Ledgerism Archive

Archive Notice: This page preserves the original work of Todd Boyle on general ledger architecture and distributed accounting (1997-2010), restored 2026 by The Ledgerism Brief. We are not affiliated with any accounting standards body. Original work © Todd Boyle. Visit The Ledgerism Brief for current editorial coverage of CPA practice, audit, M&A quality of earnings, and digital asset accounting.

Most people and businesses begin the year with about $1000 in their cash accounts, execute plusses and minuses all year, and end the year with about $1000. Why don't we figure out a way to net and offset all those pluses and minuses, without the extremely costly and manual processing of banks? The use of banks imposes big indirect costs on individuals and businesses, as well as their more obvious fees and charges.

Individuals and small businesses could easily bill each other by creating accounts receivable and payable (AR's and AP's). This proposal separates the act of buying or selling, from the act of settling (paying) the resulting obligation. A competitive market of settlement providers could be used to net and offset our mutual balances on the internet. This can be done by conventional payments or other exchange such as e-gold. However, it could be done purely as an information process, among the original community of real businesses:

This can be accomplished purely as a matter of contractual netting, in which each individual party agrees to cancel some accounts receivable in exchange for having a bunch of bills cancelled in the same total amount, and to maintain any difference that's leftover in either direction, when it's over. Anytime you like, you could pay (or receive) this residual net amount from guess who! One of the same people who owed it to you, or who you owed, to begin with. As a result there is no "Bank".

Bear in mind, that the automatic communication of an account receivable or account payable between people or companies is a technically trivial process held back only by the absence of some standards; GL and AR/AP standards are under development within ebXML, XBRL, OMG, the ARAP project, and other consortia. In coming years, when you create a purchase or sale in your Quickbooks it will of course, be transmitted to the recipient (or intermediary).

Let us suppose the ARAP cloud in this case is eBAY, and the four companies are in the habit of posting their bills on EBAY with aliases. (I'm skipping a lot but each of their B2B commerce messages such as POs and invoices, lists one of their aliases instead of their bank/ACH number.)

Let's suppose the settlement agents are clever fellows and can maintain a 3-column table and match debtors with creditors. Let's say they are even clever enough to aggregate and swap payables and receivables among themselves. They might maintain mutual balances between each other or offload particular balances directly to the Companies in the market. In this case let's assume there are four different SAs who happen to know these particular companies and advertise on their website or eBAY as clearing agents or market makers for paper issued by/against lists of aliases which they (secretly) know are Company A,B,C and D.

The settlement agents might be banks, finance companies, merchant account providers, etc. or may be the companies themselves, with respect to one or another of their own customers and suppliers in some cases. Liquidity may be initially provided within this system by prepaying of suppliers for goods or services, for example. ) Bottom line, this market may be very competitive, and fees extremely low since all these Companies already knew each other in the first place and the act of netting will dispose of their payable and receivables in equal amounts, with finality. There is no likelihood any company will agree to pay any liability that isn't already on their books as an account payable, any more than they pay fake bills from the postal mailbox. This is why it's fundamentally different from today's "bank" economy. The settlement agents don't assume risk. Nobody assumes anything. The Companies either accept the netting proposal from the settlement agent or they decline it.

http://www.byte.com/documents/s=485/byt20001103s0001/index.htm

Webservers, mail servers, and RDBMS-based business systems and e-commerce are obsolete on grounds of cost, complexity, performance and security. They can be replaced by a pure, flat, public filespace where participants post XML messages, and transactions that are encrypted, but publicly visible. Key points:

Users control all access by controlling encryption keys.
No system or database administrator.
No unencrypted data on the server to steal.

The need for transactions that span company boundaries breaks server-based control of security. Within the global file system, pure information would be stored in standard XML vocabularies.

A user could select a new best-of-breed provider for various business services by simply providing indexes and encryption keys he or she controls, without begging permissions and paying fees for additional logins to complex, centralized hosts and banks.

If today's networks and storages were available 30 years ago, SMTP, POP3, and HTTP would never have been invented. If today's XML standards had existed, SQL RDBMSs would have never happened, in their present forms. Certainly, their markets would have been much smaller.

Hub-and-spoke transaction architectures with human-supervised security are a cultural artifact. If you trust the individual and the free marketplace, you would build a common filespace with intelligent nodes and a common vocabulary.

I'm tapping my fingers impatiently for a wide-open free architecture where we can send and receive orders, invoices and payments directly to each other, for free. Point-to-point, and free.

(An ARAP cloud service could be provided to web browsers, using open source webledgers such as SQL-Ledger, NOLA or CK-ledger. This FAQ is about webledger settlement; i.e. the use of webledgers as a repository for AR, AP and settlement transactions. Please go to the open source webledger sites and test drive them to get an idea what they are.) Webledger Settlement FAQ WHO IS THE SETTLEMENT AGENT? A settlement agent can be anybody. In local communities it might be a retailer or anybody else who has an address and a reputation in the community or web of trust. In wider geographic areas one might expect that this role will be filled by banks, credit card merchant account providers, collection agencies, loan companies, telephone companies, etc. It may also be provided by webledger hosting providers, or local businesses or chambers of commerce, etc. or by robot agents. WHY DO I NEED A SETTLEMENT AGENT? The short answer is: you don't. You can always issue promissory notes to buy things, and redeem them yourself, by performing services, or by giving some commodity or money to the presenter of your promissory note. Similarly, you can always accept promises of other people on that basis, and bill them monthly, or telephone them, or "spend" their paper to buy things anywhere you can convince somebody to accept the promissory notes you have piling up. There are already at least two settlement agents used by every business: their bank, and their credit card provider. In the world today, settle- ment between buyers and sellers directly is only possible by currency, or gold or the electronic GBCs (gold backed currencies). But these are impractical for most business dealings. Using a settlement agent between company and bank provides two benefits: (1) uncouples the hardwired connection that forces all of your settlements thru your bank, allowing you to use other more competitive settlement providers without disrupting your business operations nor your accounting processes. and (2) enables a thorough automation of your accounts payable, receivable and cash accounting which would be impossible if you only use a bank. IF MY BALANCE IS POSITIVE, WILL THE SETTLEMENT AGENT PAY INTEREST TO ME? That is entirely between you and your settlement agent. In fact, some community currencies have an agreement that their mutual payables and receivables have negative interest (demurrage) making obligations decrease in value. This compels people to spend their credits quickly and is thought to avoid money hoarding and interest-seeking behavior. A webledger platform makes it highly automatic and efficient for ledger transfers to be made between any of its subscribers. There is nothing preventing the payment of interest on a daily or hourly basis. If the laws of the jurisdiction permit the settlement agent to pay interest to you, that is certainly what we expect to develop in cases of large balances. IF MY BALANCE IS NEGATIVE, WILL THE SETTLEMENT AGENT HONOR MY REQUESTS TO PAY CASH TO MY SUPPLIERS? That is between you and your settlement agent or other lender. Similarly to the question of interest, there is no functional or systematic limitation in the webledger platform that prevents the creation or management of inter-party loans or balances. A webledger platform offers unique value to lenders by enabling users to grant views to of their ledgers to lenders, to observe liquidity of the borrower. In addition, a webledger can provides a number of audit services, credit scores, and other financial metrics. It also enables a marketplace where of competitive, generic accounting and auditing services are available. As a result, we expect lenders to take up roles as settlement agents, and that the webledger users will experience greater access to loans, and lower interest rates, than they would if restricted to traditional desktop software. WHAT ABOUT SECURITY RISK? There are several steps involved in webledger settlement: the establishment and funding of a settlement account is fairly risk-free if you trust the bank or other party who is your agent. The seller who accepts book entries (credit) on their settlement agent's account has exactly the same issue. If they trust the party who is their settlement agent, they have no other risk. There are several risks that the SA and the webledger must worry about, which do not concern the end user. For example, if fraudulent messages (intercompany journal entries) could be created inside the webledger server, a perpetrator could then instruct the SA to transfer credit from one accountholder to another. The perpetrator could then instruct the SA to liquidate that balance into a bank account and withdraw it. Obviously, the webledger has put in place the necessary security measures to prevent these losses.

more links about reputation and credit in an AR/AP or mutual credit community: More links. Home http://www.ledgerism.net/reputation.htm http://www.ledgerism.net/SignedPnotes.htm http://www.ledgerism.net/nonquantified.htm http://www.ledgerism.net/hypercub.htm

The AR/AP Cloud