MIT algorithm requires that both sender and receiver do several billion calculations on each message, a practical impossibility not too long ago. Moore's Law to the rescue. The doubling of computing power every 18 months has placed the ability to process virtually unbreakable cryptographic algorithms within reach of anyone with a 166-megahertz Pentium.

Legitimate users? Any company planning on doing business on-line. When you send an order over the Internet, the contents of your message pass through a series of network routers and servers before reaching their final destination. Anyone who gains control of one of the machines along the way could intercept your credit card information. You're not going to send in the order unless you know it is secure.

Illegitimate ones? This is an imaginary scenario. You work at Apple and know, two days before it is to be announced, that Microsoft is going to pump in some cash and probably give a kick to the stock price. You're going to tip off your brother-in-law, who is going to feed the tip to a third party, an active trader in technology stocks. Do this with phone calls and you stand a fairly high risk of being caught, even though you have never met the trader.

So you encrypt the stock tip with your brother-in-law's public key and publish it on the Internet, perhaps in the middle of a chat room that lots of people visit. Your brother-in-law does the same, using the trader's public key. Both of these messages look like meaningless garbles to an outsider. They betray nothing about whose key was used to encrypt them.

Convicted insider trader Dennis Levine used a secret account in the Caribbean. But how do you use an offshore account without going through customs or making tappable phone calls? Given the power of encryption and digital signatures, a modern-day Levine could do anonymous E-trading from the comfort of his home PC, without making any suspicious phone calls or getting on a plane. Might the government have to throw up its hands someday, accepting the libertarian view that laws against insider trading just impede the efficiency of the marketplace?

"With crypto being easy to get, it's going to be difficult for governments to control transactions between people."-Adam Shostack

Someday it might. In the meantime, the government is trying to put the crypto genie back into the bottle. The current export controls permit the sale of weak crypto (the sort that could be cracked by the National Security Agency) but not crypto that would take the NSA a trillion years to crack.

The problem is that the basic tricks are widely known; indeed, the equation that drives these public key systems was published by a Swiss mathematician in the 1760s. Any reasonably competent Russian programmer can reinvent the software from scratch, and that is just what is happening (see box, p. 174). At this point, trying to regulate cryptography is like trying to cut the murder rate by regulating the sale of kitchen knives.

The next battleground will be fought over digital cash. One system, Mondex, has been adopted by an international consortium of banks led by National Westminster. The system, however, includes a digital trail that could be subpoenaed.

Not good enough, says cryptographer David Chaum, whose rival product is anonymous and untraceable;except to the spender. Customers want anonymity, he says;that's why 2.6 billion $100 bills are in circulation.

Chaum distances himself from the libertarian crowd, but his preaching about getting snoops off our backs is music to their ears. His invention may very well lead to the society espoused by Friedman and Parekh, in which widespread encryption forces the government to accept a less intrusive role in information flow.

Now the government polices what can be claimed about a prescription drug, what can be said in a real estate ad, who can talk about a publicly traded stock and when, and who can finance a political ad. Is all this necessary to preserve the union and insure domestic tranquility? The answer depends on your politics. If you are a Big Government liberal or Big Government right-winger, the answer is yes. But not everyone thinks we need as much government as we currently have.

When he was a 16-year-old high-school student in Libertyville, Ill., Sameer Parekh typed Henry David Thoreau's 9,000-word essay "Civil Disobedience" into an Apple II GS computer and posted it to an electronic bulletin board. The treatise begins: "I heartily accept the motto 'That government is best which governs least,' and should like to see it acted up to more rapidly and systematically. Carried out, it finally amounts to this, which also I believe,;'That government is best which governs not at all.'"

Look Thoreau's "Civil Disobedience" up on the World Wide Web and chances are you'll see "typed by: Sameer Parekh....1/12/1991" at the end of the text. Over the years, scores of people have made copies of the document and posted them, complete with Parekh's name and typos, on their own Web sites.

Thoreau's essay paraphrases another hero of Parekh's, Thomas Jefferson. It happens that one of Jefferson's many passions, along with fighting to keep the fledgling U.S. government as small as possible, was cryptography. In the 1790s he invented an elegant, handheld rotary cipher machine. What could he have done with a laptop!

There is something about the Internet that brings out resistance to authority. "Libertarianism is much more important in cyberspace than in real space," says David Friedman. "Nearly all political discussion on-line is pro- or antilibertarian. Libertarianism is the central axis."

Libertarianism as a central axis? Perhaps. The cyberheads have always been defiant of authority, going back to the Phone Phreaks of the 1970s, who used their knowledge of electronics to beat Ma Bell out of long-distance charges. Some of the phone acrobats evolved into today's self-styled "cypherpunks," a term combining the science fiction genre cyberpunk with the British spelling of "cipher." The cypherpunk clan (check out the Internet newsgroup "alt.cypherpunks") includes John Gilmore, one of the first employees at Sun Microsystems and an early member of the Electronic Frontier Foundation. The libertarian axis is particularly strong in the EFF, which defends hackers and cryptographers against their federal adversaries.

At Berkeley, Parekh programmed E-mail servers to allow subscribers to send and receive E-mails anonymously or under pseudonyms, and to surf the Web through a specially programmed "anonymizer" server without leaving the electronic trail that could let the Web site operators;or an enforcer for the Securities & Exchange Commission; know who visited and when. After dropping out of Berkeley in 1995, he went full time into the business of protecting Web surfers' identities.

Realizing that his subscribers' privacy was only as secure as the servers their accounts sat in, Parekh invited his friends in the hacker community to try to break into Web servers sold by Microsoft and Netscape. Successful break-ins were rewarded with T shirts. The results ("I had to stop giving T shirts out") convinced him that the real money to be made was in selling crackproof, Web-server software.

With Microsoft and Netscape restrained by U.S. law from exporting server software with strong encryption, Parekh saw an opportunity. He took a copy of Apache, a popular server software package available free on the Internet, and set about the arduous task of weaving heavy-duty encryption programs into the server software. Once he had figured out how to do that, Parekh contracted with programmers in a country he won't name (lest the U.S. lean on the country to tighten up its cryptography export laws) to write the software and formed a sister corporation in the Caribbean tax haven of Anguilla to sell it to the rest of the world.

If you don't like the tax rate or export laws in your native country, set up a Web server in a Caribbean tax haven, on the Isle of Man or on Vanuatu, incorporate there and run your business from anywhere over the Internet. Countries like those use low taxes and secrecy protection to compete for corporate custom.

As the world economy becomes less land- and factory-based and increasingly server-based, expect more nations to welcome boundary-jumping business. Encryption provides two essential functions in this sort of economy: It keeps transactions secure as they course along the world's networks, and it makes the nature of the transactions invisible to the prying eyes of border guards and tax collectors.

After less than a year, C2Net's encryption-studded software is running on about 30,000 domains;more than any other commercial software outside of the stuff sold by Netscape and Microsoft. In the process, the U.S. lost a few high-tech jobs, not to mention the taxes on the sales of the software.

As more and more business transactions are hidden from the IRS by encryption, Parekh predicts, tax revenues will decrease. Declining tax revenues will lead to the privatization of many of the government's present functions, and people will be more free to choose what services to spend their money on. They will even be free to choose what kind of money they will use.

Maybe it won't be the Federal Reserve's notes. Curiously enough, Fed Chairman Alan Greenspan is not entirely unsympathetic to the libertarian aim of taking money out of the exclusive control of the federal government. Greenspan was a libertarian in his youth;a regular in the salon of Ayn Rand (1905-1982). Greenspan predicts that electronic commerce will give rise to private currencies.

"As the international financial system becomes ever more complex," Greenspan said at a Treasury conference last year, "we, in our regulatory roles, are being driven increasingly toward reliance on private market self-regulation similar to what emerged in more primitive forms in the 1850s in the United States."

Greenspan made it clear that he did not think the government should seek to stem the tide, even though it will undermine the authority of organizations like his Federal Reserve Board. "I am especially concerned," he went on, "that we not attempt to impede unduly our newest innovation, electronic money, or, more generally, our increasingly broad electronic payments system."

Ian Goldberg is working on that very innovation, folding encryption schemes together to create a universal digital currency that will incorporate all the disparate forms of digital cash in the electronic marketplace. Goldberg, 24, a Canadian graduate student at Berkeley, spends most of his time tinkering with and poking into cryptosystems.

In September 1995 Goldberg sent a chill down Netscape's spine (and a ripple through its stock price) when he announced that he and a colleague, David Wagner, had found a major vulnerability in the security layer of the Navigator Web browser. Sixteen months later, in response to a challenge by security software company RSA, Inc., Goldberg devised a program that harnessed the spare computing cycles of about 250 assorted workstations in Berkeley's computer science department to attack a message encrypted with a 40-bit key, the government's limit on unregistered encryption software for export. Trying 100 billion keys an hour, Goldberg's gang broke the cipher in 31/2 hours. The experiment got noticed.

Where does all this end? Goldberg predicts that tax laws and commercial regulations will need to change to adapt to the world of encrypted on-line business. The FBI will have to go after bombers by keeping an eye on ammonium nitrate rather than its ear on phone lines. "Taxes will have to be based more on physical things like land; assuming one believes in taxation at all," he says. "With encryption, not only can you hide your transactions, but your assets as well. Intellectual property can be hidden easily."

As for governmental restrictions on encryption, Goldberg finds them more ridiculous than pernicious. "I don't think terrorists will say, 'Since there's a law against strong cryptography, we won't use it.'"

Against all this governments are fighting a battle they have no prayer of winning, says Walter Wriston. Fortified with strong cryptography and growing exponentially, Wriston says, the Internet will irrevocably weaken governments as we know them. "They haven't got a chance in hell with that thing," he chuckles. "There's no way anybody can control it."

We do not know where all this will end, and neither does anyone else, but for better or worse, the implications for politics, for economics and for human freedom are enormous. The 20th century was the century of Big Wars and Big Governments; fascist, communist, welfare state. The 21st century is going to be something quite different.

This was the cover story for the September 1997 issue of Forbes.

Tuesday, April 28, 2009

Dow Jones Interview with Jon Matonis

Nilly Ostro interviewed me for the Dow Jones Markets Magazine in June 1997 for an article entitled "The Future of Money". At the time, I was employed by VeriSign and I had just completed the original "Digital Cash and Monetary Freedom" for the Internet Society's INET '95 Conference in Honolulu, Hawaii.

Monday, April 27, 2009

The Electronic Future of Cash

American University Law Review published a special edition on "The Electronic Future of Cash" in April 1997 (Volume 46, Number 4), which included a discussion on the surrounding regulatory and legal issues. Also included in the edition was an article from National Security Agency's Cryptology Division, "How to Make a Mint: The Cryptography of Anonymous Electronic Cash".

The Electronic Future of Cash
Table of Contents


Piracy, Privacy, and Privatization: Fictional and Legal Approaches to the Electronic Future of Cash
Walter A. Effross


1996: Survey of the Year's Developments in Electronic Cash Law and the Laws Affecting Electronic Banking in the United States
Richard L. Field


Stored Value Cards and the Consumer: The Need for Regulation
Mark E. Budnitz

Why Regulate Cybermoney?
David G. Oedel

How Best to Guide the Evolution of Electronic Currency Law
Brian W. Smith
Ramsey J. Wilson


How to Make a Mint: The Cryptography of Anonymous Electronic Cash
Laurie Law
Susan Sabett
Jerry Solinas

How to Regulate Electronic Cash: An Overview of Regulatory Issues and Strategies
Simon L. Lelieveldt

Electronic Stored Value Payment Systems, Market Position, and Regulatory Issues
Gary W. Lorenz


United States v. Ursery: Drug Offenders Forfeit Their Fifth Amendment Rights
Sean M. Dunn

Montana v. Egelhoff: Voluntary Intoxication, Morality, and the Constitution
Robert J. McManus


The Helms-Burton Act: The Effect of International Law on Domestic Implementation
W. Fletcher Fairey

IEEE Spectrum Special Issue: Electronic Money

IEEE Spectrum Volume 34, Issue 2
Special Issue: Electronic Money
February 1997

Table of Contents

Electronic money: toward a virtual wallet
Tekla S. Perry
Pages: 18 - 19

The future of electronic money: a regulator's perspective
Edward W. Kelley, Jr.
Pages: 21 - 22

Credits and debits on the Internet
Marvin A. Sirbu
Pages: 23 - 29

“Minting” electronic cash

David Chaum, Stefan Brands
Pages: 30 - 34

Traceable e-cash
Peter S. Gemmell
Pages: 35 - 37

Crime and prevention: a Treasury viewpoint
Stanley E. Morris
Pages: 38 - 39

Locking the e-safe
Robert W. Baldwin, C. Victor Chang
Pages: 40 - 46

In your pocket: smartcards
Carol Hovenga Fancher
Pages: 47 - 53

Banking in cyberspace: an investment in itself
Michael C. McChesney
Pages: 54 - 59

Technology takes to securities trading
Steven M. H. Wallman
Pages: 60 - 65

Nasdaq's technology floor: its president takes stock
Alfred R. Berkeley, III
Pages: 66 - 67

The economics of e-cash
Mike ter Maat
Pages: 68 - 73

Money and the Internet: a strange new relationship
Howard Anderson
Pages: 74 - 76

Wildcat Banking, Banking Panics, and Free Banking in the United States

The Federal Reserve Bank of Atlanta Economic Review (December 1996) published "Wildcat Banking, Banking Panics, and Free Banking in the United States" by Gerald P. Dwyer, Jr. He writes:
"Will electronic money resemble the banknotes circulated in the U.S. free banking period? Walter Wriston, a former Chairman of Citicorp, and others have suggested that money used for transactions on the Internet may resemble nineteenth-century banknotes more than it will today’s money."
"Free banking disappeared when it was taxed out of existence by the federal government in 1865. This action was not due to apparent dissatisfaction voiced by citizens of free banking states. In fact, the national banking law adopted during the Civil War included many provisions similar to the free banking laws."

Sunday, April 26, 2009

International Chamber of Commerce Presentation by Jon Matonis

In November 1996, I was invited to speak in Paris at the Commission on Financial Services Meeting for the International Chamber of Commerce. My subject matter was the still-evolving concept of digital authentication for internet payments, and the introductory guest presentation was given by Andrew Crockett, General Manager of the Bank for International Settlements (B.I.S.).

Friday, April 24, 2009

My Campaign for California State Senate

[Note: Some linked pages may require ]

From San Mateo Libertarian, Volume VI, Number 11, November/December 1996:
"Jon Matonis was our most successful local candidate. Maybe it was because his was the only three-way race. Maybe because he was the only coast-side candidate. But maybe because he had the best-looking web site! Jon is an encryption software manager. The following is taken from his campaign web page."

We, as Californians, have two critical choices to make:

  • Do we pay for the government and state-managed monopolies to provide services or do we privatize and permit the market to provide more efficient and more cost-effective solutions?
  • Do we expand state power and spending or do we return the tax money to all Californians in the form of a check from Sacramento?

California is a world leader. This state can become the single, shining example of what the free, human spirit is capable of achieving. I aim to accomplish this with four basic, innovative planks of my campaign that impact every day of every Californian's life.

Taxation and Currency

Five out of 50 states in our great Union currently function ideally without a state income tax. My goal is for the state of California to become the sixth state. Additionally, I will propose legislation that permits banks and other organizations (even individuals) in California to issue and circulate negotiable currency state-wide which competes freely with the monopoly Federal Reserve notes.


The condition of public education in California is abysmal and continues to deteriorate. I support the initiatives for private school choice and expanded home schooling and an end to government or tax-funded pre-school programs.


Most of my district falls in an area of supreme beauty and natural resources. I support the right of private citizens and organizations to rightfully acquire natural resources for the purpose of conservation such as the Quarry Park Project in El Granada demonstrates. However, the desire to conserve natural resources is not a valid excuse for the violation of individual rights, and I therefore oppose such violations.


It is dehumanizing, and personally embarrassing to me as a Californian, for the INS and border patrol to round-up, in dragnet-like fashion, productive immigrants at their workplaces and homes. I strongly oppose all measures that punish employers who hire undocumented workers. Such measures repress free enterprise, harass workers, and systematically discourage employers from hiring Hispanics.

For further reading: 
"California Senate Results", Los Angeles Times, November 5, 1996
"CA State Senate 11", Our Campaigns, November 5, 1996
"Shannon, Sher fight for 11th Senate District", Half Moon Bay Review, March 13, 1996

11,290 (3.69%) votes for Jon Matonis

Thursday, April 23, 2009

Digital Dollars

During the fall of 1996, John M. Moran of the Hartford Courant interviewed me for Part II of their two-part series on "Digital Dollars":

Part I - "Future Currency to Take the Shape of Bits Instead of Bills", October 13, 1996
Excerpt: "Still, the rise of electronic money may foreshadow even greater changes in how people shop, what they buy and where they get it -- raising the prospect of cyber-shopping malls and virtual arcades on the Internet. And everyone, from bankers to retailers to governments and consumers, is struggling to understand what the impact will be."
Part II - "Consumers Look to Reap Benefits of Cash in Cyberspace", October 14, 1996
Excerpt: "Ironically, electronic money might also represent a new opportunity for human freedom: the opportunity to create and distribute your own financial currency, said Jon W. Matonis, director of financial services for VeriSign Inc. of Mountain View, Calif....That would allow corporations and even individual citizens to get out from under the regulated monetary supply that most nations now impose on their currency. Different kinds of private currencies would then compete across the globe for market share, Matonis said."

Tuesday, April 21, 2009

Other Looming Issues Related to Cryptography Policy

The National Academies Press published Cryptography's Role in Securing the Information Society (1996) by Kenneth W. Dam and Herbert S. Lin, Editors, for Committee to Study National Cryptography Policy, National Research Council.

This book presents a comprehensive examination of cryptography and its evolution from a national security tool to a key component of the global information super-highway. It addresses the urgent need for a strong national policy on cryptography that promotes and encourages its widespread use to protect the information interests of individuals, businesses, and the nation as a whole, while respecting legitimate national needs of law enforcement and intelligence for national security and foreign policy purposes.

In Appendix L, Other Looming Issues Related to Cryptography Policy, a thoughtful and prescient analysis of true digital cash is presented. With digital currency regulation and enforcement on the upswing today, the issues covered remain shockingly relevant:

Appendix L

Other Looming Issues Related to Cryptography Policy, p. 477

L.1 Digital Cash, 477
L.1.1 Anonymity and Criminal Activity, 480
L.1.2 Public Trust, 480
L.1.3 Taxation, 482
L.1.4 Cross-Border Movements of Funds, 482
L.2 Cryptography for Protecting Intellectual Property, 482

Thursday, April 16, 2009

NACHA Presentation by Jon Matonis

In October 1996, I was invited to speak at the NACHA Internet Council Meeting in McLean, Virginia. My subject matter was "Introduction to Internet Security Issues", which included an overview on Internet security basics, digital signatures, and public key cryptography relevant to the members of NACHA.

Formed in 1996, NACHA’s Internet Council addresses issues that advance electronic commerce over open networks and facilitate digital business transactions in a straight-through and secure manner. The Council has 75 members that focus on challenges and opportunities in the payments environment, including authentication; data security; risk management; compliance; emerging technologies; and online and mobile banking.

Monday, April 13, 2009

The Future of Money: The Return of the Gold Standard

By Julian Dibbell
The most successful of the current crop of microcurrencies is GoldMoney, a 21st-century take on the oldest financial trick in the book.

When a retired Florida oncologist named Douglas Jackson launched the world’s first digital-gold currency in 1996—an online payment system fully backed by precious metal reserves and marketed under the brand name e-gold—he did not appear to be on the winning side of monetary history. Once upon a time, nearly a hundred years before, the gold standard reigned supreme: A dollar bill or a pound note or any other major currency was in those days just a marker for a fixed amount of government gold, redeemable at any time. But by the onset of the Depression, the economist John Maynard Keynes had declared the gold standard a “barbarous relic,” too crudely physical a form of money for the complex demands of modern economies. And by the century’s end, the multitrillion-dollar global money supply had long since shed its ties to gold or any other tangible asset in particular and now resided almost wholly in the digital circuitry of financial networks. Money had gone virtual, and reattaching it to gold made as much historical sense, it seemed, as instant-messaging by pigeon post.

But now, a decade into the emergence of a fledgling digital-gold currency industry, the idea is looking trendier than ever. Just last month a slick new digital-gold app for the iPhone shipped, allowing holders of GoldMoney—a gold-backed currency, with over $631 million worth of bullion in its London and Zurich vaults—to touch their iPhone screens and instantly transfer as little as a centigram of gold (about $0.30 worth) to other GoldMoney users. But more than the latest gadgetry, of course, it’s the latest economic news that’s making gold currency look smart again. In the blink of a business cycle, the wonders of floating currency have given way to the horrors of the credit crunch—the collapse, at last, of the boom years’ towering edifice of mortgage pools, default swaps, and other so-called synthetic securities—while the price of gold holds steady at historic highs approaching $1,000 an ounce.

Even at that price, insists GoldMoney’s founder, James Turk, “Gold is still relatively cheap.” Like many gold bugs, Turk believes the market price has a lot of climbing to do before it catches up with gold’s true value—which he calculates to be as much as $6,200 an ounce—and he’s not surprised that most of GoldMoney’s initial growth has come from customers looking mainly for a safe and simple way to invest in a debt-free, low-risk store of value.

Turk is just fine with GoldMoney’s investor appeal, because it allows GoldMoney to closely monitor the transactions that people use it for. As e-gold’s Douglas Jackson can attest, rolling your own currency can be a risky business: Having swiftly built up a base of over 5 million account holders drawn to e-gold both for its liquidity and its less-than-rigorous customer-identification policies, Jackson and other e-gold principals were hit with a federal indictment in April 2007 alleging that the currency was, as a Justice department statement put it, “a highly favored method of payment by operators of investment scams, credit card and identity fraud, and sellers of online child pornography.” Last summer the defendants pleaded guilty to money laundering and related charges, and while they were spared prison time, e-gold itself has for the time being been put on ice: The currency, which once circulated at “velocities” of over $2 million in payments per day, has effectively been shut down until Jackson and company can bring it up to regulatory code.

The legitimate users of gold-backed e-currencies see them as part of a hybrid monetary future: Digital gold’s unique efficiencies as a payment system make it particularly suited to international transactions. Gold-backed cash automatically evens out currency fluctuations that can play havoc with price points and profit margins in cross-border trade. Already GoldMoney allows for faster, cheaper online transfers of funds than the existing banking system does—particularly from one country to another, where standard bank wire fees of $20 or more look almost prohibitive next to GoldMoney’s maximum transfer fee of about $3.

But even the most avid goldbugs aren’t happy to contemplate what it would take to lead all the world’s floating currencies back to the rigors of the gold standard. “I don’t think we could go back to that,” says Mahendra Naik, a director of Iamgold, a gold mining company. “The world has evolved quite considerably, it’s quite developed.” On the other hand, he points out that “if you keep printing money, sooner or later people lose faith.” In Zimbabwe, for example, the nation's reserve bank just issued the new $100 trillion bill, rendering Zimbabwe’s legal tender, in the words of the country's own finance minister, “essentially dead.”

For further reading:
"The Future of Money: DIY Currencies", Annalee Newitz, Portfolio, April 13, 2009
"Cyber currencies spawn 21st century gold rush, money-laundering fears", Marcelo Ballve, Associated Press, June 17, 2001
"Combine the Power of the Internet and the Gold Standard", Wayne Dawson, Spring 2000

Sunday, April 12, 2009

The End of Cash

By James Gleick
The New York Times Magazine
Sunday, June 16, 1996

Cash is dirty -- the New Jersey Turnpike tried to punish toll collectors recently for wearing latex gloves (thus giving the driving clientele a "bad impression"), but who can blame them? Cash is heavy -- $1 million in $20 bills weighs more than you can lift, and drug dealers have been disconcerted to note that their powdered merchandise is handier for smuggling than the equivalent money. Cash is inequitable -- if you are one of the 50 million Americans poor enough to be "unbanked," you pay extortionate fees to seedy, bulletproofed check-cashing operations (even more extortionate than the fees charged for automatic teller machines, often up to 1 or 2 percent and rising). Cash is quaint, technologically speaking -- unless you're impressed by intaglio-steel-plate-printed paper with embedded polyester strips (meant to inconvenience counterfeiters). Cash is expensive -- tens of billions of dollars drain from the economy each year merely to pay for the printing, trucking, safekeeping, vending, collecting, counting, armored-guarding and general care and feeding of our currency.

My Essay on Digital Gold Currencies

By Bartleby
The Ultimate Apocalypse
Saturday, April 11, 2009;action=display;threadid=21954

Before the advent of digital currencies backed by precious metals, the issuance of money was controlled by Central Banks. Banking has a long history, but from 1971, the US Federal Reserve abandoned the gold standard, which all world currencies were tied to under the Bretton Woods system, so that there was hypothetically no limit to their ability to issue credit in the form of loans. Many countries began a process of financial deregulation and their currencies were 'floated' to compete on the international currency market. This unlimited credit no longer tied to a commodity with real value such as precious metals contributed/caused many economic recessions and devalued the currency so that, according to the Consumer Price Index (CPI), one US dollar today is only worth six cents of what it was approximately seventy years ago (Measuring Worth 2008). Private digital gold is a move away from fiat currencies issued by governments that have nothing to back it's value with.

Most countries have central banking - usually (especially in the case of the Bank of England, The US Federal Reserve and the Reserve Bank of Australia) non-government entities that have been given power via legislation to determine the monetary policy of the country. They do this by controlling how much money is in circulation through open market operations (buying and selling currency on the open market). This allows them to determine interest rates and the cash rate which in turn influences inflation, productive output and unemployment.

Another function is that they loan out money to the federal government at interest and this becomes government debt. This is done by the Treasury printing up a number of bonds and these are sold on the open market (mostly to banks as they carry low interest rates). The sale of these bonds transfers to money in the Treasury accounts where it is then used to pay for government programs. The Central Banks then buy these bonds from the bank, using money it created from nothing, and that is how money is created (Martenson 2009). Commercial banks then "loan" out this money at many times what they actually have in their deposits (if there is a deposit requirement), and many of those dollars end up in other banks where it is again loaned out many times, multiplying the amount of debt money in the economy.

Even under the gold standard, the banks lent out many times what they had in their reserves, which led to several recessions and the gold standard was repeatedly abandoned then re-instituted for various reasons of financing government spending (Money As Debt 2007).

So money is created out of thin air, which they then loan out in the form of credit with interest. Thus, all money is based on debt. Eventually the banks make too many bad loans and there is a credit crunch. People go to withdraw their money from the banks before they become insolvent. It then becomes a banking crisis. The central banks then step in and bail out the banks or pay out deposit insurance (Diamond 2007).

An alternative currency was needed, one that is not controlled by central banks and the overzealous spending of governments. The world wide web caused a growing free market to emerge in transactions for goods and services (digital or real). The response to this was to introduce a secure digital currency for ease of global transactions. Some of these digital currencies were backed by real reserves of precious metals (E-Gold, GoldMoney). Being free to open an account, anybody could exchange their fiat currency for gold-backed digital currency. This can then be used as a form of online digital payment for goods and services or in possible P2P transactions as a way of sending money to anybody around the world. The digital gold currency can be exchanged from fiat currency by a number of global exchange providers. Governments had difficulty regulating this because it was a global digital currency issued through secure electronic payment systems through the internet, and gold reserves (often insured) are held in numerous vaults around the world, such as in the case of Goldmoney (Goldmoney n.d.).

Digital gold currencies are easy to use as transactions are electronic and therefore instantaneous, there is no need to carry around gold coins to pay for your wares. You can also buy anything around the globe using the world wide web. Although not many companies accept digital gold currencies as payment, it is possible to obtain a prepaid debit card funded by a gold, which will exchange that into the appropriate currency whenever you use the card to make a transaction. The only downside to these cards is there are higher fees involved, charged by the issuer (E-Forexgold n.d.).

Another downside to using digital gold currencies is fraud. Many ponzi schemes have been built up around them, called High Yield Investment Programs (HYIPs) ,advertising high returns yet only paying out the funds they get from other investors. Eventually, they cannot get enough investors and the scheme collapses, they then steal all of their investor's money (Zetter 2006). Identity theft is another problem as people's accounts can be hacked over the web using spyware installed on their computer (E-Gold n.d.).

Sustainability, which is the property of being sustainable - to be maintained as a viable property ( 2009), refers, in the case of IT sustainability, both to the net internal/external 'costs' of the IT industry (Meyer 2008) and it's present and future viability in the current world economic, political and social environment. It's use, though, can be applied to a number of specific areas depending on the context in which it is used - but mostly it refers to economic and ecological sustainability.

Sustainability is often used to refer specifically to environmental sustainability with the run off costs from that, and the alleged impact human activity has on the environment and the response to this by different sectors of the population. Certain politicians, who have the ability to make and enforce laws, have seized upon the opportunity of using sustainability in the environmental sense to justify drafting new regulations and imposing various forms of taxation.

Environmentalism has a long history, which goes back to the days of Thomas Malthus and his theories regarding overpopulation (Malthus 1798), but in modern times 'sustainable development' has become an often-used term by various interest groups and government agencies to refer to the industrial expansion across the globe and it's impact on the environment. Governments have responded to this by enforcing costs and regulations on ICT so that what are termed 'external' costs on the environment are actually made into internal 'costs' on the agents responsible (Meyer 2008). These legislation requirements have an impact on the business, thus they are forced to adapt or risk the penalties.

The first move to create standards across the IT industry in response to environmental concerns was probably the ENERGY STAR initiative, which is a "joint program of the U.S. Environmental Protection Agency and the U.S. Department of Energy". Set up in 1991 and first applied to IT through applying energy ratings to monitors and personal computers in 1992, this then expanded to include other aspects of the industry and more initiatives relating to environmental sustainability. It then expanded globally to many other areas including Australia, Canada, Japan, New Zealand, Taiwan and the European Union (Energy Star 2008).

The Intergovernmental Panel on Climate Change (IPCC) was formed in 1988 and was set up by the World Meteorological Organization (WMO) and the United Nations Environment Programme (UNEP). The aims of the IPCC, in their words, was to be an "objective source of information about the causes of climate change, its potential environmental and socio-economic consequences and the adaptation and mitigation options to respond to it", for use by policymakers. It's latest report "Climate Change" was released in 2007 and it stated that human-caused greenhouse gases were most likely contributing to an increase in global average temperature and that global atmospheric concentrations of carbon dioxide, methane, and nitrous oxide have increased as a result of human activity (IPCC 2007).

These recommendations outlined in the IPCC Climate Change 2007 report is going to have a definite effect on the IT industry. In 2008, the SMART 2020 Report, authored by the Global e-Sustainability Initiative (GeSI) and The Climate Group, a non-profit organisation that according to their press release "works internationally with government and business leaders to advance climate change solutions and accelerate a low carbon economy" (GeSI 2007-2008), was released. This report looked at the impact of ICT on global warming and how ICT could reduce emissions in other sectors of the economy. It found that ICTs could deliver approximately 7.8 GtCO2e of emissions savings in total by 2020 and also that ICT accounts for about 2% of global emissions of carbon dioxide (SMART 2020 2008).

The effect the recommendations had and the increasing awareness led to more direct changes within the finance and economics of the business environment. The environment effects economics and economics effects the environment, because both deal with scarcity of resources which is the key thing behind sustainability practices. Financial sustainability refers to cash and capital resources whilst economic sustainability is how the organisation fits into the wider economy (Sustainability Report 2005-2006). Finance and internal economics of the business directly relate so that can mean profitability, productive efficiency, longetivity and re-investment into the business. Outside of the business, it's how the organisation promotes sustainability by choosing 'green' ways of doing business (IE: managing waste and recyling), using ethical practices, buying/supplying to sustainable organisations and generally having a net positive impact on the local and global community (Weston 2008). It has been found by international consulting firm McKinsey that "investment in energy efficiency of about $170 billion annually worldwide would yield a profit of about 17 percent, or $29 billion" (Knickerbocker 2008). International investors are also pledging more money to 'green business', governments issue them tax credits and the rise of the carbon emissions trading market (Knickerbocker 2008). Some surveys have also shown that some consumers prefer to buy products from environmentally-friendly corporations, which directly affects the bottom line (GreenBiz 2009).

Since, as explained above, economics directly relates to sustainability issues, the possible effects of digital gold currency (if widely adopted) on economics could lead to positive sustainability practices. This is because the current system of credit creation - creating money out of nothing - is unsustainable and is likely to lead to another severe economic collapse. The Global Financial Crisis of 2008-2009 is evidence of this. But history also shows it too, as in the 20th Century across the world there were several recessions, periods of hyperinflation and even a global Great Depression (a particularly severe recession). Because of globalisation, the economic effects of a downturn in one country will inevitably affect the entire world. This impacts on sustainability because the current system leads to these unsustainable practices of environmental degradation, via exploiting natural resources through massive economic expansion, in the first place.

Thus, economists look for reasons behind these calamities and discover that each time it can be traced back to how money is created is used. The issuance of debt-based money was started by the Bank of England in 1694, beginning the modern era of capitalism. By lending out more money than they had in their reserves (called fractional reserve banking) they were able to substitute paper for gold. This process hereby indebted all sectors of society to the banks and thus began the credit expansion that continues today. The difference now, is that currency is no longer backed by gold, and through the Bretton-Woods system instituted after World War 2, the whole world abandoned the gold standard to use paper money (all currencies were tied to the US, and so when the US abandoned the gold standard because they had used up all their reserves, so did the rest of the world) (Schoon 2009). And since then prices, which were fairly stable before, have exploded upwards, according to the CPI (Murphy 2009).

This system is completely unsustainable because every dollar is based off debt, and is created through loaning it out at interest. So for the economy not to go completely bankrupt it has to produce enough wealth in order to cover both the principle and interest of the loan. Problem is, the interest is compounding and so when the repayments can't be made, the only way to pay it off is to take out another loan to pay off the previous loan. This leads to an out of control spiralling of debt.

This creates a vicious cycle and the people who suffer are those who pay taxes through 'active income' and the future generations that are going to be laden with debt, because they are the slaves who have to do physical/mental work in order to fund the ever compounding loan repayments that materialise from this debt-based currency. There are few alternative options, as governments either put taxes on any sources of value or completely monopolise it if they don’t ‘prohibit’ it. For example, any transaction not recorded by government or barter trade is referred to as an 'underground economy' which involves many unrecorded transactions and barter trade. This is mostly done because either the transaction has been deemed 'illegal' or to avoid paying taxes. Therefore, even the use of an alternative currency as 'legal tender' has been made 'illegal', even if it's lawful in some cases as a genuine barter trade (Von NotHaus 2007).

According to Jerome Corsi when the dollar collapses, as it inevitably will under this unsustainable system of debt-based money, international transactions will instead come to rely on digital gold as a private, bank-managed currency (WorldNetDaily 2009). Unlike fiat money, digital gold currency is directly based off the value of precious metals such as gold and silver, with gold being the most popular. Thus it cannot be devalued by oversupply as there is a fixed amount of these commodities available in the world. This is because they are rare to find, but not only that explains their value as gold is used in many different materials and electronics so that it's value will never diminish. Historically, gold prices are quite stable (until recently when they exploded upward as a result of the abandoning of the gold standard) and are often a good investment in periods of hyperinflation. The price of gold tends to rise during recessions, as shown recently when it hit 1000 USD/Oz, which is an historical high (Kitco n.d.). It can also co-exist fine along with fiat money, as it can be exchanged according to the current price through digital gold currency exchangers (Murphy 2005).

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