Financial cryptography (FC) is the use of cryptography in applications in which financial loss could result from subversion of the message system.
Cryptographers think of the field as originating in the work of Dr David Chaum who invented the blinded signature. This special form of a cryptographic signature permitted a virtual coin to be signed without the signer seeing the actual coin, and permitted a form of digital token money that offered untraceability. This form is sometimes known as Digital Cash.
A widely-used and previously-developed cryptographic mechanism is the Data Encryption Standard, which was used primarily for the protection of electronic funds transfers. However, it was the work of David Chaum that excited the cryptography community about the potential of encrypted messages as actual financial instruments.
Financial cryptography includes the mechanisms and algorithms necessary for the protection of financial transfers, in addition to the creation of new forms of money. Proof of work and various auction protocols fall under the umbrella of Financial Cryptography. Hashcash is being used to limit spam.
Financial cryptography is distinguished from traditional cryptography in that for most of recorded history, cryptography has been used almost entirely for military and diplomatic purposes.
As part of a business model, FC followed the guide of cryptography and only the simplest ideas were adopted. Account money systems protected by SSL such as PayPal and e-gold were relatively successful, but more innovative mechanisms, including blinded token money, were not.
Financial cryptography is frequently seen to have a very broad scope of application. Ian Grigg sees financial cryptography in seven layers, being the combination of seven distinct disciplines: cryptography, software engineering, rights, accounting, governance, value, and financial applications. Business failures can often be traced to the absence of one or more of these disciplines, or to poor application of them. This views FC as an appropriately crossdiscipline subject. Indeed, inevitably so, given that finance and cryptography are each built upon multiple disciplines.
Financial cryptography is to some extent organized around the annual meeting of the International Financial Cryptography Association Financial Cryptography, which is held each year in a different location.
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“America is a nation with no truly national city, no Paris, no Rome, no London, no city which is at once the social center, the political capital, and the financial hub.”
—C. Wright Mills (19161962)