Electronic Banking

Timothy C. May tcmay at netcom.com
Wed Nov 25 14:23:18 PST 1992

Hal Finney makes some very good points about anonymous banking and
some experiments we may try in the near future.

(First let me dispose of a minor item.)

> Some time back Tim May suggested that we should do some experiments
> with electronic cash.  He offered to do some Xeroxing if people would
> "pay" him.

(A minor note: I ended up doing the Xeroxing for free, which hasn't
yet been declared illegal...though I presume you'll all carefully note
this on your tax returns, as such "barter exchanges" are reportable
income. In theory, which shows how hopeless tax collection is
becoming, all of our "mutual consulting" on this list, and on the Net
in general, is _taxable income_--just as if we were plumbers and carpenters
getting together to work on each other's houses. A crazy system.)

Back to the important stuff. Hal continues:

> There are lots of proposals for electronic cash in the literature,
> mostly very complex.  I think one of Chaum's simpler proposals would be
> adequate for email "banking".  This proposal, from the beginning of
> his paper "Untraceable Electronic Cash" in Crypto 88(?), goes like
> this:

(Hal's excellent summary of Chaum's system elided)

> Technically, this would be quite easy to implement, using the code in
> PGP for the arithmetic, and MD5 for the one-way function.  We'd need
> to define a few message formats.  The RFC1113 ascii encoding from PGP
> could be used as well.

This sounds great! (But I worry that the handful of you already doing
the programming of PGP, new versions, MacPGP, remailers, etc., will
get overloaded and/or burned out. I'd offer to help, but my
programming these days is limited to fiddling with Mathematica and a
little bit of Smalltalk and Scheme/LISP.)

> The "social" problems are more challenging, it seems to me.  What is
> the backing for this electronic money?  Why do people care what their
> bank balances are?  Is this stuff really worth anything?

And the lesson we learned from PGP 2.0 is that actually getting
_something_ out there for people to play around with is crucial.
Getting "PGDC" ("Pretty Good Digital Cash") in use will be a harder
sell than PGP deployment was, because most people don't understand the
ideas, see no real pressing need, and can't do much in any case
without an "economy" of users.

I've long thought that a "Black Market AMIX" would be one such use,
but I won't get into that here.

> One possibility is to base digital cash on real money.  People would
> open a pseudonymous account via email, then postal-mail dollars to the
> bank, enclosing their account number so the bank would know whom to
> credit with the deposit.  Later, if someone wanted to withdraw "real
> money" from their account they would have to give a real postal
> address where it could be mailed.  Now the electronic money is worth
> real dollars.  Even if people didn't deposit or withdraw very often,
> it still has value because of the backing.
> Unfortunately, this approach would currently be illegal (at least,
> unless you actually were a real bank!).  If there were some way the
> bank itself could be anonymous, it might survive, but I don't see how
> to mail it money while keeping the anonymity.  Still, we could
> consider experimenting with this on a small scale with accounts of no
> more than a few dollars.  As long as it was clearly an experiment I
> doubt that any prosecutions would result even if it attracted
> government attention, because the expense involved in court costs
> would be so disproportionate to the few dollars involved in this
> technically illegal act.

Warning! Recently, a bunch of bowlers (women, no less) were busted for
illegal gambling because of their "pot" they were bowling for. After
much public outcry and laughter at the authorities, the charges were
either dropped or reduced. I mention this because casual bowlers evoke
sympathy, hackers and cypherpunks do not.

> One problem that I see with this approach is how you determine the
> size of the money supply.  Or, in other words, how does new digital
> cash get started circulating?  How do people get new accounts, and how
> much money is in them?

We're in new territory here. The start of a new kind of economy. Lots
of experimentation and trial and error work will be needed.

> If these problems can be solved, a big advantage of this approach is
> that the banker can be anonymous.  He would be known only by his
> anonymous address and his public key(s).  This would provide some
> safety in the event that even a small-scale experiment like this
> was targetted for a crackdown.

Yes. And also anonymous "escrow services" which are like banks but
which serve other functions, such as holding the money in a
transaction so that Alice cannot take the money from Bob and refuse to
deliver on her side of the deal.

All of these entities must be "pseudonymous" (a clumsy word), in that
digital pseudonyms are supported (a la the work of Hughes, Finney, and
Janek Martinson) and True Names cannot be traced.

> Another issue is the prospect of multiple "banks", each issuing their
> own (incompatible) cash.  How would they compete?  Perhaps in terms of
> rapid turnaround?  Some might choose to be anonymous, others would go
> public.  The latter would have the advantage that people might trust
> them more, but OTOH there is more chance of your bank account
> disappearing after a crackdown for a public bank than an anonymous
> one.

Banks, escrow services, etc. will all have "reputations" and credit
ratings (from crypto versions of Standard and Poors, themselves
operating only as a pseudonym!). All of this will evolve over time.

> Lots to think about here!
> Hal

That's for sure. Incredibly good points being made by everyone!


Timothy C. May         | Crypto Anarchy: encryption, digital money,  
tcmay at netcom.com       | anonymous networks, digital pseudonyms, zero
408-688-5409           | knowledge, reputations, information markets, 
W.A.S.T.E.: Aptos, CA  | black markets, collapse of governments.
Higher Power: 2^756839 | PGP Public Key: by arrangement.

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