Financial Cryptography

SEPA meets Money 3.0 -- a trainwreck?

Over at Dave's digital money blog, he keeps writing financial cryptography posts ... which saves the blog from doing it! Last night he opined on whether he could construct a new high level view of the changes to money:

The era of Money 3.0 is just beginning. Its central dynamic is no longer connectivity (since everything is connected to everything else) but community. We can see a glimmer of the future in MySpace and eBay, Zopa and Second Life, Paypal and Craig's List. It's the age of Reed's Law, disconnection technology and the decoupling of currency and the nation state.

To which I responded in comments, predictably, Money 3.0 is FC!

The reason for this is that it allows RTGS assets. ... It goes back to the Baumol-Tobin model on how much money we need. Their model postulates that the driving indicator is the _cost_to_bank_ of the money user. The model has one of these cute divide by zero singularities where everything flips when the cost to get to the bank goes to zero.

.... what then happens when cost == 0? Or, more practically, below the noise floor? Well, to skip a long story ... assets replace money.

See that old monpol paper for more. Now, we sort of all have at the back of our minds that "Digicash started this." That's a good headline date, although the credit goes much wider and deeper than that. The key thing here was that Digicash showed zero-cost-to-bank. Lynn also recalls in comments:

The issue of interchange/association (or lack there-of) also reared its head in the digicash trials ... being limited to a single, common institution that served both the merchants and the consumers. disclaimer ... in the digicash liquidation ... we were called in to evaluate the patent portfolio.

Some people believed that the Digicash patents had value, but that was their problem. What Lynn was talking about then was really the way the Interchange Association solved one of the big institutional headaches:

One of the big infrastructure issues in the 70s was interchange and the associations. Before that both the merchant and consumer had to be with the same institution. this was not just a technology interconnect problem but also contractual and legal issues. The value-added networks to address the interconnect problem have somewhat been obsoleted with the growth of the global internet. However, the legal and contractual issues still remain.

For instance, in some countries, at least in the late 90s, and possibly still true today, required bilaterial, contractual agreements between every accepting merchant and every issuing consumer institution.

The associations allowed merchants to have (contractual) agreements with their financial institutions, consumers have (contractual) agreements with their financial institutions. Then all financial institutions have contractual agreements with the associations (as opposed to every individual financial institution required to have bilaterial contract with every other financial institution) This reduced N*M problem to a N+M ... aka N are number of merchant financial institutions and M are number of consumer financial institutions (with each on the order of tens of thousands).

Right. What FC however does (including but not limited to the parts that Digicash introduced) is to solve the legal and contractual issues as well. Not only that, but the result means that the 1970s solution of one global Interchange Association is not needed.

Why? Because in zero-cost-to-bank, N*M is no problem. Now, obviously, at some point we drill down into that and discover that there is still a very small cost, and N*M matters some ... but let's just hand-wave past that by saying that the result is a paradigm shift of massive proportions.

Better, or worse, we saw it in operation. N*M with Bc==0 does in fact work, in real, global systems. The solution is not one that anyone except the user public will like, because it is *different*. But, it works. It is contractual, legal, technically sound.

Which brings us all to SEPA. What are they trying to do? Well, lots of things really, but we can wrap it up like this:

SEPA is trying to build a Money 2.0 solution in a Money 3.0 world.

Sorry, guys, the world has changed. SEPA is a train being carefully, slowly constructed to 20th century rules. When they put it on the 21st century rails, if they are lucky it won't move. If it moves, it will gather momentum and at some point SEPA becomes a trainwreck.

Posted by iang at August 16, 2007 04:43 AM | TrackBack