Electronic money: The road to Bitcoin and a glimpse forward

Electronic money: The road to Bitcoin and a glimpse ahead

Abstract: The proposed talk provides a definition of the problem of creating e-money and after a review of the state of the art points out possible solutions and proposes questions for discussion for the properties of electronic money system.

1. What is electronic money and different means of currency

Definition of electronic money and distinction from similar means of exchange.

Electronic money is defined as monetary value which is:

• stored on an electronic device;
• issued on receipt of funds; and
• accepted as a means of payment by persons other than the issuer.

Working e-money examples: PayPal and MoneyBookers

Other means of exchange, similar to e-money: Alternative/Social/Timeshare/Community currencies; Loyalty and Voucher systems.
Working examples: WIR and Ven currencies (Bitcoin)

What makes them different from e-money? (convertible only one-way, not a legal tender, mostly backed by trust only, etc)

Optional: Pros and cons of the abovementioned means of exchange.

2. Defining the e-money problem: What electronic money should do?

Risks and requirements to the solution for electronic money from technical, legal and business standpoint. The basic human problem of reaching a consensus and trust in a group.

General system risks:

• Credit Liability
• Credit Abuse
• Counterfeiting
• Unauthorized Withdrawal
• Purchase Order Modification
• Double Spending
• Failure to Credit Payment
• Denial of Service
• Repudiation
• Failure to deliver
• Framing
• Secrecy

Legal and accounting:

• Dispute resolution
• Money laundering and finance of terrorism
• Tax evasion prevention
• Consumer protection requirements
• Ways to negotiate and conclude a contract
• Auditability
• Reverse and chargeback transactions
• How the burden of proof is distributed

Business:

Costs for:

• Registration
• Operation
• Support
• Marketing
• Customer and merchant negotiation

Accent on the most important human problems:

• Identification and authorization (which is the required minimum?)
• Achieving consensus and easy dispute resolution in a group.
• Determine the state of the system at any given moment
• Trust (between the peer users or trust in the central authority)

3. How the risks and requirements have been traditionally addressed?

Review of the cryptographic, legal and procedural methods from the existing e-money protocols. Еmphasis on anonymity and privacy problems.

The review of the existing systems will be a distinction between:

• Online and offline systems
  Example: PayPal and Blind signature/PayWord based systems
• Centralized and decentralized systems
  Example: Liberty Reserve and Ripple/BitCoin
• Hard and Soft systems
  Example: BitCoin and Credit card based money and payment protocols

How do they solve the problems of trust and consensus in a certain group?

How they provide anonymous transactions and keep user privacy? Are independent jurisdictions a (contribution to) the solution?

Calculated risk, insurance and responsibility/role delegation as patches to the existing problems.

Which of the above systems may be deemed "legal"? (what do the central banks think)

Optional: Few words for Blind signature and PayWord techniques and the protocols around them

4. The great step forward. The contribution of Bitcoin

Emphasis on decentralization and (relative) anonymity features of Bitcoin. How the combination of a way to create(mint) coins and to timestamp the state of their distribtion created the first working non-centralised currency. What, in my opinion, contributed for the Bitcoin popularity.

5. The problems of Bitcoin

What Bitcoin doesn't provide or doesn't provide in an effective manner:

• Cost of creating money
• Method of reaching a consensus, based on computing power
• No "real value" to back it
• Settlement risk not covered
• Scalability issues
• All the lacking features of a "soft" currency

Is it decentralized or distributed system? (having in mind the introduction of "trust points")

6. A Glimpse forward

How can anonymous e-money be made better (more effective and accessible). Proposal (and discussion) of the possible enchancements.

How to issue e-money in more effective manner?

Possible solutions are to issue money based on:

• Exchange for FIAT money or back by any other valuable stock (gold, land, silver);
• IOU credit/debit principle from the community currencies;
• Some fair distribution as an alternative to:
• Solving a math problem (as Bitcoin does)

How do these solution relate to the speed the new money are accepted and used?

How to reach a consensus in a group in a more effective manner?

• Is practical byzantine tolerance more effective than distributed timestamping?
• Can and should we consider any centralized authority?
• Should we consider decentralized money impossible and settle for distributed money?
• Can a Webtrust (OpenPGP alike) scheme of trust be applied? What social identification (friend of a friend) can contribute?
• Can we use/rely on public/official timestamping services and how this can be used as a better proof?
• How triple accounting techniques may help?

How to achieve anonimity and preserve privacy?

• Is complete anonymity possible? What are the achievable levels of anonymity?
• Can the user set a "mode" of a transaction, sacrificing some protection?
• To what extend the existing bank secrecy will suffice?
• Jurisdictional independence as a possible solution / significant contributor.
• What anonymizing technical methods are possible?

More general question: Should a good e-money currency be made according to the legal requirements of the EU directive and made legal tender?

If not are features like: consumer protection (reverse and refund transactions), auditability and settlement risk coverage need to be implemented and at what cost?