Security Notes

The Coming Challenge of ‘Tethered’ Money

Gideon Samid – Gideon@AGSgo.com

When Alice pays Bob $10 using any of the payment systems discussed and analyzed in this magazine, what really happens? Is there a flow of currency in the electronic veins of the payment system? No! What “flows” from Alice to Bob is a software instruction that increments Bob’s account by $10, while another software instruction decrements Alice’s account by the same amount.

And since there is no money flow, there is no money to “tether.” That is, once the transaction is completed, Alice loses any and all control over how the money will be spent. If Alice paid Bob for some merchandise she bought from him, she should have no say as to what Bob does with his money. However, if Alice paid the money as charity, a welfare check, a grant, or a contribution of some sort, then she has every right to ensure that the payment is used for its intended purpose.

Economists tell me that the share of so-called unearned money transactions in our society is on the rise, and with it the toll of waste, fraud and abuse, all because electronic money does not support tethering payments to their intended purpose.

When I first became fascinated by the challenge of cryptographic money, I went along with the common wisdom that identified “anonymity” as the motivation for this invention: allowing people to purchase online with a cash equivalent. It was a lightning-bolt epiphany when I realized that we need a crypto-currency to implement tethered money, that is, money that flows in the electronic veins of the various banking and payment systems and remains tied to its intended purpose.

It would be pointless to steal tethered money, because it would melt in the hands of the thief. A corrupt custodian of the money would not be able to shift it to an untoward purpose, because the cryptographic coin will not fit any other “slot” than the one it was minted for.

My first attempt at crypto payment systems was with a bank in the Southwest. It never took off because the U.S. Department of Justice was concerned that crypto currency would offer a haven for money laundering and terrorism. I’m encouraged, though, that our new version of crypto payments, BitMint, can get currency lawyers excited. What a makeover for a craft that just yesterday was an obscure tool of spooks and spies.

How does it work? Imagine that I lock a $10 note in a box and give you the key to that box. This amounts to me paying you $10, right? Now suppose the box has a combination lock, so the key is the combination sequence. I can now encrypt the key and pass it on through many intermediaries, but only you will be able to decrypt it and use the combination to get the money from the box.

Soon enough, you will be too lazy to go to the box, so you will re-encrypt the box-opening combination and send it to Alice as payment. For Alice too, it would be easier to re-encrypt the opening combination when she wishes to pay $10 to Bob. And, lo and behold, the electronic money rivers are flooded with money tethered to its intended use. The very act of payment will no longer be an exchange of software commands, but the flow of a digital entity. This entity will conclude the march of currency from barter through metal weights to minted coins to printed banknotes and now to BitMint.

I am looking for people with the imagination to foresee the changes that are about to happen as money transforms into bits. The bad guys, the thieves, the criminals, the fraudsters, will not sit idly by. They will think of something. We should out-think them!

The full spectrum of financial institutions will have to adapt to the digital-money reality. It would be the first time that money is not defined over a material medium, not even paper! Money could, chameleon-like, change medium at ease. You could print your own dollar bills using, say, a readable barcode. You could synthesize chemical money (a side project we are busy developing). You could store your entire wealth on your phone. And, as with travelers’ checks, if it’s lost or stolen, you void it, and ask BitMint to re-mint the same amount!

What does it mean for the banks of the future? If you have the imagination to chart this reality, please talk to me!