Perry Metzger says,
Its fairly easy to envision a system that directly matches orders for shares in IBM. Trying to match up buyers and sellers of swaps might not be that easy.
Agreed. I do want to talk my buddy about derivatives, however, because he seems to think that there are ways that e$ protocols could help. Of course, he didn't tell me in any way I could understand... I think it had to do with the authentication of e$ instruments, proving you are who you say you are and you have what you say you have. A WAG: Maybe zero-knowlege stuff has something to do with this? However, like you say it's easy to see how IBM could issue its own shares directly into a geodesic market; maybe even a company could do it's own IPO, with the right rules... When you think about it that way, an investment banker could "sign" an issue (for a fee...), to vouch for it. After all, using that kind of "protocol" on large well established companies is what kept Morgan partners in wood walls and leather wing-back chairs from the time of Glass-Stegall all the way up until the early 70's. In the IPO markets, that's what Hambrecht & Quist does (did? ;-)). The technology changes, but the practice would be the same in a geodesic market. I mean, there's the risk of underwriting the security, but that's pretty much nonexistant these days anyway, and with some modification of the shelf registration idea, a company could "underwrite" it's own offering. Of course when you're underwriting yourself, the term "underwriting" ceases to have meaning, really.
In the foreign exchange market, for instance, most trading is done on blocks of millions to hundreds of millions of dollars worth of currency. In the current scheme of things people will only deal with entities that they know because fails are devistating. It is possible for third parties to guarantee credit to open up markets, but they will expect to be paid for this. You can't get rid of the banks -- someone has to guarantee that you have the money on hand.
It seems to me that the issue of capital concentration could be taken care of by the mutual fund analog I used before, the portfolio manager in Marblehead with an e-cash / fund "certificate" exchanger. The restriction of transaction size in the markets is still there, though it might be that the economies of scale would diminish a bit, reducing that required transaction size... The whole idea of avoiding trusted entities is what the DigiCash algorithm is about, right? e$ itself in proper form is proof it is what it says it is. Just like it's possible to spot counterfeit money. It's a pointer to some other stuff, but it can be moved around much better than the stuff it's denominated in, or the market wouldn't create that particular form of e$.
...no matter what you hold, be it dollars, shares of IBM, or futures contracts for dried silkworm cocoons (a perfectly real commodity, by the way) you need a bank to hold the account and guarantee the existance of the thing being held, be it a figment of the computer's memory or a thing backed by a bar of gold. The banks will expect to be paid for this service. Try imagining a digital cash algorithm that DOESN'T involve a bank, and you will swiftly see that there is a small problem involved...
I'm not entirely sure we disagree, Perry. e$ protocols are just pointers (with teeth) to the actual stuff being traded. e$ (cash, mutual fund shares, cocoon futures) has to be issued by somebody and it has to be convertable into something else to be of any use at all. To take one business model that we've pretty much killed, it's easy to see how someone could plug the ATM network into one end of a DigiCash server, and pay out DigiCash to customers on the internet, using encrypted card swipes and PIN numbers for authorization. Banks are necessary in that scenario, because the money the digicash was issued for has to be held in a bank by the issuer, whoever that may be ;-)... Or maybe the issuer buys t-bills (safely) and keeps the interest. Maybe the issuer charges a nominal transaction fee for the conversion from one side of the gateway to another. The money doesn't just disappear or get created. Only governments (or lending institutions) get to do that (both ways, in the case of Uncle Sam).
This is not to say that transaction costs can't be radically reduced, and the role of intermediation in fully fungible goods reduced. However, transaction costs will not go to zero, and banks will not disappear.
Yes. There will still be a need for *some* demand deposits. There will be a need for *some* brokerage accounts. The timescale is certainly nebulous here. But I think that like most successful new technology a superset of the old capital market structure gets created. We still walk, but we fly too. Cheers, Bob ----------------- Robert Hettinga (rah@shipwright.com) "There is no difference between someone Shipwright Development Corporation who eats too little and sees Heaven and 44 Farquhar Street someone who drinks too much and sees Boston, MA 02331 USA snakes." -- Bertrand Russell (617) 323-7923