R. A. Hettinga on Wed, 9 May 2001 13:47:00 +0200 (CEST)

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<nettime> Transaction Costs and the Social Cost of Online Privacy (was Re: First Monday May 2001) [orig To: "Edward J. Valauskas" <ejv@uic.edu>, Cc: cryptography@wasabisystems.com, dcsb@ai.mit.edu, Digital Bearer Settlement List <dbs@philodox.com>, David Farber <dave@farber.net>]


A nice article (see the link below, folks) in First Monday this month about
Coase's theorem, transaction cost, and the "externality" of privacy.

I expect, sooner or later, that someone will teach Mr. Sholtz about the
financial cryptography of internet bearer transactions :-).

In the meantime, my stock answer to the "personal information as property"
discussion is the same one I have to *any* property on the net: if it's
encrypted, and I have the key, then it's my property, and I can sell it for
whatever, and to whoever, I want to. "Externalities", and "Social Cost"
don't have much to do with it.

Internet bearer cash, and other internet bearer financial instruments,
should close the loop on this phenomenon like nothing else, I think.

The fact that internet bearer transactions are private by default may have
something to do with it. It should actually cost *more* money in storage,
processing, and bandwidth to make an internet bearer transaction "not
private", public, whatever. Not to mention foregoing the threat, implicit
or otherwise, of physical force, as administered by a nation-state -- the
the transfer-pricing of that cost for the non-repudiable execution,
clearing, and settlement of transactions. We currently live an interesting
economic regime two wrongs make a right: my transfer-price makes your
externality and "social" cost right.

The reduced transaction cost of internet bearer transactions should also
make firms smaller, as Coase predicted, eventually driving profit and loss
down to the device level. Auction-priced cash settled markets that even
machines can participate in without human intervention should make the
world an interesting place indeed.

To put a finer point on the history of such things, with the advent of
telegraphy, hierarchically-switched telephone networks and mainframe
computing, we invented book-entry transactions (offsetting debits and
credits sent through a clearinghouse), where the force of the very
nation-state was required for the clearing and settlement of those
transactions. This was done to replace the physical delivery of bearer
financial instruments requiring armored transport and storage and, quite
literally, "cages" to process them in.

Internet bearer transactions use financial cryptography protocols like
blind signatures over a public -- and, because of Moore's Law a now
geodesic, instead of hierarchical -- internetwork. Lots of folks think that
transactions done this way should be significantly cheaper than modern
book-entry settlement. That's in the cost of the entire transaction,
including clearing and settlement, and not simply price-discovery and
execution, which is what the web-enabled databases on the net enable us to
do now at places like Amazon, e-Trade and Priceline.

Finally, I expect that a major component in this reduction in transaction
cost will be that the *risk* of internet bearer transactions, because they
execute, settle, and clear all at once -- instead of in separate stages
spread out over days or even just minutes -- should be dramatically lower
than book entry transactions of any form we now use or can conceive of in
the future.


At 10:05 PM -0500 on 5/7/01, Edward J. Valauskas wrote:

> Transaction Costs and the Social Cost of Online Privacy
> by Paul Sholtz
> http://firstmonday.org/issues/issue6_5/sholtz/

R. A. Hettinga <mailto: rah@ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

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