Why banks are necessary

Money implies movement. If everyone kept their funds under the mattress, always, the concept would be dead. For money to move, trusted parties are required. Cash, checks, credit cards, the tokens by which we fund our commerce, are all supported by the banking system-- they provide the trusted settlement necessary for money to move, for money to actually work. Retail banks do many things, but fundamentally they are about two things: deposits/lending and payments/settlement. Payments and settlement are so fundamental as to be nearly unacknowledged, but this service provided by the banks (and their bank, the Fed), is the backbone of money.

Settlenet. Anonymity doesn't mean 'no responsibility'

A hallmark of the Settlenet system is anonymity between parties exchanging funds. What's this about? Simply, it means that the act of paying does not imply, ipso facto, a transfer of anything other than money. The means of preserving anonymity is the proxy method of validation. When you want to buy something, your bank steps in to do the transaction, interacting via a Settlenet Hub Server with the other party's bank. You don't know the other party (unless they publish it to you) and they don't know you. Settlenet escrows the transaction, ensuring that you get what you clicked to buy, and the vendor gets his money. Unless you tell the vendor who you are (and there are sometimes good reasons to do this), they will only know that a payment has been made.

Responsibility: since you have a relationship with your bank and they are proxying you, you risk losing your banking privileges if you abuse the anonymity aspect of the system. Example: Getting a piece of content and then denying you ever received it, requesting a refund. Anonymity as a fundamental quality of online payments is a return to the freedom of cash-- buying a carton of milk at the corner store never required an information relationship between you and 7-11, for instance. It can be posited that a chill effect contaminates all Internet commerce as long as personal identity and more (credit card info, social security #) are required to complete a transaction.

The Future of Money, Part III: Medium of Exchange

Medium of Exchange, Definition: A document used to convey value uniformly and discretely between one party and another. In order to be effective, a government or other large trusted institution must back the document. In the Internet Age, this document is vestigial. We know what a dollar is, what it represents in buying power, and we are comfortable carrying this idea forward into cyberspace. But the polity in this new age may press for meta-government backing, as seen in the Euro, and a new idea of medium of exchange, one that is purely digital, is bound to emerge.

Data at rest

Is personal financial data secure on the Internet? No, it isn't. Even though most sites that take your credit card info are https-encrypted/authenticated, once your data is in the merchant's hands it lives on, and is subject to hack, crack or simply someone in the company copying it and selling it. Now, there is a whole "best practices" regime from the CardCos called PCI that attempts to motivate merchants to keep everything screwed down tight. But with millions and millions of merchants large and small, enforcement and compliance is decidedly mixed. This is the dirty little secret behind Visa's recent public offering. The main thrust of the deal was to get the previous owners, the banks, out from under the responsibility and risk of data-at-rest, which has grown by orders of magnitude in the past decade.

The Future of Money, Part II: Representing Value

The Bill of Exchange was an innovation that created a boom in thirteenth and fourteenth century Europe and led to our modern concept of money. Essentially a contract representing the value of a deal, with an obligation to pay, bills of exchange could travel quickly and safely between market regions. Because they were issued and honored by merchant houses of good reputation they could be traded and transferred with confidence. Emergent trust in this system-- a receiver believed that holding a document was (nearly) the equivalent of holding gold, represented an evolutionary step in human consciousness. Without the landmark development and acceptance of the Bill of Exchange, the world economy, its fluid nature based upon credit, leverage, speed and persistence, undergirded by trust, could not exist.

Visa IPO: what I said. NY Times concurs.

Floyd Norris in today's New York Times lays it out precisely:

Visa: Bailing Out The Banks

February 25, 2008, 1:56 pm

Visa plans to go publc this spring, and the prospectus filed today indicates that it will get $15.6 billion (after deducting about $481 million in underwriting fees) from the offering if it is sold at $39.50 a share, the mid-point of its offering range.

Of that money, how much do you think will stay in Visa to help the company grow?

In round numbers, zero.

This offering is evidently intended to serve two purposes. First, to bail out the banks that now own Visa from the financial responsibility of antitrust violations involved in Visa’s effort to keep its member banks from offering American Express or Discover cards. The first $3 billion raised goes into an escrow account to pay damages.

The second purpose is to get cash to banks that may need additional capital, which is to say a lot of banks. Essentially all the remaining cash from the offering will end up with the banks, from repurchasing stock from them. The banks can use the extra capital.

Full post here.

Visa Shields the Banks with IPO

The Visa IPO has been in the works for two years; in March they will finally offer shares to the public. The New York Times reports that Visa expects to raise $17bn from the market. That would be about 6x more than MasterCard's 2006 IPO. What is Visa going to do with the money? Nothing. The net proceeds are being distributed in their entirety to the member-owners of Visa, the banks. The purpose of this IPO is two-fold. Visa is a mature operation and the time to harvest profits is (arguably) now. Growth has nearly flatlined, and the possibility of contraction sometime in the near future is real. Perhaps more importantly, Visa has a security exposure problem. The millions of credit card numbers that have been pumped out to ecommerce sites, from Amazon to iTunes to Fred's T-Shirt's are an ongoing cost problem Visa. This is because it is all too easy to hack into or otherwise steal this information. Visa has from the start continuously self-insured against fraud and default, but the cost is getting too high. If a wave of security-breach lawsuits washes over Visa in the coming years, the banks, now holding less than a 50% stake in Visa, cannot be held responsible. Make sense. For the banks.

Monetor- getting with the metaphor

grgwr-monitor
Originally uploaded by grgwr

Gregoire Vion, a talented graphic designer with an elegant office on a houseboat in the Emeryville Marina, designed this critter for one of Settlenet's proof-of-concept presentations.

The Future of Money, Part 1a: Paul Krugman makes our point

Trust. Without it, money (or its doppelganger, credit) fails. Paul Krugman writes in The New York Times today about a Crisis of Faith. He cites the contagion that has spread from the subprime mortgage and securities markets into far corners of the economy. He lowers the boom in a passage that is devastating in it's blunt implications:

"More important, however, is the way the ever-widening financial crisis has shaken investors’ faith in the whole system. People no longer trust assurances that fancy financial instruments will function the way they’re supposed to — after all, they know what happened to people who thought their subprime-backed securities were safe, AAA-rated investments. Why, then, should they believe that auction-rate securities are as good as cash? And loss of trust can be a self-fulfilling prophecy. Now that new investors won’t buy auction-rate securities because they no longer believe that they’re as good as cash, those securities become a much worse investment."
       

This is not trivial. If investors doubt the soundness of an instrument, no matter its reliability in the past, they will refrain from investing. Think about that.

Kevin Kelly specs Top Down to improve Bottom Up

KK writes of the need to insert top down editorial control into the bottom up of the emerging hive mind, here. I disagreed. Read my response.

Google thinking big with GPay

A Gpay Payment Screen
Originally uploaded by bragadocchioThis illustration is from a Google patent application filed in August, 2007. Apparently a stored-value account that leverages sms/texting as the messaging format for generating payment instructions.

The Future of Money. Part I.

What is money? We use the word money with confidence; of course we know what it means. What’s it mean, then? Well, it’s that greenback paper we carry in our pocketbook. Right? It’s the number we see in the bottom right of our bank statement. Isn’t it? It’s what comes out of the slot machine when we pull three cherries, yes?

Yes, it is. The reason that those things can be called money is that we all agree that they are instances of money. General agreement about how to represent and transmit value is the foundation of the money system. We trust that everyone, at least everyone we are likely to interact with, will abide by the same understanding of what money is and how it works.

So agreement, mutual trust, is the very essence of money. The actual rules and details we accept as part of the agreement are not important, really. They are temporal. When the rules need to change, as long as the majority goes along, they change. The important thing is that we all accept and believe in the system.

The next important feature of money is that it is persistent. It works 100% of the time. Yes, it does. Do you doubt that the $20 bill on your dresser will buy your lunch today as you dash off to work? It works every time, because the cashier at the deli knows with absolute certainty that she can transmit that bill into the deli’s bank account, where it can in turn be used for the financial needs of the business.

Now, wait just a second you say! What if the cashier has reason to doubt? What if there is massive inflation, like in South America in the 1970s, or Germany in the 1920s? People didn’t want paper money because its value declined faster than they could turn around and get rid of it. If that were to happen, that $20 might not work at that deli.

Exactly. When trust fails, the money system falls apart. There is absolutely no permanent value in a dollar bill, or your travelers checks or postage stamps for that matter; it only exists as long as the community believes it is there. Call it consensual hallucination. And this is a very useful thing for the community, because it enables a lot of things to happen quickly. As we go about conducting the business of our local, regional, national and international economies, we don’t stop and renegotiate the idea of money every time there is a transaction. It’s understood, and commerce flows.

Money is a system where value can be represented and transmitted in a consistent way. Communal belief in the system is the foundation that supports continuity.

Calling Technorati...

Technorati Profile

Grails 1.0 is here

The Grails 1.0 open source Web application development framework was announced this week by G2One and the Grails development team. Download here. Leveraging APIs from Spring, Hibernate and SiteMesh, Grails is a Convention-over-Configuration breakthrough for Java developers.

"What we're trying to achieve is really to fundamentally simplify Java EE [Enterprise Edition] development," said Graeme Rocher, creator of the Grails project and CTO at G2One.

From Paul Krill, writing in The Industry Standard, Feb 05 '08:

Used mainly for Web applications and available previously in point releases, Grails also can be used for desktop applications and Web tiers. AJAX (Asynchronous JavaScript and XML) support is built in through a prototype library, Rocher said. Plug-ins enable Grails to work with technologies such as Adobe Flex, Google Web Toolkit, and the Yahoo UI library. The 1.0 version has been in the making for two years and eight months. New features including an ORM DSL (Object Relational Mapping Domain Specific Language) for advanced mappings, support for easy-to-use filters, and content negotiation. REST (Representational State Transfer) also is leveraged, as is JNDI (Java Naming and Directory Interface).

ORM DSL allows Grails to support legacy databases in applications. "Essentially, it's a declarative way to say that this object maps on to these tables," Rocher said.

Filters apply cross-cutting behaviors to Web applications to apply capabilities such as security, tracing, and logging. With REST support, Grails allows for existing Web objects to be converted to XML or JSON (JavaScript Object Notation), with tasks being automated. With JNDI, Grails provides the ability through Spring to look up existing programming objects such as a data source.

The Grails project receives 5,000 to 10,000 downloads per month, Rocher said.

Advertising, Subscription or Pay-as-you-go

How content generates money on the Internet is still an open question. Three models have been tried and as yet there is no clear winner. Advertising, i.e. supporting a website through ad revenue (and not through the sale of content) came on strong around 1998 in the form of banner ads, but crashed heavily in the dot-bomb era of late 2000. That was when the hype was all about capturing eyeballs. Now it's back in a more sophisticated and efficient form: Google AdSense/AdWords, and to some extent Flash gatekeeper ads. Subscription also started in the 90's, and an example that succeeds from that era is the online Wall Street Journal. $79-a-year gains unlimited access to current articles and the searchable database of past issues. Other examples of subscription are the various music sites like Rhapsody and Napster, the myriad gaming sites, and of course porn sites. Pay-as-you-go has had many proponents among thought leaders, including Ted Nelson, Chris Anderson and Steve Jobs. iTunes is perhaps the premier example of this model, and seems to be doing fine. But lack of a fluid and secure micropayment option has stunted (or killed) many pay-as-you-go sites, and it is now the least commonly found of the three models.
The industry most in need of stable ecommerce model is news. They've tried everything, and now seem to be settling on advertising as the main revenue channel (except for the WSJ, of course). Folks I've talked to at Salon and The San Francisco Chronicle are confident they will get there through advertising. Personally I doubt it. I don't think advertisers will place enough value on specific sites to commit enough dollars for the news houses to sustain themselves. Furthermore, I don't think individual news generating sites can ever sustain themselves in the vertical manner they're accustomed to (find newsworthy topics, write and edit copy, assemble a paper, sell advertising and subscriptions, print the paper, distribute the paper).
I believe news organizations need to embrace the all-points distribution magic of the web and forget about tailoring their own web destination sites. Generate the news, and distribute it through the web to other places, like Yahoo! News. Most importantly, allow full mash-up possibilities from redistributors and users. All it takes is a logical payment environment, so that each use of a news item generates some revenue for its publisher.
© 2008 Settlenet Inc. | Berkeley, California

Pacman School of Design

Ted Nelson lays out thoughts on good design, with typical clarity.

Drip Like Jackson

Another beauty uncovered by Gregory Kerwin: jacksonpollock.org. Be warned, it’s addictive. The joy of finding so many creative Flex-built sites is provoking thoughts like “TV? It’s going down. Can’t compete with all this great stuff.”

XanaduSpace is cool

Ted Nelson released XanaduSpace this past June of 2007. It is a fresh idea in document performance. Families of related documents, or even whole taxonomies, are grouped into "flights," with graphically significant interconnections easily seen as you glide and rotate through the scrolls. If XanaduSpace is any indication, Ted's reputation as a thinker and not a maker is about to change. Clearly there's a lot of "make" in this product, and it deserves attention for the innovation it brings to the sluggish world of word processing.

Overview and discussion of Xanadu Space: BACK TO THE FUTURE: Hypertext the Way It Used To Be, by Theodor Holm Nelson and Robert Adamson Smith.

John Battelle thinks the government should enter the payments game

I read Battelle's post on the usefulness of FasTrak and how the government, at various levels, should enter the payments world and make all payments convenient in the manner of FasTrak. I answered with a comment about how FasTrak is not a payments system but just the Merchant node of existing systems, like Visa. And I have no problem with that-- it just isn't a payments system. Here is my complete comment.

Goethe-Institut: a website to admire, emulate

Gregory Kerwin points me to a well-designed site: Goethe-Institut
If less is more, which is Greg's point in sending me the link, how does one exploit the features in Flex/Flash without going down the road to perdition? Communicating through a website is a discipline, where simplicity and focus are hallmarks of good practice. Can richness and complexity make it better? Surely they can, but we already know they can make things much, much worse.