What backs up digital money?

[Hal]

From: jeff at BlackMagic.Com (Jeff)
> 
>   Regarding "What backs up digital currency/cash", a hypothetical situation
>   just to see what you guys think.  Can this happen ?  I honestly have my
>   doubts, mostly I see logistical problems (finding a mechanism, etc, if
>   you recall my mini-rant just a few days ago).  Anyway, these are some of
>   the things I honestly feel would have to happen for a true Internetwork
>   currency to take off, if that's even possible.
> [Lots of examples of tokens issued by various businesses and other groups]

I think this is an interesting idea, and no doubt will happen in some
form.  Coupons and other special tokens could be issued electronically.
But there are limits to how far it is likely to go, since these tokens
are competing with ordinary cash-backed tokens (digital cash).  It's like
today, maybe you could buy something at the swap meet using a handful of
50-cents-off toilet paper coupons, if the seller was agreeable.  But this
becomes in essence a barter trade.  Why do this, if the cash alternative
is much more widely accepted?

Another factor that arises is that if some token does catch on and
circulate widely, it could be subject to regulation.  I understand that
in Las Vegas, some people started using casino chips as money.  You
could buy things with them, and they were accepted since people knew
they could be turned in for cash at the casino.  But the Feds cracked
down and brought the practice to a halt.  (I will ignore for now the
question of whether such a crackdown could work on the net, but it would
at least be a barrier to the acceptance of such tokens.)

The idea of your "market square" token, which represents a basket of
other tokens, is interesting, but it seems like you're basically
re-inventing money.  I don't quite understand the specifics of your
proposal, where the market square token is based on the "market value" of
the other tokens.  In what units is this market value expressed?  It
seemed like what you had instead was a set of relative prices, where each
token was worth a certain number of each other kind.  I don't see how you
can get a unique market value for each token out of that system.  It
doesn't seem like the relative value idea really works, anyway, as it
suffers from the barter problem that there will be too few people who
want to trade their shoe tokens for fruit tokens.  That was what
motivated the transition from barter to money in the first place, or so
the story goes.

If your overall point is that even without digital cash, we would end
up with some form of electronic money eventually anyway, I think it is
true.  Entrepreneuers abhor a vacuum, and if the need is there it will
be met.  But the fact is that we are likely to have digital cash before
all these other things, so I don't really see the whole scenario coming
to pass.  I do think a lot of your specific applications are
interesting, though, and hopefully there will be many more creative
uses of this technology.  I know Eric Hughes a while back was talking
about a way for players to transfer wealth between MUD games using a
token based system.  There are a lot of game possibilites.

Hal