What backs up digital money?

[FRank O. Trotter, III]

Quite a time to go on vacation and have the power supply to my laptop
first show wires then break!  A great series of rants about the
backing of ecash, and I missed most of it (at least in real time).  I'll add 
a few of my thoughts and see if it all goes any further.

Ecash is a means of transferring value, currently USD at Mark Twain,
betweeen parties.  Ecash, however denominated, is not a currency in
itself.

Any "currency" or other "value units", be it USD, DEM, gold, silver,
coupons, etc can be transferred by the ecash system.  The Mint
licensee must agree and then issue the units.  This is, after all,
software.

The value unit or currency has value because people agree it has
value.  CyberBucks were (and still are) somewhat convertable to
tangible goods - they are for sure convertable to intrinsic goods as
demonstrated by the CyberBucks trial.  USD and DEM have value only
because we all accept them as payment - as fiat currencies there is no
formal backing.  Gold has value because ...

One of the keys in any system is that users feel comfortable about the
future value of the units or currency, be the units a national
currency, a commodity, or a coupon.  There are two components to this:
 
1)  The user must believe that they will receive the units back from
      someone at a later date - this is plain old fashion credit risk.  For
      example if  I am running an ecash system with gold then you have to
      believe that I will give you gold upon request - same for USD and this
      is why banks for the time being should be the primary issuer to avoid
      a general credit risk.  If users are unsure or unable to determine if
      the Mint operator will return the nominal value of the units then
      there is not enough confidence to run a system.  Consider pre-FDIC
      days in US banking.

2)  The user must believe that the units will have a value in the
      future.  We can agree that FOT Units are each worth US$1.0 million
      today, but how will their value be determined tomorrow?  Non-national
      currency, however attractive from a theoretical standpoint is weak
      under this guideline.  

I am a strong believer that ecash will support many national
currencies, commodity based implementations such as gold and silver,
as well as coupons and commercial equivalents.  Use of ecash for
payments will depend only on the creative uses presented by someone
willing to sell at a profit a product that attracts customers.

There is likely some point where a non-national currency will become
attractive first to the internet community, then to the public at
large.  If done with low credit risk it can survive.  You should
consider that  two of the key elements to determine value are
precisely known in ecash and not in circulating money - money supply
and velocity.  One now has only to consider other factors like
purchasing power to obtain a base value.

Ecash puts banks back into the business of being banks - acting as a
storehouse of value, and as a means to transfer this value, all for a
fee.  The early bank models were exclusively along these lines, with
the various lending and investing functions added later.

All for now, a start anyway.

FOT
Disclaimer - Personal not corporate thoughts.
Frank O. Trotter, III  -   fotiii at crl.com
www.marktwain.com  - Fax: +1 314 569-4906
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