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Digital Cash

DIGITAL CASH

Digital cash, or electronic money, consists of encrypted data that serves as an electronic substitute for regular hard currency. It can exist in the form of a cash Internet transaction or as monetary value stored on a smart card. Descended from the electronic money used in bank transactions, currency exchanges, credit cards, and automatic tellers, by the 21st century digital currency was evolving rapidly.

A HISTORY OF DIGITAL CASH

In a sense, digital cash has been around for years in the form of the automated clearinghouse (ACH), automated teller machines (ATMs), point-of-sale debit cards, and credit card networks. Even coded subway and phone cards function as a type of electronic cash. In 1996, the U.S. government initiated a campaign to create a universal, all-electronic payment system to decrease the nearly 70 billion paper checks Americans write each year. The effort was instigated by the Financial Services Technology Consortium (FSTC), which was composed of members of the banking and information technology industries. In 1998, the U.S. Treasury Department sponsored a pilot program to test the workability of paying participating federal contractors with e-checks. More than $2.5 million was paid out during the test period. By 2000, the program was transferred to CommerceNet, a consortium of 500 e-commerce developers and users, which intended to launch it worldwide.

A 1999 study by Deloitte Consulting projected that Internet revenues would top $1.1 trillion by 2002. Businesses could save about $18.3 billion annually, or roughly 72 percent of associated costs, by developing efficient and secure online billing and payment strategies. But many of the first versions of emoneyincluding CyberCoins and CyberCash, which appeared in the early 1990seventually folded. They often worked like online gift certificates, whereby consumers bought a certain amount of digital cash and then redeemed it at participating online vendors. These versions failed to win consumer acceptance because of doubts about their validity, the limited venues where the cash could be spent, and the need to install special software just to use the products.

The second generation of e-cash appeared in the late 1990s. Related to technologies such as electronic checks (e-checks) and embedded-chip smart cards, digital cash systems transferred monetary amounts over the Internet on open networks and utilized public-key cryptography to protect the content of the messages being relayed over the system. Later developments in digital cash permitted users to transfer cash via e-mail once they established an online account with a provider permitting payment at online vendor sites. Customers therefore avoided usage fees and merchants avoided the one-to two-percent transaction costs associated with credit-card transactions. This e-cash didn't require software downloads, and some versions also allowed cash withdrawals at ATMs.

USES OF DIGITAL CASH

Credit card payments account for more than 90 percent of all Web site purchases, compared to only 25 percent of offline sales. Digital cash may not displace credit cards for large online purchases, but for small purchases it has overwhelming advantages including extremely low transaction costs. Among the transactions that digital cash may facilitate are smallvolume sales by marketers, such as publishers or music sites, which sell individual books or songs online. Some e-cash services authorize "micro-payment" arrangements permitting shoppers to rack up a series of small purchases before charging the total to a credit card. Other systems deduct small amounts, from one-tenth of a cent to $10, from an account as purchases are completed. Still other arrangements enable registered users to e-mail dollars to each other or transfer amounts via wireless and hand-held devices.

RISKS AND LIMITATIONS

Digital cash systems pose unique risks for both online merchants and consumers, including questions about security, the ability to safeguard users' privacy, susceptibility to counterfeiting, and suitability as a medium for online fraud. All of these generate fears among e-commerce merchants over increased legal liability. While traditional monetary systems combat fraud by using closed networks that block unauthorized access to the system, the open networks along which e-cash payments are transmitted often lack adequate safeguards against fraudulent access. Therefore, they must utilize elaborate encryption methods to code the information in such a way that only authorized parties can read it. Furthermore, a new security apparatus and infrastructure must be devised to protect payment instruction transfers. A new public key infrastructure, which can be fairly expensive to implement, is required to diminish fraud risks.

Operational disruptions can generate serious hazards for e-cash systems. Even natural phenomena jeopardize e-cash operations. In 1993, a heavy snowstorm caused the roof-collapse of an Electronic Data Systems (EDS) facility that processed ATM transactions, interfering with 5,000 ATMs across the United Sstaes. Since digital cash is networked, difficulties with the Internet's physical networks, associated hardware, or software can compromise the system's efficiency and reliability. Computer viruses, damage to a centralized switching facility, or even software updates can all pose threats.

While digital cash renders online purchases more convenient for users, it poses risks for them as well. Foremost is a lack of anonymity. Unlike regular money, most e-cash systems track users' purchases, thus failing to protect their privacy. Concerns that anonymous e-money could encourage tax evasion and money laundering have led to demands that digital cash be traceable. The issuer's integrity also raises problems. The collapse of a branded network bank could free it of all liability for the e-cash it issued.

Finally, digital cash complicates the world's central banks' ability to formulate monetary policies and manage national monetary supplies. According to a 2000 Survey of Electronic Monetary Developments in 68 countries, conducted by the Swiss Bank for International Settlements, digital money works best in selected areas, such as public transportation, telecommunications, and potentially coin-free venues. E-cash easily crosses international borders, since any bank can issue digital cash and anyone can use it. E-money also can cheapen foreign exchange transactions, facilitating the shift from weak currencies to stronger ones and thereby impeding a country's effective management of its monetary policy.

The achievement of widespread, worldwide adoption will take time for digital cash. For this to take place, it must match old-fashioned, hard currency for liquidity, anonymity, reliability, and universal acceptability. The versions of e-money that come closest to mimicking the advantages of traditional currency seem the most likely to succeed in the long run.

FURTHER READING:

Bielski, Lauren. "New Wave of e-Money Options Hits the Web." ABA Banking Journal. August, 2000.

"E-Cash 2.0." Economist. February 19, 2000.

"Follow the e-Money." Foreign Policy. September/October 2000.

Kuykendall, Lavonne. "The Online Challengers." Credit Card Management. November, 1999.

"Leaders: Cash Remains King." Economist. February 19, 2000.

McAndrews, James. "E-Money and Payment System Risks." Contemporary Economic Policy. July, 1999.

Mitchell, Lori. "E-Cash Aims to Ease Securityand Privacy-Concerned Shoppers." InfoWorld. August, 2000.

Nocera, Joseph. "Easy Money." Money. August, 2000.

Ridgway, Nicole. "Down to the Wire." Forbes. November 13, 2000.

SEE ALSO: Cryptography, Public and Private Key; Digital Wallet Technology; Fraud, Internet; Micro-payments; Privacy: Issues, Policies, Statements

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Digital Cash

DIGITAL CASH

Digital cash is simply a series of bits and bytes. In order to use digital cash, users first need to purchase some digital cash tokens from digital cash providers. The digital cash provider maintains a central database to keep track of the digital cash tokens that have been issued. Once a token is spent, the token is deleted from the database to prevent it from being duplicated.

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