Revolutionary Financial Networks Not Revolutionary

from the credit-check dept

The rise of sites like Craigslist and eBay have shown that commerce can happen without the middlemen and brokers that add costs to a transaction. Naturally, some are tempted to apply the same theory to financial services, not just with payments (like PayPal), but to borrowing and lending. One new project, Ripple, has the ambitious goal of creating a new monetary system out of IOUs. As an example they give, you could transfer the $10 a friend owes you to a third party in exchange for some service, like a haircut. The idea is that if enough people join, it becomes like a social network where people can tally and transfer personal debts. The problem is that it’s hard enough to collect an IOU when it’s your roommate or a friend — what incentive does the haircutter have to take on someone else’s risk? Because loan enforcement may prove difficult, it also creates a market in collections that could turn ugly. Imagine if one individual owes several people $50. A third party may step in, offer to buy up all the loans at $0.70 on the dollar, and then “drop in” on the original debtor, aggressively trying to recover the money. This may sound far-fetched, but a system like this will already appeal to people who for whatever reason, are on the margins of the traditional financial system. Ultimately, the problem with this system, or any other one that tries to apply peer-to-peer networking to finance, is that they’re re-inventing the wheel; the financial system is already based on individuals and institutions lending to each other, with banks offering services like enforcement and monitoring. If anything, the need to specify to whom the loan is going seems like a major inefficiency, and will relegate these sites only to small niches.

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Comments on “Revolutionary Financial Networks Not Revolutionary”

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Joe Smith says:


One new project, Ripple, has the ambitious goal of creating a new monetary system out of IOUs. As an example they give, you could transfer the $10 a friend owes you to a third party in exchange for some service, like a haircut

This of course is the idea behind the development of bills of exchange (of which checks are one example) about 500 years ago.

Rikko says:

IOU: one goat

Now I hate to beat my chest and say “we already have money, this is pointless!” and laugh in the face of progress, but this seems totally unnecessary.

I don’t see any back to basics here, or anything that’s all that innovative.. They’re just placing another layer of abstraction on top of a money economy.

What is the common denominator here? Money. If the haircut is worth $10, then really I have a bank account with $10 in it.. Except now we’ve convoluted it with this ‘goodwill’ IOU system.

Damn it people, just pay your bills. I’d much prefer an economy where the sick concept of paying interest on money lending is eradicated.

Joe’s example of collections seems the only useful consequence of this system

Booble says:

Oh right

Imagine this monologue:

“Hey, my buddy who I haven’t heard from in six weeks–and I’m afraid he’s left town–owes me 200 bucks that I loaned him so he could pay off his psycho ex-girlfriend. Can I give you his IOU and take your advertised “used-but-perfectly-functional” DVD-RW machine off your hands? I mean, you’re asking $175 and my buddy owes me $200. Sounds like you’re gonna make out pretty well in the deal… What’s your address so I can swing by and check out your DVD-RW (to make sure it works right.) I mean, one can’t be too cautious can one, when buying electronics from total strangers on Craigslist?”

I’m selling an item on Craigslist and I actually had a guy ask me during the email communication about the item: “You take a check?”

I replied, after answering his proper item-realted questions, with:

I take cash, actually.

Yonatron says:

I agree with the post in general, except for that whole thing where you contrast eBay to commerce with a middleman. eBay is making eleventy-bajillion dollars (so they can waste it on Skype) exactly by being a middleman for person-to-person sales. It’s not that they don’t add cost, they just do it at an acceptably low rate to be extremely successful.

Matt says:

People forget...

People seem to forget that an alernate currency where time=money is inflation-proof. (this system only works well where everyone is doing the same sort of labor)

Other currencies, such as those backed by a limited reserve of gold or silver (like the liberty dollar) are also inflation proof, because the exchange value for goods in a limited reserve does not change. The value of gold in terms of the US dollars does change, but that reflects the value of US dollars, not the value of the gold itself.

It all comes down to how much you think what you want to sell is worth.

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