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ip: Dr. Richard W. Rahn before the Subcommittee on Domestic and International Monetary Policy
by Jan 22 Sep '00

22 Sep '00

STATEMENT of Dr. Richard W. Rahn On The Future of Electronic Payments before the Subcommittee on Domestic and International Monetary Policy Committee on Banking and Financial Services United States House of Representatives Roadblocks and Emerging Practices September 19, 2000 Mr. Chairman and Members of the Committee, thank you for giving me this opportunity to testify today on the monetary impact of the emerging electronic and digital payment systems on monetary policy and financial privacy. I am an Adjunct Scholar at the Cato Institute, a Senior Fellow at the Discovery Institute, and Chairman of Novecon Financial Ltd. Also, I am the author of the recent book, The End of Money and the Struggle for Financial Privacy. I will focus my comments today on the emerging digital money-like products which, I believe, will supplant most conventional government issued money and existing payments systems over the next couple of decades. Introduction The age of digital money is upon us. The new technologies of the Internet, digital electronics, public key encryption, and the rapid price declines of computing power and telecommunications bandwidth are having a dramatic effect on the financial world. These new technologies are enabling the development of financial markets, procedures, and instruments that economists in the past could only theorize about. Financial transactions can be settled in real time even though the contracting parties may be thousands of miles apart. Money and other assets can be moved at almost the speed of light to any point on the globe for a minuscule cost. Easy to use encryption programs enable almost anyone to move data or money around the globe with complete security. It is now possible for private digital currency issuers to compete without the high information and transaction costs that burdened the multiple-issuer systems in the past. Moreover, new, private monies are emerging, including "digital gold." The technical barriers have been overcome, as well as many of the economic challenges. Digital money is the monetary value of government- or privately-issued currency units stored in electronic form in an electronic device. Digital money is one type of a digital financial instrument that fulfills most or all of the functions of money. The monetary value stored in the electronic device can be transferred to other such devices, allowing the users to engage in payment transactions. This is different from traditional electronic payment systems, such as credit and debit cards and wire transfers, which usually require online authorization and may involve debiting and crediting bank accounts for each transaction. A prepaid monetary value may be stored in a computer chip on a card ö "smart card" ö or stored on a computer chip in a wireless device, or on a computer disk drive. Money transfers with cards are most often made through card reader/writers, while transfers using computers or wireless devices are made over wired or wireless communication networks, such as the Internet. Cards, wireless devices, and computers can also be used to merely authorize monetary transfers from one account to another. These accounts may be bank accounts or reserve assets held in non-bank institutions. Stock, bond, mutual fund, and gold deposit accounts may allow ownership transfer of assets, even in micro amounts, to be made by computer or wireless devices. To prevent fraud, all such transfers need to be protected by cryptographic codes. The technology now exists to make such transfers anonymous, like paper currency transactions, if the user so chooses. Financial cryptographers have developed methods whereby people will be able to securely hold bearer digital cash, bonds, stock, and even financial derivatives, and make very low cost and anonymous transactions with them. A US dollar in paper form is a bearer instrument. That is, the person who holds it is normally considered to be its lawful owner. There is no list of owners of paper currency (a registration record); ownership is conveyed by physical possession. Gold coins are bearer instruments. The advantage of bearer instrument transactions is that settlement is in real time, and therefore there is no risk of non-payment, as there is in book entry transactions such as checks and credit cards. There are no charge backs to the merchant, and the risk of fraud (in the absence of counterfeiting) is greatly reduced. Bearer instruments are also anonymous, which can protect the owner from corrupt governments or criminal types. However, because of this anonymity, many governments do not like or have prohibited certain types of bearer instruments because they make it hard for tax officials to collect revenue. Digital monetary and financial products are "disruptive" technologies, in that their creation upsets the existing legal and public policy order as to how money and financial products and institutions are regulated and organized. National borders are ceasing to have the relevancy they once did. Both businesses and governments need to build the appropriate legal order for the digital age and understand how it should be managed. This will require changes in laws and regulations, leaving businesses in a thicket of uncertainty during the transition period. Central bankers, treasury officials, law enforcement authorities, and intellectual property administrators (patent officials, etc.) will by necessity have to adjust to a different world. Their challenge will be to create a new set of rules and procedures that bring the necessary order without impinging on the rights of privacy of individuals and institutions, or destroying the economic efficiencies that the new technology is bringing. Policy Implications of Digital Payments Systems Many legal issues will arise as digital money becomes more prevalent. Given that most digital money will be global in the sense that the Internet will facilitate its movement or use outside its issuing jurisdiction, the lack of legal uniformity between countries raises many policy issues. For instance, who has the liability if a failure does occur in a particular digital money system because of fraud or for some other reason? When digital money payments are made across national borders, who has jurisdiction? Does digital money violate the monopoly rights of central banks to issue money? May a central bank issue digital money? Do non-bank issuers of digital money need to be regulated, and if so, who should the regulator be? Who is going to determine if the clearing organizations have sufficiently robust and fraud proof systems? Given that various digital money systems are now being developed and offered, the answers to the above questions will probably slowly evolve over the next few years as real problems emerge. Already, multilateral financial institutions like the Bank for International Settlements and the International Monetary Fund have established working groups to try to develop recommendations for their members in dealing with the above-mentioned issues. These BIS and IMF recommendations will be of particular interest to the worldâs central bankers who are facing the front line of change. To the extent people use privately-issued digital money for transactions, the demand for government money is reduced. If people are willing to hold liquid balances in the form of digital money, the quantity of demand deposits (checking accounts) that people need or desire is smaller, hence reducing the central bankâs supply of money. The same principle holds true for other money substitutes, from very limited money substitutes (i.e., balances held on telephone cards, or frequent flyer miles) to broad money-like products (i.e., digital gold). As these broad and narrow-use money substitutes grow in popularity because of their ease of use in the digital age, the amount of money supplied by central banks will decline. Until some non-government money reaches a critical mass whereby most users and businesses find they can do a substantial portion of their business in the "new money," virtually all digital money and money substitute products will be reconverted to central-bank-issued money at some point. However, even during this period of partial and temporary substitution of digital money for central bank money, the demand for central bank money will gradually decline. Justifiable concerns have been raised about the innovations in payments technology and the development of digital money and their impact on inflation. For monetary systems with a quantity anchor (such as the US dollar and other fiat currencies), technology changes resulting in an increase in the money multiplier or a decrease in money demand will increase the price level unless base money is reduced by an appropriate amount. If digital money is issued by an institution other than a bank, which has no reserve requirement, the growth in digital money will increase the money supply unless the central bank takes corrective action. The increases in the money supply resulting from the new technologies will be both gradual and easily recognized, and hence would be neutralized by the central bank by appropriate reductions in the monetary base. As with all innovations with payments technology, the introduction of digital cash has a one-time effect on the price level. The money multiplier would be larger but stable at its new level. If digital money is issued by a bank at the expense of deposits, and is subject to the same reserve requirements as deposits, the monetary effect would be approximately neutralized. If digital cash issued by banks is subject to a 100% reserve, or if digital cash is issued by a non-bank, with a 100% reserve, no new money is created. With any price rule digital money system (i.e. commodity backed systems), inflation by definition is not a problem. In general, electronic payments and digital money systems increase the efficiency by which the existing money supply can make payments, thus reducing the demand for money. These improvements tend to take place gradually over time, and are observed as an increase in the velocity of money, which requires a compensating adjustment in base money by the Federal Reserve. In sum, I see no reason for great concern in terms of monetary policy management by central banks as a result of these new technological innovations. The changes will be gradual and obvious, giving plenty of time to make policy adjustments to prevent inflation. One effect of the decrease in demand for central bank money will be the disappearance of central bank seigniorage revenue. At present, the worldâs central banks make a considerable income from issuing paper banknotes, which are non-interest bearing central bank liabilities. Among the G-10 countries, seigniorage as a percent of GDP ranged from a low of .28% in the UK to a high of .65% in Italy in 1996. This seigniorage not only provides for all of the central bank operations, but also provides their treasuries with significant revenue. However, it is also apparent that the efficiency gains for the economy from digital money swamp any negative effect on government revenue of the loss of seigniorage revenue, which has been in effect a tax on the banking system. It can be expected that the growth of digital money will have a direct and significant impact on the common measures of the money supply, particularly currency and demand deposits (M1 and M2). Given that many central bankers target these monetary aggregates in the conduct of their monetary policy, the focus of monetary policy may need to change. The growth of digital money could ultimately cause a substantial drop in banksâ demand for settlement balances. In the major economies, cash is the largest component of central bank liabilities. Extensive use of digital money is likely to shrink the balance sheets of the central banks significantly. At some point the shrinkage might restrict the central banksâ ability to conduct open market operations or foreign exchange sterilization operations. However, to the extent that the new digital monies are fully backed by assets such as gold or high-quality financial instruments, the need to conduct open market operations will diminish, because the supply of money for transactions should automatically adjust to demand. As more and more transactions are settled on a real time basis, the risk of non-payment and fraud declines, and hence the need for regulation and monitoring also declines. The role of the central bank may ultimately shrink to doing little more than defining the numeraire for the national money. The definition is likely to be a modern version of the gold standard. Specifically, a national currency in the future may well be defined as a monetary unit that is equal to a basket of specified commodities with a one world price, such as gold and crude oil, and even some services. Any good or service having a one world price that is set in organized auction markets could be a candidate for a currency basket that would be used to define the value of the monetary unit. Some central banks might also continue to serve as a lender of last resort to large financial institutions, by using off balance sheet transactions. The need for such a lender of last resort would seem to diminish in a world of instant information on almost all activities and institutions, and real time settlements. In the new century, the kind of financial shocks and surprises experienced in the past ought to be increasingly rare, unless financial regulators interfere too much with the market adjustments that will naturally occur in a world of increasingly perfect information. The rapidity of adoption of digital money systems by consumers depends on how their cost, convenience, and anonymity is perceived in relation to paper currency and coin. Eventually, electronic transfer and digital money systems will totally replace paper and coin, because they can greatly reduce transaction costs and will ultimately become more convenient. At the current level of technological advance, it appears that within relatively few years, whether they involve a few cents or millions of dollars, almost all monetary transactions will move over the Internet, or by wireless device, or by chip card for small transactions. The question of anonymity will remain an impediment until policy makers understand that the fundamental desire and right to personal privacy must be accommodated with the new technologies, to an extent no less than people now have with cash. The role of central banks will change, and will likely shrink, as a result of the new technologies. One danger to the world economy is that central banks will try to hold on to their traditional roles by restricting the new technologies or regulating them in such a way as to make them non-economic. Regulators should keep a hands-off approach until a problem has been clearly demonstrated and, at that time, devise corrective actions to do the least damage to innovation and financial freedom. Law enforcement officials around the world have been concerned about the potential abuse of digital money systems for the purpose of money laundering, and hence are trying to restrict or ban them. Officials in various government and regulatory agencies, such as the Financial Crimes Enforcement Network, assert that they should have more power and ability to monitor all transactions. It is true that digital money systems, particularly anonymous ones, may indeed make the job of money laundering easier. On the other hand, many government law enforcement agencies throughout the world have abused basic rights to financial privacy. The benefits of digital money greatly outweigh the potential criminal abuses, and hence measures to restrict the use of digital money should be resisted. Without the availability of anonymous systems there will be strong resistance on the part of many individuals to fully move to e-payments systems and digital money. The existing efforts against money laundering, primarily by the US and major European governments, have not proven to be the least bit cost effective. For instance, in the US in 1998, only 932 people were convicted of money laundering, yet the cost to the private and public sectors of the anti-money laundering efforts exceeded 10 billion dollars, which comes out to more than 10 million dollars per conviction. The distinguished British law professor, Barry Rider, has calculated that "the British state has been able to take out 0.004 per cent of the criminal money that has flowed through London." There is no evidence that authorities in the US are having much more success. Money launderers do not have a statistically significant chance of being caught and losing the profits from their misdeeds, and hence the deterrent effect of such laws is negligible. Privacy advocates have also documented that the money laundering laws are very arbitrarily enforced in many countries, including the United States. Money laundering is a crime of motive, rather than one of specific activity, hence its enforcement, by the very nature of the crime, is highly subjective. This subjectivity leads to selective and politically biased enforcement. Because of the constant threat of the vagueness of the money laundering laws and regulations, constructive financial innovation has been retarded, particularly in the development of digital monies. The money laundering laws have propelled the US to adopt attitudes insensitive to foreign countriesâ rights to self-determination, and to violate the sovereignty of foreign states. The US tries to impose policies on foreign states and businesses that the US would never accept if the situation were reversed. The US and the European Union have no business telling smaller developing nations that they are involved in "harmful tax competition," or that they should abolish bank and corporate secrecy laws. Small nations have a need and a right to attract foreign capital, and it is perfectly legitimate for them to compete against harmful tax, regulatory, and privacy policies that bigger nations impose on their own citizens. Anti-money laundering legislation has not only proven to be ineffective and counterproductive, but greatly undermines the financial privacy rights of individuals. Such laws require widespread reporting on the financial activities of bank customers by bank employees to their governments, thus undermining the separation of business from law enforcement, and ultimately the financial privacy necessary for civil society. The fact is, the new technologies of various forms of encrypted e-payments will make the task of enforcing the money laundering laws even greater, unless governments are permitted a level of financial privacy intrusion that most civilized people will find unacceptable. However, widespread adoption of digital money will actually reduce the number of crimes most people care about, such as murders, thefts, and robberies. In 1998, there were approximately 18,000 murders in the US, and a substantial number involved people trying to take someone elseâs physical money. A move to digital money would reduce the murder, theft, and robbery rates. Stealing digital money is a much more complex undertaking than stealing paper currency, and will be beyond the capabilities of most common criminals. If there is no physical money to steal, the incentive for criminals to steal and kill people for money will be greatly reduced. Abolishing the anti-money laundering laws is likely to speed up the use of digital money, resulting in less total crime, and less wasted money by governments, even though it will make life slightly easier for money launderers. Eventually, knowledgeable people are likely to conclude that the "war on money laundering" is going to be no more successful than was liquor prohibition in the United States during the 1920s. It will become increasingly obvious that the resources utilized in the "war on money laundering" could be better spent attacking the underlying crimes. The knowledge of how to utilize high levels of encryption is now widespread. This knowledge, coupled with the Internet, smart cards, and related technology, ultimately means that it is almost futile to try to prohibit the hard-to-define crime of money laundering. Conclusion and Recommendations Digital payments and monetary systems are coming of age, and will replace most existing money and payments systems over the next couple of decades. These changes will bring enormous economic benefits in greatly increasing the efficiency and reducing the costs of our payments systems. In addition, the absence of paper currency and coin, which is readily subject to theft or loss, should greatly reduce crime. The US government has a choice of either embracing the new technologies and helping them along (mainly by getting out of the way), or taking a "Luddite" approach and attempting to restrict and deny the inevitable. A civil society depends on a government that does not unduly restrict liberty and economic opportunity. The following recommendations, I expect, will seem radical and frightening to those who do not understand the new technologies and where we are headed. However, I expect that those who do understand the new technologies, and desire a civil society that provides both privacy and economic opportunity, will see these recommendations as desirable and necessary. Recommendations Remove all restrictions on issuing digital bearer financial instruments, including stocks and bonds. Financial cryptographers have already figured out how to issue such instruments in cyberspace, and many feel that they do not need governmentâs permission. Rather than create a new class of cybercriminals, governments should recognize the reality, and do something that is both good for the economy and that supports civil liberties. Remove the capital gains tax from trading in commodities, in order to allow the full development of commodity backed digital currencies (like gold). The capital gains tax on commodities does not bring any revenue over the long run to government, given that losses and gains offset each other. In the real world it is probably a net loss for government since people will be more prone to report their losses rather than their gains, and it reduces the efficiency of the commodities markets. Remove all restrictions on anonymous digital money and payments systems. Restrictions are almost impossible to enforce, and privacy is a basic human right. Repeal the Bank Secrecy Act and the subsequent related anti-money laundering legislation. The existing legislation and implementation is not cost effective, is subject to abuse, interferes with basic civil liberties to an unacceptable degree, and actually results in higher levels of crime. Thank you Mr. Chairman. I would be pleased to answer any of your questions. | Index of Testimony | Cato Institute Library | Cato Institute Home | http://www.cato.org/testimony/ct-rr091900.htmlhttp://www.cato.org/testimony… --- end forwarded text -- ----------------- R. A. Hettinga <mailto: rah(a)ibuc.com> The Internet Bearer Underwriting Corporation <http://www.ibuc.com/> 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

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CDR: ADV: Search Engine Registration
by mike623＠asean-mail.com 21 Sep '00

21 Sep '00

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CDR: ADV: Search Engine Registration
by mike623＠asean-mail.com 21 Sep '00

21 Sep '00

Removal instructions below I saw your listing on the internet. I work for a company that specializes in getting clients web sites listed as close to the top of the major search engines as possible. Our fee is only $29.95 per month to submit your site at least twice a month to over 350 search engines and directories. To get started and put your web site in the fast lane, call our toll free number below. Mike Bender 888-532-8842 To be removed call: 888-800-6339 X1377

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CDR: ADV: Search Engine Registration
by mike623＠asean-mail.com 21 Sep '00

21 Sep '00

Removal instructions below I saw your listing on the internet. I work for a company that specializes in getting clients web sites listed as close to the top of the major search engines as possible. Our fee is only $29.95 per month to submit your site at least twice a month to over 350 search engines and directories. To get started and put your web site in the fast lane, call our toll free number below. Mike Bender 888-532-8842 To be removed call: 888-800-6339 X1377

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CDR: ADV: Search Engine Registration
by mike623＠asean-mail.com 21 Sep '00

21 Sep '00

Removal instructions below I saw your listing on the internet. I work for a company that specializes in getting clients web sites listed as close to the top of the major search engines as possible. Our fee is only $29.95 per month to submit your site at least twice a month to over 350 search engines and directories. To get started and put your web site in the fast lane, call our toll free number below. Mike Bender 888-532-8842 To be removed call: 888-800-6339 X1377

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CDR: ADV: Search Engine Registration
by mike623＠asean-mail.com 21 Sep '00

21 Sep '00

Removal instructions below I saw your listing on the internet. I work for a company that specializes in getting clients web sites listed as close to the top of the major search engines as possible. Our fee is only $29.95 per month to submit your site at least twice a month to over 350 search engines and directories. To get started and put your web site in the fast lane, call our toll free number below. Mike Bender 888-532-8842 To be removed call: 888-800-6339 X1377

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CDR: ADV: Search Engine Registration
by mike623＠asean-mail.com 21 Sep '00

21 Sep '00

Removal instructions below I saw your listing on the internet. I work for a company that specializes in getting clients web sites listed as close to the top of the major search engines as possible. Our fee is only $29.95 per month to submit your site at least twice a month to over 350 search engines and directories. To get started and put your web site in the fast lane, call our toll free number below. Mike Bender 888-532-8842 To be removed call: 888-800-6339 X1377

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ANNOUNCE: OpenSSL 0.9.6 beta 3 (Final beta)
by Richard Levitte 21 Sep '00

21 Sep '00

OpenSSL version 0.9.6 Beta 3 (Final beta) ========================================= OpenSSL - The Open Source toolkit for SSL/TLS http://www.openssl.org/ OpenSSL is currently in a release cycle. The second beta is now released. This beta is in fact two releases, one for the current mainstream OpenSSL, and one with an "engine" branch incorporated. The "engine" branch contains an interface to external crypto libraries, which is currently used to support the hardware devices CryptoSwift (by CryptoSwift Inc), Atalla (by Compaq) and CHIL (previously called HWCryptoHook, by nCipher) as well as the internal OpenSSL routines. The two beta releases are available for download via HTTP and FTP from the following master locations (the various FTP mirrors you can find under http://www.openssl.org/source/mirror.html) o http://www.openssl.org/source/ o ftp://ftp.openssl.org/source/ The file names of the two betas are: o openssl-0.9.6-beta2.tar.gz o openssl-engine-0.9.6-beta2.tar.gz Please download and test them as soon as possible. This new OpenSSL version incorporates 84 changes and bugfixes to the toolkit (for a complete list see http://www.openssl.org/source/exp/CHANGES) Changes that have been made since last beta are a lot in the documentation, in Win32-specific code and in VMS-specific code, and there has also been small changes that may affect everyone (for the better). Tests on Win32 and VMS need to be made very soon. Tests on other platforms should be made very soon as well, to verify that we haven't messed up since last beta. Also, new (non-default) targets for HP-UX have been added. Since they are non-default, they won't get chosen implicitely, so they are non-critical in nature, but it would be nice if they got tested as well, for future reference. Reports and patches should be sent to openssl-bugs(a)openssl.org. Discussions around the development of OpenSSL should be sent to openssl-dev(a)openssl.org. Anything else should go to openssl-users(a)openssl.org. The best way, at least on Unix, to create a report is to do the following after configuration: make report That will do a few basic checks of the compiler and bc, then build and run the tests. The result will appear on screen and in the file "testlog". Please read the report before sending it to us. There may be problems that we can't solve for you, like missing programs. Yours, The OpenSSL Project Team... Mark J. Cox Richard Levitte Andy Polyakov Ralf S. Engelschall Bodo Mvller Holger Reif Dr. Stephen Henson Ulf Mvller Geoff Thorpe Ben Laurie -- Richard Levitte levitte(a)openssl.org OpenSSL Project http://www.openssl.org/~levitte/ Software Engineer, Celo Communications: http://www.celocom.com/

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Brands' Book on PKI Just Published by MIT Press
by R. A. Hettinga 21 Sep '00

21 Sep '00

It looks like Dr. Stefan Brands' book, "Rethinking Public Key Infrastructures and Digital Certificates; Building in Privacy", with outstanding discussion of, among other things, ;-), internet bearer transactions, has gone through the mill at MIT press and come out the other side. If you couldn't get a copy of it when Stefan offered it as a self-published version of his doctoral thesis, now's the time to get it. Cheers, RAH --- begin forwarded text

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CDR: Re: was: And you thought Nazi agitprop was controversial?
by Gil Hamilton 21 Sep '00

21 Sep '00

Marcel Popescu writes: >From: "Trei, Peter" <ptrei(a)rsasecurity.com> > > > Imagine if the software business were like this - that the programmers > > of the late 40's had formed an American Programmers Association, > > and it was unlawful for anyone without APA certification to write > > code for money. > >Some people are trying to do this. See for example >http://www.colosseumbuilders.com/american.htm [I especially find the "no >foreign competition" (aka "no H1-B") disgusting. Tim May notwithstanding, >we >DO compete with the americans - and a lot of us are better.] What a hoot! Thanks for the pointer. I don't know who these bozos are, but their web site reads like the product of a bunch of high school dropouts. Guilds are of course dangerous and a bad idea, for a long list of reasons that we've been over on this list dozens of times. Fortunately, no one is likely to take these "programmers" seriously. As a long-time software designer and implementer, I can confidently say that anyone who believes there is no shortage of programmers either isn't a programmer himself or has let his skill set get way out of date. And no, I don't live or work anywhere near Silicon Valley either. (Apparently, these folks believe that it is the responsibility of their employers to train them - they really need to take charge of their own careers.) They, as well as the academics whose works they have links to, apparently believe that all those job postings in the papers and on web sites are a vast right wing conspiracy designed to allow the Evil Big Corporations to hire foreign programmers for peanuts thru the H-1B program. Mark, don't worry, the real programmers among us aren't afraid to compete (actually, right now, there's plenty of work for everyone who is competent so there's little need for real competetition). Fortunately, these losers are unlikely to be successful in their organizational and lobbying efforts. - GH _________________________________________________________________________ Get Your Private, Free E-mail from MSN Hotmail at http://www.hotmail.com. Share information about yourself, create your own public profile at http://profiles.msn.com.

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