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The following archive was created by hippie-mail 7.98617-22 on Fri Aug 21 1998 - 17:15:59 ADT
Robert Hettinga (rah@shipwright.com)
Sun, 15 Mar 1998 18:43:54 -0500
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Call for Founders:
An Email List (and Subsequent Conferences) on
Digital Bearer Settlement
(or, Hettinga Fires Up a New Toy...)
Boston, Massachusetts
Sunday, March 15, 1998
Since the invention of the telegraph, financial transaction
settlement has had a problem: How do you transact business at a
distance when the simplest way to execute, clear and settle a
transaction is with an exchange of bearer certificates? For instance,
you have a bearer bond, and I have cash, and we're in the same place,
say the City of London, or in front of a buttonwood tree on Wall
Street. Since we're standing face to face, we can simply agree on a
price, exchange one kind of paper for another, and the trade is over.
Execution, clearing, and settlement are all the same action.
Unfortunately, because of telecommunication, that isn't how we trade
financial assets anymore. If I'm in Boston, and you're in Atlanta,
and we telegraph/telex/telephone/modem our trades through our various
brokerage offices to the New York Stock Exchange, then how and when
do we arrange that physical exchange of bearer certificates? The
answer is, of course, we don't.
The Book-Entry Ziggurat
Our current system of so-called "book-entry" transaction settlement
was invented in order to handle the problems caused by remote
transaction execution and the subsequent need to physically exchange
bearer certificates for settlement. It can easily be said that the
entire structure of modern capital markets has been built around this
communication architecture of hierarchically "wired" charts of
accounts. At the top of all markets is some kind of geodesic
"face-to-face" auction market, be it an exchange of some sort, or an
open-outcry pit, or, more recently, overgrown bulliten-boards like
the NASDAQ or Reuter's currency system. But, until a trade gets to
where it is actually executed, it's either climbing up or down this
extensive financial ziggurat we've built to move our money around.
And, especially after the trade is executed, it still has to clear
and settle in the same kind of system.
All of this bookeeping and shuffling of paper takes a long time.
Tansactions requiring bearer settlement would take weeks, and then,
with improvements in transportation (Brinks became an air cargo
business as well), days, to settle. Within living memory, even pure
book-entry transactions on the New York Stock Exchange would take up
to 5 business days to settle, and that was with all stock
certificates locked down in a vault at the Depository Trust Company
in New York. NYSE transactions now clear with offsetting accounts on
the respective books of the buyer, seller, and the DTC, and they
settle when the buyer's funds arrive in the seller's bank account.
Book-entry settlement is not just confined to transactions in the
financial markets. Virtually all forms of money except physical cash
is in book-entry form now. A check is a request to your bank to move
money up, and then back down, another financial ziggurat of
offsetting book-entries called the automated clearinghouse system,
eventually landing in the bank account of the person you wrote the
check to. A credit card transaction is simply an instruction to
borrow money from a bank, or from Diner's Club or American Express,
and send it over the financial clearing ziggurat to the vendor in
question, with your implicit promise to pay the lender back later.
Even a "foriegn" ATM transaction is effectively a loan settled over
the finanancial ziggurat. That's what those "inflated" ATM fees pay
for, for the most part: the time value of the money "lent" to you by
the owner of the machine plus, the cost of running the machine
itself, and the opportunity cost of not lending it elsewhere. Even
though global currency transactions are executed geodesically --
directly between bank to bank -- the transactions still settle on a
book-entry basis over SWIFT, or other international funds transfer
systems, and thus move hierarchically to settle, especially for
smaller banks.
Note, finally, that communications networks these days are becoming
more geodesic (defined: "the straightest line across sphere") and
less hierarchical, because Moore's Law makes the cost of switching
information fall by half every 18 months. The internet is the mother
of all geodesic networks. It's now almost always cheaper to add an
automated "switch" and break up information into more immediately
usable pieces for the people who need it most than it is to aggregate
information and pass it up and then down through a hierarchical
organization/market/network. That goes for financial information as
well: cash, equity, debt, or any derivative thereof. So, how do you
clear and settle transactions even if you can now execute them
geodesically? With digital bearer settlement.
The Invention of Digital Bearer Settlement
In the mid 1980's cryptographer David Chaum invented a cryptographic
protocol which would change all that, at least it would when a
ubiquitous geodesic internetwork made the technology practical.
Chaum's invention was the blind signature protocol. Using blind
signatures and on-line reissuance to prevent "double spending", it
became possible to create unique unforgeable binary objects which
could be exchanged anonymously and which could still be assigned any
financial value, as long as the issuing party honors the object's
implicit promise at redemption. Since Chaum's invention of blind
signatures there has been an explosion of new cryptographic digital
bearer settlement protocols, created by some of the best minds in
cryptography, ranging in designed scale from large macroproject
financing technology to micro-, or possibly even pico-payment
systems.
Put simply, it is now technologically possible to create digital
bearer certificates representing cash, debt, equity, or any
derivative thereof. These systems will probably be able to handle
transactions from very large gigadollar bond issues down to
bandwidth-purchase transactions in the thousandth or maybe millionth
of a cent range. These cryptographic objects are true digital bearer
certificates, which, like the paper bearer certificates of old, can
be traded, cleared, and settled instantly, without years of audit
trails to prevent non-repudiation, without clearinghouses -- though
requiring on-line validation/reissue in higher-value cases -- and
with the minimum possible number of financial intermediaries. For
instance, in a secondary market transaction for a digital bearer
bond, the buyer, the seller, and the underwriters of the bond and the
cash exchanged for it can all effect the trade instantly, with
completely manageable transaction risk, without either party needing
to know anything about the other except the reputation of the bond
and the cash traded for it. All with a cryptographic protocol which
unmasks any forger mathematically before any fraudulent trade can
finish execution.
A comparable book-entry bond transaction, taking place in
"meatspace", would require up to 6 or 7 different financial
intermediaries besides the buyer and the seller, and would still take
at least 24 hours to clear at a minimum. And, of course, it would
also require the implicit physical force of a nation-state to prevent
repudiation of the trade until everything cleared and settled. Not to
mention 7 years of audit trails for various regulatory agencies --
including the tax man. Oddly enough, the closer you get to instant
settlement, the more costly, and risky, all this becomes relative to
digital bearer settlement.
Hence my persistant -- but still unvalidated :-) -- claim that
digital bearer settlement will prove to be at least 3 orders of
magnitude cheaper than even electronic book-entry settlement. Divide
the transaction cost by a thousand, in other words, and that might be
cost of digital bearer settlement compared to even the most advanced
book-entry methods possible. That's why I think this technology is so
important, and not just because of its remarkable implications for
our own personal financial privacy. Economic reality is never
optional, just like it wasn't when the New York Stock Exchange
transaction glut in the late 60's resulted in the eventual death of
physical bearer settlement in the early 1980's. If digital bearer
settlement actually works, the entire financial landscape is going to
change. Tectonically.
Back to the Future of Financial Technology
Let's look at fraud, for instance. Because of the immediacy and
information-rich environment in which they're traded, bearer settled
markets, digital or not, rely much more on reputation than legal
sanction for fraud prevention. Like J. Pierpont Morgan said,
"...Character. I wouldn't buy anything from a man with no character
if he offered me all the bonds in Christendom." In digital bearer
markets, that persistance of reputation is enabled by cryptographic
digital signature protocols, of which Chaum's blind signature
protocol is a special case. One's digital signature then becomes
one's financial identity, having its own hard-won reputation separate
from one's "biometric" physical identity. So, the old cypherpunk saw
is now in fact true: Biometric identity can be completely orthogonal
to reputation in "cypherspace". One person can have many digital
signatures, but each signature has its own reputation, and a new or
untrustworthy reputation is a hard thing to hide in a ubiquitous
online environment.
Remember, the primary reason biometric identity is required for
book-entry settlement is the lack of security of the actual
book-entries themselves. At their heart, book-entries are simply
database fields which require strong access controls, physical
biometrics, an extensive legal and requlatory apparatus, and, of
course, police to enforce those laws and regulations against the
fraudulent "revision", shall we say, of data. The consequence of not
following all of those procedures to the letter can be disasterous,
as the Leeson affair at Barings can attest. The costs of such a
system, not only in terms of simple administration and processing,
but in the actual required presence of the nation-state in every
facet of our financial lives, is, again, quite large, but, since you
couldn't shove a bearer certificate down a wire, there wasn't much we
could do about it. Until now.
And So, Hettinga Starts Yet Another Mailing List
What I'm about to do is a continuation of the personal journey I
started when I became interested first in digital commerce on the net
when commercialization of the net was finally allowed, but frowned on
<http://www.shipwright.com/dcsb.html>. After that, all I could think
about was cryptography, when it became clear to me that cryptography
was the most interesting part of digital commerce
<http://www.shipwright.com/>. And again, when I beat to death the
phrase "digital commerce *is* financial cryptography", because it
became apparent that financial applications of cryptography were the
most interesting uses of cryptography in general
<http://www.fc98.ai/>.
In that vein, I am now starting an email group dedicated to the
discussion of the business of, the research and development of, the
finance and economics of, and the law and policy of, something which
I now think is the most important form of financial cryptography
itself. Something which, like all the other times I took off hell
bent for leather about a particular technology, causes much
consternation with people who disagree with me about its existance,
much less its importance to the way the world will work: Digital
Bearer Settlement.
The List's Charter and Projects
Except for explanations of what their effects are, I would like to
leave technical discussions of the actual cryptography of bearer
settlement protocols to the various cryptographic mail and news
groups, not to mention Financial Cryptography conference itself. But,
everything else, especially the cost/benefit of digital bearer
settlement financial cryptography, and the effect of digital bearer
settlement on finance, economics, and policy, should be considered
open for discussion on this new list.
The list, like others, will have a charter, or at least a rant, :-),
and, of course, you're reading it. Put more specifically, the
charter of this new list is to actively promote the development of
businesses which will sell either digital bearer settlement
technology and services or will require those technologies and
services in order to function themselves. Toward that end, I'm going
to propose a series of conferences on digital bearer settlement,
starting as soon as there is enough interest on this new list to do
so.
A Market Development Conference on Digital Bearer Settlement
The first conference, which I propose to occur in the Boston or New
England area this summer, either in Boston itself, or, maybe more
symbolically, at the Mount Washington Resort at Bretton Woods in New
Hampshire <http://www.mtwashington.com/mtwashington/>, will be
history's first market development conference on digital bearer
settlement. It will be held on four half days in middle August. I'm
looking at the 10th through the 13th at the moment. This will be a
somewhat informal business-oriented conference with invited speakers,
and with ample opportunity for people to conspire and schmooze with
each other about the development of the business of digital bearer
settlement. There are a whole lot of people out there who have met
each other at less focused cryptographic and privacy events, but who
have not had the opportunity to devote adequate "bandwidth" to the
problem of developing markets for digital bearer setttlement. In
addition, there are certainly going to be people in the financial
community who will have discovered digital bearer settlement during
the time we start focusing our on-line discussions on it. I think it
is now time to get all those people together physically, so they can
have uninterrupted conversations about the prospects for digital
bearer settlement in comfortable surroundings. I am, of course,
actively soliciting sponsorship for this event, :-), so contact me
directly <mailto: rah@philodox.com> if you're interested in doing
that.
A Peer-Reviewed Financial Conference on Digital Bearer-Settlement
The second conference, a full-time two-day event, probably on a
Monday and Tuesday, will be history's first peer-reviewed financial
conference on digital bearer settlement, and its focus will be the
possible financial, economic, and policy implications of digital
bearer settlement cryptography. But not the cryptography itself,
which again belongs in the various extant cryptography conferences.
I'm hoping to have this financial conference in New York City, and,
of course, as physically close to the Depository Trust Company as it
is economically possible for me to do so :-). I'm planning to have it
within the year, possibly in the late fall or in the early winter,
depending on my ability to recruit an appropriate program chair, and
that person's ability to assemble a committee and get the papers read
on time. I'm hoping to have the proceedings of this conference
published in an archival volume, hopefully under a well-known
financial nameplate, in the same way that Springer-Verlag publishes
the proceedings of the Financial Cryptography conferences in its
Lecture Notes in Computer Science series. This event will also be
sponsored, but, of course, sponsorship will in no way affect the
selection of papers for presentation in the conference. Again, talk
to me directly for details, as I get them figured out.
Taking The Show On The Road
Eventually, I want to combine the conference with an exhibition, like
we did at FC98 this year, for annual meetings at various financial
capitals around the world, with the peer-reviewed sessions happening
in the morning, and the business sessions happening in the afternoon
of a combined four-day event. The exhibition would include an exhibit
floor, sponsored talks and events, and other things. And, no, I don't
think I want to take all this to Anguilla. :-). In fact, the point of
taking these two events on the road after starting them out together
in New York will be to evangelize digital bearer settlement
technology to the rest of the world's financial community, to
empirically demonstrate that it *is* the cheapest way to clear a
trade since the invention of the telegraph, and, finally, to
demystify it of both its technological complexity and, of course, its
real or perceived threats to the regulatory status quo. Frankly, I
believe that digital bearer settlement will be an internet-only
phenomenon, at least in the earliest stages. If and when economic
necessity dicatates that all transactions are digital-bearer settled,
or, sooner, that a very large portion of financial assets stay
permanently on the net in bearer form, the world will have many more
interesting things to think about besides whether FinCEN can see
where everybody's money goes. Obviously, these "interesting
phenomena" will only occur if digital bearer settlement is in fact
radically cheaper and more economically useful than book-entry
settlement, which is, of course, still just a wild and unproven
assertion on my part. :-).
So? What is Philodox.com?
To do all this, and to do a couple of other projects I'm working on,
I'm starting a new business called Philodox. "Philodox", if you look
it up in the Oxford English Dictionary, is a rarely used perjorative
word meaning, most recently, "lover of one's own opinions". :-).
I've jokingly used it as my job "title" for years. A few days ago, I
decided to create a business dedicated to financial technology
evangelism projects like this one. I had Fearghas McKay register the
domain name philodox.com with InterNIC, so I could use it as an
umbrella for things like this digital bearer settlement list and
conference series I'm doing.
Fair Warning...
So, folks, fair warning. I'm doing all this stuff for the money, now,
instead of free carribbean travel, reputation capital, and elbow room
at an open bar. :-). Financially, it means that Philodox will take in
money in the form of sponsorships, conference fees, and occasional
public domain software development syndicate subscriptions (more on
that later, as I figure it out), and, out of that money, it will hire
whatever goods and services it requires to get a given event or
project off the ground. After it pays me first. :-).
It also means that these conferences will be branded events, as in
"The Philodox Market Development Conference on Digital Bearer
Settlement", or something. Maybe, if I have enough chutzpah, I'll
name this new list "The Philodox Digital Bearer Settlement List", or
something apropriately meglomaniacal. Yup, I'm getting out of control
all right. I can see it now. The most dangerous place in the world is
going to be between me and a reporter. Actually, that's nothing new,
now, is it? :-).
More seriously, it has become apparent to me that lots of the value I
add to the business of digital commerce, to financial cryptography,
and, hopefully, to digital bearer settlement, is in promoting a given
financial technology to the wider world, and, more important, in
getting that technology's major players together to conspire to
create the future. I did that with the Digital Commerce Society of
Boston, and with the e$/e$pam lists, and with the FC97/98
conferences. In order to keep doing stuff like this in the future,
I'm going to need to get paid, and, more important, own the assets I
create, and Philodox is how I propose to make that happen. The name
"Philodox" is sufficiently unfocused that I can use it as a handle
for most of what I do, which I couldn't really do even with a name
like "Shipwright Development Corporation". Of course, "Philodox" is
not nearly as much as fun as "Virgin", but it'll do. :-).
DBS List Sign-Up Details
So, there you have it, mostly. If you're interested in an email
discussion list on the technology and business applications of
digital bearer settlement, sign up for the digital bearer settlement
list with this URL:
<mailto:requests@philodox.com?subject=subscribe%20dbs>.
And, for those of you without fancy URL processors in your mail
readers:
Send email to:
With a subject:
subscribe dbs
Summer Market Development Conference Details
If you're interested in participating in the world's first market
development conference on digital bearer settlement, stay tuned, or,
better, get on the dbs@philodox.com list and help us create it. I'm
hoping to have that conference this summer, so look for an
announcement on it within the next month or so in most of the usual
places, if you don't want to subscribe to dbs@philodox.com just yet.
I'll be doing a call for presenters for this conference very soon
now, and I'll be issuing personal invitations to my preferred daily
keynote speakers as well, so keep an eye out for one (or both :-)) of
those things in the mail. For the moment, all I'll be able to do for
compensation is to waive fees for presenters, plus, in a few
instances, help a few with room and board and, possibly, travel, for
the more indigent folks who I'd like to have on the conference
program. All of this depends on audience size, of course, and where I
can afford to hold it based on the indications of participation I
get, as well. Keynoters I'm going to have to do a bit more for,
including paying all their expenses. Which should be an interesting
proposition, as I just got off the phone with the conference manager
at Bretton Woods. :-).
Peer-Reviewed Winter Conference Details
If you're interested in presenting your financial, economic, or
policy research on digital bearer settlement for peer-reviewed
presentation and publication, keep your eyes open for a call for
papers for the finance conference I want to do in New York this
winter. And, of course, you can get on the list and tell us what you
think, if you'd like, in the meantime.
I'm also going to put out a call for the winter finance conference's
program chairman sometime soon, once I've started things rolling on
this summer's market development conference. So, if anyone's
interested in chairing the program committee, please contact me
directly. Once the chair's picked, the program chair will pick a
program committee, the committee will then put out a call for papers,
and we'll meet in New York to hear them all.
Further!
So, this should be an interesting next few months. I'm extremely
nervous, but very excited. This is about the scariest thing I've
tried to do, because I'm about to go back and talk directly to people
in the financial transaction business, after having long ago given up
on it all and gone off to learn something else which was much more
fun to me. :-). However, the last three years of thinking about
nothing but digital commerce and financial cryptography seems to have
brought me full circle, with a knapsack full of absolute financial
heresy to evangelize to the financial community. And, since I've been
evangelizing absolute financial heresy to my friends on the net for
years, it's something I'm at least cofortable with, if not pretty
good at by now. :-).
Certainly most new businesses like Philodox.com fail. However, like
most congenital entrepreneurs, I've had more than my share of
businesses go under, and so failure's not as scary a prospect as it
used to be. Nonetheless, I *can* console myself with the fact that
this idea of evangelizing digital bearer settlement is completely in
line with the successful things I've done lately. So, I'm pretty sure
I'm going to make something happen again here. It's just the audience
which is going to be a little different, a mixture of old friends and
new ones.
In the meantime, thanks to all of you who have helped me in the past,
and who are helping me still on the other projects that I'm still
working on besides Philodox and evangelizing digital bearer
settlement.
And, of course, thanks in advance to those who are helping me put
this new idea together as I write this.
As it used to say on the front of a schoolbus, a long time ago:
"Further!"
(Or was it "Furthur"?) :-).
Cheers,
Robert Hettinga <mailto: rah@philodox.com>,
Philodox Financial Technology Evangelism
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Robert Hettinga (rah@shipwright.com), Philodox
e$, 44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'
The e$ Home Page: http://www.shipwright.com/
The following archive was created by hippie-mail 7.98617-22 on Fri Aug 21 1998 - 17:15:59 ADT