Monday, April 7, 2014

Crypto Currency: Indistinguishable Dollars

Continuing the discussion on Crypto Currency, here's another issue with using digital dollars: the dollars are indistinguishable.

Let's say my employer, Payer Inc pays me $500 for the month in 5 $100 bills. I decide to buy groceries and a car. The groceries cost $100, and when I go to buy a car they tell me it will cost $500. At this point, I only have 4 $100 bills, so I can't get the car.

But in modern times, everything is digital. I don't get paid with 5 literal $100 bills, Payer Inc sends an electronic message telling my bank, Bank Eville Guys, telling them I have $500 more in my account and Bank Eville Guys adds the money.

What is stopping me from spending that money twice? In theory, when I tell Bank Eville Guys I've spent money at a merchant, they should subtract it from my account. I buy $500 of groceries, and I now have $0. But with a name like Eville Guys, they might not do that.

If Bank Eville Guys decides not to subtract that money from my account but creates some currency, I could buy $500 of groceries and then go buy a $500 car. Later on when the grocer, Payer Inc, and the car dealership are having morning coffee, they both comment they thought I only made $500 a month, but they both sold me $500 of stuff. They're both suspicious, but the only way for them to check on if they've been double paid is for them to ask Bank Eville Guys, and of course they're not going admit to their fraudulent activity.

Again we could mitigate this with good book keeping and perhaps auditing Bank Eville guys on occasion, but we still have a fundamental problem here: without physical dollars to point out our payments are indistinguishable amounts of dollars.