Friday, October 10, 2014

Concept of a Large Value, Non-Fiat, Digital Currency

So far in this blog I discussed digital currency as values stored in a personal electronic device (PED) denominated in local fiat currency. Conceptually the architecture depicts walking around money; it is cash for use for purchase of goods and services and not for investments such as a ship’s cargo or a factory or a business. In this post, I want to design a different type of digital currency, one that primarily transfers large values and denominated in a non-fiat currency although still issued by financial institutions (FI).

The purpose of creating non-fiat currency is to eliminate the perils of foreign exchange (although the currency will float in value against different world currencies). It does not need conversion to a fiat currency for deposit to an account. There are other advantages to such a currency, (call it the Wampum) such as it does not need to use a gross real time payment system to safely transfer it instantaneously because interception of the data by unauthorized recipients renders it worthless.
Both the payer and payee devices form the electronic signature and so another device receiving it automatically invalidates the signature. If an attacker knows both device values forming the signature a counterfeit Wampum is still worthless because the attacker will never know the other elements of the signature that only occur once for any given transaction and automatically form part of the encryption used during transfer. Finally insurance for each transfer will cost less than fees charged by operators of large value transfer systems. The insurance will be less because if an attacker does manage to counterfeit a Wampum transaction, no entity will accept it without first validating it with their insurance company, which will determine quickly that its history is suspect.

Wampum allows corporate treasuries to store large sums outside of banks within the confines of a tamper resistant storage device in the presence of more than 1 person at all times. Although no interest accrues on a Wampum stored outside a FI, conversion of Wampum to a fiat currency at any specific instant almost guarantees a successful bet. For example if a company buys 1 Wampum for $100,000 and at that instant a dollar was worth .8 Euros, .62 Pounds, and 108 Yen, and later the company wishes to convert the Wampum to a fiat currency, then conversion to any of those currencies worth more at that later time will constitute a winning bet.   In some cases conversions will create more profit than any interest payment.

So why have no banks tried this concept? Is there vulnerability or laws that make such a scheme unworkable? I encourage comments from knowledgeable readers so many may understand the impracticality of the Wampum.  

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