Domain Names as Digital-Currency – How it Works
Recently there has been much talk about numeric dom-COM domains and their use as a digital currency – particularly in the Chinese market. The new numeric promotion by dot-XYZ has generated more discussions and a lot of misunderstanding. So I will try and explain how dot-COM names can be used as a substitute currency and why I think the XYZ promotion isn't going to work as a digital currency.
I use the term "currency" in its loosest possible meaning - that is, something that can be used as a repository of worth and later exchanged for good, services or commodities. This means almost anything can, and does, get used as currency. I am told by a friend, who is a regular off-track explorer in Zimbabwe, that the most useful currency to carry in the villages is UHT milk. Economists often refer to this as Commodity Money and is probably the most ancient form of money, as opposed to Representative Money, which are the banknotes & coins most of us use today.
For a long time China has had export restrictions on currency and capital transfers, this was tightened further in Jan-2017. Personally, I'm a free-trade believer. You have to keep things flowing in all directions for international trade to work. However, a country can become impoverished if all the money is sucked out of it by big multinationals, so you have to strike a balance. Chinese investors, possibly fearful of a financial crash at home, or simply wanting to diversify their portfolio risk, were increasingly sending money abroad - reducing the cash circulating in the local economy.
Person-A wants to buy goods worth $2000 in the US, but he can't get $2000 out of his country. He goes to local Person-B, who owns a domain name worth $2000, and gives this person $2000 worth of local currency in exchange for the domain. Person-A can now sell the domain in the US and now has $2000 in US jurisdiction, without having exported any currency.
Alternatively, Person-A could trade the domain with another local Person-C for US good & services without even cashing in the domain itself. Person-C knows they can turn the domain into US cash if they need to, or trade it on, so the domain is as good as paying in cash.
If Person-B bought the domain for hand-registration prices, or thereabouts, he also didn't have to violate export restrictions. However, it is also possible that Person-B has some kind of special export allowance, so can repeat this transaction.
Effectively, the domain name is being used as a way of trading in US$ without having to actually hold any US currency itself. Its a token, just like a bank note. Its a $2000 bank note, whose value is guarantee by the history and rarity of dot-COM names, instead being guaranteed by the Federal Reserve.
This use does not require that the domain has any long term value, simply that it retains its value long enough to be sold, probably in less than 24 hours. This also means that the purchase price, and the renewal price of the domain, are pretty much irrelevant, as the new owner has little or no intention of keeping it that long.
However, this does require that the domain name has an intrinsic value that can be realised anywhere. Its intrinsic value is also a guarantee against a crash in prices, which gives the traders confidence to accept this as a currency substitute.
It also relies on the domain having substantial value. This means the fees of handling the currency token do not outweigh its face value.
If the domain was only worth $1 then it would require transferring 2000 of them to achieve the same ends – this potentially causes a number of problems. Firstly, if there is any transfer fee, this would need to be factored into the equation and secondly, if there is any mandatory renewal-on-transfer then the whole thing breaks down.
But assuming ZERO transfer fee and NO renewal-on-transfer and a fully automated EPP capability to transfer all 2000 domains, it would be entirely possible to use 2000 domains worth $1 to implement the same transaction – e.g. 678000.XYZ to 689999.XYZ
The problem is the guaranteed value. Unless the XYZ registry guarantees to buy back any promoted domain for their face value, there is no guarantee, for the new owner (in my example, Person-A), that they they will be able to realise the final phase of the transaction – selling the domains in the US.
That is, if I put those 2000 dot-XYZ domains up for sale on Sedo right now, I might be lucky to get $200 for them.
All national currencies have a value because the national bank of that country, as the financial representative of the government, provides a guarantee of its value – i.e. they are the guarantor of last resort. If the value of the currency slides, they will intervene in the international markets to prop-up their currency's value.
Bitcoin has no guarantor of last resort, they maintain value by maintaining rarity, but the price they pay is extreme volatility in the value of bitcoins. A bitcoin may be worth over $2500 now, but as recently as two years ago it was worth a tenth of that – few countries would accept this level of volatility in their currency. Even the value of Gold is not this volatile.
Can it work for dot-XYZ?
As there is currently no confidence in the open-market value of dot-XYZ domains, I believe, for dot-XYZ's digital-currency plan to work, the registry will need to guarantee the value of the names - for example, to offer a guarantee to buy them back at face value.
However, they still have the hurdle of the renewal fees. At some point, somebody is going to have to pay those fees and no other currency costs 100% of its value per annum simply to keep it stored.
With a $2000 dot-COM domain costing $8/year for storage, the ratios may be acceptable, but having to pay $1 per year to store $1 of value is not an equation any financier would recognise as a good investment. This means the relative cost of using dot-XYZ domains as a digital-currency are probably prohibitive.
There would also be a huge risk to dot-XYZ in providing any kind of guarantee. Should China change the rules on currency movements, the entire business model could disappear overnight and, within 24 hours, everybody might want to cash in their chips – a move which could easily cause the registry to go bust.
Dec-2013 China effectively banned Bitcoin and within 6 months the value had dropped by more than half, from about $1100 to about $400.
In addition, if there is no transfer fees, and the XYZ domains are only worth $1 each, could the XYZ Registry afford to sustain the levels of free transfers necessary to make XYZ domains a viable currency, or are they going to end up being forced to invest in more infrastructure, which is earning them nothing.
But if there is both a transfer fee in addition to the storage (renewal) fee, does this usage case make sense for the end-user? Almost certainly not, when a wide range of high & low value dot-COM domains are already available as an alternative.
Like leaves from a tree, you can't expect something that is plentiful and has little underlying utility, or guaranteed value, to be used as a substitute for currency becuase the holder can not be sure to be able to realise their holding whenever they want.