David coalesced a lot of email on the subject here. Some points.
Cash is the original example of a network effect - Metcalf's Law applies to currencies (If you disagree I have some zlotys here for you).
Starting a new currency is hard. Paypal basically did it by good usability implementation and a lot of bribery with VC money (the $5 spiffs to new entrants and their introducers, the total absence of fees for individuals until they were hooked and dependent as businesses).
Cybercash, eCash et al failed in some ways by doing too good a job of security at the expense of usability, in the same way PGP has, as well as by being too early to work the bribe trick and ride eBay's market.
Trusting Paypal is like trusting the US or UK not to inflate the currency too much. One kind of private currency a lot of people got burned by accepting payment in over the last few years was company stock.
AKMA comments on the distinction between different kinds of reputation - moral versus financial, and then says part of what David�s saying is that credit ratings and credit cards generally work pretty well, and I suspect it�s worth building out from there.
This is where I disagree. Credit Cards work OK mostly; credit ratings work really clumsily. People spend inordinate amounts of time and effort doing illogical things to improve their credit profiles. I notice this more than most; as a US resident alien I discovered that my lack of US credit history meant that I could not obtain credit cards at all except on remarkably onorous terms, (eg I deposit $1000, get a $1000 credit line, am charged $20 a month and get an APR of 30%).
I got credit card solicitations commensurate with my salary like everyone else (along with the frankly insulting ones), but if I took them up I'd be rejected by the credit bot, and my rating would then have 'rejected' on it too. If I took up 0% credit lines and behaved rationally, paying them off before they expired without penalty, that was a further black mark. The thing to do is take out a loan on whatver terms are offered, make regular payments and wait 5 years.
Jaron Lanier said:
Real, though miniature, Turing Tests are happening all the time, every day, whenever a person puts up with stupid computer software.
For instance, in the United States, we organize our financial lives in order to look good to the pathetically simplistic computer programs that determine our credit ratings. We borrow money when we don't need to, for example, to feed the type of data to the programs that we know they are programmed to respond to favorably.
In doing this, we make ourselves stupid in order to make the computer software seem smart. In fact we continue to trust the credit rating software even though there has been an epidemic of personal bankruptcies during a time of very low unemployment and great prosperity.
We have caused the Turing test to be passed. There is no epistemological difference between artificial intelligence and the acceptance of badly designed computer software.
How about a distributed reputation system that is the inverse of a credit rating agency -one that collates individuals' experiences with financial institutions and gives them a corresponding rating? That sounds interesting.
Finally, you should all go and read Cory Doctorow's book 'Down and Out in the Magic Kingdom' (to be published Jan 9th)- Whuffie is reputation based finance, and the novel examines the implications:
Whuffie recaptured the true essence of money: in the old days, if you were broke but respected, you wouldn't starve; contrariwise, if you were rich and hated, no sum could buy you security and peace. By measuring the thing that money really represented -- your personal capital with your friends and neighbors -- you more accurately gauged your success.