July 15, 2005

Cash - so hard to trace, so hard to untrace

The blinded signature patent of Prof. David Chaum, father of financial cryptography, expires:

U.S. Patent 4,759,063 ("Blind Signature Systems") to David Chaum is the core invention enabling privacy-protecting electronic payment systems and credentials. It was a truly ingenious, ground-breaking contribution. Unfortunately the existence of the corresponding patent, which was notoriously difficult to license, prevented this great invention from receiving the wide use that it so very much deserved. For a copy of the patent, see [here].

Unlike copyrights these days, patents do expire. The blind signature patent will expire on July 19, 2005, next Tuesday. Since weekends tend to fit better with the schedules of potential party goers than weekdays, we are holding the party this Saturday instead.

If you understand what that's all about, you are invited to the party, writes Lucky Green. Beer is on him, and if you can deliver some working code, he'll buy your meal! WebFunds has some Chaumian code somewhere which Edwin wrote one fine summer, but collecting on the meal also involves a flight :-)

Meanwhile, tracing cash is back in fashion:

Officials at the Idaho National Laboratory say one of the devices "sniffs" the air for the chemical odor of paper currency, while another utilizes electron beams to look for metals in the green ink used to print money. Scientists are also in the process of developing a device that would store the individual serial numbers of all bills.

And as a sneak preview, I've seen a draft of how a particular group of users want to use token money but they want it explicitly traceable instead. I.e., blinded tokens with the blinding turned off. Hopefully the authors will have their draft ready for #3 of FC++ but perversely they are untraceable at the moment.

Whenever discussion of these things takes off, google can't be far out of the gossip. Mostly, we've not covered the speculation one what they are going to do, but Max Levchin, founder of Paypal, was recently caught speculating. This is interesting because Paypal perfected the art of hype and blather fairly early on and their pronouncements were not of any great use, but Max on a potential new and serious competitor gave him a chance to say something.

[Max] The fundamental business model of PayPal is "seller pays for the right to acccept payments in a risk-free (or at least risk-reduced) transaction", and the fundamental game is can you charge the seller low enough rates to keep things interesting for her, while losing little enough money on the risk management part to keep things interesting for yourself!

Which is why the core PayPal "skill" is risk management.

[ElReg] And this is quite a different skillset. Is it one that's a core Google competency right now?

[Max] No, it's not, and Google needs to recruit. I think their key recruiting challenge will be risk management people. which is trickier than one might think. Risk management people come from old-school places like retail banks, and they favor conservative-first approaches, which almost always ends up being expressed as risk policies that favor old, established customers, and turn away transactions from new, riskier customers. Even people from sub-prime card issuers and lenders frequently have that attitude, which can be deadly for your growth.

The advantage that PayPal has...

For which advantage you should read the rest of the Register's article. It's worth reading by any budding payment systems entrepreneur (including for a rather odd comment by the Register on 'rights holding'.) Oh, and we commented on what Google's challenge would be and it's quite close to Max's view.

Posted by iang at July 15, 2005 07:21 AM | TrackBack

"Clearing house for rights holders" refers to copyrights. The payment system used for copyright licensing is irrelevant since the business is dwarfed by other transaction costs. I doubt Google and Yahoo! will be able to compete even with retailers like iTunes or [various sites that, per _Grokster_, I do not intend for any readers of this to use], much less clearing houses.

The Harry Fox Agency (http://www.harryfox.com/index.jsp) is a long established copyrights clearinghouse. They are used to licensing in very big chunks. So are newer clearing houses such as Orchard. (http://www.theorchard.com/thedeal/index.php).

Levchin's comment that PayPal is really providing "risk management" rather than just a payment system is another instance of the importance of transaction risks. The mechanics of the payment system are an irrelevant fraction of an EBay transaction's costs. And as Levchin points out the nature of transaction risks are different for different kinds of sales.

Both the seller and the buyer have to worry about transaction risks, and these worries limit the granularity of payment systems. For a look at this from the buyer's point of view -- the risks of not getting the value you thought your were paying for -- see

Posted by: Nick Szabo at July 16, 2005 02:27 PM

> The blinded signature patent of Prof. David Chaum expires: [see at bottom]

I agree --- this is a historic date.

I'm not a big fan of untraceable digital cash.... I'm not sure Ian is either. But the Chaum patent is not totally untraceable. It is intended to be *sufficiently* untraceable. Perhaps too untraceable perhaps not, depending on your politics.

Everybody involved in the design of money systems should study the Chaum invention both for the technical features it employs, and to consider where you stand on the goals and outcomes you think are desirable.

The rewards await you, once you understand how cryptographic algorithms can be implemented to bring about to mask particular elements of information from particular parties in multiparty arrangements while strongly nailing down other elements. The rewards of course are envisioning how various combinations of algorithms can be used to achieve design requirements for other purposes. Another that comes to mind are voting systems that ensure against fraud, ensure the necessary kind of auditability of elections while preserving the requirement of a secret ballot. http://www.google.com/search?q=votehere+algorithm+open

Posted by: Todd at July 21, 2005 06:24 PM
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