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Electronic Payment Systems: - Transaction Reconciliation

This document discusses encryption techniques and their applications to electronic payments. It begins with an overview of public key cryptography and how it works using Alice and Bob as examples. It then provides technical details on the RSA encryption algorithm, including how it selects prime numbers to generate public and private keys, how it uses modular arithmetic to encrypt and decrypt messages, and why the system is secure due to the computational difficulty of factoring large numbers. The document concludes by discussing some applications of encryption like digital signatures and how it affects privacy, transaction costs, monetary policy, and market organization.

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36 views13 pages

Electronic Payment Systems: - Transaction Reconciliation

This document discusses encryption techniques and their applications to electronic payments. It begins with an overview of public key cryptography and how it works using Alice and Bob as examples. It then provides technical details on the RSA encryption algorithm, including how it selects prime numbers to generate public and private keys, how it uses modular arithmetic to encrypt and decrypt messages, and why the system is secure due to the computational difficulty of factoring large numbers. The document concludes by discussing some applications of encryption like digital signatures and how it affects privacy, transaction costs, monetary policy, and market organization.

Uploaded by

rajdac
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Electronic Payment Systems

• Transaction reconciliation
– Cash or check
Electronic Payment Systems

– Intermediated reconciliation (credit or debit card, 3rd party money


order)
Encryption

• The need for encryption in ecommerce


– Degree of risk vs. scope of risk
– Institutional versus individual impact
– Obvious need for ecurrencies.
• Public key cryptography: an overview
– One-way functions
– How it works
• Parties to the transaction will be called Alice and Bob.
• Each participant has a public key, denoted PA and PB for Alice and
Bob respectively, and a secret key, denoted SA and SB respectively
Encryption
• Each person publishes his or her public key, keeping the secret key
secret.
• Let D be the set of permissible messages
– Example: All finite length bit strings or strings of integers
• The public key is required to define a one-to-one mapping from the
set D to itself (without this requirements, decryption of the message is
ambiguous).
– Given a message M from Alice to Bob, Alice would encrypt this using
Bob’s public key to generate the so-called cyphertext C=PB(M). Note
that C is thus a permutation of the set D.
• The public and secret keys are inverses of each other
– M=SB(PB(M))
– M=SA(PA(M))
• The encryption is secure as long as the functions defined by the
public key are one-way functions
Encryption

• The RSA public key cryptosystem


– Finite groups
• Finite set of elements (integers)
• Operation that maps the set to itself (addition, multiplication)
• Example: Modular (clock) arithmetic
– Subgroups
• Any subset of a given group closed under the group operation
– Z2 (i.e. even integers) is a subgroup (under addition) of Z

• Subgroups can be generated by applying the operation to elements of


the group
• Example with mod 12 arithmetic (operation is addition)
Encryption

• Solving modular equations


– RSA uses modular groups to transform messages (or blocks of
numbers representing components of messages) to encrypted form.
– Ability to compute the inverse of a modular transformation allows
decryption.
– Suppose x is a message, and our cyphertext is y=ax mod n for
some numbers a and n. To recover x from y, then, we need to be
able to find a number b such that x=by mod n.
– When such a number exists, it is called the mod n inverse of a.
– A key result: For any n>1, if a and n are relatively prime, then
the equation ax=b mod n has a unique solution modulo n.
Encryption

• In the RSA system, the actual encryption is done using


exponentiation.
• A key result:

Fermat’s L ittle Theorem


If p is prime, then for any a  Z p a  0,
a p 1 mod p  1
Encryption

• RSA technicals
– Select 2 prime numbers p and q
– Let n=pq
– Select a small odd integer e relatively prime to (p-1)(q-1)
– Compute the modular inverse d of e, i.e. the solution to the
equation

de  1 mod  p  1 q  1

– Publish the pair P=(e,n) as the public key


– Keep secret the pair S=(d,n) as the secret key
Encryption
– For this specification of the RSA system, the message domain is Zn
– Encryption of a message M in Zn is done by defining

C  P( M )  M e mod n
– Decrypting the message is done by computing

S  C   C d mod n
Encryption
– Let us verify that the RSA scheme does in fact define an invertible
mapping of the message.
 For any M  Z n
P  S  M    S  P  M    M ed mod n.
 Since d and e are modular inverses of each other
ed  1  k  p  1 q  1
for some integer k . Hence,
M ed mod n  MM k ( p 1)( q1) mod n
 MM ( p 1) M k ( q 1) mod n
 M M 
( q 1) k
mod n  M
(the last steps follow by applying Fermat' s theorem.)
Encryption
– Note that the security of the encryption system rests on the fact
that to compute the modular inverse of e, you need to know the
number (p-1)(q-1), which requires knowledge of the factors p and
q.
– Getting the factors p and q, in turn, requires being able to factor
the large number n=pq. This is a computationally difficult
problem.
– Some examples:

http://econ.gsia.cmu.edu/spear/rsa3.asp
Encryption

• Applications
– Direct message encryption
– Digital Signatures
• Use secret key to encrypt signature: S(Name)
• Appended signature to message and send to recipient
• Recipient decrypts signature using public key: P(S(Name)=Name
– Encrypted message and signature
• Create digital signature as above, appended to message, encrypt
message using recipients public key
• Recipient uses own secret key to decrypt message, then uses senders
public key to decrypt signature, thus verifying sender
Policy Issues

• Privacy and verification


• Transaction costs and micro-payments
• Monetary effects
– Domestic money supply control and economic policy levers
– International currency exchanges and exchange rate stability
• Market organization effects
– Development of new financial intermediaries
• Effects on government
– Seniorage
– Legal issues

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