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Re: Escrow Risk (was Interledger and Privacy)

From: Adrian Hope-Bailie <adrian@hopebailie.com>
Date: Wed, 28 Oct 2015 14:40:43 +0900
Message-ID: <CA+eFz_K8hPSP89rAGQnYmKX38xFQGXK9-Q8BOrW-_t2ik-XfAw@mail.gmail.com>
To: Interledger Community Group <public-interledger@w3.org>
It was pointed out to me that my reference to the central bank is
misleading. I put it in there because Arie asked about central banks but
it's actually a poor example.

So, to be clear, control of when to release or reverse the escrow sits with
the ledger. In the case I was thinking of, the central bank is a
"connector" between two retail banks, (a poor example because in this case
the banks normally hold funds/obligations with the central bank as opposed
to the central bank holding accounts at the retail banks). I was trying
emphasize that the quality of the participants determines the risk.

In reality, where the ledger has ultimate control over if and when to
release or reverse the escrow funds the connectors are the only entities
ever exposed to risk of not being settled. The assumption is that they will
price this into their offers based on which two ledgers they are connecting
and how much they trust those ledgers to execute the escrow properly.

On 26 October 2015 at 17:39, Adrian Hope-Bailie <adrian@hopebailie.com>

> More Arie questions to scratch your head over:
> Given the connector ultimately holds the money for however long in
> "escrow":
>    - is there counterparty risk relative to where the escrow money sits
>       (call it escrow risk??)?
>       - could central banks play a role here?
>       - IMF / BIS?
> I'd only classify this as counter-party (settlement) risk if there is a
> chance that the reserved funds are lost before they are released (i.e. they
> weren't really in escrow).
> The risk of this happening will differ from ledger to ledger and connector
> to connector (e.g. If the connector is the central bank I'd say the risk is
> close to zero...) and this is another characteristic of the ledgers and
> connectors that a user may consider in path-finding.
> If there is some way for the user to get a guarantee that the funds are
> truly in escrow the risk is very low.
> Perhaps this would be through some independent certification of the ledger
> system if it is a closed ledger?
> For a system like Ripple or Bitcoin it is almost non-existent because the
> system is open and the user can verify that the funds are in escrow if they
> want to.
> This topic feels like it has some more questions that are not immediately
> apparent...
Received on Wednesday, 28 October 2015 05:41:13 UTC

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