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Digitally Signed Promissory Notes (P-notes)

Problem Statement

Reducing transaction cost is a fundamental goal of SMEs and business strategy, of providers of software to SMEs.

Any vendor of accounting applications has an interface providing them with a potential foothold in transaction processing which is not available to competitors at other layers of the OSI stack or its business layers. Languages like UBL provide standard semantics ("document formats" as well as a rationalized, coherent data dictionary) for exchange of all of the most common transaction types. The AR/AP project submission to OMG provides for automatic settlement and reconciliation of AR/AP.. AR/AP choreography solves some fundamental problems of many-to-many transaction markets on a P2P basis, without bank fees, while providing a multiparty EAI platform for data integration.

Still, there is a problem with this vision for settlement--as with most B2B and EAI platforms: the only settlement solution it supports is bank payment (either EDIFACT or manual). Bank settlement is

expensive in some countries,
too expensive for micropayment scenarios,
exposes SMEs or their xSPs, to great security risks,
reveals customer lists to banks, as well as their trading partners' customer lists,
creates a disincentive for users to send transactions detail where banks can see them,,
breaks data integration when banks can't forward business data or manifest to payees.

Vision

The vision we are trying to achieve is uncoupling the selection of payment provider, from the AR/AP application. Instead of viewing "payment" as a verb, as a programmatic procedure performed by AR/AP software, we envision that the liability object will be encapsulated so that it can be processed by any agent, or applications, or whatever other application is objectively the best choice based on circumstances existing at the time of the decision to pay.

The AP will be settled by the issuance of a promissory note, a different type of liability. This project allows takes advantage of the fact that most AR/AP business takes place between companies who already know each other and suppliers have already granted credit to customers. This project proposes:

This project gives SME's a way to affix their digital signature to their promise to pay money, and send the signed P-note to their trading partner. P-notes will be the first application of digital signatures by most SMEs. Once coded, this capability has many potential uses. The P-notes may optionally allow the user a choice to make their P-note transferable, as well as non-transferable.

As individuals and companies issue more and more transferable (bearer) P-notes, these P-notes may, potentially, begin circulating as a kind of money which creates liquidity within e-business markets. For example a large purchaser could issue bearer P-notes into his supply chain in exchange for manufacturing supplies and components. Those promise having good credibility, could be used by those suppliers, in exchange for raw materials. Thereby, the supplier would achieve lower transaction cost and higher credit than otherwise possible. These promises could circulate quite widely, if they are well designed. http://www.ledgerism.net/arapcloud.htm

This project proposes P-notes based on a generic digital cash mint concept, with measures to prevent doublespending of the P-notes. A holder of the digital P-note will have a way to determine with a high degree of confidence whether the P-note is an authentic promise of the issuing business entity.

Users Scenarios

These features are aimed at the Owner of a business, both on the buying and selling side, who will achieve lower transaction costs by better data integration and convenience, particularly at settlement time. These lower costs will be achievable only by other, additional work in automation, but the digital P-note with its XML information payload will allow a range of process improvements associated with AR/AP settlement.

P-notes used within supply chain scenarios allow sellers to verify credit faster and cheaper than credit agencies. In tturn these features will also attract sales people in markets where buyers having the ability to issue P-notes may prefer suppliers who accept P-notes.

Signed P-notes are also aimed at principals and settlement agents in many-to-many AR/AP communities. Wherever you have vast numbers of parties in many-to-many relations without any dominant supplier or customer, or, wherever you have AR/AP ledgers outside the SME or xSP host, (including Win32 applications), SMEs start needing SAs. SAs begin to require this kind of legally nonrepudiable, signed P-note. Payables and Receivables will flow into whoever is the best, fastest services for settlement, from all kinds of external platforms. Likely, only specialist firms and developers will provide competitive services required by Settlement Agents (fast, scalable accounting interface, coupled with a digital mint, advanced features for manipulating ARs and APs, automatic multiparty reconciliation, etc.)

Finally, the features are aimed at completely unrelated parties who may enter the market and buy P-notes of reputable firms, in order to use them as electronic money just as they do today in commercial paper markets. And of course it is aimed at chief bookkeepers and accountants seeking convenience in accounting that always comes with generic AR/AP integration.

Scope and resources

The scope of this ambitious project is to provide the minimum necessary infrastructure so that all SME users have a signing key, and access to a signing module for creating P-notes. This project will research and identify appropriate signing solution, considering PKI infrastructure, SAKEM, or simple hashes:

SMEs may decide to implement the full, and recommended, set of X.509 or proprietary Public Key Infrastructure, including arranging for an external trust provider such as Verisign, Entrust etc., PKIX to other trust hierarchies, etc. SMEs or XSPs could function as an ORA (Org. Registration Authority) etc. This would cost on the order of $100,000 plus approximately one fulltime permanent staff.
Alternatively SMEs or XSPs might select from its existing platform vendors (Microsoft etc.), or open source software, or ISV's, software enabling users to create a public/private key pair for digital signatures, and enabling the XSP or SME to maintain and manage them securely. This standalone certificate server would be a subset of PKI.. or,
SMEs or XSPs might decide that all signing will happen on the server, and to retain custody of all signing keys. In that case you have a proprietary solution and can use a variety of encryption to generate signatures, which only SMEs or XSPs could read. If SMEs or XSPs wanted to avoid the appearance of locking in the SA, SMEs or XSPs could publish the proprietary code. or,
SMEs or XSPs might adopt one of the PGP solutions which already have some global public key registries, enabling the SA some ability to independently check the validity of signatures. This might, potentially, allow users some additional ability to use the same keys for other uses.

Making P-notes better than digital cash, and better than cash: addressing the problem of terrorism or money laundering

provides an architecture for transaction tracing but only at SMEs or XSPs server, and only with a court order.
provides as great a level of privacy as is possible, without allowing completely anonymous or anarchic payments.
no automatic Key escrow or government reporting etc as with banks.

Empirical Reputation Metrics

an interface that provides very basic, version 1.0 empirical reputation metrics (ERM) to assist credit evaluation by recipients of the P-note, or Settlement Agents, is essential. This will allow public inquiries as to the length of time the user has been with any XSP (webledger host), number of P-notes issued/retired and 5 to 10 other very simple, basic facts.
a user interface allowing the user to specify constraints on what ERMs are released, and to what parties, such as holders of his P-notes. (ERMs are discussed at http://www.arapxml.net/reputationXML.htm This is all under the control of the SME user.)

Creation, maintenance, and retirement of P-notes

a P-note data repository with security and permissions distinct from any issuer or holder of P-notes, recognizing the XSP's "Froomkin role" in maintaining the integrity of P-notes
a control allowing the user to choose to issue a P-note as one of their payment choices in settling accounts payable. The user may use this control at order time, receipt of goods time, or later time.
an interface that accepts inquiries from other SME users regarding a P-note (i.e. a UID for a P-note), and simply returns information to the inquirer whether the P-note is still outstanding, has not already been redeemed.
an interface that allows the holder of a P-note to present it to the Owner (e.g. an XML/X object) to effect a transfer to a new owner (e.g. by redeeming it and reissuing it, to prevent the previous copy from being used again.)
an interface to facilitate redemption (extinguishing the debt; marking the P-note as void in their P-note registry.) while at the same time, tying the settlement of the outstanding P-note with a specific bank transfer or other payment (to provide the Owner with a trail of evidence associating his payment with the retirement of this particular unique note.) A P-note might be retired by the issuer only by one of the payments journals, PAYMUL, or other payment gesture.
optionally, a mechanism by which a promise to pay interest and/or fixed markup amounts or percentages may be encoded into a P-note, as provided in ArapXML

High level architecture

Solutions Concept

The feature will be used primarily in straight purchasing scenarios. Buyers will use it to achieve greater acceptance of their credit and win some incremental trust from sellers, which will translate into greater availability of credit. Sellers will find that they can transfer P-notes to a liquid market of settlement agents including banks, perhaps, in exchange for cash or credit. The feature will be used in any multiparty settlement community where sellers need some measure of assurance or do not already know the buyer.

The acceptance criteria satisfying users' requirement is robustness of the signatures, security and reliability of the service, and ease and practicality in the users' ability to create, transfer, evaluate and generally move the P-notes around.

Footnote 1: relationship with MeT

The MeT specification provides a geneneralized signing capability. The scenario of most immediate relevance is MeT account-based payment, available at http://mobiletransaction.org/documents.html SMEs or the XSP's should consider developing interfaces which enable the user to sign P-notes by sending them to their cellphone or PTD by various network paths.

However, MeT signing devices are not yet available. P-note signing capability competes with the signing capability of MeT and may render it unnecessary. The XSP's should attempt to uncouple its signing capability from any document generating and management capability. This may enable users to apply some future "signing wizard" to other content, perhaps even 3rd party contracts just as MeT does, and, allow SMEs or the XSP's users to choose this signing engine or to maintain their own keys and signing mechanisms.

Note 2: P-notes transmission outside the original SME or XSP

Digitally-signed P-notes have some similarity to a variety of other document formats for payable obligations, for example XML vouchers,
http://www.ietf.org/internet-drafts/draft-ietf-trade-voucher-lang-01.txt
http://search.ietf.org/internet-drafts/draft-ietf-trade-voucher-vtsapi-00.txt

One future vision is that the P-notes may be sent over the internet to the wallet such as a WebFunds wallet, or hardware device owned by the user, so that they can exchange them outside the community of their own application or the XSP. WebFunds (www.webfunds.org) is an open source Java application enabling the user to receive, manage, and send digital bearer cash tokens or coins with compliant digital cash servers. Webfunds enables the user to manage keys and perform specific validation functions against the digital contracts etc. (The Ricardian contracts in WebFunds consist of a very minimal set of ascii data including amount and currency identifier, encrypted with the mint's key. This is not AR/AP)

The concept in this version is that the P-notes will stay safely on the XSP's server and might be transferred among the XSP's own users only. This will give the XSP greater experience with the new digital signing code, MeT emulation and other challenges while still providing the traders in P-notes with greater assurances.

The deliverables from Architects team would need to be include a more thoroughly researched and documented design. This will include identifying and recommending cryptographic algorithms, and defining business process / workflow in greater detail than the outline above.