ECash

ECash is a computer generated Internet based system which allows funds to be transferred and items to be purchased by credit card, check or by money order, providing secure on-line transaction processing.

Electronic Money, E-Cash, is changing the way currency is perceived. While the change seems as revolutionary as the conversion from value-based mediums of exchange (e.g. gold, silver) to paper currency, it is actually only an evolution from current paper-based mediums. There are a number of benefits of E-Cash over greenbacks, but there are also new issues with which to contend. In addition to new issues, there are also new forms of old problems which ECash will not solve. In its current state electronic cash is a necessary innovation in the financial markets. However, it is highly doubtful that E-Cash will actually replace paper currency. This paper defines the concept of E-cash, how it differs from currency as we now know it, and what significant issues are arising during its advent. The paper is organized as follows:
1. What is E-Cash?: E-Cash represents several different types of products.

This section explores the different types of e-cash products and how each functions. The pros and cons of e-cash versus competing products is also examined.
2. Security: Security is of extreme importance when dealing with monetary

transactions. Faith in the security of the medium of exchange, whether paper or digital, is essential for the economy to function.
3. Privacy: Transactions involving paper currency are difficult to trace. If

digital money is to replace paper currency, it must retain certain aspects of this quality.
4. Regulation: A new medium of exchange presents new challenges to

existing laws. Largely, the laws and systems used to regulate paper currency are insufficient to govern digital money.
5. Sources

What is E-Cash?
E-Cash represents several different types of products. This section explores the different types of ecash products and how each functions. The pros and cons of e-cash versus competing products is also examined.

While many different companies are rushing to offer digital money products, currently e-cash is cash is represented by two models. One is the on-line form of e-cash (introduced by DigiCash) which allows for the completion of all types of internet transactions. The other form is off-line; essentially a digitially encoded card that could be used for many of the same transactions as cash. This off-line version (which also has on-line capabilities) is being tested by Mondex in partnership with various banks. The primary function of e-cash is to facilitate transactions on the Internet. Many of these transactions may be small in size and would not be cost efficient through other payment mediums such as credit cards. Thus, WWW sites in the future may charge $0.10 a visit, or $0.25 to download a graphics file. These types of payments, turning the Internet into a transaction oriented forum, require mediums that are easy, cheap (from a merchants perspective), private (see Privacy), and secure (see Security). Electronic Cash is the natural solution, and the companies that are pioneering these services claim that the products will meet the stated criteria. By providing this type of payment mechnism, the incentives to provide worthwhile services and products via the Internet should increase. Another prospective beneficiary from these developments would be Shareware providers, since currently they rarely receive payments. To complete the digital money revolution an offline product is also required for the pocket money/change that most people must carry for small transactions (e.g. buying a newspaper, buying a cup of coffee, etc...). The concept of electronic money is at least a decade old. [Hewitt 1994] demonstrates that check writing is a pre-cursor to E-cash. When one person writes a check on his bank account and gives the check to another person with an account at a different bank, the banks do not transfer currency. The banks use electronic fund transfer. Electronic money, removes the middleman. Instead of requesting the banks to transfer the funds through the mechnism of a check, the E-cash user simply transfers the money from his bank account to the account of the receiver. The reality of E-cash is only slightly more complicated, and these complications make the transactions both secure and private. The user

downloads electronic money from his bank account using special software and stores the E-cash on his local hard drive. To pay a WWW merchant electronically, the E-cash user goes through the software to pay the desired amount from the E-cash "wallet" to the merchants local hard drive ("wallet") after passing the transaction through an E-cash bank for authenticity verification. The merchant can then pay its bills/payroll with this E-cash or upload it to the merchant's hard currency bank account. The E-cash company makes money on each transaction from the merchant (this fee is very small, however) and from royalties paid by banks which provide customers with Ecash software/hardware for a small monthly fee. Transactions between individuals would not be subject to a fee. E-cash truly globalizes the economy, since the user can download money into his cyber-wallet in any currency desired. A merchant can accept any currency and convert it to local currency when the cybercash is uploaded to the bank account. To the extent a user wants E-cash off-line, all that is necessary is smart card technology. The money is loaded onto the smartcard, and special electronic wallets are used to offload the money onto other smartcards or directly to an on-line system. Smartcards have been used successful in other countries for such transactions as phone calls for a number of years. The money could also be removed from a smartcard and returned to a bank account. Visa is developing a related product, the stored value card. This card comes in a variety of denominations, but functions more like a debit card than E-cash. In essence, E-cash combines the benefits of other transaction mediums. Thus, it is similar to debit/credit cards, but E-cash allows individuals to conduct transactions with each other. It is similar to personal checks, but it is feasible for very small transactions. While it appears superior to other forms, E-cash will not completely replace paper currency. Use of E-cash will require special hardware, and while most people will have access, not all will. However, Ecash presents special challenges for the existing "middlemen" of the current paper currency society. More and more, banks and other financial intermediaries will serve simply as storehouses for money, lenders, and processing/verifying electronic transactions. Personal interaction with a teller, or even visits to a bank ATM will become obsolete. All one will have to do is turn on his computer.

E-Cash Security
Security is of extreme importance when dealing with monetary transactions. Faith in the security of the medium of exchange, whether paper or digital, is essential for the economy to function.

There are several aspects to security when dealing with E-cash. The first issue is the security of the transaction. How does one know that the E-cash is valid? Encryption and special serial numbers are suppose to allow the issuing bank to verify (quickly) the authenticity of E-cash. These methods are suseptible to hackers, just as paper currency can be counterfeited. However, promoters of Ecash point out that the encryption methods used for electronic money are the same as those used to protect nuclear weapon systems. The encryption security has to also extend to the smartcard chips to insure that they are tamper resistant. While it is feasible that a system wide breach could occur, it is highly unlikely. Just as the Federal Government keeps a step ahead of the counterfeiters, cryptography stays a step ahead of hackers. Physical security of the E-cash is also a concern. If a hard drive crashes, or a smartcard is lost, the E-cash is lost. It is just as if one lost a paper currency filled wallet. The industry is still developing rules/mechanisms for dealing with such losses, but for the most part, E-cash is being treated as paper cash in terms of physical security. Companies are making some exceptions when it comes to a software/hardware failure, but these are supposed to be rare. To help customers get used to this concept, most companies are limiting E-cash wallets to $500, reflecting the primary use of E-cash for low value transactions. There is a benefit to E-cash in the area of theft, however. A mugger or pickpocket would not be able to make use of another's smartcard without the appropriate password. Merchants should also lose less cash to employee theft, since the electronic cash will be inaccessible (or, at a minimum, traceable). The ultimate area of security is faith in the currency. This, however, would still be the responsibility of the Federal Government on a systemic basis. Essentially, the E-cash is merely a representation of hard currency on deposit at banks. Thus, faith in the system should not falter.

E-Cash Privacy
Transactions involving paper currency are difficult to trace. If digital money is to replace paper currency, it must retain certain aspects of this quality.

As information technologies expand, privacy becomes of greater concern. People are realizing that with every credit card transaction, corporate databases are becoming larger and larger. By using paper currency, people are able to exclude themselves from these databases. Therefore, for e-cash to be effective, it must maintain this privacy function. DigiCash claims it has developed a system that provides privacy for the user without sacraficing security for the receiver. If a system is completely private, the merchant has no way of verifying the validity of the electronic money. The user would also be unable to have a receipt for the transaction. However, DigiCash utilizes a one-sided signiture. Basically, the user keeps record of payments made, but the merchant only receives enough information to allow his bank to verify the authenticity of the E-cash. This signiture process is also suppose to deter the criminal element of cash transactions. Since a record of the transaction is created and kept (by the payee), extortion, bribes, or other illegal transactions should occur less frequently.

E-Cash Regulation
A new medium of exchange presents new challenges to existing laws. Largely, the laws and systems used to regulate paper currency are insufficient to govern digital money.

The legal challenges of E-cash entail concerns over taxes and currency issuers. In addition, consumer liability from bank cards will also have to be addressed (currently $50 for credit cards). E-cash removes the intermediary from currency transactions, but this also removes much of the regulation of the currency in the current system. Tax questions immediately arise as to how to prevent tax evasion at the income or consumption level. If cash-like transactions become easier and less costly, monitoring this potential underground economy may be extremely difficult, if not impossible, for the IRS. The more daunting legal problem is controling a potential explosion of private currencies. Large institutions that are handling many transactions may issue electronic money in their own currency. The currency would not be backed by the full faith of the United States, but by the full faith of the institution. This is not a problem with paper currency, but until the legal system catches up with the digital world, it may present a problem with cybercash.