We are seeing huge changes in the large hierarchical institutions we once took for granted. Our networks, and therefore our social structures, are collapsing from hierarchies to geodesics because the plummeting prices of semiconductor switching makes it possible to connect every node to every other. It's hard to see just how pervasive and amazing this is until you look at some of the most mundane human institutions and watch them dissipate into little bits. Look, for example, at the seemingly staid world of financial operations.
The original building blocks of modern finance were bearer securities, printed on paper certificates centuries ago and traded at specific places like the old buttonwood tree on Wall Street in New York. Possession was 100 percent of the law with bearer certificates. Show a certificate, and, as its bearer, you were entitled to whatever the certificate said you could have: debt payments (if a bond), equity voting (if a stock), or some contingent claim (if a derivative like an option or a futures contract).
We used bearer certificates in this country until they were abolished in the early 1980s. The slow decline of bearer certificates occurred first of all because book-entry settlement technology was invented. In book-entry settlement, one certificate signifying an entire stock or bond issue is locked up in a stock exchange's clearinghouse, and securities are "traded" by offsetting accounting entries at the buyer, seller, and a clearinghouse. This gained popularity as certificates became cheaper to handle when stored in a vault somewhere, and the introduction of computers made the scheme practical.
Secondly, the IRS found out how easy it is to subpoena records in this automated environment. The result was transaction taxes of all kinds: everything from sales and income to capital gains. To make transaction taxes work, you need audit trails, which book-entry settlement has in spades. You also need strong biometric identity: signatures, pictures, and fingerprints. Now you can send miscreants to jail if they change the wrong number somewhere. This is why, despite their kvetching about taxes and regulations, the securities markets let Uncle Sam do what he wants. If Uncle gets his cut, the finance community doesn't have to spend so much money enforcing its agreements in the market.
Nonetheless, there is good news here, in the form of the computers that allowed the creation of book-entry securities in the first place. When there are enough of them on a network, these computers allow the creation of digital bearer certificates.
David Chaum's digital cash system, called ecash, is the first cryptographic implementation of digital bearer certificates. These certificates allow buyers and sellers to conduct business anywhere the Internet goes, without having to guard the numbers in an accounting database somewhere. Like paper certificates, you don't care who sold you the certificate, as long as their reputation's good. The certificate speaks for itself, so the trade doesn't break. This saves money. It's the difference between running a small business out of your wallet and hiring an accounting firm to do your books.
Digital bearer certificates could work for an amazing range of financial activity, from paying micromoney tolls for switching an Internet packet through a router (using something like Adi Shamir's Micromint protocol) to a bond syndicate for a macroengineering project, using large-denomination versions of Chaum's ecash.
Because they rely on strong cryptography, digital bearer certificates could make income and other transaction taxes an optional exercise. That, in turn, could bring about the cherished dream of cypherpunks: relegating nation-states to the ceremonial status of modern monarchies.
Combine digital bearer certificates with increasingly geodesic networks, and you get anonymous point-to-point trading of any kind of capital, with instantaneous clearing and cash settlement. Exactly the way it happened in front of a buttonwood tree on Wall Street 200 years ago. Only it won't be at a specific location; it'll be everywhere, all at once.
- Robert Hettinga (rah@shipwright.com) is a digital commerce consultant and moderator of the Digital Commerce Society of Boston.
