May 21, 2007

Choose your hatchet: when governance models collide

As mentioned, I advised e-gold on governance models way back when, and now we can see how the company deals with its relationship to the US government. Someone has posted a video over on YouTube of some 2006 testimony before Senate hearings on child pornography, wherein governance models are much discussed.

The video looks like hatchet job versus hatchet job, as governance of Internet child pornography collides with governance over payment integrity.

There is a wide-spread belief that the case against e-gold is likely to be fought on a battle ground of public opinion and regulated insiders, rather than that of law and public policy. Same as it ever was, perhaps, but a wider question for future FCers is what to do about it?

The governance models that were provided to e-gold were relatively sound, albeit incompletely implemented. No matter the incompleteness, the models were strong enough to preserve the gold for many years, at least to the extent that the recent seizure by the courts was able to complete. That's by way of a proof that some gold existed, although the victims of the seizure will have other choice words.

But those governance models are designed in general to deal with routine fraud of an inside nature. They are not designed to deal with the sort of difficulties facing e-gold. How then to do better in the future?

I see three lessons here for FCers at the governance layer.

1. A lot depends on the contract Ivan has with his users. We might say that an issuer should have a clear contract with its users. And, in that contract we might expect to find certain relationships with governments, law enforcement, regulators and other interested parties.

The question then would be to see whether these relationships were sustainable, stable and reasonable. In the case of e-gold, they were somewhat unbalanced at least due to its nominal offshore status, so e-gold ended up serving two or three jurisdictions instead of one. Complication, not simplification, without any offsetting protection.

2. Normal business process is to arbitrage existing structures and regulatory postures, but this is not to say that sustainable business includes simply facilitating crime. There is some grave doubt as to whether child pornography was more severe within the e-gold system than in classical banking, but there is much less doubt about ponzi schemes and pyramids. e-gold seems to have permitted these to a far greater extent than desirable, and that was unlikely to make friends in the long run.

Then, the need might be interpreted as to create a business process that delivers an overwhelming good without delivering an overwhelming bad. Truly a matter of judgement, but an easy call might be to keep clear of the more popular crimes.

3. Finally, a reasonable and sustainable dispute system is required. Neither Paypal nor e-gold achieved this, and indeed the banks are widely criticised for it (or its absence). The only payment system that seems to have achieved this is WebMoney, although the story takes on fairy tale proportions due to the lack of english documentation.

Either way, the e-gold dispute resolution system is coming in for a hammering, so this aspect should be noted well by FC community. As a matter of record, alternative dispute resolution (ADR) was well studied by the e-gold founders, who gave speeches at conferences on subjects such as arbitration, but study did not apparently transfer to implementation.

Posted by iang at May 21, 2007 10:02 AM | TrackBack
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