Over at Science News Online, Erica Klarreich writes of markets as tools for prediction:
"During a highly charged week in Washington, D.C., last July, a research project sponsored by the Department of Defense sparked a furious outcry from prominent politicians and was then hastily axed by the Pentagon. The project, known as the Policy Analysis Market (PAM), was to have been a market in which participants could wager on Middle East events, say, the gross domestic product of Syria in coming years or the political instability of Iran. The project's developers, however, had made a public relations faux pas. On their Web site, they invited participants to suggest additional topics for markets and speculated that those suggestions might include terrorist attacks and political assassinations. Critics labeled the project a "terrorism futures market" and denounced it as morally repugnant and grotesque."
The PAM "doh!" is just the lead in to a nice article on non-conventional markets.
http://www.sciencenews.org/20031018/bob9.asp
One of the regrettable truths in this business of FC is the scant regard that entrepreneurs give to barriers to entry. These barriers start out large, get huge and huger still, generally as people skip the analysis steps that outline these barriers.
One of the barriers is institutions. They fear loss of payments, and their existance must be considered in the plan.
In general, it is very hard to include existing institutions and share the benefit, and that means having to compete with them at a later time. But, there are exceptions to this, and it now seems that - throwing all theory aside, at least in one case, a group of institutions has actually cooperated and launched a big payment system.
Even more surprising, the group includes banks, credit card companies, and telcos!
The story is almost a textbook case of the impossible:
http://www.iol.co.za/index.php?click_id=115&art_id=qw1066093560707B264&set_id=1
Here's an excerpt:
"Getting the payment-by-phone idea off the ground was not easy. It required co-operation from three industries that don't always see eye-to-eye - banking, credit cards and telecommunications."
"Park said executives laughed at him when he first approached credit card companies - with a TV remote strapped to his cell phone to demonstrate how it would work."
"Credit card companies were loath to co-operate so closely with telecoms because that would require sharing valuable customer information and transaction commissions."
"The card companies figured they already had the entire country in their grip, with an average of four cards issued for every working person. But after extended negotiations, they finally agreed, acknowledging the inevitable march of technology."
"The mobile phone companies, on the other hand, were hungry for new services. Their markets were saturated. All three major providers are now on board."
http://www.mises.org/fullstory.asp?control=1349
By Gene Callahan
[Posted October 17, 2003]
Somewhat ironically, it was one of the greatest philosophers who has ever lived, Aristotle, who was perhaps most responsible for steering the discipline of economics down a false trail. Since the time that he expounded his views, economics has been struggling to rid itself of Aristotle's first, false step.
Consider the following passage from the man known in the Middle Ages as "the philosopher":
"Money, then, acting as a measure, makes goods commensurate and equates them; for neither would there have been association if there were not exchange, nor exchange if there were not equality, nor equality if there were not commensurability." [1] (All emphases mine.)
Aristotle posits that if there were no common medium of exchange (money) that could determine equality-presumably of value-between goods, then there would be no market exchange, and, indeed, no association of humans beyond the scope of the household.
If, as per Aristotle, money serves to "measure" some "equality" between goods and exchange depends on the ability to establish such equality, then it follows that this equality must exist prior to exchange. Goods themselves must possess some property that makes seven of good X equal to three of good Y. If that is the case, then economists ought to search for the factor by which certain quantities of certain various goods can be declared equal to each other.
The two most obvious places to look for such a factor were in human effort and natural bounty. Relatively early in the history of economics, Sir William Petty (1623-1687) proposed a theory of value that relied on both of these factors. According to Petty, "all things ought to be valued by two natural Denominations, which is Land and Labour." [2] Karl Marx, among others, famously based his value theory on the amount of labor that went into a good. If the worker did not receive 100% of the final price of a good he made, he was being "exploited."
The problem with all such efforts to conceive value as dependent on some "objective" factor is that they are viciously circular. If the value of a flute depends on the labor that went into constructing it, then how do we determine the value of that labor? If the value of a head of lettuce depends on the value of the land that produced it, then how do we explain the value attached to that land?
Marx himself recognized, but didn't resolve, this difficulty. He understood that someone who labored all day vigorously smashing chairs could not expect the same pay as someone who worked building them. He declared that it was only "socially useful" labor that determined value. But how in the world could we characterize "socially useful" labor other than by the fact it produced "socially useful" things? In other words, we are still stuck in a circle, explaining the value of goods by the labor that went into them and the value of that labor by the goods it produces.
It was perhaps the Austrian economist Carl Menger who was most responsible for diverting economics from this barren path, although certainly he must share credit with William Stanley Jevons and Léon Walras, who arrived at similar conclusions as Menger almost simultaneously.
Despite his intellectual roots in Aristotlean thought, Menger was wise enough to see that Aristotle had erred in regards to exchange. One can make no sense of the relationship of value to market prices if one regards value as a property of goods themselves. Since the properties posited as "inhering" in goods, such as land and labor, are themselves traded on the market, such explanations must always beg the question as to how those "determinants" of value are priced.
Menger's breakthrough insight was to realize that "[v]alue is? nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs... and in consequence carry over to economic goods as the? causes of the satisfaction of our needs." (Principles of Economics)
In other words, value is the name of an attitude or disposition that a particular person adopts toward a good: he chooses to value it. Although Menger set economics on the path to a correct theory of value in 1871, ancient errors die hard. We can still find many erroneous conceptions of value in contemporary discussions of economic issues.
For example, it is quite common to refer to money (or gold, or financial assets) as a "store of value." But an attitude cannot be stored! You cannot pour some of your attitude towards goods into a bar of gold, put it in a vault, and hope it "keeps." You can, of course, store the gold bar. And you will certainly hope that when you decide to take it from the vault and sell it, that others will choose to value it as well. But only the gold was stored.
Money is also referred to as "a measure of value." But if, following Menger, we regard valuing as an attitude people take towards things, then money certainly cannot measure value, since money itself is simply another thing that people choose to value (or not). Rather than "measuring" the value of other goods and services, money itself is valued by human actors based on its adequacy as a commonly accepted medium of exchange.
Another common, troublesome phrase claims that in free markets, people "trade value for value." But if we realize that value names an attitude or disposition, we see that the phrase is misleading. I can trade some gold that I value with you for a sheep you value. If such a trade takes place, you must also value my gold and I your sheep. In fact, you must value my gold more than you value your sheep, and I must value your sheep more than I value my gold.
When we exchange these goods, my attitude toward the gold does not transfer to you with the gold, nor does your attitude toward the sheep become mine. If that occurred, we would wind up immediately trading them back again, since before the first trade you valued the gold I was offering more than the sheep, and I valued the sheep you offered more than the gold I made available.
In fact, there is nothing fishy about my trading something I don't value at all for something you have that I do value. Perhaps I have a painting I consider awful, and I am about to throw it away. But you visit and upon seeing it exclaim: "What a great painting! I'll give you $100 for it."
Now, it might be charitable of me to say, "No, just take it." But it is not immoral for me to accept the money. Lest anyone think that the idea that it is not dishonest to profit from such a deal is a recent product of "bourgeoisie mentality," see Sir Lionel Robbins noting:
"Saint Thomas says that if a merchant arriving at a place of dearth, knowing that there are merchants, let us say, a week behind him who are due to arrive at a place of dearth and who will bring the price down, he is not committing a mortal sin if he sells at the prevailing price in the place of dearth-although Saint Thomas adds that it might be more virtuous if he revealed that there were other chaps speeding along about a week behind." [3]
The error contained in the idea of "trading value for value" is closely related to the notion that goods should sell for close to what they cost to produce. If I sell a computer program for far more than it cost me to make it, many people would call my price a "rip-off." After all, if exchanges properly take place when the "exchanged values" are "equal," then any profits earned by one party to the trade must be illicit.
We see this idea in "cost-plus" pricing to set utility rates. Of course, this tempts utility executives to drive up costs in order to charge higher rates, since some of those costs can be perks for themselves. This is known as "padding the rate base." Regulators have tried to allow only "reasonable" costs, but that raises the issue of how regulators are to gauge better than company executives what is a reasonable expense.
The subjective nature of the value of consumer goods extends to all of the layers of producer goods. Producer goods are priced according to the estimated value of the consumer goods they might produce. It is true that products requiring high-priced inputs will generally command a high price themselves. But that is because, unless a product can fetch a high price, producers will not use expensive inputs to make it. If people value diamonds highly for jewelry, no one will consider using them for ordinary windows, even if they might work well for that purpose. It is not the fact that diamonds are expensive that makes diamond rings expensive; it is the fact that people value diamond rings highly that makes diamonds expensive.
Wine producers place a high value on Napa Valley vineyards because consumers place a high value on Napa Valley wine. If they did not, real estate there still might be expensive, but it would be devoted to housing developments or something else other than vineyards. If the wine were lousy, no producer could expect a high price for it just because his land cost a bundle!
Consumers just don't care how difficult it is to manufacture a product. They care how much satisfaction they will get from it. It would be very difficult for me to write articles while holding my breath underwater, but that will not up the fee a magazine or website will pay me for an article. Of course, I might turn the process itself into a spectacle or show, but in that case I'd really be selling the spectacle plus the article.
So, in conclusion, let me ask: is there anyone out there who will pay me extra for underwater economics writing?
Gene Callahan is author of Economics for Real People. Send him MAIL, and see his Mises.org Daily Articles Archive.
Issuance has been at the core of FC since the time dot. It's either the entire 6th layer - which I called Value - or it is an application in its own right.
Finance - the 7th layer, of applications that have financial intentions - includes as pure issuance plays currencies like the gold community, self-issuance by companies of internal monies and shares in operation, and various gift or voucher style issues. That is, the application of the company is primarily its issuance, opposed to other things like trading.
How much is this worth?
A question oft asked! And there are few definitive answers, as there are few enough Issuers with a wide variety of models. So comparisons are hard.
For example, e-gold have a sustainable issue with a 1% storage fee per annum, and a 0.5% transaction fee that is capped at USD 50 cents. Is this sufficient to calculate its worth? No, as they are joined at the hip with their primary exchange maker, and not only do they have to deal with weakened governance because of it, they also have to soil their balance sheet with the filthy lucre of exchange: average of 2-4% per transaction!
Other DGCs are less well-heeled, as they are the challengers, so let's skip them for now.
For comparison, the Visa/Mastercard empire charges about 2% to all its merchants for every transaction. It goes up and down, depending, but it's a lot of money in anyone's mathematics. And it skyrockets when you get into the societal arbitrage industries like Adult and Gaming... With chargeback ratios of 50%, you just know that the credit card companies are taking a serious slice.
I've heard that the US Mint estimates the cost of coinage at about 1%. That sounds high to me, but they get to keep the other 99 cents on every dollar, so we can tell why they're smiling. But, national currency issuance is a special case of monopoly, so it's not a viable comparison.
Still, national currencies do compete! And, in the great competition of this decade, the dollar v. the euro, here's a very interesting fact:
Over on El Zorro Plata Bob diligently scans the markets for silver news, and reports this article:
Russia to price oil in euros in snub to US
which talks about the Ruskies switching their oil trading to Euros. It aslo quotes this:
If the dollar were ever displaced by the euro, it would lose the enormous freedom it now enjoys in running macro-economic policy. Washington would also forfeit the privilege of exchanging dollar notes for imports, worth an estimated 0.5pc of GDP.
That's astounding! 0.5% of the GDP for an export called having the international unit of account. Talk about a windfall. Talk about an embarressment if it all comes flooding back!
But, leaving aside the amazing shift that will occur when or if the dollar loses its international unit of account status, consider this: a nation-state is more or less simply modelled as a company with its citizens as employees. Its product is its exports. The GDP is the internal market to produce that product.
So, if one were to use the above figure as a guide - and bear in mind, this is a very loose single point of data - one could postulate that a self-issuance of your own corporate currency may be worth 0.5% of everything you do. Depending on how similar you are to the US economy, of course.
It's a number, like any number. Only time will tell how optimistic or pessimistic it is.
Trust is a funny thing. It's hard to pinpoint. One can say easily that one trusts someone, but less easily why.
Trust could be considered to be an expectation that some predicted event will come to pass.
Put that way, we can then break down the use of trust into something more objective.
If you have an expectation, you can compare it to other expectations that have since happened. If you rely on this event, you can also determine what your potential costs, benefits and losses are on this event.
There - we said all that without saying who! And, in fact, trust is not about who, it's about events. When I say, "I trust my wife," what I mean is that I have high expectations for her to do and act in a certain way in any given event. I just haven't bothered to list those events.
(Of course, I never say "I trust my wife." Perhaps that's what she didn't marry me.)
Events and expectations. Take the DGC industry. There is this digital gold. It's supposed to have value. You can buy stuff with it, but it costs money.
How do I trust that? How do I trust any person in the DGC world?
Well, it's actually quite easy to get or acquire trust. You do it by starting small, and building up.
You buy something small. This works, because your loss in the bad event is small, so you don't care so much. Or, to put it another way, even if you lost out on, say, $10 worth of digital gold, you had a little fun and experience to go with it.
This is why so many people's first experience of digital gold is a 1g event. Someone sends them a gram, it's about the same price as a movie ticket, and it has similar entertainment value.
Very broadly speaking, of course. Any loss is offset by the fun of it, and any success confirms the story and starts the building of trust.
Of such small events, bigger expectations are built.
When you next get into the big league and buy, say, $100 worth of gold, that exciting twinge of fear teases. Maybe you'll get the gold. Maybe it will all evaporate the moment you do get the gold, and you will wake up wondering about the white rabbit?
But it all works, and it gets bigger and bigger, and you learn about the exchange providers and how to tell the good from the bad.
You build up trust. In the expectation that, when you send your paycheck entire to some dude with a strange name, you'll get a full bag of gold in return.
Then there is the gold itself. It's digital. How did that get to be trusted?
Well, everyone else believes it trusted. That's a good start.
But, everyone knows about scams. That's not such a good start!
And, in fact, at least two Issuers of gold currency have collapsed - OSGold and Standard Reserve. Both in dire and financially ruinous conditions for some. And, to see some of the actions of some of the current pack of Issuers, it's not so clear that one can safely say they aren't the next to be written up in our list of infamous fraudsters.
So, how does our newbie tell the pyrite from the gold? And, why can't it be easy like telling a good exchange provider from a bad?
Issuance is different to exchange. Let's look at the events, again, and form our expectations.
In Exchange, you send me national currency, and I send you gold. Either you get the gold, or you don't. That means you can tell fairly quickly whether it happened.
It's fast. It's also limited in value, to the precise amount.
Let's look at the downside - I as the Exchange provider decide to run with your national. I will do this if you send me so much money that it exceeds all the future profits that I can earn.
This is a given - there is no point in me working my butt off for the rest of my days if I will earn less money than I could by taking my one chance at your pot [1].
In the business of Exchange, the provider sees a lot of moderate amounts flow through, in and out, very quickly, and she takes a small cut from each [2]. In general, the cut will grow over time, as her revenue, and will be worth much more than any one amount that is being bought and sold.
Not so with the Issuer. By definition, all the metal that is behind an issue is in the hands of the Issuer already. Every little bit that comes in is way less than the amount already under management.
So the equation is reversed. Every Issuer that is out there faces the fact that if he could steal the whole lot, he could earn more money than he could if he stayed in the business of issuance.
Every day, every moment, Issuers are faced with this equation. Cut and run is highly lucrative.
How do we then reverse this? How do we turn this devil's temptation into a sustainable long term business serving us angels?
Well, one way is to promote good governance. We talk about things like 5PM, which is a way to take the power out of hands of the Issuer, and to share it with other trusted parties [3]. Briefly, we examine the location of the bars, what serial numbers they claim, who has verified that they exist, and who can sign them out.
We repeat the process for the digital side [4].
Lately, we've also started to discuss reputation in a less objective fashion. Honour, I've called it [5]. Can we assess the honour of an Issuer and his propensity to do more than just set up a copycat of 5PM? Because that's what happened in one of the failures, 5PM was copied and convincingly presented. People bought it.
Issuance is a different product to Exchange. It has the unusual characteristic that when we hand over our cash, we don't get immediate satisfaction of our trust requirements.
Unlike buying a car, flying in a plane, or trading the digital gold itself, with Issuance, we are dependant on a trust equation that extends out into the indeterminate future.
Like banks, Issuance requires long term reputation. Like pensions, we need to know that the institution will stay, and will stay safe. Like schools, we need to know more than just whether the child is safe today. Like the army, we don't care what silly parade ground drill they are rehearsing today, we just want to know that we can call on them in 5 years time, when the barbarians are at the gate.
Businesses like these are ripe for government regulation, but that's just because the government is the last man standing when everything else has collapsed. Surely the government knows how to do this, people say? And, when the government shows it doesn't know, people don't say anything, because the issues are too complex [6].
We have a unique sector going on here. We have - collectively - shown how to build a long term trust equation that stands on its own feet. It delivers cost benefits beyond that of any competing arrangement. It finds new solutions quicker than the conventional world. It shows flexibility. It shows strength. It grows and it evolves.
Into this fray comes one more business activity, the activity known as dispute resolution.
The problem of settling disputes has been a vexing one. Many users are far-flung, talk in different languages, and even think under different laws. Issuers are in strange places with names that are found in holiday brouchures. Exchange providers likewise.
Out of this, several strategies have arisen. One Issuer insists publically on only court orders for all disputes Another strategy is sabre-rattling. A further strategy is to craft the user base to be ... less dispute-ridden.
And, we also have ADR. Alternative Dispute Resolution means a technique for resolving disputes by not using the courts, but instead, using a well known private party to intermediate. He's called a mediator or an arbitrator.
First promoted in the early days of e-gold, perhaps most visibly in a series of conferences called Lex Cybernatoria, it has long been known that if we as a group can Exchange and Issue, why cannot we also Resolve?
It has long been expected that ADR will arise in some form or other, but all of the powerful players are of course conflicted. Only independant players can resolve disputes. Of course.
The American Arbitration Association is listed in at least one Issuer's user agreement, but we have no reports of it being tested in a user dispute. Notwithstanding its conceptual form, it is apparant that the substance of ADR has distinct and challenging characteristics.
Like Issuance, we are, as users of the service of ADR, dependent on events in the future. Unlike Issuance, we do not so much analyse and enter into this field with eyes open; it's a characteristic of disputes that if one knew what we were doing, we wouldn't have done that!
Also, unlike Issuance, even if we wanted to analyse it, how could we do it? We can't for example run a little event. There's no such thing as a trial dispute, for example. And, other people's disputes do not mean so much to us - especially in today's world of bluster and never admitting doubt or wrongness.
If we were to draw a matrix of these characteristics:
Building Trust
Trial Events
Cannot Try Out
Quick
Exchange
[7]
Future
Issuance
Dispute Resolution
So, up-front analysis is not really a characteristic of dispute resolution. We thus can dispose of a lot of rhetoric easily.
How then can we trust a provider of ADR? The close we look at the event, the more daunting it becomes:
The parties to a dispute have already faced losses - that's a characteristic of disputes. They are also looking at further potential losses due to costs. Perhaps one of them is looking at a potential gain, in the event that she "wins" the dispute.
It's not fast. We didn't want to be here. And we are at great risk. Yet, here we are. Looking at a future event of some great risk.
We need a lot of trust in this process. And no events to draw upon.
When we look to a provider of dispute resolution, we need to know, with great confidence, that it is trusted, because without making the normal conscious and planned choices, we are suddenly dependent on the judgement of the provider. Indeed, the provider of dispute resolving services has a daunting task establishing this level of trust. The only thing left to analyse is secondary information: the past, the people, the actions, the politics, the results of actions.
All these data points are indirect, so as many as possible are needed to analyse. Every part of the past will be brought to bear, because that's all there is to go on.
Every action, every posture. Here's a trial list:
* considered, reasoning writings, not hyperbole
* impartiality
* longevity and transparency
* respect to all
* a sense of honour (that meets and even exceeds that demanded of the Issuers)
* straight forward answers to difficult questions
* polite useful answers to easy questions
* acceptance of criticism, acceptance of weakness
* open structures, open procedures
* gravity and seriousness, not tomfoolery
Which I scratched out in a moment. Other lists could also be written, no doubt.
Which leaves us in a dilemma - the list of the above is almost impossibly hard to meet. Does that mean we should lower our standards to find a provider of ADR?
I believe not. ADR is nothing without an extremely high level of trust. If it is, then, so like nothing, then we are better off not having it.
We as users may actually be a lot better off by cutting our losses. We are often better off limiting up front than relying and risking on the uncertain future gamble.
If we found ourselves in dispute resolution, and it was bad dispute resolution, then we would be better off avoiding it; removed of the crutch of a false promise, we would then at least be enabled to develop more reliable ways of commerce, in exchange for the losses suffered.
iang
[1] So, don't ever send payments to an EP in excess of her normal takings. Stay under her biggest amounts, and you have a good chance of being safe.
[2] Exchange providers are often referred to in the feminine, as a merchant, Matilda, whereas Issuers are generally in the masculine, Ivan. It's a convention that helps those in the English language.
[3] 5PM is Five Parties Model, which places the actual control of something valuable in the hands of several parties. Space does not permit full description today...
[4] Which makes for ten parties. Sorry about that.
[5] Ivan the Honourable makes his first appearance at http://www.iang.org/rants/ivan_the_honourable.html
[6] Mises asked the question, why is it that we think that government knows the answers? He never got a satisfactory answer before he died, so it behoves us to keep asking for him.
[7] If you are wondering what goes in this corner, it may be security - it's quick, but you cannot test it. A paradox, but one irrelevant to today's topic.
http://www.glenbrook.com/opinions/financial-privacy.html
Momentum towards stronger financial privacy for consumers in the United States has picked up a lot of steam over the last 30 days. While most welcome the change, some financial institutions are still tentative about the new direction, others are actively resisting it, and a few are not sure how to respond. But to strategic thinking institutions wanting to secure competitive advantage, we believe that now is the time to act-getting out in front of the financial privacy issue, leveraging their reputations for trust, and better serving their customers in the process.
How Did We Get Here?
The recent seeds for strengthened financial privacy were planted in 1999 when the U.S. Congress passed the Gramm-Leach-Bliley (GLB) Act. Conceptually, GLB relaxed the artificial walls between the banking, insurance, and security industries-effectively allowing a single entity to offer financial products from all three categories to customers. While not central to the act, significant financial privacy rules were also enacted, effective in 2001, that required that any financial institution that wanted to share non-public customer information with third parties to give customers an opportunity to opt-out, or block, their information from being shared.
The opt-out approach was a classic political compromise, of sorts, enabling individuals on the privacy fringe to limit how financial institutions use customer information, but was cumbersome enough to simply be ignored by most convenience-oriented customers. Significant in retrospect, GLB also gave states the right to enact even stronger financial privacy, if they saw the need and could muster the votes to pass such legislation at the state level. Several states have gone that extra mile-North Dakota, Vermont, New Mexico, and now California-to do so.
Of the state-level legislation enacted in the last few years, the just-signed California Financial Privacy law goes the furthest, extending to customers the ability to opt-out of information sharing among even affiliated companies (within the same holding company) and requiring financial institutions to have explicit customer approval, or opt-in permission, before sharing financial information with third parties. While most analysts have focused on the back and forth power struggle between partisans, in a practical sense the adoption of opt-in requirement means that strong financial privacy is the default in California beginning next July.
Financial services industry critics of privacy regulation say these state-level laws limit customer choice (by restricting the downstream offers of secondary products to consumers), increase cost (relative to revenue), and lack any consistency from state-to-state (which is true enough). Proponents say these are orthogonal arguments and are just the cost of adequately securing sensitive customer information.
In addition, federal regulatory agencies recently released for comment proposed guidelines that would require financial institutions to notify customers (under certain circumstances) if they discover unauthorized access to sensitive customer information, such as social security number, username, or password. California enacted legislation last year that effectively requires any such disclosure be communicated to any affected California citizens.
What Changed?
Why is "business as usual" in the financial services industry suddenly under assault on both the legislative and regulatory fronts? Simply stated, people are a lot more sensitive to privacy issues and abuses. This came through loud and clear in an April 2003 Harris Interactive survey of U.S. adults:
10 percent of those surveyed were "privacy unconcerned"
64 percent of those surveyed were "privacy pragmatists or people who are concerned about their privacy and want to protect themselves from abuse or misuse of their personal information by a government organization or a company"
26 percent of those surveyed were "privacy fundamentalist who believe their privacy is eroding and are trying their best to halt the process"
When 9 out of 10 bank customers say they are concerned about privacy, something very important is changing the marketplace. When one out of four customers identify themselves as "privacy fundamentalist", the genie is truly out of the bottle.
We suspect that what's really behind this dramatic shift in attitude-especially as it relates to financial services-is the dramatic increase in identity theft. Gartner reports that 7 million U.S. adults, or 3.4 percent of U.S. consumers, were victims of identity theft during the 12 months ending June 2003. The identity theft problem has become wide enough that many people, if not victims themselves, know someone else who has already been victimized.
It's also worth noting that the shift in attitude about privacy is not focused just on the financial services industry. The Health Insurance Portability and Accountability (HIPAA) Act of 1996 addressed many of the same issues with respect to sensitive medical records and personal health information.
Its Not Over Yet
While the changes to date have been dramatic, collectively we are still in the early stages of establishing a national policy in the U.S. towards financial privacy. Several large financial institutions are still publicly opposed to the recent California Financial Information Privacy Act and reserve the right to fight it through the court system. Others hope to lobby behind the scenes to influence the upcoming revision of the Fair Credit Reporting Act (FCRA) to overturn some of these state-level protections and to pre-empt local jurisdictions from enacting any broader financial privacy laws.
While it's hard to project the final outcome, it is clear that these efforts-if pursued-are flying in the face of what the average person wants and will likely paint financial service providers as anti-consumer. While not the end of the world, such a stance could erode much of the hard-won trust that financial institutions have earned from customers.
Unlike marketing costs, it's hard to place a direct monetary value on trust. Participants in other industries would love to have the same level of consumer trust as financial institutions. But they don't and they're not likely to ever earn it. Holding on to this trust will be especially critical as banks and other financial services companies move forward in the coming years to leverage new technologies and introduce new services. In the area of biometrics, for example, early deployments show significant cost savings for financial institutions-but achieving those benefits will require convincing consumers their personal biometric data is private, secure, and never available for sale or misuse.
Recasting the Problem as an Opportunity
Consumers are saying loud and clear they want and value strong financial privacy. Financial institutions should give it to them and take credit for it. Don't offer consumers financial products-offer them "privacy enhanced" financial products. Don't just provide strong financial privacy in four states-provide it universally across the institution's complete geographic footprint. Don't just give consumers the minimum privacy required by law-protect them in ways they wouldn't even dream about.
Easier said than done? Here are some ideas:
Privacy Policies. Explain privacy policies in everyday language that anyone can understand. Don't make the policy read like a contract addendum in six-point type; instead be real clear about not selling, renting, or sharing private financial information without explicit consumer consent.
Online Banking Site. Financial institutions could provide easy access to do-not-call registries and credit bureaus from their own online banking sites-and provide help and guidance to consumers wanting to utilize them. By helping customers proactive fight identity theft and frivolous direct marketing, institutions can reinforce the strong trusted reputations they already enjoy.
Credit Card Enhancements. Much like travel accident insurance is included as a credit card enhancement, financial institutions could provide identity theft insurance at no cost to the customer as another built-in card enhancement. There are distinct first mover advantages to making this move.
To the extent other financial institutions drag their feet-waiting until the last possible day to provide the minimum compliance required by law, and fighting even that in court-the savviest institutions will begin to provide strong financial privacy now, integrate it into their branding, and use it to differentiate themselves from competitors. As Harry Truman might say, the time has come to "get out in front of it and call it a parade."
And who knows, maybe privacy-concerned consumers will jump ship and move their business to privacy-friendly financial institutions. With strong financial privacy gaining momentum, what's for sale won't be my sensitive financial information-it will be my loyalty, my trust, and my business (and associated profits) to a financial institution that earns it.
DigiCash's eCash introduced a set of coins denominated in powers of 2. That is 1,2,4,8... This allowed the most efficient arrangement of arbitrary values, and it also means that the denomination of a coin can fit in only a byte sized integer. Quite elegant, really.
(Think about the old parable of the Chinese peasant, the chessboard and the grain of rice to see how big you can go with one just one byte. In my code I limit it to 64.)
The method I have used slightly extends the eCash method by including zero, which I believe that eCash ignored. The inclusion of zero is essential for testing purposes, as it removes the need for care and concern about the coins and the need for issuances of special currencies.
Recently, someone asked for more normal denominations as are apparent in normal national monies. There are two common sequences to my knowledge:
1, 2, 5, 10, ...
1, 2.5, 5, 10, ...
Question number 1: are there any more common sequences in use by people today?
I'm not that keen to duplicate for example the sequence of pre-decimal Sterling but it is amusing to list:
1/2, 1, 3, 6, 12
for ha'penny, penny, thrupenny bit, sixpence, shilling, and then
1, 2.5, 5, 10, 20, 21
shilling, half-crown, crown, 10-shilling, pound and finally, the guinea.
Now, once we introduce the notion of non-trivial coin sets, it is also possible to experiment. One consideration is that if one were doing an untraceable bearer token scheme, then traffic analysis occurs at the coin unit. That is, for the one person who can afford a $1,048,576 coin, he has no protection.
And, at any given coin size, there is only as much protection as the size of the pool would permit. So the obvious thing is to increase the size of the pool, by, for example, reducing the denominations. For example,
1, 5, 10, 50
Or even
1, 10, 100, 1000
The disadvantage is the larger payments and the extra signing burden, but, hey, none of my computers are doing anything right now. I'll bet your's aren't either. Why not load them up a bit?
http://www.enhyper.com/cgi-bin/jump.cgi?ID=1173
What is microfinance and why is it
important?
Microfinance programs provide financial services - such as credit, deposit, and savings services-to the entrepreneurial poor that are tailored to their needs. Good microfinance programs are characterised by:
* Small, usually short-term loans, and secure savings products.
* Streamlined, simple borrower and investment appraisal.
* Alternative approaches to collateral.
* Quick disbursement of repeat loans after timely repayment.
* Above-market interest rates to cover the high transactions costs inherent in microfinance.
* High repayment rates.
* Convenient location and timing of services.
There are many types of microenterprises. At one end of the spectrum is, for example, the woman who sells vegetables. She operates her microenterprise for just a few hours a day because she has other responsibilities, such as taking care of her children. At the other end of the spectrum is the small enterprise that employs several workers. Though microenterprises create jobs and
contribute to GDP, they are often constrained by lack of access to financial services.
Providing financial services to the entrepreneurial poor increases household income, reduces unemployment, and creates demand for other goods and services-especially nutrition, education, and health services.
Merchants who *really* rely on their web site being secure are those that take instructions for the delivery of value over them. It's a given that they have to work very hard to secure their websites, and it is instructive to watch their efforts.
The cutting edge in making web sites secure is occuring in gold community and presumably the PayPal community (I don't really follow the latter). AFAIK, this has been the case since the late 90's, before that, some of the European banks were doing heavy duty stuff with expensive tokens.
e-gold have a sort of graphical number that displays and has to be entered in by hand [1]. This works against bots, but of course, the bot writers have conquered it somehow. e-gold are of course the recurrent victim of the spoofers, and it is not clear why they have not taken more serious steps to protect themselves against attacks on their system.
eBullion sell an expensive hardware token that I have heard stops attacks cold, but suffers from poor take up because of its cost [2].
Goldmoney relies on client certs, which also seems to be poor in takeup. Probably more to do with the clumsiness of them, due to the early uncertain support in the browser and in the protocol. Also, goldmoney has structured themselves to be an unattractive target for attackers, using governance and marketing techniques, so I expect them to be the last to experience real tests of their security.
Another small player called Pecunix allows you to integrate your PGP key into your account, and confirm your nymity using PGP signatures. At least one other player had decided to try smart cards.
Now a company called NetPay.TV - I have no idea about them, really - have started a service that sends out a 6 digit pin over the SMS messaging features of the GSM network for the user to type in to the website [4].
It's highly innovative and great security to use a completely different network to communicate with the user and confirm their nymity. On the face of it, it would seem to pretty much knock a hole into the incessant, boring and mind-bogglingly simple attacks against the recommended SSL web site approach.
What remains to be seen is if users are prepared to pay 15c each time for the SMS message. In Europe, SMS messaging is the rage, so there won't be much of a problem there, I suspect.
What's interesing here is that we are seeing the market for security evolve and bypass the rather
broken model that was invented by Netscape back in '94 or so. In the absence of structured, institutional, or mandated approaches, we now have half a dozen distinct approaches to web site application security [4].
As each of the programmes are voluntary, we have a fair and honest market test of the security results [5].
[1] here's one if it can be seen:
https://www.e-gold.com/acct/gen3.asp?x=3061&y=62744C0EB1324BD58D24CA4389877672
Hopefully that doesn't let you into my account! It's curious, if you change the numbers in the above URL, you get a similar drawing, but it is wrong...
[2] All companies are .com, unless otherwise noted.
[3] As well as the activity on the gold side, there are the adventures of PayPal with its pairs of tiny payments made to users' conventional bank accounts.
[4] http://www.netpay.tv/news.htm
[5] I just thought of an attack against NetPay.TV, but I'll keep quiet so as not to enjoy anyone else's
fun :-)