IEEE Technology and Society Magazine - Summer 2013 - 30

electronic record in the databases
of all parties. Such shared interorganizational databases have been
studied in great detail, and they
are used extensively in building
electronic exchanges and auctions.
They also have complex transparency requirements that reveal
transactions and provide audit
trails to all relevant parties, while
hiding information from all others.
In this environment, all businesses
can act as currency exchangers by
automatically accepting the currencies of their trusted business
partners. A transaction between
non-business partners is intermediated by others. Such intermediation
can be completely automated, and
go through many intermediaries
before the two parties can be connected by a chain of intermediaries where each is trusted by the
next. Each intermediary accepts
the currency of a trusted partner,
and replaces it with its own, before
pushing the payment to another
trusted partner, on its way to its
ultimate destination. Such automated intermediation is similar
to how the Internet operates as a
distributed network, where a message goes through multiple intermediaries, called routers, before
it reaches its destination. Such
dynamic network management is
well understood, where each node
has extensive local information,
but very limited global information
[13], [14].
Banking is dramatically altered
in this new environment. The
need for formal bank loans is
minimized, since the distributed
management of money enables
extending credit automatically
to one's business partners, and
indirectly to others, by merely
accepting their private currency.
Each business utilizes its knowledge of its business partners to
judge their credit-worthiness, and
decides on the credit line to extend
to them. In effect, formal bank
loans are replaced by the network
of business relationships, and the
30

collective and distributed judgment
of credit-worthiness within the network. This results in decentralization of control and management
of the money supply. Default risk
of a business is also distributed
among all its partners that hold
its currency. In effect, businesses
use their knowledge of each other
in performing these intermediary roles, and judging each other's
credit worthiness. Such knowledge is acquired during the normal
course of business, but needs to be
supported by a legal framework
that requires transparency. Businesses need to reveal the identities
of their partners, and the amount of
currency (credit) they have issued
to each partner. Businesses need to
be able to observe the underlying
assets and the total currency issues
(debt) of their partners to judge
their credit-worthiness, to facilitate
the distributed peer-to-peer payments without any central control.
Such transparency can be implemented by independent electronic
exchanges that keep public records
of all transactions among partner
businesses, and their outstanding
currency balances. Industry-wide
electronic exchanges are common,
and the technologies to implement them are widely available
in terms of industry standards, or
inter-organizational data exchange
[8], [12].
Credit risk is fundamentally
different in this new environment.
At the most detailed level, how
much a business is willing to hold
the currency of another is a measure of trust it places on the other's
credit (trust). How much a business already holds the currency
of another is a measure of relative financial strength (collateral).
At the most aggregate level, how
much of its own currency, all of its
partners are willing to hold in total,
is an indication of its credit-worthiness (credit). How much of its own
currency, all of its partners already
hold, is a measure of overall financial weakness (debt). The difference

between the partners' total willingness to hold and the amount they
actually hold (credit-debt) is a good
measure of aggregate confidence
in a business, leading to a realistic
measure of future performance,
since it is actually the difference
between their aggregate credit and
their aggregate debt. Conversely,
a business that is holding a great
deal of others' currency is a high
performing business that does not
have to issue large amounts of its
own currency, and it is in a position
of great power in deciding whose
currency it will hold (i.e., extend a
credit to) [12], [24].
There are many attempts to
adopt such private currencies in
the online world, leading to many
profound experiments with money
and banking. The translation of
these ideas to the physical world is
still some time away, due to numerous economic, technical, legal, and
management challenges, but they
are likely to fundamentally change
the perception and reality of risk in
the world of money and banking
[8], [23], [30].

Changing Concepts of Risk
Technology is a source of risk. Not
only because it often has unintended consequences, but also
because accelerating technological change creates compound risks
resulting from multiple interacting
technologies. More importantly, a
fast changing technological environment introduces additional risk
because of the numerous social, economic, and political opportunities
it creates, and threats in engenders.
reduction of these risks should be
a major concern for all social institutions, instead of merely dealing
with undesirable consequences after
they occur. There are numerous
risk-reduction technologies that can
be deployed to reduce risk without
damaging the efficiencies created
by other efficiency-creating technologies. Some of these risk reduction techniques are being deployed
in virtual environments leading to

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