R. A. Hettinga on 13 Mar 2001 22:11:29 -0000

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[Nettime-bold] Geoecon: Who needs money anyway? (was Re: <nettime> FW: Money aWaste, Economists Conclude)

Bruce isn't the only one...



The Geodesic Economy
by Robert Hettinga

"Who needs money anyway?": The New Monetary Economics, Monetary Separation,
and Digital Bearer  Settlement

October 1, 1999

One of my best friends in the whole world is Mark Tenney of Mathematical
Finance in Alexandria, Virginia. The best man at my wedding, I met Mark
during my mostly sad attempt to go to the University of Chicago as a
"Student-at-Large", where I snuck in the back door and hung out for almost
a year before they threw me out -- though, to my credit, or lack there of,
it was for impecuniosity, more than anything else. "First thing you do, you
get the money", and all that.

It was fun, though, and I *did* manage to transfer enough credit from
Chicago to finish my undergraduate philosophy degree at Missouri. Up until
the last five years or so, when I discovered the "University of the
Internet", I'd always wished I could afford to go back some day and play
some more, especially in finance and economics.

Anyway, Mark was one of those scary mathematical prodigies who finished
both high-school and college in three years apiece, finished
all-but-a-doctoral-dissertation in Physics at Brandeis in three years,
hedging himself with an Master's, then turned on a dime and did the same
thing in Finance at Chicago, hedging again with an MBA in Finance. All this
before wading into the fray of quantitative fixed-income
analytics-for-hire, swinging that claymore-sized intellect of his with both

Last year, I told Mark that I had decided to concentrate on digital bearer
transactions full-time, and he asked a bunch of questions like he always
does when I reveal my latest off-the-wall idea. And not saying much in
reply, which he also always does, being one of the most laconic people I've
ever met. That's okay, I suppose. I talk enough for both of us.

Anyway, a few days later, Mark calls me up, all excited. Well, as excited
as Mark gets, anyway. "You could issue digital bearer certificates backed
up by an S&P 500 portfolio," Mark says with not much affect, followed by
dead air, which is my cue to talk.

"Yup," says I, chattering away, "That's easy. Old hat. We talked about
stuff like that on cypherpunks *years* ago. The only problem is, it's
illegal in the US for various reasons, and proving that you're *only*
issuing to and redeeming from foreign nationals is *really* too
complicated. We don't call it 'digital bearer settlement' for nothing. Of
course, that doesn't keep several smash-the-state cryptoanarchists out
there from daydreaming, in color, about that idea pretty much full time.
Expressions like 'tax-evasion' and 'money-laundering' only make them work
harder, after all. Me, I'm only in it to reduce transaction costs. Illegal
business is chump change compared to putting the entire global economy onto
the net in digital bearer form.

"Steve Schear and I even figured that you could do it with just about *any*
stock, anywhere, from anywhere, as long as it was legal in the jurisdiction
you did it *from*. Sort of an "Unsponsored Network Depository Receipt",
UNDRs, for short..." and then, I proceeded to go into an entire rant on
*that*. In four-part harmony. Arlo Guthrie would have been proud...

Finally, I run out of gas, like I always do, and Mark says, "If you issue
digital bearer certificates collateralized by the S&P 500, you won't need
cash anymore."  More dead air.

"Well," I said, jumping back in, "maybe, maybe not. I mean, the dollar's
pretty much pecunia franca right now, yes? Anyway, you wanna write
something up about it, and we'll zing it out onto some of my mail lists for

I figure that if Mark was excited enough, *he* could bash on the
mathematical finance of this idea much better than I ever could, being
mostly innumerate myself, with my undergraduate philosophy degree from a
midwestern state-school, and leftover student-at-large credit from UofC.

I mean, the closest thing I ever got to a genuine financial education was
sneaking out of the University of Chicago Bookstore Graduate School of
Business textbook section with books like Brealy & Meyers' "Corporate
Finance", and Sharpe's "Investments". Needless to say, reading stuff like
that, and hanging around people like Mark at a place like Chicago pretty
much set my "if there's not a market for it, it really doesn't matter" view
of reality into steel-reinforced concrete. It's kind of the core of my
anti-state bias as well, I suppose.

Mark is, of course, a pro at this kind of stuff, having figured ways to use
Green's functions to kill off lots of Monte-Carlo modeling, building
closed-form solutions for various security prices, and so forth. His
asset-liability models sit in the guts of several very large insurance
companies, and there are questions about his asset-value calculation
methods on the US actuarial exam. One of his latest projects is building
the analytical core of start-up e-finance company in an as-yet undisclosed
European country, and his client before that was one of the largest
financial services firms in the world, owning well-known insurance and
mutual fund companies everywhere you would care to name.

So, I didn't hear much from Mark about this idea of his anymore, probably
because most of his "wetware" bandwidth is paid for these days, with real
money, and he doesn't have much time to spare for actual fun -- much less
writing a non-reviewed finance paper that I would just pass around the net
for free. And so that's the last I heard of it for a while.

Then, a few months ago, after I'd started up my new company, IBUC.COM, to
actually issue digital bearer cash and other stuff some day, some newbie on
the cypherpunks list talked about trying to do yet another internet
currency, a smallish rant with a whole bunch of, well, *wrong* stuff in it.
So wrong, in fact, I can't even remember most of it. As is unfortunately
usual in these circumstances, I ended up writing my own rant in reply. It
centered around my own favorite point on the subject, that unless any
"internet currency" was exchangeable into *dollars*, or some other standard
unit of exchange, nobody was going to pay any attention to it.

There have been several efforts on cypherpunks and elsewhere to think about
synthetic currencies based on attention, or machine cycles, for instance,
and, while using machine cycles to prevent *forgery* is at the core of most
decent micromoney protocols like MicroMint, but you have to denominate your
digital bearer cash in something *financial*, or it will be of no real use
to normal people. Not that most cypherpunks care about being normal, you
understand, but there it is.

Nonetheless, I did toss off some nice words in the direction of the e-gold
<http://www.egold.com> guys, who, at the time, were issuing a kind of
gold-backed "internet currency", albeit in book-entry form. They had been
having some success with it, mostly among the anarcho-survivalist gold-bug
crowd. Meaning that a lot of very bright erst- and proto-cypherpunks have
been playing with e-gold, for reasons of politics, paranoia, or both. Or at
least so I figured at the time, anyway.

Dr. Douglas Jackson, the oncologist-turned-founder of e-gold, is quite a
bit more phlegmatic about these things himself, though certainly never a
fan of fiat currency. He understands, for instance, that storage costs can
make gold-backed account balances actually depreciate over time. But, in
implementing the e-gold payment system, he and several thousand e-gold
users have ended up with quite a bit more experience in non-credit-card
internet payments than anyone else has to date, mostly because they didn't
try to do anything too complicated in the early stages.

More to the point, all of Doug's competition (like First Virtual,
CyberCash, and DigiCash, to name a few) have killed themselves off going
for the main chance. They kept trying to conquer the world, trying to be
some kind of *sole* transactor of business on the web, without
understanding that finance is a business of herds and swarms and that
*nobody* trusts anyone who's the sole *anything*.

Meanwhile, Doug's still doing a tidy, if not land-office, business,
precisely because he's *not* trying to take over the world. In fact, I'd
say that anyone who's interested in internet payment should pay more than a
little attention to e-gold, or, as their evangelist Jim Ray likes to call
it, "The little internet payment system that could."

Anyway, Ian Grigg <mailto:iang@systemics.com>, an expatriate Australian who
I can't really call a cypherpunk -- more of a "moneypunk", maybe, since
he's spent a lot of time lately down in Anguilla building things for
e-gold, among other people -- sees this cypherpunks rant of mine about
internet currency after I forwarded it to dbs, the digital bearer
settlement discussion list that I run. Ian observed there that if
transaction speed was fast enough, the market would probably converge to a
world without cash at all. Shades of Mark Tenney.

Since I respect Ian's opinion, because Ian seems to have read every
"Austrian" economist there ever was, and is a great fan of Scottish free
banking, not to mention because of all his work for e-gold, which now runs
on his "Ricardo" web-market-making system, I thought to myself, "Okay.
Maybe. Someday. In the meantime, I want IBUC to do cash, dollars
preferably, thank you very much, and after that, other *actual* securities,
and, after *that*, we'll see if the dollar really does evaporate as the
world's primary exchange currency." And having said so to the list in
reply, I left the discussion there for the time being.

Which brings me to a little while ago, when I was half-to-three-quarters of
the way through with a nice rant for this column on something else
entirely, and ended up throwing it all in the trash.

That was because of something I got in email from *another* friend of mine,
one of the best internet transaction lawyers in the business, John Muller
<mailto:johnmuller@bobreck.com>, a partner at Bobreck, Fleger and Harrison,
in San Francisco. Among other things, John is Chair of the Web Site Working
Group of the American Bar Association Joint Subcommittee on Electronic
Financial Services <http://www.abanet.org/buslaw/efss/> (say *that* ten
times fast), and Co-chair of the Automated Transactions and Electronic
Agents project of the ABA Cyberspace Law Committee.

What John sent me was the most recent Electronic Financial Services Update,
the back issues of which can be seen at
<http://www.abanet.org/buslaw/efss/whatsnew.html>, and in that update was
"Towards a Moneyless World?"
<http://www.sscl.uwo.ca:80/economics/faculty/nmewien.pdf>, a paper by Malte
Krueger, of the University of Cologne and the University of Western
Ontario, for the International Atlantic Economic Conference, which was held
in Vienna this past March. Apparently, this paper was also presented in
different form to the Second Berlin Conference on Internet Economics a
little while later.

And, there, after converting PDF to PostScript, and then PDF to ASCII text
so I could read it faster, *there* was a pointer to where my friend Mark
Tenney -- and, I bet, Ian Grigg -- got the idea that as transaction latency
and transaction costs go to zero, the value function of currency converges
to that of more "financial" assets: They were quoting, whether they knew it
or not, the so-called "New Monetary Economics" (NME), a phrase coined by
Robert Hall, but conceived, in the early 1980's, by no less a pair of
financial luminaries than Eugene Fama, of the Efficient Market Hypothesis,
and Fischer Black, of the Black-Sholes option equation. Others, like
Krueger, apparently, call this the "BFH system", in their honor -- or for
other reasons, it's hard for me to tell.

Krueger says, of NME/BFH,

	 In the current system money (cash and deposits) is used as
	 medium of exchange and unit of account. In the BFH system
	 there would be no common medium of exchange with a fixed
	 nominal value in terms of the unit of account. Instead,
	 assets with variable prices  are used. This implies that, in
	 principle, any asset could serve as a medium of exchange.  An
	 example that is often used to illustrate 'moneyless' payments
	 are mutual funds shares. The value of mutual funds'
	 shares varies with the value of the funds' assets and within
	 certain limits they can be used for making payments. So, the
	 medium of payment 'mutual  fund share' has a value that
	 is not fixed in terms of the commonly used unit of account.
	 Eugene Fama (1980) argues that monetary separation is
	 efficient because the financial  system (Fama uses the
	 term 'banks') serves two functions that are independent of
	 each other: the accounting function and the portfolio
	 management function. Banks could fulfill the accounting
	 function without holding assets or using any medium of
	 payment. It would  be sufficient to have a unit of account.
	 As an uninvolved third party, banks could just  keep records
	 of transactions. The issue of liabilities and the purchase
	 of assets is  derived from the second function, the portfolio
	 management function. In this function  banks help individuals
	 to hold their wealth in a form they desire.

What the above means to me is pretty much what Tenney and Grigg said, that
Moore's law creates an increasingly geodesic, ubiquitous, public
internetwork, which, coupled with the financial cryptography of digital
bearer settlement, "surfacts" currency into its constituent parts. Why keep
something which doesn't earn you money, in other words? Why not use
something which is as risk-free as possible but still earns money while
it's in your possession? Furthermore, the longer money's going to be in
your possession, the more incentive you have to invest in something where
short-term volatility isn't a problem. We'll leave discussion of my opinion
on the "accounting" function as an exercise for the reader.

Anyway, Macroeconomists call this division of unit of exchange from unit of
account, monetary separation. And, as a result, we get more and more
different kinds of exchange with decreasing transaction cost. Banks go back
to being "counting houses" instead of fiduciaries, trustees, keeping track
of who owes what to whom, and the returns on money are higher for the users
of that money. The advent of the money-market mutual fund, was, of course,
a step down this road.

As to whether this means the death of currency, Krueger comes down on the
side of network effects -- unfortunately conflating them with
path-dependency; network effects being cool, and path dependency being
balderdash -- and says that the opportunity costs of keeping track of
various different asset classes, and, more importantly, exchanging those
different asset classes with others just to effect any trade whatsoever in
a virtual re-emergence of barter, still costs too darn much, and thus, the
internet gives us monetary integration, and not separation. As someone said
of Mozart, "too many notes".

I'm personally not so sure, Moore's law being what it is. It might be easy
enough with with enough bandwidth and processing power to do all those
exchanges and re-balance one's "portfolio" of money-equivalents, paying
people in whatever asset class they want, and still make more money than
parking money as dollars in a bank somewhere, or, worse, keeping cash on

However, I also think that it'll be a while, just yet, for that world to
emerge, and, frankly, I want to buy things with *dollars*, and right now.

By way of some even *more* twisted synchronicity, Krueger's paper then
points to my friend Tatsuo Tanaka's paper on the macroeconomic consequences
of internet free banking. Which, oddly enough, I edited and recommended for
publication in the peer-reviewed internet journal First Monday four or so
years ago. I even invited Tanaka to come up and present the paper at a
Digital Commerce Society of Boston luncheon shortly after the paper came

Tanaka says, first of all, that internet free-banking is like the
expatriate-cash Eurodollar market on steroids. Internet free-banking drives
the final nail in the coffin of central bank control of any nation's
currency, because, if a currency is stable enough, and maybe even if it
isn't, sooner or later more of the currency is "issued" on a fiduciary
basis outside a country, collateralized by foreign-held dollar-denominated
accounts, for instance, than is issued by the central bank itself. And the
net makes *where* the money is, heh, immaterial.

Unfortunately, Tanaka also says that competition for underwriting cash to
the net causes the eventual fractional reservation of digital cash against
its denominated currency, and that, sooner or later, crises of confidence
in all those different issues, and their various partial reserves, force
the creation of, you guessed it, monetary union of some kind. Tanaka liked
to wax about the eventual creation of a central bank of cyberspace, thus
setting most cypherpunks' and other free-money advocates' teeth on edge,
mine included, skyward-rolling eyes and all.

But the story gets weirder than that. Recently, Douglas Jackson and his
crew at e-gold have been taking their association with "moneypunks" like
Mr. Grigg (and, um, others :-)), to heart lately. They split themselves
into a trustee-underwriter relationship of several firms, and, in the
process, have created an offshore subsidiary, based in, where else,
Anguilla, to, you guessed it, offer fractionally-reserved, (but
non-blinded) gold-denominated digital bearer certificates, called, oddly
enough, DigiGold.

The idea behind DigiGold is to fractionally reserve gold denominated
transactions, loaning out the reserve's other fraction to offset the cost
of gold storage, which, as we noted above, at a percent or more a year, is
a considerable one if you're trying to create a currency which is supposed
to hold its value. In fact, Ian went so far as to start buying and selling
notes denominated in gold recently, apparently as part of his work with

"Gold-denominated Burmese opium futures", indeed.

For one final bit of weirdness, I eventually got around to reading Glassman
and Hassett's "Dow 36,000" article in the Atlantic Monthly,
<http://www.theAtlantic.com/atlantic/issues/current/9909dow.htm>, which, at
the core of its analysis, notes that among other things and contrary to
received wisdom, equities held in the long term are much *less* risky than
even long-term government bonds are, and how the market has been
compensating for that for the last few decades or so by driving equity
prices slowly upward to their risk-adjusted "reasonable" price. Like their
title says, they say that the Dow could be at 36,000 and still be
"reasonable", whatever that means. Mercy.

A splendid read nonetheless, whether you agree with them or not, and the
bit about the risk of the equity market certainly makes a compelling
argument for a very, very, interesting result for us, in light of all of
the above.

At the core of all modern financial analysis is the proposition that
government bonds, especially short-term ones, are the safest investment.
They're safe because, for instance, the chance of the US government
defaulting on any given 90-day T-Bill on any given day is virtually
non-existent. T-Bills are literally risk free, and all other investment is
calculated against them for riskiness. The Net Present Value equation, for
instance, says that if the returns of a proposed investment are less than
you would get from a T-Bill, you should forget the investment and keep your
money in T-Bills instead.

And, at every year of bond maturity, the government bond sits at the lowest
point of the risk "well" for that maturity. Or so I thought, until I saw
Glassman and Hassett's description of what all financial theorists knew
already for a fact, that the long-term risk of the overall equity market is
much less than that of even government bonds.

So. Can we back that "zero" equity-market risk down the maturity curve to
the present? Maybe, with a derivative or two. I haven't gone looking for
the answer, and it's press time already. I wouldn't be surprised, though,
and to walk out on a very thin limb, I'm going to assume it to be true.

Certainly the idea of, say an S&P 500-, or maybe a larger-index-based
"cash" starts to make sense, if we can do it. After all, Ian Grigg and his
friends are trying, for all intents and purposes, to do roughly the same
kind of thing with gold. Gold hops around a bunch, and volatility is
probably not a good thing for a currency to have. So any financial
engineering you can do to at least take the volatility down a bit would be
good. And you'd want to do the same thing with equity indices, because, as
a functional perpetuity, a stock can be just as volatile as a 30-year bond
might be.

What we get, if we do create a low-volatility equity-based currency, is
really very interesting.

We get what Gene Fama and Fisher Black must have been thinking about back
in early eighties heyday of the "New Monetary Economics": a completely
private form of "riskless" return.

Think about that for a minute. Not only do we have digital bearer
settlement, so we don't need the nation-state to provide force and ensure
the non-repudiation of our transactions, but we don't even need another
kind of force either: the confiscatory force of a nation's tax system,
making for "riskless" government securities, which, in turn, undergird our
very concept of what risk is.

What we get is truly *private* money. That is, someday we can create a
completely synthetic currency based upon a commonly-referenced *equity*
market index.

Look, Ma, no currency board, much less a central bank. No guns. No
sovereign. And we still get money. Amazing.

So now, instead of stepping *back* to a commodity economy to avoid state
control of the monetary supply, using something like gold to anchor value
on the net, we can step *forward* into the information economy, the
geodesic economy: All we need to collateralize our transactions is a
sufficiently representative and publicly known equity index, with the
volatility hedged for short term use using *other* publicly known
derivatives. Presto change-o, a synthetic internet security. And, of
course, this works with bearer held stocks, if we ever get those, as well.

Finally, anyone who wants to can do this -- well, if their reputation's
good enough. This is finance, after all.

Of course, the sticking point all this fun is the state itself, as I said
to Mark Tenney more than a year ago. Remember all the book-entry taxes and
regulations about bearer ownership of bonds, TEFRA, et. al., here in the
U.S., and then exponentiate that number to get the regulatory barriers for
bearer equity.

It'll certainly be easier, for the time being, to issue cash denominated in
dollars than it would be to try to climb an enormous ziggurat of regulators
and legislators, telling all of them that issuing bearer-form
equity-index-denominated money would be a good thing, even if it completely
removed *their* central banks, much less *their* very government bonds,
from the center of the financial universe. A lead balloon, indeed. Almost
makes you want to believe in path-dependency, that does.

But don't despair. Remember that if digital bearer transactions really *do*
turn out to be significantly cheaper than book-entry transactions,
something I'm betting my company on, sooner or later an equity index-based
"internet currency" will in fact emerge as the best way to buy things.

Even more interesting, if we're right, government-extorted revenue will
cease to be the foundation upon which the concept of "riskless" return --
and all of finance itself -- rests.

But that's probably what Fama and Black had in mind, right?

R. A. Hettinga <mailto: rah@ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

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