Hash trees and bank solvency.

I publish this trivial and obvious idea, because if I do not,
publish it, some clown will surely patent it.

(Has the patent on chewing gum and walking at the same time
been taken yet.  The more outrageous patents the patent office
issues, the more power and influence they get and the more funds
they recieve.)

One of the great hazards with banking, and with financial services 
similar to banking, is that the financial institution has the 
opportunity to steal a great deal of money.

One solution to this problem is government auditors.  Government
inspectors, unlike private auditors, can force their way in, in
the early hours of the morning, and as each bank employee turns up,
take him to a separate cubicle and interogate him with a gun in
one hand and an account book in the other.  This makes it difficult
for the financial institution to fabricate a misleading picture of
its financial situation.

A hash tree can provide proof to a banks customers that the bank only
has the amount outstanding that it claims to have, without the need
for gunmen to check the totals.

At the close of month, the customer accounts are orgnized into a hash 
tree with the totals forming part of the hash

Each node is a hash of the two nodes below it, and the amounts of money in
the two nodes, and the sum of those two amounts.

Each customer can then see that the money the bank owes him is a part of
the total the bank claims to owe.  If a customer discovers he is not 
part of the hash tree, he knows the bank, or financial institution,
understates its indebtedness;

No auditors, government or otherwise, required.


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              				|  
We have the right to defend ourselves	|   http://www.jim.com/jamesd/
and our property, because of the kind	|  
of animals that we are. True law	|   James A. Donald
derives from this right, not from the	|  
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"James A. Donald" <jamesd@echeque.com> writes:

 > One solution to this problem is government auditors.
 > Government inspectors, unlike private auditors, can force
 > their way in, in the early hours of the morning, and as each
 > bank employee turns up, take him to a separate cubicle and
 > interogate him with a gun in one hand and an account book in
 > the other.  This makes it difficult for the financial
 > institution to fabricate a misleading picture of its
 > financial situation.

This would be killing a mosquito with a flyswatter. Besides, the
employees of a financial institution may be in no position to
accurately state its financial situation, even if they are in
little cubicles with guns to their heads.

A somewhat more civilized method is used by my broker, who gets
audited on a regular schedule by one of the major accounting
firms.  The accounting firm puts an insert into every statement
periodically, with an envelope addressed to the accounting firm,
asking the customer to carefully examine the enclosed statement
and to contact them if it is not entirely accurate.

 > A hash tree can provide proof to a banks customers that the
 > bank only has the amount outstanding that it claims to
 > have, without the need for gunmen to check the totals.

 > At the close of month, the customer accounts are orgnized
 > into a hash tree with the totals forming part of the hash

 > Each node is a hash of the two nodes below it, and the
 > amounts of money in the two nodes, and the sum of those two
 > amounts.

 > Each customer can then see that the money the bank owes him
 > is a part of the total the bank claims to owe.  If a
 > customer discovers he is not part of the hash tree, he knows
 > the bank, or financial institution, understates its
 > indebtedness;

I would trust the typical customer to mail back a form to an
outside auditor far more than I would trust him to examine a hash
tree, check his own entry, check the neighborhood of his own
entry for cryptographic integrity, and sound an alarm.

To be perfectly candid, I would not even want the task of
explaining to the typical banking customer what a hash tree was.

The outside auditor can of course be spoofed by giving him access
only to some subset of customer accounts.  The hash tree can be
spoofed by not telling a subset of customers of its existance.

All things considered, I think I would prefer the auditor.

--
     Mike Duvos         $    PGP 2.6 Public Key available     $
     mpd@netcom.com     $    via Finger.                      $