What is digital currency?

At its core, digital currency is a type of currency that only exists electronically. It is not traded as coins or paper but rather as electronic exchanges on computers and computer networks.

Since the early 1990s, a wide mix of libertarian and cypherpunk thinkers have been trying to figure out a way to make an electronic version of cash, complete with its anonymity and liquidity features available. While the anonymity part had, for the most part, been resolved by the early 1990s (cryptographer David Chaum, who founded Digicash, the pioneer in the field, had research papers on those aspects as early as the late 1980s and had implemented the core basis of an anonymous currency by the very early 1990s), the challenge for digital currency has been one of transaction volume.

With some small changes, systems that were originally planned for all-digital currencies were eventually adapted to support existing legacy currencies like dollars and euros, leading to the rise of companies like Paypal, with a centralized clearing system not dissimilar to those in more traditional payment systems like Honk Kong’s Felica–based Octopus smart card payment system, which is probably the most successful implementation of a store-and-forward payment system in the world.

Similarly, in the US and Europe, recent deployment of store-value cards and NFC technologies have established a potential infrastructure for building out a possible way to eliminate physical cash over the long run. Over the last decade, the rise of internet payments, electronic deposits, and electronic debits has lowered the reliance individuals and corporations have had on paper checks, leading to a substantial drop in the amount of business done around check-related product lines. It is assumed by many in the financial industry that checks are on their last legs.

So what about cash?

Cash has a very long history and seems to have gone from one technological revolution to the other without being drastically impacted. In fact, a history of cash seems to point to cash being closer to a concept that can attach itself like a remora to the latest technology. So while coins used to be the only way to transact cash prior to the invention of the printing press, cash eventually came through the first information revolution stronger as currency became something printed on bills and thus became easier to carry around.

With the advent of the telegraph system, cash started being delivered more as a concept, using a store and forward approach whereas one could go to a telegraph office and send a promissory note over the air. The sender would pay the telegraph operator and the telegraph operator would then work out credits and debits between the different offices, only moving physical cash when actually needed. The same concept basically moved from telegraph to telephone to fax machines to the internet and now to mobile phones. Different modes of distributions but fundamentally the same concept.

The introduction prepaid cards (also known as stored-value cards) in the last decade has made it possible to move cash into a fairly anonymous plastic container that can then be used to make payments wherever the currency it has been filled with is accepted. With players like Visa and Mastercard in the game, it is easy to find networks that support such offerings.

Back to the Euro crisis

For countries in the Euro-zone, there is now a choice: either agree to a more centralized management of their economy from the European Union or decide to strike out on their own.

The former would lead those countries to become more like states in the United States, where they have some level of autonomy but also must ensure alignment with a larger federal entity. The net result, in the long run, for the countries that decide to go down that route, is that they will help forge a United States of Europe, with closer cooperation and eventually a concept similar to federation making its way through that union (I’d put the probability of this happening as fairly high within the next 25 years)

The latter is a more interesting case, from a technological standpoint, because it would mean figuring out how to fill the gap and this is where a digital currency makes sense. If you look at the USA, which came of age in a time when paper currency had become common-place, the vast majority of the cash being trafficked is through bills in denominations as low as $1 (there are $1 coins but they are not very commonly used.) By comparisons, Euros and other European currencies do not have a bill for a single unit of currency and still hang on to coins for that purpose: this is due to the psychological concept of money of more tangible and since the lower end of currency is handled more often, people may want to feel it in their hands.

So what if a country that decided on building (or rebuilding) a currency from the ground up were to do so in today’s day and age?

First of all, we are dealing with a world where electronic payment systems have become more common, with ATM and credit card readers reaching near ubiquity in everyday commerce. At the same time, we are dealing with a world where mobile phones are becoming something that everyone carries. Looking at those factors, is it too much of a leap to imagine a world where a currency could be added and subtracted from phones or pre-paid cards. Why would one need physical cash in today’s world? Are there use cases where the legal transfer of money from an individual to a company and vice-versa could not exist in an all-electronic world?

I’d warrant that no. There is no reason why cash needs to remain a physical component. For starters, the government could distribute e-wallets to any of its constituents relatively cheaply (today, the cost of a pre-paid card with no value on it would be measure in cents in the US) through bank networks. Some ATM might have to be retrofitted reloading of cards but that would be about it (they can already read the cards today). And with just such a move, a whole country would have moved from a physical currency to a digital one.

So the question now remains as to which country will be bold enough to make that first move. To go electronic would probably be substantially cheaper than any other alternatives a country would have to consider if it decides to create or relaunch a currency… and that’s why this option should be the top on the implemetation table for countries that are leaning in that direction.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title From Euro to e-uro. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

So without further ado, here are my prepared remarks:

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Good afternoon,

I know many of you are probably wondering why a history of currency would be on the program at a Web 2.0 conference. So let me first dispel a few concerns you may have:

• History can be a useful indicator of what may happen in the future. Under a historical lens, Web 2.0 is pretty easy to predict as the natural descendent of community organizing and lowered cost of communication and mediation.
• Web 2.0 will impact currencies and that will probably be the biggest thing historians of the future may remember about Web 2.0

So, in the next few minutes, I’m going to take you on a trip through roughly 60 centuries of history (just the highlights, I promise) and will show you how each major shift in the evolution of currency reflects what we consider pillars of the Web 2.0.

Having done so, I will attempt to take you through the next 25 years and project how Web 2.0 may fundamentally redefine how we think of currency, and present some of the challenges and opportunities this historical change may present.

So here we go…

About 4000–5000 BC, the basis of most trading was something called barter. Barter is simple to understand, really. At its most basic level, it goes something like this:  “I have fish and you have some chickens. How many chickens will you trade me for my fish?”

The other guys says he will give me 5 chickens for my 10 fish and, if I feel it’s a fair trade, we make the exchange.

So that’s all good but one can’t live off fish and chicken alone. And eventually, I go back to the guy and he tells me he’s not interested in fish but if I can find a cow to sell him, he’d be willing to exchange 50 chickens for it. So now, I’m out looking for someone who will give me a cow in exchange of some fish.

That may work for a couple of goods but you can see how inefficient an approach it is.

Back then, people started realizing the same thing and so there was a move to find some way to simplify things. Communities started gathering around some goods that they would agree were useful as a basis for trade: grain, honey, rice, etc…

And, through these actions, the concept of money was born… and with it, the basis for what defines a currency was established:

• It provides a standard measure of value for goods and services
• It serves as a medium of exchange
• It serves as a method of storing value

Let me get into those points in more details before we move on.

A currency provides a standard measure of value for good and services. If I go back to my example of chickens and fish, I can look at currency as a go-between. By establishing that a fish is worth 1 pound of grain and a chicken is worth 5 pounds of grain, I can then extend the model to a cow is worth 100 pounds of grain and a house is worth 1 ton of grain. From this data, I can infer that a house is worth more than a cow, which is worth more than a chicken and so on…

However, none of this can happen if there isn’t an agreement amongst everyone that a particular currency has value. You could call that a certain wisdom of the crowds and that’s where currency starts overlapping with web 2.0. We’re going to get to more details about that later.

The second point is that a currency serves as a medium of exchange. Because everyone agrees that grain is a great way to make those comparisons, I don’t have to go around and try to make conversions from one item to another. I trade the item against grain and then can use the grain to “buy” something else. In that sense, I can exchange any good for grain and grain can be exchanged against any other goods.

Once again, this only works if people agree on it as a medium of exchange. And that, in turn, represents a form of metadata about a trade. Sort of like if people were to tag an item with the same term. And once again, we get to a position where it overlaps web 2.0 as the crowd is now working together to establish value and therefore define markets.

And because currency is metadata, it can also serve as a way to store value for future use. For example, if I fish, there’s only so long I can keep my fish before it spoils. By selling it immediately (ie. Trading it for its currency equivalent), I can avoid that spoilage and store its value for future use. So, in a sense, currency serves as a storage medium.

But the fact that it works as a storage medium can be both an advantage and a disadvantage. As storage for value, the currency itself become valuable. And when something is valuable, well, some people try to acquire it through means other than production. From here, we end up with theft, pillage, war, etc… And from all this carnage, we get to the point where people try to find ways to protect their currency (and, almost as often, their lives).

In around 3000 BC, in ancient Egypt, some people come to the insight that, by storing their currency together and agreeing to share the cost for an army to protect that currency (which, at the time, is grain), they may be protecting themselves from loss. Along the banks of the Nile, granaries start to appear and they become a place for storing currency: people come in with the grain they received as a form of payment for whatever it is that they sold. And the first accountants appear, keeping track of what amount of currency people have in their accounts.

Everybody is happy and celebrates as they have discovered a fantastic way to store their currency and keep people from threatening them. Across Egypt, people pat each others on the back until, well, until the first currency crisis.

Around 2200 BC, severe drought made grain more scarce. The result was that disbursements (taking grain out) started to move at a higher rates than deposits (putting grain in). And some people found themselves in a situation where they had spent all the grain they had and had a hard time producing anything they could sell. In this case, the value of the currency (grain) increased because the currency became more scarce.

Eventually, the problem affected the top of the economic food chain, aka. The pharaoh and, as a result, local people started opting out of pharaoh rule and attempting to take control of their own currency. When all was said and done, about 200 to 300 years later, grain was abandoned as a currency as it was considered that a currency that can be eaten is a currency that can have a problem. So metals, which could be turned into tools, which themselves could be melted again to turn them back to metals, started emerging as the dominant form of currency.

This is important because it finally moves currency to something that is more abstract. Metal may be a commodity that, without any work, could be considered of little value but, as an abstract construct of value, it works. And for the next few centuries, that’s the case.

Some interesting alterations in terms of the ways money is stored and carried happen during that era. For example, in a number of countries like China and Sweden initially, people realize that metal may not be the most portable of currency for large transaction and so places where currency is stored (now called banks, because, initially they were sitting on river banks) start issuing the equivalent of paper receipt for storage and people start trading those receipt. Here, we see the emergence of two key components of a more modern system:

• First, the concept of representative money, where a piece of paper can be redeemed for a certain amount of metal, therefore representing that metal.
• Second, the emergence of paper as money, creating another layer of abstraction in the transactions.

With the move to paper, currency becomes sort of an I.O.U., representing a certain value but not possessed of that value in itself. This shift, called the shift to representative currency, is important because it establishes currency as an even more abstract concept. The piece of paper you receive is basically a receipt that can be redeemed for some equivalent amount of metal but it isn’t the metal in itself. So here, we see currency basically becoming free-floating metadata, asserting worth without necessarily showing it.

The problem is that the distance from a bank where the paper note can be redeemed becomes a factor in terms of exchanging the banknote.

Enter John Law.

Law is an interesting character: he’s a Scottish economist who, at age 23, shoots a man, is tried and found guilty of murder. He’s thrown in jail, manages to escape and lands in France. While there, he gambles a lot and comes upon two major observations:

• People have taken to trading the paper bills as if they were coins
• Paper is divorced from the metal it represents

From there, he deducts that whoever could control the flow of paper bills could start issuing more IOUs than they have metal for.

With this, he comes up with the concept of a reserve bank, assuming that he could have a bank with only 75 of the cash reserve needed to cover the IOUs it had issued. But there’s a problem with that: in order to control the flow of paper bills, he needs support from a government. And initially, most people think it’s a crazy idea and won’t go for it. But Law convinces some more junior people that it’s a good idea and, eventually, one of his patrons hits the jackpot: Philip D’Orleans rises to power and quickly realizes that he’s running a country where the government has a substantial deficit. So he puts Law in charge of creating a national bank and law sets out to create the first government controlled reserve bank, issuing more paper than it has metal currency for.

It’s a pretty radical idea. Law is dealing with a society where everyone agrees that what you see is what you get as far as currency goes but then he leverages the agreement that paper is a representation of what you get and, after having taken over control of the currency flow, he turns that into what you see is what you get if no one rushes the bank.

Because with his second insight, John Law creates the concept of fractional reserve banking, which basically means that the bank, at any given time, only holds a fraction of its obligation.

But fractional reserves can be a little scary: they work well as long as people trust that the bank can repay them. And most of the time that’s not an issue because while a person needs to pick up their gold or silver or whatever other metal the currency is traded against, another person probably doesn’t need his or hers. So it balances itself out in some sort of common good.

Where the system can fail is when everyone decides to take their metal out at the same time: remember, the bank doesn’t have enough metal in its safe to cover all the currency it’s distributed. That problem is actually an echo chamber problem.

A run on a bank, the situation I’m talking about, generally begins with a whisper: somebody has heard that the bank is having problem and concludes that money you’ve deposited there is no longer safe. That whisper starts spreading and, thanks to an echo chamber type of effect, people worry that their money is no longer safe in this bank. Since they don’t want to lose that money, they run to the bank and withdraw all their money from the bank. Problem is, they are not alone and quickly tens of thousands or more people start doing the same. Because of that massive onslaught, the bank no longer can meet its financial obligation and actually does fail.

This happened in the 1920s with the great depression and it’s happening now (that’s why the government is busy bailing out a number of financial institutions.

But let’s return to history. In the 1940s, after World War II, the Bretton Woods accord established some global rules for currency exchange against gold. But most of the reconstruction of Europe ended up being backed by US dollars to the point where the US held somewhere around 65 percent of the global gold reserves. In 1960, an economist called Robert Triffin figured out a problem with what had happened: there were more dollars in the marketplace than there was gold to back it up. In the early 60s, an ounce of gold was worth about four to five dollars more in London than it was in New York.

Due to many political and economic events throughout the 60s, the possibility of a run on gold and a run on the dollar started increasing and on March 17, 1968, the possibility became reality, creating a substantial money crisis. The whole financial system teetered on the edge of collapse during that era and eventually, the Bretton Woods accord was abandoned. On August 15, 1971, US president Richard Nixon announced that the US would no longer convert dollars to gold. In fact, he added the US would not convert dollars to anything.

That announcement is appropriately called the “Nixon Shock” because with it, Nixon puts an end to the concept of a representative currency established by John Law. In its place is now the concept of a Fiat currency, a currency that is traded not because it has a guaranteed value but because the government says that this currency MUST be accepted as a form of payment.

And so currencies now float, not based on a physical value but based on what people think that value ought to be: today, dollars, euros, pounds, and yens have a particular value not because it is set against actual goods but because people believe that the government that backs those currencies will continue to do so in the future.

So let’s go back to our fundamentals of currencies: they have to be an agreement and that’s where we get to web 2.0 and its impact on currency.

Which gets us to more recent times. During web 1.0, a number of companies starting thinking that the internet, because it was global in nature, needed a global type of currency. So technologies like Digicash, Cybercash, Ecash, Flooz, Beenz, appeared in an attempt to mirror cash and create new currencies.

But they had many problems. First of all, the different systems were hard to use, often requiring software to be installed on the users’ machine. That limited participation and, if you remember one of the fundamental rules of currency creation is that users generally agree on using a common currency.
The second part was that the systems actually went too far in trying to emulate cash. So, just as you need to go to an ATM to get cash today, most of the system used the concept of a purse that was to be refilled from a different area. But why go to an ATM to withdraw cash when you’re on the Internet? Why not say, “I have money in my account, refill my wallet if it’s empty. ”

The third, and probably most important part, was that once spent, the currencies were transferred back into some real world currencies like the dollar or pound sterling (and no euros because this is all happening before the euro became a consumer currency.) That was the biggest mistake because currencies weren’t really traded.

The dotcom bubble crashed and, along with it, most of the virtual currencies that had been introduced. It wasn’t a very big deal because people didn’t hold much money in those currencies.

Meanwhile, a parallel development having absolutely nothing to do with currency creation took form across the internet: because of its global outreach, the net was a perfect place for people to play games together. At any given time of day or night, there was always someone interested in a game of chess or backgammon or something else. Some games went beyond the basic board games and leveraged the concept of role playing games that had been so attractive to so many computer geeks.

And over the years, as computers became more powerful, the quality of the graphics improved. And as the games improved, new point systems were created for each quest allowing to trade work (game-related achievements) for goods (better weapons, magic potions, housing, etc..)

Those points took various forms. So games like World of Warcraft or Lord of the Rings online, which are set in a medieval-like type of environment, turned to gold as their achievement point systems. Linden Lab, with created Second Life, created the Linden Dollar, and so on and so forth.

But then… then something really unexpected by most of the game makers happened: people started exchanging those virtual currencies for real world ones. Looking back now, it seems to make total sense: the challenge, for a lot of those games, is that it takes a lot of time to acquire virtual currency.

Here, in the developed world, time tends to be at a premium. Most of us are multitasking constantly because we just don’t have enough time to do everything that we would like to. But because we spend a lot of time working or doing other things, we don’t have much time to play games. On the other hand, we tend to have more disposable income than people in underdeveloped countries.

For example, in 2005, the average annual salary (and let me make this clear, I’m talking average annual salary) for a Vietnamese worker was 1200 dollars. That’s 1200 dollars a year. That same year, in the Guangdong province of China, that number was $2,778.

Some of those people are in their early 20s and when they get out of work, they go out and spend some of their money to play video games. At some point, a few entrepreneurs around southeast Asia realized that if they paid ANYTHING to those players, they might be able to get past some of the more boring tasks and resell the accounts to people with little free time. A new economic model was born and all of a sudden, World of Warcraft gold started getting traded against US dollars and euros.

Students of currency history could have predicted this. Remember, currency is a social agreement on the value of something and here, those virtual currencies became an agreement on a value of time.

While initially the phenomenon was one of supply arising from southeast Asia to meet North American and European demand, it eventually went around full circle. When China decided to start requiring that people register their work occupation as “virtual workers” for people dealing with that type of trade, over 750,000 people applied in the first quarter. That’s three quarters of a million people in China alone claiming to make the majority of their living from creating goods they sell against virtual money.

And Asia is where it actually gets very interesting because frictions between the government and virtual currencies are becoming more common.

Meet Tencent. Cute little penguin, right? Well, that little penguin is currently at war with the Chinese government. It started relatively innocuously. Tencent provides an IM system and offered a virtual currency, the QQcoin, to be used so one could upgrade their online avatar (an avatar is basically what your online character looks like) and allow for people to give gifts to other avatars. Not a big problem until a few other web sites started accepted QQcoins as payment for services, and eventually for goods. In May 2007, the Chinese authorities started issuing warnings about the QQcoin. By November 2007, they were blaming it for impacting the Yuan, the national currency.

That industry, which people have called the virtual world economy, real money trade, or RMT, currently represents anywhere between 2 and 4 billion US dollars of transaction flow a year. That’s up from inexistent less than 5 years ago.

So let’s keep that number in our minds and move to the next set of influences Web 2.0 is having on currency. As you know, Web 2.0 in increasingly about giving power to the user and increasing peer to peer relationships.

I talked earlier about the virtual currencies that popped up during the web 1.0 phase. There was one company which, at that time, came up with the idea of moving currency from one Palm device to another. For those of you in the audience who may not remember that time, Palm devices where the spiritual grandfathers of the iphone or most smartphones today. Well, the Palm thing didn’t work out for them, so they figured they’d start moving money via email. Oh, and they renamed the company around the name of the product: Paypal.

I think everyone here knows the rest of the story. Paypal has become a leader in moving money on a person to person basis with something as simple as an email address in terms of identification. That simplified transactions and many people around the world are actually using paypal today to move money from one currency to another.

And while many may snicker at the idea that moving money from something as ridiculous as the Palm, well, it was just a question of timing and marketplace. Currently, in Kenya, M-PESA is doing the equivalent of 10 million US dollars in daily person to person transaction on mobile.phones. That 3.6 billion dollars a year.

That’s real currency right now but why does it have to be a real one? After all, it’s just virtual money as it moves from an electronic device to another.

Meanwhile, marketplaces like prosper.com and zopa have started allow users to make loans to each other via a web interface. It’s called peer-to-peer lending, basically, people lending money to other people, or as most of those companies claim, they’re Ebay for money.

According to the online banking report, it will be a US$9 billion a year business by 2017.

That’s real currency right now but why does it have to be a real one? After all, it’s just virtual money as it moves from an electronic device to another.

So if we take the trends we’ve just explored:

• Virtual currencies have grown to be traded as if they were real currencies
• People are moving money from one person to another via the internet or mobile devices

We may be able to come up with the conclusion that where this is going, in the long run, is an area where exchanges could be set up either online or on mobile devices to use virtual currencies are real currencies.

And if we assume that this first step is possible, then it’s not too far away from the next step, which is an explosion in the number of currency offerings we may see in this world.

What we’re seeing here is the first shot in what I think is the next evolutionary step in the history of currency and it’s an evolution that could either be a transitional phase without major disruption or a massive change in the way people are interfacing with currency: this could be our generation’s Nixon Shock.

The issues around this new world are significant.

The first issue is around who is controlling those currencies. For most of history, currency was under the control of the currency issuer. But in the last couple of centuries, there’s been an increasing trend towards government control of currency.

How will government react when their own currency is challenged? And will their reaction matter? After all, the Chinese governments actions to date, as far as the QQ is concerned haven’t stopped trading.

What will happen in terms of tax collections? Will government have to start accepting currencies beyond their own as agreed form of payments? And if they accept other forms of currency, will they have to accept other government-run currencies as form of payment?

How will criminal behavior be dealt with? Today, criminal elements can be tracked because whenever they have to deal with some currencies, they have to eventually deal with banks. And because banks are regulated, criminal behavior can be intercepted. What happens when those money flows move outside of the financial institution control? Shouldn’t governments think about regulating those institutions as money transfer operations ?

What happens when the number of currency explodes? Sure, computer systems can do the conversion without problems but how will WE assess the worth of a currency?

And, as currency initially proliferate, there will eventually be a move towards an agreed upon set of new currencies because remember that currency is ultimately, about an agreement value by all of us. But when some of those currencies die, what will happen to the people holding them? Will the dead currencies be converted to emergent ones? And what happens if the dead currencies are ones that were controlled by governments? Will they fight for survival?

I unfortunately don’t have any of the answer to those questions but if there is one thing I know, it is that where questions exist, opportunities abound.

And with that said, I would now like to open up the floor for discussion.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Coins to QQ at Web 2.0. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

I’ve been looking at the press coverage and it seems that some of the coverage does not work out. For starters, Boo.com’s failure is not an example of why B2C E-commerce will fail, it’s an example of why Boo failed itself. Nor is it a failure of E-commerce in Europe.

Now that the company is buried, I’d like to take a look at what went right and what went wrong with the company and go into more details as to what we should learn from that failure. I will try to summarize what I learned over the 6 months I spent there but I may be off a little here and there since it’s been a while since I’ve left the company.

Boo was the first company to launch from the ground up in multiple countries from day one. This represented a set of challenges that were previously unadressed, ranging from technology challenges to more traditional issues in generating a global brand. While I was working for Boo, I was in charge of developing the back-end fulfillment system, a platform that allowed us to handle multiple currencies, multiple languages, on the fly tax calculation, and integration with multiple fulfillment partners. Let me go into more details on what this means.

Multiple currencies

If you want to trade globally, you can’t only offer US dollars. As a result, you need to figure out a way to handle multiple currencies ranging from dollars to pounds to liras to francs, to deutshmarks, to kroners, etc… If you are planning on doing this well, you have to peg your prices to a particular value. However, you have to realize that prices are not the same in every country and what may seem expensive in the US can be seen as cheap in other countries. This is where you have to make a decision as to whether you want to set a fixed price in the local currency or set a more dynamic price that is affected by currency exchanges and other fluctuations. It’s a fascinating problem in and of itself but it’s one that we discovered to be a big pain to deal with.

In the end, Boo built a system which allowed us to set a different price for each country or set a single price for all countries and have that price be translated in the proper currency based on a set exchange rate. It was a bit of a kludge but it worked and, to this day, I haven’t seen an Ecommerce shop with a similar system.

LESSON:

When dealing across multiple countries, decide early on how you want to set up your pricing scheme, it will save you headaches down the road.

Multiple languages

First of all, forget translation software packages. They are still relatively immature and there is (at this point anyway) little hope that they will mature much beyond their current point in the near future. If you’ve taken any linguistics course, you know that grammatical rules can hardly be standardized for several languages. For example, something as simple as a verb can become a whole new set of problems. In English, there is a relatively small set of basic rules. The verb “to want” breaks down into “I want, you want, he wants, we want, you want, they want”. Notice that there are only two basic variations here. In French, the same verb “vouloir” breaks down as follows: “Je veux, tu veux, il veut, nous voulons, vous voulez, ils veulent.” In this case, there are 5 different variations. In spanish, it’s six… and so on. Take that problem and try to automate it and you are building a system that is bound to fail. The way we worked around it at Boo was to create a system where the copy was translated by hand by people who were fluent in the language.

Unfortunately, another problem cropped up: British English and American English are EXTREMELY different. Considering that the assumption was that one version of each language was sufficient, problems cropped up and some of the perfectly normal British english stuff ended up being very offensive in the US. THAT was a major problem.

LESSON:

One language per country can be a dangerous road, check with the locals before making anything available to the general public.

On the fly tax calculation

This one almost killed me. In the US, it’s relatively easy to deal with taxation. For the most part, the only taxes you have to pay are for states in which you have a physical presence. Where it gets tricky is when your servers are located in one area and your offices are in another. Technically, that is two locations.

In the case of Boo, it got worse. For example, a sale to France was taxed three ways. Why? Quite simply because the company had offices in Paris, its servers were located in London, UK and its distribution center was in Cologne, Germany. However, the interesting part of the problem was that we were making a sale but not delivering a good in the UK, delivering a good but not making a sale in Germany, and making a sale and delivering a good in France. This was just one example. Multiply that by the number of countries the company was doing business in and it soon got VERY complicated. Add to that the fact that certain goods were coming from China or Taiwan and the picture got so clouded that we had to bring in tax attorneys to help us on the details.

LESSON:

Hard to believe, but accountants and tax attorneys should be part of your development cycle if you are developing global Ecommerce apps.

Integration with multiple fulfillment partners

The main issue here was dealing with different file formats for DeutschePost (the European fulfillment company) and UPS (the company that did fulfillment for the US). What we ended up doing was create an EDI link to those guys (DeutschePost was not web-enabled yet) and create a set of filters for each of them. A simple answer to a simple problem but this little answer cost about 150 man months of work as the content had to be migrated from the old (untagged) setup to the new one. Because the original database was originally set up wrong, we had to totally reorganize the schema and refit the content into it.

LESSON:

Plan early, think of all that can go wrong, and then plan it again. Usually, spending more time on specs saves you from many headaches down the road.

Where’s the plan?

When I joined the company in August, the launch was behind schedule by three months and we had ten weeks to the Christmas season. The first thing I asked to see what the project plan. It didn’t exist. People were working on bits and pieces of the project without communicating with other people they were affecting. Within a week, we put together a MS-project chart and things started to move properly.

LESSON:

An e-commerce project without a development plan will always be “this close” to launch but will never launch.

Front end is technology

One of the biggest failures at Boo was to assume that the front end was not a technology issue. Up through launch and beyond, the front end team was first reporting to business development and then to marketing. This was a capital mistake that I kept fighting over. A web site front-end is interface design, it’s not a marketing exercise. It should include people who are versed in this and not just people who know about pretty colors. Ultimately, I think this was one of the big failure factor in the company.

LESSON:

No matter how good your backend systems are, the users will only remember your front end. Fail there and you will fail, period.

There are many other reasons for which Boo failed (I’d rather not go into them but I can say that the press is on the mark on a lot of their accusations) but ultimately, there were a lot of really smart and really good people there who worked very hard to put together what, to my mind, was an amazing back-end operation. Lack of communications to and from the top was definitely a problem as well as a lack of understanding of Internet time (the redesign of the site I heard about on the day after launch has not yet happened and probably never will now). In the end, though, Boo’s failure was not that unexpected to anyone who had worked for or with the company. Boo.com did not fail as an Ecommerce company, it failed as a company, period. The thing that took it down were not Ecommerce related as much as they were just plain business. Yes, I’m a bit saddened by the fact the company went downhill but I already knew this was going to be the outcome back in January when I left.

Ultimately, Boo is a typical example of a lesson that many VCs are pushing these days: Management makes or break a company.

Let’s hope we all take that lesson, remember it, and let Boo stand as old mistakes we will never make either again (for those of us who made them) or at all (for those who haven’t).

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Boo.com Goes Bust. You can follow him on twitter here or receive his weekly newsletter by subscribing here.