Consequence of e- Digital Cash
Digital cash brings benefits as well as problems. One major advantage of digital cash is its increased efficiency opening new opportunities, especially for small businesses. On the other hand, it will encourage potentially the worsening of problems over taxation and money laundering. In turn, these problems may alter foreign exchange rates, disturb money supplies, and encourage an overall financial crisis.
The transnationality of digital cash — the ability of digital cash to flow freely across national borders — encourages these benefits and problems, and could have significant repercussions internationally.
From an economic view, this transnationality is the most important characteristic of digital cash. If digital cash behaved like traditional currencies, circulating within a national border and controlled by a central monetary authority, there would be few economic implications that would be worth analyzing. In this scenario, digital cash would be nothing more than a convenient transaction method such as a credit card.
However, digital cash’s very transnationality has the potential to cause conflict between cyberspace and nation states. If digital cash spreads successfully in the next century, its history may be written as a transcript of economic battles between nation states.
Digital currency (digital money or electronic money or electronic currency) is a type of currency available only in digital form, not in physical (such as banknotes and coins). It exhibits properties similar to physical currencies, but allows for instantaneous transactions and borderless transfer-of-ownership. Examples include virtual currencies and cryptocurrencies or even central bank issued "digital base money". Like traditional money, these currencies may be used to buy physical goods and services, but may also be restricted to certain communities such as for use inside an on-line game or social network .
What are the economic consequences of digital cash? What are its implications from the view of economics? In recent years, several proposals for electronic cash have appeared in cyberspace. In several cases, forms of digital cash are already in use . The economic consequences of these transactions have not yet been fully examined.
To some observers, one important economic consequence of electronic cash is the free issue of private currency by commercial banks or other non-firms . However, if we look at the history of money, it is not easy to make privately issued currency credible in the eyes and wallets of the public. As long as there is competition between banks, private banks will sometimes become bankrupt. Nothing is more debilitating to the credibility of privately issued currency than bankruptcy.
The most important characteristic of digital cash is its transnationality. Digital cash does not recognize national borders. It is not controlled by any central bank of any nation state. The unprecedented efficiency of international payments with digital cash may indeed increase the instability of the global monetary system. This efficiency indeed may lead to conflicts between digital cash providers and users and the central banks of nation states.
There are over a dozen proposals for electronic payment systems on the Internet . To briefly understand these systems, let’s us examine a few issues by trying to pay a bill via the Internet with a credit card. In comparison to using cash in the real world, transmitting a credit card number over the Internet might lead to the following difficulties.
First, there is the entire question of security. Credit card numbers may be viewed by unauthorized individuals because the Internet is an open system. In the real world, there are a number of means to minimize fraud. A customer using a credit card will usually opt to carry out transactions at trustworthy or familiar facilities, stores, and markets.
Second, credit cards can be used only at authorized stores. Unauthorized small businesses or individuals generally cannot carry out transactions with credit cards. In other words, credit cards cannot be used for peer-to-peer payment. Cash encourages peer-to-peer payments.
Third, credit card payments usually charge a small fee. Although this cost is low, it can be a significant cost when the payment itself is very small, such as less than 20 cents . As a result, credit cards can not be used for micro-payments. Cash payments is used for even the smallest financial transactions.
Finally, receipts from credit card payments leave residual records of expenditures. Those who issue credit cards know exactly what kinds of goods and services have been purchased, as well as where and when they were acquired. In other words, user’s expenditures by credit card can be traced while cash payments are untraceable.
Electronic payment systems, more or less, try to cope with the above issues . According to the extent to which these systems cope with these problems, I classify digital cash programs into three categories.
1. Credit card base type
To minimize security risks and the loss of credit card numbers in transit, First Virtual Holding began a payment system in which users transmit passwords instead of credit card numbers when purchasing an item (See Figure 1–i) [6].
Customer sends his ID or encrypted creditcard number to the shop.
Shop asks for payment to the Credit card company, which confirms
customer by e-mail. After the confirmation, payment is done. Card number
itself never goes through the Net.
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Person “A” issues his electronic check. He sends it to person “B” and
informs the bank of his check. Person “B” asks for payment to the Bank.
After the confirmation, the bank transfers money from person A’s
account to person B’s account.
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Person “A” asks the bank to issue digital cash. The bank issues
digital cash and reduces his account by that amount. He sends it to
person “B”. Person “B” asks the bank for payment. After confirming that
the digital cash is not double-spent, the bank increases person B’s
account by that amount. Note that the bank cannot know who sent that
digital cash to person B. (Untraceability)
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In this system, a user registers in advance with First Virtual to secure a password corresponding to a credit card number. With the purchase of goods or services on the Internet, only a password is transmitted to complete the transactions. After the actual purchase, a confirmation electronic mail message confirms the validity of the transaction. This system is simple and is already in use to some extent. Visa and MasterCard are planning a similar payment program using encryption instead of passwords.
These credit-card based solution solve only the security question. As Figure 1–(i) illustrates, the actual communication between the consumer and electronic storefront are addressed by this strategy. The transaction of real money remains to be done by conventional credit card transactions. These transactions require a fee. A peer-to-peer transaction is impossible. Certainly, the entire transaction is also traceable.
2. Check type
Checks are closer transactionally to cash than to credit cards, because peer-to-peer transfers are possible. Micro-payments are possible as well though banks are reluctant to accept process micro-payments by checks thanks to the high operational cost of check clearance . As a result, several proposals (CyberCash, NetCheck, and others) have emerged to invent checks on the Internet, which would be transferable between individuals . As Figure 1–(ii) shows, a customer opens an account in a bank on the Internet, and issues an electronic check to pay a bill. The recipient of this digital check sends it to the Internet bank to confirm and cash it. Security is guaranteed by both encryption and the bank’s confirmation process with the issuer of the check . This system permits peer-to-peer payments and reduces fees to some extent. But transactions are still traceable since a bank can track the actual use of the electronic check.
3. Cash type
Cash transactions are untraceable and anonymous To achieve untraceability on the Internet, encryption has to be fully employed to prevent untraceable money from being easily copied and spent twice, a phenomenon known as double-spending. David Chaum as well Tatsuaki Okamoto and Kazuo Ohta have proposed untraceable electronic payment systems using advanced encryption technology
The mechanism in this system is similar to an electronic check, but it prevents banking institutions from linking purchasers to specific goods and services (see Figure 1–(iii)). How does this work? First, an Internet user opens an account with real money at an Internet-based bank. The customer asks the bank to issue a certain amount of digital cash for use on the Internet. The bank issues this digital cash using encryption and deducts the funds from the established account. An example of a bank that performs these sorts of transactions is Mark Twain Banks, operating since late in 1995
This digital cash is a combination of two huge integers which have special mathematical relation. No other person or institution, but the bank, can imitate this relation. Any calculation that would attempt to duplicate this relation would take an almost infinite amount time in the absence of the bank’s secret key.
When an individual uses digital cash, this unique data that defines the actual electronic currency is given to the merchant. The merchant in turn sends this data to the bank to confirm it. If the bank confirms it, the bank credits the merchant’s bank account by that amount, or alternatively issues the merchant a sum of digital cash in the same amount. Only the bank can confirm that this data — or, digital cash — is legitimate and actually issued by the bank. Only the bank can verify that this that this data has not been used elsewhere, or double-spent. The bank cannot know who used the digital cash, as long as customers of the bank do not use it twice.
This payment system deserves the name of “cash on the Internet” because it is almost equal to a cash payment in terms of security, fee, peer-to-peer payment, and untraceability. I will now focus on this cash-type “digital cash.”
With digital cash, financial transactions will become more efficient, which in turn will broaden new business opportunities. Problems? Certainly, taxing digital cash and the specter of money laundering are significant issues. Additionally, digital cash could introduce instabilities to exchange rates and upset the overall money supply. Let’s first look at the primary benefit of digital cash.
Digital cash will make transactions more efficient in several ways. First, digital cash will make transactions less expensive because the cost of transferring digital cash via the Internet is cheaper than through the conventional banking system. To transfer money in the traditional way, conventional banks maintain many branches, clerks, automatic teller machines, and specific electronic transaction systems. Overhead costs for all of this bureaucracy is generated in part from fees for money transfers and credit card payments. Since digital cash uses the existing Internet network and the specific computers of its users, the cost of digital cash transfer is much lower, close to zero . With the transaction completed within the Internet, the transfer fee and bank tips are zero, in case of the Mark Twain Banks . This low cost for transactions enables micro-payments, like 10 cents or 50 cents, to be possible, which in turn may encourage a new distribution system and fee structure for music, video, and computer software. “Super distribution” is just one practical application . This ability to finally handle micro-payments might also provide a solution for the payment of fees to authors and publishers for use of copyrighted materials in electronic form.
Second, since the Internet recognizes no political borders, digital cash is also borderless. Thus, the cost of transfer within a state is almost equal to the cost of transfer across different states. The cost of international money transfers, now much higher than transfers within a given state, will be reduced dramatically. For example, now it may take more than a week to send a small amount of money to a foreign bank. But if a given foreign bank accepts digital cash, this delay is significantly reduced .
Third, digital cash payments potentially can be used by anyone with access to the Internet and an Internet-based bank. While credit card payments are limited to authorized stores, digital cash makes person-to-person payments possible. Thus, even very small businesses and individuals can use digital cash for all sorts of transactions.
The consequence of these effects is an enlargement of new business opportunities and an expansion of economic activities on the Internet. Even small businesses can trade with customers all over the world. Multinational small businesses will become a dynamic new force in local and regional economies . For example, a high school student may use the Internet to sell his programs to a world-wide customer base, accepting digital cash as payments for his products. Not only will individuals and small companies benefit. Large firms will find digital cash efficient for international payments leading to less expensive and more sophisticated services for most customers.
1. Taxation and money laundering
Digital cash may cause some problems in part because it permits seamless transactions across national borders. Should sales taxes be imposed on Internet transactions? Suppose a Chinese software developer uses a server in the United States to sell his software, say to a customer in Japan. Which sales tax rate should be applied, and by whom? Which country should benefit from the tax? Conflicts over international taxation of digital commerce, which have appeared only occasionally so far, could intensify. This problem may need to be resolved by a whole new view on international taxation. Since digital cash is untraceable, not leaving well-defined records for a tax authority to follow, taxation will not be easy even if there are adjustments to tax regulations.
The untraceability of digital cash may encourage criminal activities such as money laundering. Sending real money as digital cash means transport across national boundaries without any real evidence of transfer
As mentioned earlier, not all electronic money is untraceable. Traceable electronic payments will not cause taxation and other problems, thanks to residual transaction records . If digital cash in its untraceable, real cash-like form spreads in cyberspace, taxation and illegal transfers of funds will become a serious issue
2. Macroeconomic effects
What are the possible effects of digital cash on large-scale, economic stability? Is digital cash a proxy for real currency or is it just privately-issued new currency?
For the sake of this analysis, I will assume that digital cash is a proxy of currency in the real world. In other words, digital cash will be issued on the same terms as existing hard currency — digital cash of dollar, digital cash of yen — and can be exchanged to its hard currency equivalent at anytime.
Some assume that since digital cash is issued by private firms, it is independent of government conditions If this assumption is correct, digital cash may have a kind of monetary freedom . Nevertheless, it will be difficult for the public to trust a privately-issued currency, not controlled by the government in some fashion.
The conditions that make government-issued money credible do not apply to privately-issued currency. Government-issued currency is the official currency of a given state, and is used, in spite of its value, by the citizens of a given state. Citizens can voice their views, in some cases, of economic policy and the value of government-issued currency during elections. Overall, within a nation, there is only one official currency, and there are no alternatives. These conditions do not hold true for privately-issued currency. If the value of a specific privately-issued currency begins to depreciate, those using this currency quickly dispose of it. This dumping may accelerate the depreciation of a given currency, and, in extreme cases, eventually lead to bankruptcy. This instability may discourage the use of privately-issued currency.
If the value of digital cash is exactly equal to real currency, then digital cash is convertible to real currency at anytime . For example, dollar-term digital cash would have the same unit as dollars and customers would be able to convert it to real cash. In other words, digital cash is not “new” currency in the sense that the dollar, mark, or yen are new . Hence, we will assume that digital cash is cash backed (or created) by banks using real cash as a base, and that there is guaranteed convertibility to real cash. Even under these conservative assumptions, I envision several monetary problems.
2a. Macroeconomic effects: exchange rates
Digital cash may potentially increase instabilities in exchange rates. Since digital cash is a proxy for real currency, there has to be an exchange rate applied to it. There must be a foreign exchange market in cyberspace (see Figure 2).
For example, dollar-term digital cash can be exchanged for yen-term digital cash using the real world exchange rates as a base. The exchange rates in cyberspace and in the real world should be equal. If not, arbitrage transactions would immediately equalize the virtual and real exchange rates.
However, there will be differences between virtual and real exchange markets. First, the fee for exchanging one currency’s digital cash with another currency’s digital cash should be lower than the fee for exchanging real cash, since exchanging digital cash is merely an electronic activity. In the real world, the difference between the selling rate and the buying rate is about two percent for average customers. This rate reflects the costs of the storing the actual bills in various currencies, managing branches to handle the currencies, and hiring workers to staff the branches. Most of these costs will be eliminated with digital cash. Thus, the exchange fee for digital cash should become very small. This reduction should encourage greater participation in the foreign exchange market.
Second, users of digital cash will use the Internet to broaden geographically their consumption patterns. In turn, those with digital cash will be more likely to carry a richer variety of currencies, a variety of digital cash notes based on real currencies in different states. In the real world, a consumer will most likely have on hand cash just of one state. In the virtual world, a consumer may have stored on a hard disk digital currencies of several states for purchases. If one currency is depreciating, consumers will be more likely to exchange one form of digital cash for a more valuable and less volatile form of digital cash. In other words, there will be an incentive toward speculation in digital currencies.
If there is a great deal of digital speculation, it could lead to the de-stabilization of foreign exchange rates. Speculative behavior could accelerate the initial depreciation of any given currency and amplify general fluctuations in the market. A so-called bubble effect could occur.
Of course, an increase in the number of participants may stabilize the market, if the participants' expectations are independent of each other. But if expectations are dependent on each other, it increases the prospects for a bubble to occur . Bubbles historically are a possibility when the general public joins in speculative transactions . Massive participation by the general public in virtual speculation may de-stabilize the foreign exchange rate since the exchange rate of digital cash is linked to the real world.
2b. Macroeconomic effects: money supply
Digital cash may affect the money supply in the real world. Those using digital cash deposit real cash in a bank and request in exchange for this real money digital cash. If a bank issuing digital cash does not offer loans in the form of digital cash (a so-called 100 percent reserve system), the amount of digital cash will be fixed to the amount of the real cash on deposit. In this conservative case, no new money will be created.
However, if the economy of the Internet expands, banks may chose to lend customers money in the form of digital cash. Banks will move to a virtual, fractional reserve system parallel to that found in the real world. New money will be created. In other words, the total amount of digital cash will exceed the amount of deposited real cash (see Figure 3).
This money creation could lead to the possibility of bankruptcy. But since there is no central bank in cyberspace, the bankruptcy of banks tend to cause chained-bankruptcy, that is, financial crisis. (Problem 4)
In turn, there will be a money multiplier of digital cash. “Money multiplier” in this case means the ratio of issued digital cash to deposited real cash, on reserve, in this cyber-economy. If the virtual economy develops like normal, real economies, this process can be expected to evolve over time.
This development means that money in cyberspace fluctuates with virtual economic activity which in turn eventually has an impact on the real world’s money supply. Suppose the virtual economy expands leading to a temporary shortage of digital cash. The demand for digital cash will mean the transfer of real cash to electronic banks. Cyberspace will absorb real cash and in turn shrink the money supply in the real world.
This sort of interaction is not new. In the real world, economic expansion by one country will increase its interest rate, which will lead capital to flow in from other countries, contributing to a shortage of other money supplies elsewhere. But there are other complicating factors in cyberspace. First, since digital cash is a proxy of real cash, this interaction with money supplies will be more direct and rapid. In the real world, geography and fluctuating exchange rates dampen the speed and amount of capital flow. These barriers are minimal for digital cash. Therefore, the interaction between cyberspace and a given national economy may be more direct and rapid than that between two national economies. Second, since cyberspace is borderless with no central monetary authority, digital cash in the form of dollars can be issued by anywhere in the world. As the virtual system exists, it would be impossible for any one government authority to try to regulate the production of digital cash everywhere. These factors will make the monetary control for central banks potentially more difficult.
2c. Macroeconomic effects: Financial crisis
If banks begin to create new money in the form of digital cash, there will be an opportunity for bankruptcies, the chain effect of which may easily lead to a virtual financial crisis.
A bank that issues digital cash within the limits of its real cash on deposit, and which does not lend, can respond to any and all demands of its customers for real cash. In this case, bankruptcy would be unlikely and the chain effect is limited. Nevertheless, the natural evolution of virtual finance will probably parallel the real world. Banks will loan digital cash beyond their deposits of real cash. This development may lead to bankruptcy of a given virtual bank, which in turn may cause other banks to default.
In the real world, this risk is minimized by a safety net offered by central banks or institutions in the United States such as the Federal Deposit Insurance Corporation (FDIC). In cyberspace so far, there is no central banking authority that provides the equivalent of this safety net. For example, some forms of deposits in the Mark Twain Banks are not insured by the FDIC
It is possible that the default of one bank may lead to the defaults of other virtual banks. Customers may rush to their banks to demand a conversion of digital cash to real cash. If there are insufficient real funds on hand, there could be a financial crisis. In the absence of a virtual central bank, there is an increased risk for this sort of problem .
The problems and benefits of digital cash will not occur unless the amount of digital cash in use is equivalent to a considerable percent of world GDP . What is the critical characteristic of digital cash? If we can identify this characteristic, can we predict some consequences of the use of digital cash?
3. Characteristics
What is the most important character of digital cash? One characteristic played an important role in all of the previously discussed cases: transnationality. Digital cash is not constrained by national borders. Those using digital cash can purchase services and goods from any site anywhere on the Internet. Banks issuing digital cash can do so relative to any stable, real currency.
Transnationality makes international transactions more efficient. For example, in Japan, with traditional currencies the bank commission on an international money transfer is equivalent to about 20 or 30 dollars; for a domestic transfer, the fee is roughly two or three dollars. The cost reduction for international virtual transfers of funds should be quite dramatic. As discussed earlier, the problems for digital cash are also deeply rooted in this transnationality.
To understand the importance of transnationality, let us assume that digital cash is completely domestic. That is, only a bank in a given state can issue digital cash in that state’s currency. Only the citizens of that state can use this digital cash and only with merchants for products and services within the state. The benefit of digital cash will be reduced to the level of a new payment system equivalent to a new variety of credit or prepaid card. The prospect of multinational small businesses will be impossible. A potential worldwide customer base will evaporate.
Regardless of these losses, the potential problems, caused by digital cash, will be far less serious. In this scenario, domestic taxes can be applied to electronic transactions. Money laundering may be possible, but it also will be more easily detected. With digital cash not traveling on the world’s markets, there will be less incentive to participate in exchange rate speculation. Disturbance of the money supply will be minimized because a given central bank can control not only real cash but also digital cash by the conventional means. Both the benefits and problems of digital cash disappear if digital cash is completely domestic.
Transnationality is a critically important characteristic of digital cash. If digital cash was affected by the borders of states, it would be considered just an efficient payment system like a credit card or an electronic transfer. There would be no significant economic implications. Credit cards and electronic transfers increase the efficiency of financial transactions, changing the velocity of money and raising the money multiplier . But credit cards and electronic transfers have not caused significant problems that are possible with digital cash. Digital cash that respected the borders of states and followed the regulations of central banking authorities would pose few negative economic consequences.
It’s important to distinguish digital cash from so-called electronic money. Electronic money, as we know it today, is not transnational. A smart card system like Mondex is regarded by some as a form of digital cash . But some smart card systems require specialized equipment, reducing their global reach
4. One possible scenario
Some of the consequences considered in this paper will only occur if digital cash is used extensively on the Internet. There are many who are anxious about the security issues surrounding digital cash If these concerns outweigh the benefits, digital cash will not spread. In addition, in the real world there are many regulations that protect the consumer and provide for financial stability. These laws could act as obstacles for the widespread use of digital cash . In spite of these potential difficulties, I would like to consider at least one scenario, in which digital cash will become prevalent on the Internet.
The widespread use of digital cash will turn cyberspace into a large-scale economy. The attendant benefits of digital cash, in this scenario, will be sufficiently plentiful to overcome security concerns. With an increased use of digital cash, what will happen? In this scenario, I will consider three stages of development.
4a. One possible scenario: Expansion stage
Digital cash spreads on the Internet. Increased efficiency brings unprecedented benefits to both producers and consumers. Multinational small businesses gain momentum and new business organizations appear, the so-called virtual corporations. Consumers enjoy the ability to purchase goods and services anywhere in the world. Some banks, that decide adhere to traditional transaction systems, lose their competitive edge. The size of the cyberspace economy, measured by the total sales on the Internet or the GNP, grows at a more rapid pace than the economy of the real world.
As long as the size of the cyberspace economy is smaller than the economy of the real world, effects on exchange rates and money supplies are limited. The main problems at this stage are over-taxation and criminal activities. These two areas demand an international accommodation of rules, such as an international standard taxation rule on Internet-based transactions and an international agreement on criminal investigations . The process of making these new rules may lead to harsh negotiations between different states. The new rules may be a patchwork of regulations that may not change the fundamental characteristics of digital cash . It is possible that in spite of these regulations, the use of digital cash will expand.
4b. One possible scenario: Confusion stage
The expansion of digital cash will eventually enlarge the cyberspace economy so that it will have a significant impact on the real international economy. For example, suppose the amount of transactions in cyberspace are five percent of the total of all international transactions. There is the possibility then of effects on the exchange rate and money supply. There will be resistance to any sort of control or reform of digital economic activity. This resistance may indeed confuse the general public, politicians, and bureaucrats. It may require the shock of a financial crisis to bring some order to virtual transactions.
4c. One possible scenario: Organizing stage
If a financial crisis actually occurs, what kind of reform might be possible? There are two possibilities: territorial segmentation of cyberspace by national states or alternatively, the establishment of a monetary authority in cyberspace. In the first case, every bank on the Internet would fall under the jurisdiction of some nation and be controlled by the central bank of that specific state. The central bank, in turn, would be responsible for the control and circulation of digital cash. For example, regulations would be introduced to prohibit digital banks from “printing” digital cash in foreign currencies just to stabilize exchange rates . With these sorts of controls, digital cash will lose its transnationality. This sort of reform would represent a colonization of cyberspace by nation states.
The division of cyberspace into national states obviously would not be a satisfactory solution for most netizens . Another possibility would be to establish a monetary authority in cyberspace just like a central bank in the real world. The organization of this monetary authority may represent a union of the banks on the Internet, a committee of technical experts and bankers, or a group of netizens elected on a routine basis in cyberspace. However it may be founded and organized, this authority would be responsible for the financial stability of digital economics and ensure its proper links to reality. All banks issuing digital cash would have to accept the authority of this international, digital monetary bureaucracy.
However, if digital cash remains a proxy of real cash, this monetary authority will not be able to perform its role well in the absence of a right to issue real cash. In the real world, a monetary authority can issue real cash to any extent as a last resort of credit. If digital cash remains a proxy of real cash, this newly created virtual authority would not be a last resort of stability in the face of a potential crisis.
Suppose this authority could create a completely new, digital currency that we will call e$. e$ would be a new currency similar to the dollar or yen but only the virtual monetary authority could issue e$-term digital cash. Other banks on the Internet would use this cash as a base money. As a consequence, cyberspace would obtain sovereignty and monetary independence .
An independent agency governing virtual financial transactions is not a completely remote possibility. There are a number of suggestions that encourage the independence of cyberspace relative to reality. This independence will foster the growth of different kinds of organizations to exert some control over Internet-based activities . The absence of these sort of bureaucracies and authorities may mean that the history of digital cash is really a description of one of the many battles between cyberspace and nation states.
Digital cash will provide benefits and problems in the near future. It is the very transnational character of digital cash that will open new business opportunities around the world but also bring vexing problems for governments. The solutions to these problems may very well lead to a more controlled cyberspace with parallel structures and regulations governing the use of funds. Alternatively, the economy of the Internet may be regulated by those who best know cyberspace, the netizens, technicians, and agents of this borderless place, in the form of new and responsive digital bureaucracy. The economic consequences of the large-scale use of digital cash clearly indicate that some form of control will occur. Only time will tell if the history of virtual commerce will be peaceful, successful, and tightly coupled with current operational features of the international financial community.
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E-Money and virtual currencies
The digital currencies story is a continuation of the long-running saga of economics, markets, and commodity exchange in human society. With the constant rise of the global network, we have witnessed many global services becoming widely accepted and in a way changing (by adding to) our experience of mutual interaction. Looking back in history of the Internet we can conclude that public-key cryptography and digital signatures make e-money possible.
E-money can either be centralised (with the control point
of money supply) or decentralised, where the control over the supply can
come from various sources or network of sources (Bitcoin and/or other
virtual currencies). The main difference between e-money and virtual
currencies is that e-money does not change the value of the fiat
currency (euro, dollar, etc), but virtual currency is not equivalent to
any fiat currency. In other words, all digital currency is electronic
money, but e-money is not necessarily digital currency.
Electronic money or e-money in short is the money balance recorded electronically on a stored-value card or remotely on a server. The Bank for International Settlements defines e-money as ‘stored value or prepaid payment mechanisms for executing payments via point-of-sale terminals, direct transfers between two devices, or even open computer networks such as the Internet’. E-money is usually associated with so-called smart cards issued by companies such as Mondex and Visa Cash.
Electronic money is a floating claim that is not linked to
any particular account. Examples of e-money are bank deposits,
electronic fund transfer, payment processors, and digital currencies.
The term ‘stored-value card’ means the funds and/or data
are 'physically' stored on the card, in the form of binary-coded data.
With prepaid cards, the data is maintained on the card issuer's
computers. Typical stored-value cards include: prepaid calling cards,
gift cards, payroll card, loyalty cards, travel cards.
E-money can also be stored on (and used via) mobile phones
or in a payment account on the Internet. Most common and widely used
mobile subsystems are Google Wallet and Apple pay.
The fast introduction of e-money has lead to governmental
regulatory activities. Hong Kong was among the first jurisdiction to
regulate e-money, by allowing only licensed banks to issue stored-value
cards. Since 2001, the European Union has implemented a directive on the
taking up, pursuit and prudential supervision of the business of
electronic money institutions (E-Money Directive - 2009/110/EC).
Electronic currencies can be divided into soft currency and
hard currency. Hard electronic currency is one that only supports
non-reversible transaction. Reversing transaction, even in case of a
legitimate error is not possible. They are more oriented to cash
transactions. Examples for hard currencies are: Western Union, KlickEx,
or Bitcoin. On the other hand, soft electronic currency is one that
allows reversal of payments in a case of fraud or disputes. Examples are
PayPal and credit cards.
Digital currency
Simple intention drives this technological avalanche, based
on financial and commercial competition (as is the case of regulated
economies). In this struggle, the regulated market and the privacy of
the affairs of financial actors are crucial. Fair and constructive
financial institutions acting as intermediaries are the safeguards of
these principles. In most cases these are state regulatory agencies.
But something has changed in the digital era. Regulation is taking a new
form of teamwork and networking.
virtual money (virtual currencies) as a ‘type of unregulated, digital money which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community’. This Internet based medium of exchange have properties similar to physical currencies, however allows for instantaneous transaction and borderless transfer-of-ownership. Banks and customers use their keys to encrypt (for security) and sign (for identification) blocks of digital data that represent money orders. A bank ‘signs’ money orders using its private key and customers and merchants verify the signed money orders using the bank’s widely published public key. Customers sign deposits and withdraw using their private key and the bank uses the customer's public key to verify the signed withdraws and deposits.
virtual currency as ‘a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically’.
Both virtual currencies and cryptocurencies are types of digital currencies.
Cryptocurrencies are set to take the online world by storm,
as their popularity and use, and understanding of their advantages and
limitations increases. Giant companies like Apple, Dell and PayPal have
already indicated their plans to integrate cryptocurrencies as a payment
method, and more are likely to follow, with Bitcoin emerging as one of
the most popular virtual electronic currencies. The main invention of
this cryptocurrency is to present the central ledger of all
transactions, known as blockchain. This open source software allows all
peers in a network to verify every transaction ever made in the Bitcoin
system and therefore serve as guardians to this central ledger.
There are signs that central banks are also paying more and more attention to virtual currencies.it was looking into the possibility of launching its own virtual currency, considering that this would contribute to making economic activities more transparent, while also reducing money laundering and tax evasion.
The main issues
There are many comparative advantages of this system of
money creation and payments compared to the usual form of online
financial transactions. Using one source (the Internet) to connect to a
unique global financial system sounds like possible futuristic idea, but
with virtual currencies, it is not far away.
At the same time, there are also many warnings that virtual
currencies could be misused for illegal goods and services, fraud, and
money laundering. The anonymity associated to the use of virtual
currencies (such as bitcoin) transactions increases the potential of
possible misuse. A US government-funded report on the 'National Security
Implications of Virtual Currencies', published at the end of 2015,
noted that ‘non-state actors’, including terrorist and insurgent groups,
may exploit virtual currency by using it for regular economic
transactions.
Government regulation is still the key to virtual
currencies attracting more users, as well as to potentially address the
risks of misuse. States around the world are currently considering its
regulation. This will not only increase consumer confidence in the
technology, it will also involve more companies and investors in the
growing business. While some are arguing that unregulated virtual
currencies are safe haven for money laundering and illegal flow of
money, others present this as an ultimate tool in fighting identity
thefts and leakage of personal financial information.
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Electronic Money
What Is Electronic Money?
Electronic money refers to money that exists in banking computer
systems that may be used to facilitate electronic transactions. Although
its value is backed by fiat currency and may, therefore, be exchanged
into a physical, tangible form, electronic money is primarily used to
transact electronically, due to the sheer convenience of this
methodology.
How Electronic Money Works
Electronic money is used for transactions on a global basis. While it
may be exchanged for fiat currency (which, incidentally, distinguishes
it from cryptocurrencies),
electronic money is most commonly utilized through electronic banking
systems and monitored through electronic processing. And since a mere
fraction of the currency is utilized in physical form, the vast
percentage of it is housed in bank vaults and is backed by central
banks.
For this reason, a primary function of the U.S. Federal Reserve and
its 12 supporting banks is to manage the fiat currency in physical form
and control the money supply through monetary policies and open market
operations.
Electronic money is backed by fiat currency and may be exchanged for physical cash, but it is most often seen in electronic usage
Open Loop Card
Electronic money is backed by fiat currency and may be exchanged for physical cash, but it is most often seen in electronic usage
Special Considerations
Currency in Circulation
Electronic money can be held in various places. Most individuals and
businesses store their money with banks that provide electronic records
of the cash on deposit. However, prepaid cards and digital wallets like
PayPal and Square likewise let users deposit fiat currency for
electronic money.
Electronic Payment Processing
Many Americans process transactions electronically in a multitude of ways, such as:
- Receiving paychecks through direct deposits
- Moving money from one account to another via electronic fund transfers
- Spending money with credit cards and debit cards
While physical currency is still advantageous in certain situations,
its role has gradually diminished over time. Many consumers and
businesses believe electronic money is more secure and convenient
because it cannot be misplaced, and it is widely accepted by merchants
nationwide. The U.S. financial market has consequently established a
robust infrastructure for transacting electronic money, which is
primarily facilitated through payment processing networks, such as Visa
and Mastercard.
Banks and financial institutions partner with electronic money
networking processors to issue their customers branded network cards
that facilitate the electronic transactions, from bank accounts to
merchants. Electronic money is also easily transacted through
e-commerce, letting consumers conveniently shop for goods and services
online.
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Open Loop Card
What is an Open Loop Card?
An open loop card is a general-purpose charge card that can be used
anywhere that brand of card is accepted. It usually bears the logo of
the card brand or network (which processes the actual transactions),
such as Visa, MasterCard, American Express, or Discover. In the case of
cards offered through financial institutions, like Visas or MasterCards,
it often shows the name of the issuing bank or credit union as well.
Open loop cards can be credit cards, debit cards,
gift cards, or prepaid cards. The partnerships involved with the
issuance of open loop cards can be structured in various ways.
The opposite of an open loop card is a closed loop card, which can only be used to make purchases from a single company or retailer, like a department store.
The Basics of an Open Loop Card
Any charge card that is widely accepted at a variety of merchants and
locations is considered an open loop card. Open loop cards can take a
variety of forms.
- An open loop card is a general-purpose charge card that can be used anywhere that brand of card is accepted.
- The opposite of an open loop card is a card that can only be used at a specific retailer, known as a closed loop card.
- Open loop cards can be credit cards, debit cards, gift cards, or prepaid cards.
Credit Cards
Open loop cards are what most people think of when they think of
credit cards: a piece of plastic, issued by their bank, credit union or
financial services company, that they can use to purchase goods or
services at a variety of places, both in person and on-line. Every
month, the cardholder receives a statement with his charges for that
period, which he can pay off in full or in part.
This sort of card is issued to customers by a financial institution
in partnership with that institution's processing network (Visa or
MasterCard). American Express and Discover act as both their own issuing
bank and network processor.
Debit Cards
The debit card tied to your checking account,
which deducts funds from it immediately when you make a purchase, is
also an open loop card. Like credit cards, debit cards work in
partnership with a network processor and include its branded logo. Debit
cards can be used anywhere that their processing network is accepted.
Gift Cards and Prepaid Cards
Prepaid cards loaded with funds for future use can be open loop cards
too. General prepaid cards are reloadable and can be consistently used
for payments and recurring billing. Gift cards, usually defined as cards
that can usually only be used until the loaded funds have been
depleted, are open loop if they are not specific to a certain store.
Some prepaid cards may also be used for public assistance benefits.
For example, certain prepaid assistance cards might allow qualifying
individuals to purchase food at any grocery store that accepts Visa.
Flexible spending account cards are also a type of open loop prepaid
card, which can be used to make qualifying health care purchases from
any merchant that accepts the branded processor.
There are also open loop payment cards that can be used as payroll cards
to pay workers who don’t have bank accounts, can’t receive direct
deposits, and would have to pay a fee to cash a check. Employers partner
with payroll card issuers to provide this card as a benefit for their
customers. Some of these cards come with numerous fees, but workers can
use them anywhere that the network brand is accepted.
Co-Branded Cards
Although they may have their own proprietary cards, many retailers
are also team up with a bank and a credit card network processor to
offer open loop credit cards, like an Amazon Visa or a Saks Fifth Avenue
MasterCard. Known as co-branded cards,
because they bear both the logos of the retailer and the card company,
these cards offer the best of both worlds, so to speak: They can be used
anywhere, but when used in the store, let cardholders accrue rewards
points and get perks and privileges, like free delivery or special sale
days. Unlike proprietary store cards, however, these co-branded cards
have annual fees.
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Closed Loop Card
A closed loop control system is a set of mechanical or electronic devices that automatically regulates a process variable to a desired state or set point without human interaction. Closed loop control systems contrast with open loop control systems, which require manual input.
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Closed Loop Card
A closed loop control system is a set of mechanical or electronic devices that automatically regulates a process variable to a desired state or set point without human interaction. Closed loop control systems contrast with open loop control systems, which require manual input.
What Is a Closed Loop Card?
A closed loop card is an electronic payment
card that a cardholder can only use to make purchases from a single
company. A closed loop card, also called a single purpose card, will
usually have the company’s logo on it, indicating where the card can be
used, but it will not have the logo of a major payment processor like
Visa or MasterCard.
Closed loop cards are an electronic payment card that can only be used with a specific payee. Generally electronic payment cards can be either closed loop cards or open loop cards. By contrast, an open loop card is a card type more commonly associated with all types of standard transactions. An open loop card can generally be used anywhere the card brand is accepted.
Closed loop cards are an electronic payment card that can only be used with a specific payee. Generally electronic payment cards can be either closed loop cards or open loop cards. By contrast, an open loop card is a card type more commonly associated with all types of standard transactions. An open loop card can generally be used anywhere the card brand is accepted.
Closed Loop Card Issuance
Closed loop cards are usually issued from the merchant where the card
will be accepted. Closed loop cards can be either debit or credit cards.
Debit cards will usually be issued as a gift card with a prepaid
balance. Credit cards are usually obtained by application either at the
merchant’s location or online through their website.
When a customer applies for a credit card at a retailer they may be
approved for either a closed loop card or an open loop card. The type of
card that a customer is approved for is based on information from their
credit inquiry
as well as income details provided in their credit profile. Both closed
loop cards and open loop cards will usually offer rewards that can be
obtained through each purchase.
Merchants partner with financial institutions to issue both closed
loop and open loop credit cards. For example, Citibank is the primary
issuer of credit cards for Best Buy. Terms governing the issuance of
these cards is detailed in agreements between the merchant and the card
issuer.
Card Processing
Processing on closed loop cards is a bit more simplified than open loop cards. Generally large retailers will work with their merchant acquiring bank as the card issuer. This provides for consolidated services and a more efficient merchant account agreement.
Merchants who work with their acquiring bank as the card issuer can
eliminate some added costs per transaction. In a closed loop card
transaction at a merchant the entities involved will include only the
merchant and the merchant acquiring bank. There is no need for a
processing network since the merchant and merchant bank communicate
directly. Thus, there is also no issuing bank involved since the
merchant acquiring bank assumes that role. Overall, closed loop cards
usually require lower processing costs for merchants which can be one
advantage in marketing them to customers.
Loop Control for motor application numeric counter register
Loop Control for motor application numeric counter register
Closed-loop neuromodulation of spinal sensorimotor circuits controls
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Cash Card
A cash card is an electronic payment card that stores cash for various types of payments. Cash cards may include bank debit cards, prepaid debit cards, gift cards, and payroll cards. They do not include credit cards since credit cards are a form of debt rather than cash.
Breaking Down Cash Card
Cash cards provide a convenient way for cardholders to make
electronic payments. Standard branded cash cards are typically allowed
for use at all merchants where the network processor is accepted.
Alternative cash cards may have certain limitations on their use.
Standard Cash Cards
Banking debit cards are the most common type of standard cash card.
These cards are typically linked to a bank account at a financial
institution. They allow a cardholder to make electronic payments that deduct cash. Standard cash cards can also be easily used at an ATM to withdraw cash from an account.
Gift cards are another type of standard cash card. These cards are
pre-loaded with cash. Some gift cards may only be used at a particular
store such as Costco or Subway. Other gift cards may be available for
use similar to a debit card.
American Express is one company that provides gift cards with
pre-loaded funds that can be used anywhere American Express is accepted.
Most gift cards are not reloadable, allowing the cardholder to only
make purchases up to the pre-funded limit.
Alternative Cash Cards
Several alternative cash cards also exist with varying terms and
available uses. These cards are generally known as prepaid cards and
help to support the underbanked population by providing a cash card that
is not linked to a bank account. Payroll cards are also an alternative
type of cash card that employers may provide for their employees
- Square: Square is one of the leading providers of cash cards and prepaid cash card services. Services are provided through the Square Cash application. Square Cash users also have access to a Square cash card for making all types of electronic purchases. The Square Cash card can be obtained by mail and is linked to the balance in a user’s Square Cash account.
- Payroll Cards: Payroll cards are a type of cash card that can be provided by an employer. Payroll cards are an employee benefit that employers arrange for through partnerships with prepaid debit card issuers. They'll allow an employer to make scheduled payments to an employee’s payroll debit card. These payments are a simple form of direct deposit and provide the cardholder with immediate access to funds. Payroll cards can be easily integrated into an employer’s payroll system while also providing easy access to wages earned for the employee. These cards carry a balance from month to month and can be used the same way as a debit card.
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Prepaid Cards Processor
What is a Prepaid Cards Processor
A prepaid cards processor is a company that processes transactions
for prepaid payment cards. Prepaid card processors are responsible for
processing transactions for prepaid credit or debit cards, gift cards, payroll cards, and other payment cards that are considered secured by the front-loading of money.
BREAKING DOWN Prepaid Cards Processor
A prepaid cards processor works with prepaid cards to allow a
cardholder to conduct transactions without the use of cash but limit the
size of the transaction to the amount of money available on the card.
Examples of prepaid cards include gift cards and phone cards but can
also be used in government aide programs instead of sending a periodic
check. Prepaid cards are often re-loadable and may require the card
holder to set a pin number in order to use it and minimize theft.
Prepaid cards are secured cards, meaning that the value of the card
is limited to the amount of cash that has been loaded to the card’s
account. For example, a gift card may
have a maximum value of $50 if only $50 has been loaded to that account
at the point at which the card was activated. Requiring prepayment before activation limits the exposure of the issuing company to a precise value, unlike an unsecured card linked to a line of credit. Some types of prepaid cards also have a penalty fee for disuse or use past a set time limit.
Prepaid card processors are unlikely to provide point-to-point encryption (P2PE) because
they do not provide a direct link between the point-of-interaction,
such as the card terminal at a merchant, and the processor. Instead,
prepaid card processors are responsible for the payment processing
component of the transaction. This requires the processor to record
purchase information and manage the account balance of the prepaid card, as well as manage chargebacks, returns, and payment disputes.
Advantages and Disadvantages of a Prepaid Cards Processor
Prepaid payment cards are typically more customizable than cards issued by banks and other financial institutions. This is because the needs of the organization offering the card can vary greatly. Large credit card processors,
such as VISA, are frequently involved in this line of business, though
smaller businesses may also provide prepaid card processing services.
Prepaid cards through a prepaid cards processor can be a convenient
way for organizations to procure funds for their clients or recipients,
but they do carry a risk of being misused or even stolen. For instance,
because the value of a prepaid card is carried entirely within the card,
if it is stolen or given to the wrong individual, the value may not be
able to be recovered.
What Is Contactless Payment?
Contactless payment is a secure method for consumers to purchase
products or services using a debit, credit, or smartcard—also known as a
chip card—by using RFID technology or near-field communication (NFC).
To make a contactless payment, tap your card near a point-of-sale terminal that is equipped with the contactless payment technology. Since contactless payments do not require a signature or a personal identification number
(PIN), transaction sizes on cards are limited. The allowable amount for
a contactless transaction varies by country and by bank.
Contactless payment is also referred to as tap-and-go by some banks
and retailers. Examples of non-credit or debit card contactless payments
include transit cards, Apple Pay, Android Pay and Google Wallet.
Understanding Contactless Payment
Contactless payment is a popular way to make purchases at
participating retailers. It has been around since the 1990s with only a
handful of merchants and retailers using the technology during that
period. Since then, it has spread out to include thousands of banks,
credit card companies, merchants, and retailers around the world.
Some merchants and retailers may set a low limit for their tap system in order to prevent fraud,
while others still allow for large transactions. Depending on the
merchant and type of transaction, larger dollar amounts may require a
signature.
Most banks offer contactless payment cards and terminals that are
fully equipped for the system. These cards come with a symbol indicating
they are ready for tap payment. Although smaller shops may not offer
tap capabilities, many national chains have moved to tap capable payment
terminals.
The main advantage of contactless payment is that it speeds up
transactions by eliminating the need for a customer to enter a PIN. Tap
customers speed up the line, so that both the merchant and customer save
time when contactless payment is used. Another benefit of
contactless payment cards—at least for banks and credit card issuers—is
that consumers who tap tend to use their cards more frequently.
________________________________________________________________________________How it Works
When you make a purchase, look for the contactless payment symbol on
the merchant's payment terminal. This symbol is similar to the wifi
logo, but turned onto its side. When the system makes the prompt, the
customer can then bring the card between one to two inches from the
contactless symbol on the terminal. When the system accepts the tap, it
signals the customer with a beep, green light, or checkmark. Once the
approval is received, the transaction is complete.
Consumers can also connect their credit cards
to a device—a smartphone, smart watch, or fitness tracker—to pay using
the contactless system as well. This is done by downloading a payment
app such as Apple Pay, allowing consumers to securely store credit and
debit card information to make purchases by tapping a smartphone or
Apple iWatch.
- Contactless payment is a secure payment method using a debit, credit, or other smartcard by using RFID technology or near-field communication.
- To use the system, a consumer taps the payment card near a point-of-sale terminal equipped with the technology.
- Contactless payment is considered a quick and easy way to pay since it doesn't require consumers to input their PIN.
- Popular in Australia, Canada, South Korea, and the United Kingdom, contactless payment has to make traction with consumers in the U.S.
Problems With Contactless Payment
Even with the convenience of contactless payment, many consumers are
worried about the security of their cards. There have been stories in
the media about criminals skimming
card data using smartphones to read tap cards in consumers' wallets.
The range at which a card can be read is very short and, even if the
criminal is close enough to grab data and do a transaction, he cannot
create a copy of the card. This is not true of magnetic strip cards.
That said, the chip and pin card is still the most secure, as they can't
be duplicated and they require data (your pin) that is not contained
anywhere on the card.
If a skimmer gets your card data, his next step is to find a website
that doesn't require the three digit code printed on the back of the
card and run transactions under the credit limit. If a criminal steals
your physical card, he'll likely head to the nearest store to buy gift
cards with small balances using tap. While annoying, you can dispute the
transactions and get a new card issued. There are also protective card
sleeves and wallets that block readers from getting to your card data in
the first place.
If you do detect fraud on your card from a contactless payment
system, there is recourse. As of 2015, merchants and credit card
companies became liable for any fraudulent activity that took place
through their systems if they had no chip technology in place.
