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Berentsen and Schär
Figure 3
Payment System with a Central Authority
Goods
Buyer
Seller
Payment
Payment
Balance
Payment
Bookkeeper
central authority then ensures that the buyer has the necessary funds and adjusts the accounts
accordingly (Figure 3).
Centralized payment systems solve the double spending problem, but they require trust.
Agents must trust that the central authority does not misuse the delegated power and that it
maintains the books correctly in any state of the world—that is, that the banker is not running
away with the money. Furthermore, centralized systems are vulnerable to hacker attacks,
technical failures, and malicious governments that can easily interfere and confiscate funds.
1.4 Stone Money of Yap
The key feature of the Bitcoin system is the absence of a centrally managed ledger. There
is no central authority with an exclusive right to keep accounts. In order to understand how
this is possible, we w ill first discuss a historical payment system that has certain similarities
with the Bitcoin system.
On Yap Island, large millstone-like stones were used as a medium of exchange. 2 The
stones were quarried almost 280 miles away on the island of Palau and brought to Yap by
small boats. Every inhabitant could bring new stone money units into the system. The money
creation costs, in the form of labor effort and equipment such as boats, protected the economy
from inflation.
Instead of having to laboriously move the stones, which are up to 13 feet in diameter,
with every transaction from a buyer’s front yard to a seller’s front yard, the ownership rights
were transferred virtually. A stone remained at its original location, and the unit of value could
be detached from it and circulated irrespective of the stone’s whereabouts. It was sufficient
that all the inhabitants knew who the owner of every stone was. The separation between the
unit of value and the stone went so far that even the unit of value for stones that were lost at
sea remained in circulation. The stone money of Yap can therefore be described as a quasi-
virtual currency, as each unit of value was only loosely linked to a physical object.
Federal Reserve Bank of St. Louis REVIEW
First Quarter 2018
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