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Date: Tue, 3 Jan 2006 12:44:40 -0500
To: Philodox Clips List
From: "R. A. Hettinga"
Subject: Money Ain't What It Used To Be
http://www.businessweek.com/magazine/content/06_02/b3966101.htm
Business Week
JANUARY 9, 2006 * Editions: N. America | Europe | Asia | Edition Preference
INVESTIGATIVE REPORT
Money Ain't What It Used To Be
However the complicated tale of e-gold Ltd. plays out, it and a few of its
rivals have already reached a milestone: For the first time, stand-alone
digital currencies have real customers, even if some of those customers may
engage in illicit activities.
That's big news, since until recently digital money has been a failure. The
idea of replacing paper money -- messy and expensive -- with its electronic
equivalent seemed immensely logical in the mid-1990s, as the Internet took
off. "Digital money is the ultimate -- and inevitable -- medium of exchange
for an increasingly wired world," intoned a June, 1995, Cover Story in
BusinessWeek (MHP ) entitled "The Future of Money." Congressional hearings
with the same title soon followed, and Citicorp patented a proprietary
version of digital cash. "I think money is about to remake itself," former
Citicorp CEO Walter B. Wriston told Wired magazine in 1996.
At the time, experts feared that privately issued digital money,
untraceable and not controlled by central banks, would facilitate money
laundering and tax evasion. They also worried that digital money, on a big
enough scale, could undermine central banks' ability to steer economies by
setting monetary policy. Government officials sounded desperate to stop the
threat. "We are nowhere near the issue of regulating it," Stanley E.
Morris, then the director of the Treasury Dept.'s Financial Crimes
Enforcement Network, told BusinessWeek in 1995. "We're one step back."
Well, it turned out that the regulators had plenty of time to catch up.
DigiCash, the most innovative and best-publicized digital cash scheme,
sought bankruptcy protection in 1998. CyberCash, a competitor, followed
that route in 2001, the same year Beenz and Flooz, two rivals, closed their
doors and left holders of their currencies high and dry. "Technologists
thought that notes and coins would disappear," says David G.W. Birch, a
director of Consult Hyperion, a British consulting firm that runs an annual
conference on digital money. "But money is a very conservative technology."
For the past ten years, digital cash has been a solution in search of a
problem. Credit cards do just fine for most online transactions, especially
since consumers have good legal protection against fraud and mistakes. By
contrast, "we don't have the same kind of protection in place for the new
forms of payment," says Anita Ramasastry, associate professor at the
University of Washington Law School and an expert on laws governing digital
money.
That's why the apparent success of e-gold (and rivals like GoldMoney) in
attracting customers is so striking. Besides the anonymity -- which
previous digital money systems also offered -- the link with gold seems to
provide enough solidity to overcome the potential dangers of putting your
assets into a private currency. A gold-based banking system, which is what
e-gold really is, appeals to people who fret about inflation and exchange
rate fluctuations and don't trust the paper currencies central banks issue.
Still, even if digital currencies survive the e-gold controversy, they will
never be a serious challenger to credit and debit cards. No one's going to
buy a newspaper with e-gold. The best bet for small retail purchases in the
future is either a smart card, like the Octopus Card issued by Hong Kong's
mass transit system, or a payment capability built right into cell phones,
like the Edy system in use in Japan. These systems, tied closely to
respectable institutions, don't provoke the same worries as a stand-alone
private currency like e-gold.
But a successful digital currency again raises the issues that regulators
fretted over a decade ago, especially now that the world is far more
tightly networked. The future of money is not here yet, but it may be a lot
closer than you think.
By Michael Mandel in New York
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R. A. Hettinga
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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R. A. Hettinga
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'