Financial Cryptography

Google and Finance 2.0? Nope, sorry. They lack the competency of demythicalisation.

One of the interesting things about the financial system we built back in the late 1990s is that the design was pretty much spot on, and that keeps getting confirmed. I recently found out that the PKI infrastructure used the design in a CA-to-CA protocol, so they do know how to do it :)

Slowly, the knowledge inches its way up to the level needed to appreciate and duplicate the work of the early pioneers (insert long list of names here...). Over on the Harvard Business blog, Umair Haque muses on what "finance 2.0" would be like and looks at google.

Every day, you handle more searches than the NYSE handles trades — and that difference, I'm guessing, is about to hit an order of magnitude more. Every day, you connect people, businesses, and communities in deeper and tighter ways than besuited beancounters do. From my tiny perspective, it seems that you just might be in the best position of any organization in the world to take on Finance 2.0.

It's an inspirational question; and we know where the inspiration came from. But it is not exactly spot on. Google is a good fit for the market data side and search ("market"), as seen above. But not for the trade side, or more particularly the settlement side. If you know the difference, you're half way there. They *could be* a good fit because that side is just a matter of acquiring the right skills, the right mentality. But it takes a job of work and some tearing down of assumptions, because those things aren't easy to look up on wikipedia. Been there, spent the money, and only by luck and hard work did I figure it out. Not, I assure you, because "I'm smarter."

After money, the first great financial innovation was bills of exchange. What's interesting about bills of exchange is that they're just, well, information. Their example makes the point: money, debt, derivatives — all are just information.

Oh, big mistake, and this makes the point. Finance isn't "just information," it's information built on a foundation of transactions, which is built on a foundation of contracts, which is built on ... well, you get the point. And these many floors, each a foundation for the next, are widely and deeply misunderstood even, or especially in the building known as finance.

In my experience, when I talk to deep industry experts, they almost universally focus on the elevator ride and consequently bumble around with great authority in a 2 x 4m box within a huge edifice. I guess this point shouldn't be controversial, as we've now seen this great financial crisis, so we know that the industry is competitive with Hollywood when it comes to the mythology and starstruckedness.

Google Finance is nice. I like using it a lot. But if it created thick value — by really slashing search costs in finance — it would have prevented people, communities, and society from investing in toxic CDOs in the first place. It didn't. It's a pair of reading glasses, when what the world needs (to begin with) is the financial equivalent of an electron microscope.

What would a Googlier finance industry resemble? What would a more Googly set of capital markets look like? That's the $12 trillion dollar question. After all, markets are just search engines — remember?

See how people are getting closer? So much hope, still far from the solution, but getting closer. Given the amount of desire for solutions right now, there is an outside chance that the creativity needed could take off around 2015, where it didn't in 1995.

Let's get serious. Markets are just search engines, but only at one level of abstraction. This is where google fits, where information is searchable. At other abstractions they are exchanges of information, and this widely-studied topic is full of nuance, full of deception. Google doesn't fit here at all, and many have broken themselves on it.

What does it look like? It looks like financial cryptography; finance with a delicate touch of cryptography, but also larger doses of software, rights, accounting, governance stuffed in between. If you want to know what it looks like in more detail than a windmilling blog post, study Digicash for inspiration, AADS for the complications, Systemics for the transactions, the gold issuance business for the governance.

But beware; it's not about awesome, nor is it about marketing blah blah, nor is it about huge data capabilities. If anything, the core skill you need is demythologisation; the stripping away of fairy tales, until you can see the core.

What company is best for that? I have my views, but it ain't google.

Posted by iang at November 23, 2009 03:51 AM | TrackBack