----- Original Message ----- From: "Ian Grigg" <iang@systemics.com> To: "Hal Finney" <hal@finney.org> Cc: <cryptography@metzdowd.com>; <cypherpunks@al-qaeda.net>; <em@em.no-ip.com> Sent: Sunday, November 07, 2004 11:21 AM [Hal:]
Interesting. In the e-gold case, both parties have the same bank, e-gold ltd. The corresponding protocol would be for the buyer to instruct e-gold to set aside some money which would go to the seller once the seller supplied a certain receipt. That receipt would be an email return receipt showing that the seller had sent the buyer the content with hash so-and-so, using a cryptographic email return-receipt protocol.
This is to mix up banking and payment systems. Enzo's description shows banks doing banking - lending money on paper that eventually pays a rate of return. In contrast, in the DGC or digital gold currency world, the issuers of gold like e-gold are payment systems and not banks. The distinction is that a payment system does not issue credit.
Actually, seeing issuance and acceptance of L/C's only as a money-lending activity is not 100% accurate. "Letter of credit" is a misnomer: an L/C _may_ be used by the seller to obtain credit, but if the documents are "sent for collection" rather than "negotiated", the payment to the seller is delayed until the opening bank will have debited the buyer's account and remitted the due amount to the negotiating bank. To be precise: when the documents are submitted to the negotiating bank by the seller, the latter also draws under the terms of the L/C a "bill of exchange" to be accepted by the buyer; that instrument, just like any draft, may be either sent for collection or negotiated immediately, subject, of course, to final settlement. Also, depending on the agreements between the seller and his bank, the received L/C may be considered as collateral to get further allocation of credit, e.g. to open a "back-to-back L/C" to a seller of raw materials. However, if the documents and the draft are sent for collection, and no other extension of credit are obtained by the buyer, the only advantage of an L/C for the seller is the certainty of being paid by _his_ (negotiating) bank, which he trusts not to collude with the buyer to claim fictitious discrepancies between the actual documents submitted and what the L/C was requesting. (And even in case such discrepancies will turn out to be real, the opening bank will not surrender the Bill of Lading, and therefore the cargo, to the buyer until the latter will have accepted all the discrepancies: so in the worst case the cargo will remain under the seller's control, to be shipped back and/or sold to some other buyer. If it acted differently, the opening bank would go against the standard practice defined in the UCP ICC 500 (http://internet.ggu.edu/~emilian/PUBL500.htm) and its reputation would be badly damaged). So, the L/C mechanism, independently from allocation of credit, _does_ provide a way out of the dilemma "which one should come first, payment or delivery?"; and this is achieved by leveraging on the reputation of parties separately trusted by the endpoints of the transaction. Generally speaking, it is debatable whether "doing banking" only means "accepting deposits and providing credit" or also "handling payments for a fee": surely banks routinely do both, although they do not usually enjoy a _regulatory franchise_ on payments because failures in that field are not usually argued to be capable of snowballing into systemic failures. (Austrian economists argue that that's also the case with provision of credit, but it's a much more controversial issue). In the US, as we know, Greenspan's FED decided several years ago against heavy regulation of the payments business, and most industrialized countries chose to follow suit.
So, in the e-gold scenario, there would need to be similar third parties independent of the payment system to provide the credit moving in the reverse direction to the goods. In the end it would be much like Enzo's example, with a third party with the seller, a third party with the buyer, and one or two third parties who are dealing the physical goods. There have been some thoughts in the direction of credit creation in the gold community, but nothing of any sustainability has occurred as yet.
That would probably end up attracting unwelcome attention by the regulators. Besides, wouldn't that require some sort of fractional banking, resulting in a money supply multiple of the monetary base by an unstable multiplier, and ultimately bringing back the disadvantages of fiat currencies? Enzo