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Robert Hettinga
Shipwright Development Corporation
44 Farquhar Street, Boston, MA 02131
Comments: rah@shipwright.com
November 19, 1995
>Ps. I know I could probably look this up, but exactly what are >bearer bonds? I frequently hear them mentioned when market >anonymity and money laundering come up.
It's the little questions which take the longest to answer...
I wrote something here in cypherpunks this year called "The Book Entry / Certificate Distinction", which you might want to check out in the archives.
Bearer bonds and bearer certificates (like cash) belong to the bearer. To be flip, possession is 100% of the law with a bearer bond. Bearer bonds can be stolen, but they aren't registered anywhere, which makes them useful for anonymity. All along the bottom of a bearer bond are little squares called coupons, which you cut out periodically and mail in to the issuer, and they'll send you back an interest check for that period's interest. Lots of financial phrases come from bearer bonds. When a bond trader talks about a bond's interest rate, she may use the word "coupon" interchageably, as in, "That bond has a 7% coupon.". Meaning, it pays 7% interest per year. Then there's the phrase "clipping coupons", meaning someone is retired or independently wealthy and living on their bond interest. Every month the interest on one bond or other would come due, the coupons clipped and sent in to the bond's issuer in return for an interest check.
Most securities these days are registered to the owner somewhere, at a trustee, at the issuer, at a clearinghouse, or some combination of all. In fact, most securities these days don't exist in physical form at all and exist only on the books at clearinghouses and brokerages. This is why your stock broker squalls about "physical delivery" when you ask for a certificate. About a year ago, we talked about the Depository Trust Company, the clearing house for the New York Stock Exchange. They have entire issues there consisting of a single piece of paper in the clearinghouse vault which are traded entirely on a book entry basis, that is, only accounting entries are swapped when these securities change hands.
There are several reasons for this. The putative reason is that as taxing authorities, like the Internal Revenue Service, have relied increasingly on various cash-flow taxes like the income tax for thier revenue, they have slowly regulated or legislated bearer bonds out of existence in favor of registered, and more to the point, book-entry securities.
However, like everything else, law and regulation is really a creature of technology, and the technological reason that book-entry and consequently registered certificates are popular is because they're cheaper to handle locked down in a vault in a clearing house somewhere with the ownership changing hands by changing offsetting accounting entries at the buyer, seller, and clearinghouse.
This is a direct consequence of financial systems organized on top of hierarchical communications networks, which was how all communication networks were organized before automated switching, and, more to the point, microprocessor switching made them more and more geodesic in structure. You might want to check the archives for more of my rants here on that subject.
The thing about digital certificates, of which ecash is only the camel's nose in the tent, is that while electronic, they're actual bearer certificates. You get a lot of great non-sequiturs when you talk about them. "Digital bearer certificates", when you can't actually touch them to "hold" them, Electronic "physical" delivery, and the like.
So, with a digital bearer bond, you would have in effect a bundle of digital certificates. One would be for the principal and whould be good for the repayment of that principal on the date the bond was called or the redemption date -- depending on how the bond offering is written. The other certificates would represent coupons, one for each interest period for the life of the bond.
These digital certificates, in combination increasingly geodesic networks enabled by exponentially falling microprocessor prices and strong cryptography, theoretically allow secure, point-to-point trading of any security of any amount with instantaneous clearing and cash settlement.
The current hierarchical capital market model, with brokers, "wholesalers", and central exchanges has been collapsing for decades since the advent of electronic trading systems (glorified computer bulletin boards, really) like NASDAQ. With the coming of digital certificate technology on public networks, these markets will be "surfacted" into smaller and smaller concentrations of information and capital.
I have no idea what markets will look like when we "return" to things like digital bearer bonds, but there's a prima facie example now on the web as we speak. This week Mark Grant just upgraded his Electronic Cash Market (ecm)-based cyberbuck (c$) webpage "trading post", so that it will take the new Mark Twain ecash. That means that it will be possible to trade old Digicash beta-certificate c$, which sold in the secondary market for 5 cents US per c$ last time I looked, and instataneously clear and settle them for Mark Twian ecash on-line. No checks have to be sent between trading parties to buy these certificates anymore, which should lower transaction costs significantly, not to mention the float on the money while the trade settled.
It was curious that people were buying these things to begin with, as they had no value at all except their uniqueness, anonymous electronic transmissibility, and a promise from Digicash BV to issue only a millon of them. Yet now, with the market made infinitely more liquid with the introduction of real-time cash settlement, things will get, as Alice said, "curioser and curiouser". Digicash still has some large number of these things in the "treasury" unissued. I believe these original beta-test certificates have both payee and payor anonymity, especially if traded offline, which has been how they've been traded through the ecm.
More fun with numbers.
Cheers,
Bob Hettinga
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