From: tcmay@netcom.com (Timothy C. May) For example, I tend toward Amanda's point of view, that credit cards "quack like a duck." I don't think I can stress the following enough, but understanding the following principle is necessary (not convenient, or helpful, or replaceable) to understand how payment systems work: ** The most important thing about a transaction system is not how it ** works a transaction succeeds, but what happens when it fails. Failure properties are more important than financial properties. The the expectations about float, rates of interest, time to clear and settle, etc. are all meaningless if the failure properties don't create a robust system. Anyone at all can design a transaction system which works for successful transactions, but designing for failure is enormously and surprisingly difficult. For example, here's a transaction system that works only when there are no failures. Everyone memorizes the amount of money they have. When two people do a transaction, one persons increases their money by the same amount that another person decreases theirs. Now obviously this system doesn't work. But the reason it doesn't work is because of failures -- increasing balances between transactions the obvious one. Note that if all the implicit constraints are met the naive system above does actually work. Let me be blunt. Most transaction systems people run by me show the same naivete as those who design ciphers for the first time. These naive systems just won't work, and those that propose them just haven't thought through the issues, and usually have been ignorantly unaware that there are any. "Why can't you just ..." is, unfortunately, most often said in mock ignorance rather than humility. I should note, though, that almost all these systems _do_ work reasonably well under simple failures. That means that they could be deployed, but that they won't scale to many users. Thus while they might be suitable for a club like the hypothetical Hacker Privacy League (which cypherpunks is _not_), they aren't suitable for universal use. As a primer and milestone, I'll make the bald assertion that bankruptcy of the financial institution is one of the most important failure modes to consider. The argument that this almost never happens is made only by those who haven't estimated the cost of this failure more. Once you have a good appreciation about bankruptcy and payment systems, you'll be well on your way to having the mental framework necessary for dealing with the issues. I don't intend to lecture on this list about these issues. These are extremely arcane yet important details, and I hope to derive part of my livelihood from them. When I make a purchase with my credit card, and the thing clears, both the merchant and I act as if we've just exchanged money. To take this particular example, what happens if it doesn't clear? Is this different that, say, with a check or with cash? Anyway, there are many forms of "money," with many things that make the forms "money-like." A "means of payment" is only one of the functions of "money". It is useful to keep this clear. Eric

Eric Hughes says:

Negotiable means something else entirely. A negotiable instrument is an instrument that can be transferred with certain protections over and above the transfer of a normal contractual obligations. The requisites for negotiability are, basically, those that make the instrument suitable for sale in a secondary market. The instrument must be in writing (not oral). It must be signed. It must contain an unconditional promise or an order for a particular sum of money and must contain to other promises, orders, etc. It must be payable to order or to bearer. The exact details may be found in your standard commercial paper review guide.

It must be for a sum certain in money, payable on a date certain. It must state the place and person (note -- not necessarily a natural person) to whom the money must be delivered. Typical notes contain other conditions, but those are the keys. Checks, promisary notes, bank notes (which most of us have never seen in our lifetimes) and many other similar instruments are all considered "commercial paper" and are similar in form. (Checks are interesting in so far as they are an order to the bank to pay at its premises to the named party, whereas many notes state that the signatory must pay to the holder at his premises on a particular time and place. However, such subtleties aren't particularly important for our purposes.) The fascinating thing about the rules for commercial paper, by the way, is that they come from the Law Merchant, which was developed at medieval trade fairs in merchant courts that had no connection with any government entity and no overt powers of enforcement... Perry