[fc-discuss] Financial Cryptography Update: The Rise and Absorption of Paypal - a lesson for offshore

iang@iang.org iang@iang.org
Tue, 30 Aug 2005 17:02:03 +0100 (BST)


 Financial Cryptography Update: The Rise and Absorption of Paypal - a lesson for offshore 

                            August 30, 2005


------------------------------------------------------------------------

https://www.financialcryptography.com/mt/archives/000541.html



------------------------------------------------------------------------

Over on Cato, there is an article bemoaning the fate of Paypal:
http://www.cato.org/pub_display.php?pub_id=4405
============
The company would no longer permit customers to use the service for
purchases associated with "mature audiences," gambling, hate
paraphernalia, or prescription drugs, along with a long list of other
prohibitions. It would also fine its customers up to $500 for
attempting such transactions. Those terms apparently applied to
donations to blogs with content PayPal found objectionable.

That's a far cry from the libertarian vision founders Peter Thiel and
Max Levchin originally had for PayPal, an online payment service that
enables account holders to send money to anyone in the world with an
e-mail address. Thiel and Levchin had hoped PayPal would grow to become
an extra-governmental system of currency, something reminiscent of the
world described in Neal Stephenson's novel Cryptonomicon, in which
programmers use encryption to create an offshore data
haven free from government control.
=============

What follows in that article is mostly a review of _The Paypal Wars_,
by Eric M. Jackson.  I've not read it, but can offer my opinions: 
Paypal should have failed a dozen times over, and the book seems to
agree.	The fact that they survived is good testament to their
persistence;  hundreds if not thousands of their competitors failed in
these and similar ways.

The book also reads as testimony to the offshore theory of early
digital money pundits.	Back in the mid 90s when we were building these
things, the wiser voices amongst us realised that we should go
offshore, not for any conceivable tax benefits, but for the simplicity
of regulation and the cost savings in reduction in 'enemies' to use the
Paypal meme.

Offshore is like that - it has a higher startup cost in capital because
everything is more expensive there.  But if you are to succeed, then it
quickly becomes more effective, simply because there are far fewer
external problems to deal with.  It makes a difference when the
jurisidiction is small: not only are the regulators somewhat limited in
pandering to whoever has their ear, but you can also meet the entire
team around a small coffee table.

So what about the payment systems that did go offshore?  Primarily this
would be the gold units (or, these are the ones I know well).  e-gold,
the leader in transactional volume, branched offshore in late 2000,
splitting into e-gold Ltd as the issuance company in the Caribbean and
G&SR as the trading company in mainland USA.  In practical effect,
e-gold then contracted all operations back to G&SR so the physical move
was not of great import, but the jurisdictional move was quite
significant.

It worked out quite well, notwithstanding the frequent criticism. 
Considering always that the market of choice was mostly the US and the
major market maker was a monopoly provider there, this move created
just enough of a jurisdictional separation to establish a suitable
distance between the 'enemies' and the operators;  there always remains
a possibility that if an enemy pushes too hard then the stuff will
really move offshore.

In a similar timeframe, goldmoney started up and is now the leader by
value under management.  It had a more fullsome offshore arrangement,
including a more or less complete range of 5PM governance partners.  An
early decision to place itself in the heavy jurisdiction of Jersey put
goldmoney under the beady eye of the regulators there, which I would
count as a mistake.  For this benefit of brand name offshore finance
center, it had to adopt a very stringent due diligence regime that
slowed spread down dramatically.  As the DD was regrettably far more
severe than a mainland USA bank or that of any other operator, this
placed its survival in doubt in the critical years 2-4.

However, goldmoney may have overcame this deadweight drag by coupling
up with Kitco, and now something like 80% of sales go through that US
coins and bullion seller.  Does the DD still slow them down?  Yes, and
in spades, but it would seem that the Kitco channel is so strong that
it has overcome these difficulties.

What then to conclude for new operators?  Doing the partial offshore
thing seems like a good compromise.  It's not a completely safe choice,
as even e-gold faced many life threatening challenges (and, finding
good offshore advice is like asking Don Juan to chaperone your
daughters).  But if you can appreciate the statistics of the Paypal
story then it still makes sense to consider.

And, as a side note, the Financial Cryptography conference returns to
Anguilla, our spiritual home for the 10th edition in 2006.  Back in
1997 it seemed that Anguilla had a chance of being somewhere special,
but two things killed the excitement that the conference generated: 
lack of any real net (Cable and Wireless had/has a death grip on
Anguilla, say no more ...) and the dramatic difficulties in importing
financial cryptographers past the normal anti-immigration policies
(common around the world) meant that no serious operation could take
root.

I calculated that the interest generated would have naturally led to
about 100 FCers by 2000 and created a very welcome third sector for the
island, but for those factors;	at one stage we were seeing serious
plans for half a dozen FCers every month.  Only a few brave fools were
stupid enough to ship in, in spite of the two big barriers, and by
about 2002 they were all gone.

-- 
Powered by Movable Type
Version 2.64
http://www.movabletype.org/