Trust Networks


In a Financial Times article on the 15th of April, an interesting, albeit illegal, trust network was explained.

In short, what people in Iran have to do to move large sums of money in and out of the country in the face of an increasing economic clamp down from the US, is to make use of a centuries-old method known as hawalah.

How it works is best described by the diagram above, but in essence, an intermediary is engaged who charges commission to transferor, then phones a friend in the receiving country (another broker) and asks him to give money to the receiver. Now the first broker has actually incurred a debt with the second broker because no money passed between them, only an instruction.

The way in which this debt is settled, is that when the receiving broker also has a client who wishes to transfer money into the country of first broker the process happens in reverse, with either the exact debt, or more, or less being settled.

An interesting aspect to social computing that this practice illustrates, is that a mutual trust relationship exists between the brokers (there is also a trust relationship between the transferring parties and the brokers, but they know where the brokers live!). If the debt is not settled later then the broker will go out of business because no future transactions will be passed through him. The cost of reneging is too high.

Thus, the system regulates itself, and everyone wins . . . well almost everyone - the practice is not quite what the US were hoping to amplify when they imposed their ban on foreign currency trading with Iran.