Friday, June 22, 2007

Currency: Response to a comment

This week we will respond to a comment from one of our readers. This is a continuation of the topic: A call for a new currency. Lee's comment was:

It sounds interesting, but have you ever lent money to a friend?
Trust doesn't work very well as a basis for financial transactions.

These are very good points, and other people may share your concerns about the monetary payment system ripple. Well there are three ways that ripple helps mitigate unpaid debts. The first is that debts with companies should be sound. If a steak house is doing business with this alternate currency then it must honor its debts or the access to this currency will be cut off. It would be easier to not be a part of the system than try to cheat it. Also there would be sore customers if the steak house tried to cheat them, and that's bad for business. It's the same principal that ensures that the steak house will not overcharge your credit card. This ensures that the steak house is honest most of the time.

The second check has to do with person to person accounts. If one of your friends is going to cheat you, the only way they can do this is to stop using the account. As long as your friend keeps receiving payments his credit to you may be used to complete a transaction. This means that if your friend is always in debt to you then you can go in and revoke the credit that you extended to him. Later you may make a payment that will use his credit, and this credit that was owed to you is repaid.

The third reason is very simple. If you are worried about someone paying you back then you don't have to extend them any credit. Being selective will help prevent you from having credit that you can’t use. Someday, I imagine that a credit rating will be incorporated into the program. This could simply be a smite button, when a person has been smitten five times in a year then the account could be flagged, and people would know that the account is in bad standing. People whose account is in bad standing will have difficulty receiving credit, and so people will try not to be smitten.

Lee, thanks again for raising this issue.


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