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Tethered Money – a Game Changer

By: , Posted on: August 13, 2015

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What is possible now, and what was impossible yesterday is to disrupt the universality of money: to deuniversalize currency, to tether cash, to tie a payment to its intended purpose. And that’s a very big deal.

Tethered money: stored value inexorably tied to its intended purpose, useless otherwise, is a feasible technological reality that can actually tweak the old invention – money – and jolt it to have a dramatic new impact on societal well-being.

Air miles, gift cards, discount coupons – all are examples of tethered money. They function as money with a restricted use. If you planned to dine in at a particular restaurant, then the 40% discount coupon you use works as cash equivalent. Similarly for a flight you would have had to pay for, if you had not used your air miles. The entity that provided you with such tethered money retains control over its use, after having transferred it to your possession. This is in contrast to having given you the same amount in cash, against an unenforceable promise to use it as intended. This highlights the fact that nominal money comes untethered, with the freedom to use it for any purpose, for any goods or services priced for its face value. The seller will hardly bother himself with the question of where you got your cash from, who gave it to you, or for what purpose.

Walking into a shopping center, with a full wallet, a person himself may not have a clear idea as to how he will use his cash, what would he purchase this evening. Buyers walk in with a sense of power – they can purchase anything they fancy for the cash at hand. Worse, most of us walk around with a credit line, using our “plastic” up to our credit limit to buy anything and everything that is priced under our expenditure ceiling. Such is the power of possessing the currency of the land. Is there something wrong here?

This freedom of use is the joy and benefit of the money earner. Having provided goods, services, or efforts, and getting paid for it, you earned the freedom to dispose of your cash as you see fit – be whimsical, if you wish. Alas, our modern economy is built to a large degree on unearned money – money that was not attained against fair goods and services, but was rather secured as a loan, a credit, a grant, a charity, a welfare check, a payment advance – as part of a long-term plan for something specific to happen and benefit the money provider. The problem is that such money can be used in the shopping mall as described above – freely, regardless of the use-intent articulated by the provider of such unearned money. A person may be granted a home construction loan secured by the progressive construction per se, but he or she may use the cash to purchase an expensive cruise travel; a businessperson may persuade his banker to loan him expansion money, but uses the funds to settle a personal debt; a welfare recipient may use his dollars in a liquor store, not in the grocery; a researcher may divert his grant money for personal travel; an insurance company is going high-risk with its premiums funds. These are all examples of a payer expecting the payee to do one thing with the paid money but the payee doing something different.

Tethered money, once we deploy the technology to accomplish it, will keep the payer in control of the handed-over money, and thereby will encourage many money owners to risk their money on a prospective future scenario. So while the tethered money will decrease the freedom and control of its possessor, this control is not lost but simply shifted to the source of that money. Arguably, the tethered money regimen is more just since the payee has not earned it against his goods, services, efforts or sweat, but rather received it by promising some action in the future, sometimes even less.

Money then will have a usage sphere, which may be as narrow as, say, air miles, usable only for flights on same airlines and under its prevailing limitations, subject to the imposed expiration date. Or it may be used for traveling on land, sea, or air, or perhaps it can be used for payment to any named city vendor. The tether – the leash – may be short or long, the restriction may be narrow or broad. Winning a double ticket to a specific show for a specific date is an example of narrowness, and using the money to pay anyone except Bob, is an example of broadness.

In a bad economy, business is sluggish, and there are fewer opportunities to earn money against one’s goods, services, sweat and effort. When this happens the government flexes its muscles on countless initiatives that in essence amount to providing unearned money, cast as grants, unemployment checks, welfare, tax incentives, rebates, student loans, etc. If such money is indistinguishable from earned money than its payees will be more inclined to enhance its receipt rather than vie for earned cash. If such unearned payments will be tethered, then practically and psychologically they will count as less than untethered money, which its recipient had to exchange a needed valuable for. The freedom to use such money for anything that cost as much, will be much more appreciated. So tethered money will, on one hand, render the government initiatives more productive, and less abuse prone, and on the other hand it will not discourage people from seeking an earned money deal, to claim the untethered freedom to do with it as they please.

It’s true that a payer of unearned money could in theory always demand an explicit contract that would limit the use of the money to be consistent with the intent of the payer. Alas, the money itself, once it has passed, is history-free, context-free, undisclosing as to its origin, or method of attainment. A nominal coin or paper bill is silent about its track record from the moment it was minted to the moment it is being paid. So, contract or not, the now money possessor will use it with total freedom. What then are the options of the contract holder in return? First, the payer will have to monitor and follow the money he transferred. Then, the payer will have to render judgment as to a prospective violation of the terms of the transaction, and after that he would have to alert and complain to the abusive recipient; argue, demand, insist, and at the end of this exhaustive effort the payer might be left with only choice: a lawsuit. Of course, this tedious action-path is not practical in view of the countless instances of unearned money payments. The revolution of tethered money is that its very nature is such that its use is restricted; it cannot be abused or misused (by normal efforts). It is impossible to misdirect, or to violate its terms of payment – or nearly impossible.

Remember the old travelers’ checks? They were a form of tethered money restricted for paying to oneself. Only the named owner could use those checks to buy nominal (untethered) currency for its face value. And as a result, they provided security because, if lost or stolen, they would be replaced and the thief is left empty-handed: while he now has his victim’s money, he does not have the victim’s identity (identity theft notwithstanding). The new technology offers a modern version of these old travelers’ checks. Cryptography will very easily tether money to its holder, providing a similar security. This alone will make it safe for people to keep their money in their phone, rather than in their bank; let’s go a step further: they will be able to use their cell phone as their banking establishment. Similar security could be accomplished for financial institutions holding large sums of money. Today these huge amounts of capital are tracked through numbers, which carry a value, but no identity. A hacker that logs in as an “administrator” in the host computer will be able to change that number, and steal the balance, but if the same sum has been kept as tethered digital money, then stealing it will do the thief no good, and that is why it won’t happen.

Air-miles, gift cards, coupons, and prizes today are the forbearers of broadly traded, widely leveraged, tethered money, through and across the entire economy, discouraging abuse, encouraging long range productive bidding.

The strategy for global prosperity is, without a doubt, a means to provide resources and power to the most talented and capable among us because these individuals will be in the best position to exploit such power and resources and build solutions to society’s challenges. Alas, at any given moment, the distribution of wealth and resources substantially deviates from the distribution of talent and accomplishment ability. And hence, society needs to develop a mechanism to align these two distributions so that its most capable members will control a commensurate measure of its resources. Capitalism proposes one way to achieve that goal, and socialism proposed an opposite way, but both theories of economics do agree that a mechanism to provide the most talented among us with the resources to work with should be applied. Indeed, history has shown that when a rational credit system prevails, prosperity follows. Now, all credit payments exchange unearned money: money given against some future expectation. If the receiver of that money is subject to the temptation to abuse its original purpose, then the giver is held back by suspicion and apprehension. If, on the contrary, the payer is provided with clear assurances that his or her money will be used in ways consistent with the agreed-upon terms, then the payer/giver will be more inclined to risk his or her money in the credit market. More money will flow from those who have it, to those who can do the most with it. This is how a simple technological solution that assures the most desired disposition of money acts as a powerful accelerator for human progress. Healthy and robust credit market fueled by the technology of tethered money will push money to valuable research, will provide funds to daring leap-frog start-ups, will attract resources to large, long-term projects, will invest in multiyear programs for education, and cultural improvements.

In recent years we have witnessed accelerated productivity owing to the marvels of technology. Much fewer people take care of the same business that a threefold count of people had to attend to, only yesterday. Productivity is a boon to manufacturers, but a curse to the multitude that is being dropped out of the workforce. If they are too old they wouldn’t be able to catch up with the newly skills, and, as a result, society, structurally, would find itself supporting a growing number of dependents. A growing measure of resources is diverted to unemployment compensation, to welfare, to educational programs, to retraining initiatives, etc. All this money is essentially unearned sums. It is given with a strict expectation of use limitation. The reality though is that the recipients of this kind of money may get tempted to dispose of it in ways inconsistent with the aim of the givers. As a result, the efficacy of the programs, under which such money is paid, suffers and neither society, nor the recipients get the best out of them. Here again, a simple effective cryptographic solution for tethered money will ensure that all those billions of dollars are funneled to the purpose for which they were designed.

Government raises taxes, amasses treasures, and then a small number of bureaucrats are given the authority to dispose of that treasure, all for the good of society. These faceless bureaucrats, in most cases, face a very compelling temptation to exploit their spending power. There is a huge gray area of abuse, way beyond the prosecutorial radar. Budgets are not earned, they are allotted, and spent with less than utmost care, at the very best, or in violation of the criminal code, at worst. Each government has its stories of massive corruption: human nature is what it is, not what our preachers and philosophers would wish it to be. Institutions that dispense of First World money to Third World recipients have thousand-nights-and-one stories of bold and daring abuse of various aid money – and no solution in sight. A solution is finally visible – tethered money – money that resists fraud, waste and abuse.

It is fascinating that an embryonic concept that for years has been limited to reward points and air-miles, can now be leveraged with advanced technology to become no less than the technological answer to fraud, waste, and abuse, and more importantly to become the leverage with which to catapult world economical reality into sustainable global prosperity.


About the Author:

gideon samidProf. Gideon Samid, PhD, specializes in engineering, economics, cyber-security, and cryptography. Following on his PhD dissertation Gideon has been developing the Universal Theory of Innovation which codifies the generic aspects of Research & Development, and which accelerates the innovation process by focusing on the credibility of the estimate of cost-to-complete. Applying the same for cyber-security, and exploiting his granted patents for a new dimension in cryptography (equivocation v. intractability), Gideon realized early, (2008), the multi-dimensional impact of frictionless payment, crypto-secured currency, and tethered money. He has been building-up this vision ever since; bringing to bear a wealth of cyber-security experience, engineering design, and economic analysis of high-uncertainty projects. Gideon earned his BSc., MSc., and PhD at the Technion — Israel Institute of Technology; learned his craft serving the State of Israel, working at the Pentagon, Exxon, NASA, SAC, Presearch etc.; running D&G Sciences — Innovation Productivity Corporation, and recently serving as the Chief Technology Officer at BitMint, LLC; also teaching cyber-security, cryptography, and digital money at the University of Maryland, University College, and at Case Western Reserve University. Gideon authored over 50 peer-reviewed technical rticles, and a handful of critically acclaimed books. Gideon Samid who shares his life with Dolores, is a proud father of Anat and Yaron, and an overjoyed grandfather (four grandchildren, so far).

Professor Samid’s new book, Tethered Money: Managing Digital Currency Transactions, presents a comprehensive discussion of financial transactions using digital currencies. Exploring the technical, legal, and historical aspects of digital money, the author discusses how the emerging technology of money specified for a specific need or to perform a particular task will affect society. The ability to dictate, Samid argues, how money is spent could increase control over our lives and resources, enabling us to practice a certain efficiency that would, in due time, become a pillar of civilization. Informative and thought-provoking, the book describes an evolving future that, in some quarters, has already arrived.

tethered money

To purchase your print copy, visit the Elsevier Store. Apply discount code STC315 for up to 30% off the list price and free global shipping. If you prefer an e-copy, you can access the book on ScienceDirect.

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