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Exploring Digital Cash

Introduction

This exploration of digital cash is a project for Information Systems 204, "Information Users and Society." Our group has delved into the issues surrounding digital cash and electronic commerce, both to investigate issues raised by these new developments, and to look at some specific products and proposals in these fields.

The prospect of digital cash as a developing method of payment is both exciting and worrisome. Many different interest groups have issues which must be addressed before digital cash and electronic commerce can proliferate. Among these issues are anonymity and privacy, security, ease and cost of use, standards, infrastructure, control of the money supply and criminal activity. And as is to be expected, the positions of some interest groups are directly opposite to those of others groups. The discussions that resolve these differences will shape the way that digital cash will evolve in the United States, and how well it will work for consumers.

As we began studying these issues, it became apparent that "Digital Cash" was being used to describe many different kinds of products, from micropayment to smart cards to actual digitized value stored in computers. Each system is different, has different requirements and capabilities, and potentially different problems. But just examining digital cash raised an important problem for our group: this is such a rapidly developing field right now that any information and links we've provided may quickly become dated. This set of web pages is an investigation of the products, issues and potentials of digital cash at this time (September to December, 1997) and should be understood as such. During our work on this project, some companies have disappeared while others have begun widespread testing of their products. This field will likely continue to evolve remarkably quickly, but the issues we raise about how digital cash will develop (and how different groups want it to develop) are also likely to create temporary roadblocks in the continued development of widespread electronic commerce in the United States.

We welcome questions, comments and observations from readers of this project.

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What is digital money--or variously, digital cash, electronic cash, electronic money, etc.? According to a G10 paper "a precise definition of [digital] money is difficult to provide [as] a number of official bodies have described and categorised these products in different ways". Money has emerged in new forms recently through processes somewhat analogous to those identified by Orlikowski for organizations(1) and largely in response to consumer activity on the Internet (see Consumer Issues section below). Therefore, although this paper focuses on issues from different perspectives regarding digital money, a clarification follows about the forms it has assumed.

There are three principal payment methods currently in use on the Internet. The first are those based on credit cards where the card number is either encrypted and transmitted over the open network, or verified off-network. The second payment type is a digital checking system whereby electronic checks are sent over the Internet and cleared off-network. The third type is digital money which is transmitted and cleared on-network at the time of the transaction. This type, which appears in the forms of smart cards, stored-value cards and downloaded electronic "wallets", is most often associated with small-value purchases, or micropayments, such as units of information (e.g., journal articles, songs) and road tolls.

The following framework, drawn from the work of Jim Miller, provides a summarized basis for thinking about the issues discussed in this paper.

Identified

Anonymous

On-line

-Requires bank -Known cash withdrawer -Audit trail created

-Requires bank -Unknown cash withdrawer -No audit trail created

Off-line

-No bank required -Known cash withdrawer -Audit trail created

-No bank required -Unknown cash withdrawer -No audit trail created

The anonymous off-line transaction, which is true digital money, is the most complex. The privacy it offers also creates opportunities for double-spending, (i.e., uncontrolled and fraudulent re-use), money laundering, or tax evasion.

Consumer Issues

The Internet, which has been doubling in size each year since the introduction of the World Wide Web, provides consumers with an additional avenue for purchasing goods. The Internet population is currently thought to be at 60 million people with about ten percent actually making any purchases. Aside from the conveniences of being able to make purchases from home and at any time, electronic shopping on-line allows for potential passed-on savings: an estimated 75 percent of information product costs stem from distribution expenses. But consumers appear reluctant to buy over the Internet, preferring to "windows shop". Changing this attitude may necessarily involve constraint of the very ethos of "freedom" as expressed by the Internet: the open nature of the Web, and the concomitant anonymity it confers have been publicly critiqued ("Flood Control on the Information Ocean: Living With Anonymity, Digital Cash, and Distributed Databases", I. Moral and Social Environment, A. Costs of Anonymity, paragraph 5.; Michael Froomkin). That is, consumers need to trust that the `net will safeguard their privacy and transactions, while continuing to make shopping easy and enjoyable.

The advent of technology which makes electronic payments possible is not new, nor is it unproven, untested, or unreliable. It is, however, unpopular, because some would argue that there is no guarantee of privacy and therefore, no guarantee of security. But what is privacy or security? Those pushing for a more anonymous (or continued anonymous) electronic world seem to define it in terms of what strong encryption brings to the table; namely, a thoroughly secure, unbreakable way of getting information from point A to point B, unbeknownst to anyone but sender and receiver. But there is no definition of privacy (and therefore security) which is commonly understood or commonly agreed to. Although a bit off-topic, the Roe v. Wade decision reminds us that privacy is not a concept found in the constitution and so in essence, we have been "making it up as we go along."

The concept of privacy is a curious phenomenon as it relates to digital money vis-a-vis the Internet's anonymity. Consumers are assumed to distrust digital money for the opportunities it provides sellers to capture data on them--which can then be sold in an uncontrolled fashion to unknown parties. However, it is a common-place that personal information is already freely surrendered and manipulated: detailed credit profiles are routinely created without any one individual's explicit consent (which is most of the adult population of the United States). Additionally, a particular segment of the population, who might be expected to be desirous of transaction secrecy, has made pornography the most profitable business on the Web. Therefore, what is it about electronic money that poses a threat to one's privacy? Who will decide what is or is not private? Should this definition be incorporated into the development of any standards for digital money products and what (disinterested third) party will set those standards?

The issues surrounding transaction security are no less interesting. Security concerns have frequently been limited to discussions about encryption. These codes are feared for their possible criminal uses despite the awareness that the presence of cryptography to ensure confidentiality, provide reliable user authentication, and detect unauthorized tampering with electronic data can help to deter electronic bank fraud and many other types of illegal activity. Although this topic is treated more fully in the paper's Government section, a security issue closer to the customer is that of acknowledgment. Acknowledgment assures the customer that their transaction was not diverted, misidentified, or otherwise misplaced. Traditionally, physical receipts have been provided to customers to fulfill this function. This safeguard has been legislated in several forms, such as Regulation E which requires that for electronic funds transfers the issuing institution must track all transactions, provide periodic statements, and give customers a paper receipt when a transaction has occurred. It is mirrored in the receipts provided at ATM's, as confidence in both the technology and the sponsoring institution were insufficient for consumers to embrace this product. However, providing paper receipts for micropayments, the currency of the still relatively small information vending market, is unprofitable. Further, it may become unnecessary for machines to assure customers of their competence and reliability by producing a physical artifact: the generation now in elementary school, when it reaches economic adulthood, may insist on electronic notification which would facilitate their record-keeping and the profitability of microtransactions.

Any system of electronic money will also need to instill complete confidence of transaction protection and currency soundness. To the first point, any electronic money scheme needs to be trusted that: the merchant will deliver what was paid for; that the merchant is real and not a fraudulent extraction scheme; and that redress exists for disputes if the product turns out to be unsatisfactory. To the second point, the tender must be as acceptable and reliable as today's common form, reserve notes (i.e., US dollars). However, what if, for example, American Express began to mint "AE electro-dollars"? In fact, private currencies were an important form of money in the United States before the Civil War. Historians have refined the idea that this time was rife with wild-cat banking and currency arbitrage: analyses indicate that losses to "bank note holders and bank failures were not out of line with other comparable periods in US banking history." Therefore, one might expect that the AE e-dollars, backed by rock-solid securities, could experience a similar acceptance and success--the AE e-dollars might even be bought and sold in a manner similar to how global currencies are now traded.

The consumer is also concerned with a fair price. This may be evident in familiar hard goods, but how will that be judged if one is buying information? Is some information better quality and who will determine that? Indeed, why should much of what is free on the Internet become a purchasable commodity? Will agencies arise (charging their own fee) to rate the worthiness of information? Will products develop that can make your search for information more cost-beneficial?

Finally, how will this change in attitude come about and what will cause someone to want to give up trips to Safeway to shop electronically? It seems to be an oversimplification to assume that consumers are only waiting for the knowledge that purchases are secure and private and that they would not miss the look and feel of the grocery store. This also brings up questions of the type of community and therefore relationships we say we would be willing to have in the future. Will it suffice to know one's surroundings only as YAHOO defines them?

(1) Wanda Orlikowski, "Improvising Organizational Transformation Over Time: a Situated Change Perspective", Information Systems Research, Vol.7, No. 1, March 1996

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The prospect of the proliferation of digital money is an exciting one to many, including those in the business world. In fact, business may be the interest group which stands to gain the most if gain is measured in dollars (profits, earnings, sales). For years, companies have invested large amounts of their budgets in marketing activities in order to get recognition for their products and services in the hope that recognition eventually translates into sales, loyalty and increased market share. Of course, these outlays are only considered investment if the benefits outweigh the cost, otherwise they are sadly just expenses. Similarly, companies have taken advantage of the possibilities of global connectivity, (read the world wide web) as a new means and channel medium to augment those marketing activities which they have been carrying out for years. But, instead of replacing those original marketing investments, posting a web page has been used as an additional element within a marketing plan in order to complement traditional promotional activities. Now, business would like to start reaping the benefits from these investments and in a big way. The possibility of an easy to use, low cost payment medium such as digital money is viewed by those in the business world as a means to start reaping these benefits.

How? The use of digital money may expand business opportunities and increase sales over the internet by furnishing an additional method of making and receiving payments to the consumer and to the company. Digital money creates a larger potential customer base becuase a person who has a way to pay for something over the internet is a potential customer. A person who lacks such an instrument is unable to make a purchase over the internet and is therefore, not a potential electronic customer. This takes advantage of customer impulse buying which would lead to increased sales.

Furthermore, if the transaction can take place over the internet, the buyer avoids the cost and possible inconvenience of going to the store and the business avoids or reduces the need to pay rent and maintain a store for his/her physical place of business (physical customer interface) by maintaining an electronic place of business (electronic customer interface). This is a benefit realized through any means of electronic commerce over the internet whether it be digital money, digital checks or credit cards. Thus, the option of paying with digital money enhances the benefits of an electronic place of business.

The use of digital money may expand business opportunities and increase sales over the internet by providing ease of use to the consumer and to the company at a reasonable cost. The proliferation of digital money may increase business volumes if (and possibly only if):

• it provides enhanced benefits from cash (security, anonymity)
• it is as easy or easier to use as cash and credit cards

Quite possibly the most important initial use of digital money would be to use it for charging and making micropayments to view content on the internet. Currently, it is difficult for some and next to impossible for others to charge viewers for the right to view content of web pages like digital books. The most popular method of payment, credit card transactions, is too costly and onerous to be used to charge something like a tenth of a cent per page to view web pages. Currently, intellectual property rights holders have to trust the reader’s willingness to pay for the right to read, print and copy the copyrighted material. If the reader chooses not to pay, there is nothing the content owner can do about it. The possibility of using digital money to extract micropayments then provides a way for business to force compliance of intellectual property law by obliging customers to make their micropayments in order to view said material. This would be a real business opportunity considering the exponential annual growth of the internet as a source for information. Furthermore, it might encourage many businesses to make more intellectual property available over the internet if they knew they would be compensated for it and it would probably increase access to and availability of this material. Of course, if viewers, used to the idea of free content access, do not or cannot accustom themselves to the idea that they have to pay for content, it could possibly curtail the growth of the internet.

The numerous issues surrounding the proliferation of digital money and the shape it eventually takes concern business directly with regard to the expanded business opportunities it presents. But, digital money also concern business inasmuch as it affects its customers. These issues include privacy (read anonymity), security from risk of fraud or loss, cost and ease of use. Customers and business will only resort to digital money as a method of payment if it fulfills certain characteristics that cash and other payment methods exhibit and demonstrates certain enhanced features to make it more attractive, more desirable as a method of payment. Therefore, the use of digital money to purchase things over the internet may depend greatly on how it addresses these consumer requirements and in what form it manifests itself. People’s (customers’ and business’) willingness to use digital money then may be conditioned on many factors such as:

• availability of anonymity to the customer (payor) when making a purchase with digital money
• availability of anonymity to the business (payee) when receiving digital money
• cost (is digital money to be sold by digital money generators at a premium in order to cover their costs?) and ease of acquisition
• cost (is special hardware required on the part of the payor? the payee?) and ease of use
• cost and ease of online verification
• cost and ease of offline verification
• availability, cost and ease of reuse
• cost and ease of cashing at a financial institution
• availability, cost and ease of replacement if lost
• risk of fraud (accepting digital money that was already spent elsewhere)
• risk of fraud (accepting stolen digital money)
• risk of fraud (accepting digital money fraudulently duplicated (bills), digital money fraudulently reused (bills) or increased (smart cards whose security system is corrupted and cash balance increased))
• risk of fraud (ability of someone who fraudulently acquires someone else’s digital money to use that digital money)
• liability for fraud (in the case of a fraud, how much is the payor and/or payee responsible for?)

These issues are very close to the hearts of consumers and business. Before there is to be a mass proliferation of digital money as a new method of payment, these questions will likely have to be answered.

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What effect will digital cash have on financial institutions? The customer will witness a change in the nature of services provided by institutions, such as check cashing, teller services, loan processing, notary services, and draft writing. Remotely processed transactions are more monetarily profitable than face-to-face assistance. The resources to finance new products that emphasize remote access and flexibility will come from elimination of line employees. As with the introduction of the Automatic Teller Machine, institutions planned to minimize the costs associated with human tellers by offerring ATMs as an alternative. In both cases, customers with preferences for interacting directly with an employee and handling currency will find fewer resources available for their use.

What effect will digital cash have on the customer?
A lack of consumer confidence, with the value of the money uncertain, and concerns regarding the reliability of form. Loss of customer business because of reduced resources available, such as long teller lines, part-time tellers, reduced hours of operation, checking accounts carrying limits and fees, Retailer point of sale acceptance and authentication. Is it universally accepted as payment, will everyone take it?

Security concerns:
Currency safeguards: The money must be encrypted to protect its reliability, and the unit value must be verifiable. Authentication: Stolen funds or fraud are difficult to investigate without some identification of the parties involved. Operating policies and hardware must be adapted to monitor data transfer and detect misappropriation.

Privacy:
If embraced, the institution's close relationship with individual customers and their transactions changes. Financial data is no longer warehoused in bank servers. Records pertaining to the spending and borrowing habits of customers can no longer be traced. This anonymity encourages the commission of crimes that rely on faulty currency authentication, such as money laundering and counterfeiting.

Regulation and interchangeability:
Thus far, no regulation has been enacted to standardize digital money or its use; it is sorely needed, for faith in its value depends greatly upon the number of retailers. This regulation would establish business practices and address the "worth" of a unit. Until one form is used for the industry standard, a currency exchange of a type will occur. While multiple producers of digital money circumvent the Treasury Department's monopoly on production of legal tender, their products have no mutual acceptibility nor foundation of value.

Many participants using Digicash use it as a processing agent for credit card payments, and eliminate that function within the institution itself. It is much the same as the outsourcing their security guards to Brinks.

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        The U.S. Government has a central role in the nation’s economy through monetary policies (including control of the money supply) and bank regulations.  Policies and regulations that were originally geared towards a cash-based society have developed over time to handle banking innovations such as credit cards, ATMs, traveler’s checks, and wire transfers.  Many of these rules were developed in response to problems arising from the implementation of new technologies rather than in anticipation of potential problems.  Digital cash is another major technological development in the financial services industry in which the U.S. government is taking a "wait and see" attitude.  Advocates of the "wait and see" approach believe that government intervention at this time is likely to inhibit and distort the emerging market — the unstated assumption being that digital cash is good for the U.S. economy.

       Given the "wait and see" attitude of the government and the desire by many Internet content providers to charge for their services, it is likely that a thriving digital cash market will eventually emerge.  As a result, it is likely that additional government intervention will be necessary to address problems digital cash creates.  The kinds of regulations needed would depend upon the type of electronic money that becomes most prevalent.  For example, digital cash that was designed for micro-payments (e.g., low cost transactions including those less than one cent) for material provided over the Internet would be a very different product from digital cash that could handle large dollar transactions.  While some government concerns regarding the impact of the two forms of digital cash might overlap, (such as the ability to detect illegal use of the money); there would also be numerous concerns specific to each product.

       Given the nascent stage of the digital money market, it is impossible to predict what type(s) of digital cash systems will become the standard(s).  As a result, it is difficult to isolate government concerns with respect to a specific form of digital cash and this paper does not attempt to do so.

       The G-10 governments (Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, the United Kingdom and the United States), developed the following list of five broad areas of interest with respect to digital cash in it's April 1997 Report on Electronic Money:
 

• Limiting systemic and other risks that could threaten the stability of financial markets or undermine confidence in the payment system;
• Providing consumers with adequate protection from fraud and unfair practices, financial loss, or unnecessary intrusions on personal privacy;
• Encouraging the development of effective, low-risk, low-cost, and convenient payment and financial services for consumers and businesses;
• Ensuring the central bank’s ability to conduct monetary policy (in the U.S. this is the Federal Reserve, an independent body with members appointed by the President); and
• Not hindering the ability of law enforcement authorities to prevent and detect movements of funds associated with criminal activity.

Discussion

         The following provides a brief discussion of each of these categories.

Stability of Financial Markets 
 
Current regulations surrounding the financial services industry are intended to ensure the stability of financial markets and confidence in the payment system.  Some experts believe that a digital cash system that allowed for large transfers of funds through non-regulated institutions and organizations could cause distortions in the stock market, weaken the control of the money supply by the Federal Reserve, and generally undermine confidence in the payment system.  It is unlikely that the federal government would allow such an unregulated system to develop.  Nevertheless, a digital payment system that allowed large transfers of anonymous funds may not be too far fetched and would require the government to institute appropriate regulations.  Possible regulations could include required reserve ratios that would help the Federal Reserve control the flow of funds.  In addition, regulations similar to those that exist to prevent money laundering may help.

Consumer protections

Development of effective, low-risk, low-cost, and convenient payment and financial services for consumers and businesses

        The current regulatory system already provides for an effective and convenient payment and financial services with acceptable risks and costs for consumers and businesses for nearly all transactions.  An exception is those transactions occurring over the Internet where a host of issues are unresolved including privacy, security and convenience.

        The government’s interest in developing an acceptable payment system is its general interest in a strong economy, increase in GDP and tax revenues.  Assuming the government believes that increased Internet commerce will be beneficial, the government may assist in developing an effective and convenient payment system by encouraging the development of technical standards.   The government may assist in developing a low-risk system and by attending to the criminal issues discussed below it could encourage a low-cost system through anti-trust regulation and judicious application of other regulations.

Money Supply

        Digital cash systems include those in which the digital cash has intrinsic value (e.g., cash) and those that are representations of money (e.g., checks).  A system in which the digital cash had intrinsic value would increase the amount of money in circulation.   This would require the Federal Reserve to take into account the total value of digital cash in circulation when adjusting the money supply according to its monetary policy.  In addition, the government may want to impose required reserve ratios to limit the amount of digital cash in circulation.

        In his remarks at the U.S. Treasury Conference on Electronic Money and Banking, Alan Greenspan, Chairman of the Federal Reserve said that the Federal Reserve could continue to have adequate control over the money supply if a digital money market emerged.  He is a proponent of the "wait and see" attitude arguing that "Our optimum financial system is one of free and broad competition . . ."  However, others argue that unless digital cash is legal tender so that only the Government can mint it, the Federal Reserve’s ability to control the money supply will become dangerously limited.

Criminal Activity

        Criminal activity can be divided into two categories: 1) illegal uses of digital cash including money laundering, tax evasion and illegal gambling; and 2) tampering with digital cash itself, including counterfeiting, fraud and disruption of the system.

        Illegal uses of digital cash would probably proliferate if digital cash were used for large value and anonymous transactions.  Although cash is the preferred form of payment for illegal activities, completely anonymous, large volume transactions with U.S. financial institutions are not possible for cash transactions.  For example, there are serial numbers on bills and regulated financial institutions must report deposits over $10,000 and wire transfers over $750.   As a result, the federal government would likely want to ensure that no digital cash system was completely anonymous. As noted above, this goal needs to be balanced with the goal of consumer privacy protection.  Another option would be to place low limits digital cash account balances.

        The amount or ease of counterfeiting, fraud and disruption of the digital cash system would also depend in large part on the solution to the anonymity/encryption dilemma.
 

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Products

Products currently available or in development as of November 1997 have been summarized within one of the four categories listed below:

• True Digital Cash: a radically new concept.
• Wallets and Multiple Payment Products: extensions of the current credit-card/ATM type systems.
• Micropayments: small amounts like coins in a pocket.
• "Niche" Systems: early prototypes of digital cash use.

Classification of each product or project is not precise, as some projects contain features of other projects, and some projects are relying on each other's developments for the systems proposed.

Other Observations:

• Micropayments vs. "Regular-size" Transactions
• Few products available today
• Architectural Considerations
• Consumer/Merchant Orientation
• Innovation by Unknowns vs. Adaptation by Well-knowns
• Network Models

Micropayments vs. "Regular-size" Transactions

There are two major and distinct levels at which "digital cash" systems are expected to operate. The first is to replace credit card or debit card transactions with the transfer of actual digital value. This value is derived in some way from a deposit of cash or transfer from a credit card, but the "value" then exists electronically, in the hands of the consumer. This "digitized" cash could then be used for the same range of purchases that have been historically handled by credit cards and ATM debits, where the high transaction costs require transfers of more than $5.00 or $10.00, with the average being much higher.

In contrast, other systems are being developed for a much smaller range of payments, or "micropayments." These products, none of which exists beyond alpha trials now, utilized simplicity and economies of scale to make much smaller transfers of money feasible. Micropayment sizes starting at a tenth of a cent have been discussed for some years, though current systems are focusing on one cent to a few dollars as the designed range of transaction sizes. By enabling small, real-time payments for delivery of information or web content, micropayment systems are markedly different from existing types of monentary transfers, and have important implications for the content and use of the World Wide Web.

Few products available today

At this moment, there are very few digital cash products in existence worldwide. Yet the number of innovative products "in development" has increased greatly in the last two years, and there are several such products in "alpha trial" right now. Many of the new systems for online payment being developed are not entirely (or even partly) digital cash approaches, but are just newer ways to initiate, authenticate and complete payment for goods through an Internet connection that use similar language and concepts to the digital cash field.

Most of these developing systems are coming from companies that are already involved in credit and debit card transactions, or that create network and PC hardware and software. These less-innovative systems are generally promising at this time to incorporate some of the newer innovative technologies (primarily micropayment abilities) into their products, but the extent to which this occurs can only be determined when these products come onto the market. Many of the earliest and most innovative approaches to digital cash focused on placing genuine electronic cash into the hands of consumers, with a great degree of flexibility and anonymity surrounding its use. Such products were generally being developed by universities or small start-up companies and, with few exceptions, they have stopped development or disappeared. A few other existing products can be called "niche" products, designed to solve just one aspect of online security. These are not really digital cash in any sense, though the language of the developers is again similar to that of the digital cash field.

Architectural Considerations

Some of these digital cash products are designed as what could be called Applications. Application software in this context ranges from actual cash value stored as software to the interfaces required on a PC to utilized electronic cash or a virtual wallet of payment options.

But increasingly, the systems being developed are moving in the Services layer of network architecture. In the most basic sense, many of the newest products (from large financial and technical companies) are designed to expand the exisiting financial services layer of Credit/ATM verification to include new products and web functionality. Other services are seeking to combine the use of different products, and these combined products consist of both applications and yet other services.

By keeping the efficiencies of the horizontal architecture in mind, it becomes apparent that products requiring a dedicated network of merchants equipped to accept their payment method (DigiCash, Virtual PIN, Clickshare, CyberCents) have more limited potential than products that can piggyback onto the existing and ubiquitous Credit/ATM system, or take advantage of existing financial institutions and network designs. Yet the applications level is still in a sufficiently innovative phase that a product (E-Cash or Mondex for example) could be incorporated into the financial and network structures by services created by other companies. Also worth noting is the increasing tendency of companies to form alliances and partnerships, to make their products dependent on one another, and to seek integration of digital cash systems from the most innovative applications and concepts (digital cash and micropayments) to the existing payment and authorization structures.

Consumer/Merchant Orientation

It is notable that the language used by each company, and the basis for their designs tend to fall into one of two orientations: many of the companies have backgrounds of supplying software for merchants and thus structure the transactions with the needs of the merchant foremost. Other products, notably the digital cash product (Mondex, E-Cash) are more focused on the consumer, and begin with assumptions of the importance of anonymity and portability, yet initially require dedicated networks of merchants to allow these products to be used.

Innovation by Unknowns vs. Adaptation by Well-knowns

The model of development seen in the digital cash field is interesting, and likely applies to product development and fielding in general. Small, new companies with innovative ideas are founded, and they initially create much of the excitement. Few of these companies (or University Departments) ever create an actual product, though some do, and others are acquired by larger companies.

Large and existing companies enter the field later, with more conservative though perhaps more realizable plans. They incorporate some innovative features, and form alliances with other companies to create large products that have a higher likelihood of successful development and use. These companies have more resources and reputation than the startups, and are in an advantageous position to survive the long period needed to develop, test and market new products. These companies also must engage in e-commerce development to protect their images and product lines, and to have a chance of acquiring market share in an emerging field. It is not accidental that Sun is developing a Java Wallet, nor Microsoft a commerce server for Windows NT.

Network Models

These diagrams are only representative of each kind of transaction model. The details of each system varies, but they generally fall into these basic relationships.

The Credit-ATM Model is proposed for other uses as well, such as verification of digital cash accounts that remain on a bank server, or servicing of multiple account or payment options for consumers.

The strictly Digital Cash Model, as exemplified by Mondex and Digicash, puts electronic cash into the hands of the consumer. Merchants have the option of verifying the cash's validity online, though they may also store the cash and verify it later (offline).

The merchant receives the electronic cash directly, and returns it to the bank to convert it to "real" money. Electronic cash of this kind can also be transferred between consumers.

This is just one model of possible Micropayments. With low values for both transactions and consumer holdings of digital cash, security is lower than with other systems, though verification can take place by the content provider or information "merchant."

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The most revolutionary products developed in financial and Internet circles in decades have been the true "Digital Cash" products. These are designed to convert money to an electronic equivalent, present on either the chip of a smart card, or on the PC of a consumer. These systems generally provide for anonymity of the payee, though not generally for anonymity of the payor, as this person (assumed in most models to be a business) will turn in digital cash to a bank after receiving it. Some of these systems are designed to also allow the transfer of digital cash between users, primarily the smart card models. And these systems also raise the greatest concerns about duplication of electronic currency, money laundering, theft and loss.

Digicash: Digicash is available now at six banks worldwide, and two more will begin issuing it soon in Europe. In the United States, one must open an account with the Mark Twain Bank of St. Louis, Missouri, and the recommended opening balance is a minimum of $100. One then gets "E-Cash" to download and spend. The product is focused on large payments, and the information given does not mention micropayments at all. As with many of these products at this point in time, one must locate a merchant that will accept DigiCash, generally through DigiCash's Web Page. Anonymity of the payor is promised, though the payee must return the E-Cash to one of the host banks to recover the value. E-Cash can be accepted by merchants offline (without checking back to the issuing bank) but online validation seems the norm, as Digicash states that it is"...easy to make copies of your ecash..." There is no provision to transfer E-Cash between users, and it seems to essentially replace the use of a credit or debit card in making purchases anonymously. Digicash is licensing the product to other companies (primarily banks) through non-exclusive licenses, and is currently seeking investors in their own company. The company is also working on smart cards and automated toll payment systems.

Mondex: Mondex International is primarily working on smart cards, which will store electronic value on a chip on the card itself. But they have plans to create "a card reader that attatches to your computer" so that individuals may use these cards online. Mondex can only transfer funds to another Mondex card, but users can transfer funds among each other. The company says that it's extremely difficult if not impossible to duplicate or create more cash for users, as each transaction a card makes is stored as a unique event on that card. "Early Mondex prototype systesm are currently being trialled on the Internet..." and the company has alliances with CyberCash, VeriFone and Sun Microsystems. As with Digicash, the product seems designed for the larger range of transactions, though they do claim that, due to the low transaction cost (unlike a credit card), "transactions of even one cent become viable."

CAFE: This 3 year project begun in 1995 is called Conditional Access for Europe, and is part of a larger project called EC ESPRIT. 13 partners are working to create a secure electronic "wallet," which will allow for purchases from electronic cash or credit accounts, and possibly provide a form of identification for the user. This is a project and not a product right now. The cash value part of CAFE would be based on smart cards, and the identification functions are ambitiously proposed to include, "electronic personal credentials (like passports, driver's licenses or housekey) and medical information." User-to-user transactions are predicted, as is the use of infrared interfaces to conduct transactions with the wallet. The plan is to use DigiCash's E-Cash for the money part of the project, and thus micropayment ability will be determined by E-Cash's abilities in this regard. Trials are now being conducted. Currently employees and visitors at the European Commission in Brussels use a smart card implementation of the CAFE electronic wallt to pay at canteens, coffee shops and vending machines on site. Other trials will be conducted in Greece and Italy next year.

NetCash and NetCheque: These two projects were developed by the Information Sciences Institute of the University of Southern California, beginning in 1994. Only one organization (TEKnology-Laine Inc. of Bremerton, Wash.) is listed as a future provider of these systems. One would open an account with that company, and receive software and electronic currency to spend. Four places that will accept NetCheque and NetCash are listed, though three of these are classified as "coming soon." The information on this product is two years old, and there seems to be no reported progress since that time. The tone of the information is very academic (in contrast to the more recent business-oriented proposals) and the creation of a demo, if not the web site itself, seem to have been the high-water mark for this proposal.

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The products being developed by companies already involved in payment verifcation for credit-ATM, and software/hardware development are generally realistic products. Many of these systems are in early trials phases now, and they can be characterized as doing two things. These products extend the capabilities of exisiting authentication networks to handle more payment options (including Digital Cash, and most of them now promise, micropayments). And they also complement the exisitng product lines or operating systems of software companies, and are aimed at keeping market share both for the existing OS platforms (such as MS Windows/NT and Sun's Java) and extending these products into new fields, to capture market share in those fields.

VeriFone: VeriFone is the company that's well known for ATM/Credit verfication systems. (Watch the next time your card is "swiped" through a reader in a store. Chances are that it's a VeriFone.) Beyond the ATM/Credit model, VeriFone is working with Hewlett-Packard to create a "V Wallet" sometime during 1997. The V Wallet is designed to store shipping and billing information, credit card numbers, digital credentials (certificates and key pairs) and can incorporate other Internet payment instructions as they are developed. The V Wallet will be SET compliant (see CyberCash) so handling electronic cash should be possible. There are products sold to merchants as well as the V Wallet for consumer use, and this product can be viewed as the next generation of the existing VeriFone system, with banks acting as the acquirer/processor of transactions, and merchants purchasing software to conduct transactions. The interface being developed for the V Wallet by HP is called the Paypage API. While it is definitely an evolutionary product, if VeriFone/HP successfully incorporate new digital cash capabilities created by other companies, and make the use of these available to consumers, there is the advantage that such new products will be universally usable, rather than depending on a dedicated network of merchants that can handle an exotic payment product.

IBM Commerce Point: This product was announced by IBM on Sept. 9, 1997, and is available now. The merchant-server part is called NetCommerce, and the wallet for consumers is being designed as a browser plug-in. The whole scheme uses the existing "cc processing systems" from IBM, and feature "Domino-Web compatability." IBM plans to utilize Cryptolope (a Java-based security object) to sell applet-based services over the web. This would be exemplified by software that, once purchased, is able to upgrade itself. The payment approval routine is, as with VeriFone, built on existing credit card routines, so if electronic cash is a part of the V Wallet, and software sales are routine, this again is an evolutionary product that has exotic implications.

GlobeID Payment: GlobeID’s technology offers a wide variety of payment methods, such as electronic purse, virtual electronic purse, micro-payments, magnetic stripe or chip based bank cards. The technology also supports standard payment protocols such as SET and C-SET as well as standard security protocols such as SSL, and therefore establishes a basis for rapid international acceptance and deployment. Merchants license the virtual cash register from Globe ID, and users get the Wallet Interface Module (WIM) for free to use on their computers. The WIM is an application/interface that can govern a user's credit cards, digital cash and stored value accounts, though the information on these accounts (and any stored value) exist only on the Globe ID Operator's server. Users can make purchases over the Internet, selecting from their WIM which payment option they desire. Their information is verifed by a merchant with the Operator, and any credit card numbers or other information remain invisible to the merchant. The GlobeID technology is already operational and integrated with major merchant servers, such as Microsoft Commerce Server, Intershop, Icat and Ilog. Via its licensees, and in particular KLELine (Compagnie Bancaire), more than 30,000 consumers today have access to the GlobeID payment system, and hundreds of merchant kits have been distributed in Europe, Latin America and the Middle East.

Java Wallet: Sun Microsystems is developing a Java applet that "...will organize all of a user's credit cards, electronic checks and electronic cash, as well as organizing receipts, coupons and other electronic identification." It is designed to be a component of web browsers, and to provide both database and cryptographic technologies. By leveraging the Java language's capabilities to download code, the Java Wallet will be able to include new payment and receipt mechanisms. This system is claimed to have micropayment abilities, with a range of 5 cents to 2000 dollars being given. It is unclear whether this product is being developed for browsers other than Sun's own JDK, but an alpha version (requiring JDK 1.1) is available online.

NetBill and CyberCash: NetBill was developed at Carnegie-Mellon University, and is being licensed to CyberCash for worldwide use. CyberCash is similar in scope to Globe ID Payment, in adding the new functionality of online commerce and multiple payment options to the existing bank/credit system. The consumer receives a wallet, issued by a financial institution, and the wallet governs the use of credit cards, currency and checks. Wallets are now available as a browser plug-in from Netscape, Compuserve and Checkfree. They have the goal of creating a CyberCoin system as a component of CyberCash, to handle micropayments and delivery of information. There are products linked to CyberCash to help create web-based Points of Sale, from consumer payment to catalog creation to billing services.

MSFDC: Microsoft and First Data Corp. "launched" MSFDC in June, 1997. It's built to allow consumers to pay their bills online, using existing home banking products or new web sites. They want to have a stake in "...next generation electronic payment and remittance capabilities." This is, however, a service and not a digital cash system.

Checkfree: This is a product for paying bills online, using existing bank accounts. Like MSFDC it is an online bill presentment and payment system not any form of electronic money.

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While many of the "extension" systems described previously promise the ability to handle micropayments, they have often done little more than added this capability to their claims, or are unclear about when these capabilities will be available. In contrast, there are two products being designed specifically to facilitate micropayments and their unusual requirements, and which do not claim to be designed for the rest of the electronic-financial spectrum of future services.

CyberCents: Outreach Communications has created a demo of CyberCents, which is designed as a micropayment system. CyberCents would be purchased (generally by credit card) in blocks of 5 to 10 dollars, so the transaction costs of credit are only incurred once. It is designed for payments as small as 1 cent, though it does seem to have some possibility for larger transactions of several dollars each. Outreach Communications seems to be very merchant-oriented in their line of products, and claims a background as "...a leading supplier of Internet payments systems with a full line of proven Internet Commerce software solutions and busniess services."

Millicent: This is from Digital, and one of the most interesting products being developed to handle micropayments. Digital has a background of making networking equipment and software (the old VAX/VMS systems) and is currently shifting customers over to networks using the "Wintel" model, though with DEC Alpha Servers and/or workstations. Their approach to micropayments is to not worry about the issues that plague larger transactions ranges, and to issue a moderately-low security scrip to enable microcommerce in real time. Digital will provide the software to brokers, who will then issue the scrip to consumers, though only in small amounts. The scrip is effectively a local currency, specific to each broker's server, though it will be authenticated by the broker. The design range of transactions is from one cent to two dollars, and the product is under development at this time. (As with other companies, it is likely that Digital would like to offer some part of the functionality needed to participate in emerging electronic markets to their customers. But this system is different from most other computer companies's in that it's just one component of electronic commerce, not a system designed to use other components.)

U.C. Berkeley's Haas School of Business is offering chapters and drafts of current works on the internet, using Millicent as the payment mechanism. This site is available at http://host.millicent.digital.com:3190/~cmit/entry.html.

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These products were perhaps innovative a few years ago, and represent stages in the evolution of electronic commerce infrastructure. They use much of the same language as other "digital cash" products, but are essentially seeking to fill niche markets between the old systems of credit (and now ATM) verification in person or by phone, and the newer methods of direct funds transfer over the Internet.

Clickshare: Newshare Corp. has created clickshare, which is not digital cash nor a micropayment system, but a system to total up bills for consumers for web page access. Participating web servers purchase a lisence from Clickshare ($1,995 and 20 percent of all revenue) and then host pages for which access is logged. Users sign up with one of the web servers (also called publishers) and are billed by this publisher for content accessed. If the user accesses content from other Clickshare publishers, the billable amounts are transferred between publishers. The product claims to be available from Clickshare's homepage (one can clearly send them some money, and find out later what's actually available) but the number of "publishing members" is not available. There is little security, as they're relying on low value of transactions and browser security features, as well as watching the user logs at each publisher to prevent patterns of access suggesting fraud or theft. They claim that the log information will not be used for any purpose other than billing. We've classified this as a niche product as, despite some wonderful new jargon (clickstream?), it seems that this product will be eclipsed by more comprehensive systems with less proprietary software and lower investments by content publishers. Clickshare does claim to be able to handle a purchase range down to 10 cents per transaction.

Virtual PIN: First Virtual created the Virtual PIN some time ago, and it is available now. First Virtual charges $10 annually for the service, which is designed to allow users to charge purchases over the Internet without sending their credit card numbers. The Virtual PIN is a proxy for the account number, and is sent unencrypted to merchants that accept these PINs. The PIN is then sent to First Virtual, who provides account information, and sends e-mail to the user requesting authentication of the purchase request. This is a niche product as avoiding transmission of credit card numbers is its only feature, and if people were to become confident in transmitting their account numbers (especially in light of increasing browser security levels, and the realization that verbal purchases over the phone network are no more protected) then the niche would cease to exist. First Virtual implies that they handle micropayments by discussing the sale of information, but a close reading of this shows that they're generally referring to shareware (with higher transaction costs than pennies) and for web content, their system would allow the user to receive the content, and later refuse to pay for it. This seems like it serves First Virtual's architecture, but will never be popular with content providers.

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1. The most innovative products, specifically electronic cash-value systems for consumers, have been developed, tested and deployed first in Europe. (Mondex, Digicash.) In the United States, a more cautious approach is being taken, and this cautious and evolutionary approach seems to be the predominant model in the U.S. Consumer acceptance is always a tricky thing, but why is the United States, as a society or at the level of individual consumer preferences, more reluctant to make such changes quickly? Is this a valid observation? If so, are the roots of this reluctance economic, regulatory or cultural?
2. Is the development of a new field of products such as digital cash always more likely to be evolutionary than revolutionary? Is this more attributable to the financial or the technical aspects involved in the creation of payment systems for electronic commerce? Is a great deal of pragmatism perhaps necessary in modifying monetary systems?
3. What effect will the eventual introduction of successful micropayment schemes have on the content and use of the World Wide Web? Will this generally be the "end of an era" typified by widespread access to free material on most of the web? Or will it signal the opening of access (for some if not many "consumers" of the web) to a wide array of higher quality goods, and a step forward in resolving issues of payment and protection for intellectual property?
4. Some of the most innovative products rely on networks of merchants assembled to accept new forms of proprietary payment. At what point does a product gain wide enough acceptance to become a near-universal method of payment? Is it first incorporated into the services assembled by larger companies or alliances? Will the best product endure? Or will the simplest or most economical product endure?
5. Will the various corporate alliances backing different electronic payment methods be eventually reduced to just one or two groups, with one or two systems of e-commerce that are widely accepted? If so, what effect will this have on the "losing" corporate alliances? If not, how difficult will consumers, banks and merchants find it to deal with a variety of similar but incompatible products?
6. Are real savings possible for merchants and financial institutions through the use of electronic payment, especially in light of the technology (and technologists) needed to utilize such new systems?

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The E-Cash Group. A team of graduate students from the Harvard Business School, the Kennedy School of Government, the Harvard Law School, and the Massachusetts Institute of Technology, “Electronic Micropayments,” Presented at the Harvard Business School on April 23, 1997
http://rpcp.mit.edu/~pearah/micropayments/

Electronic Privacy Information Center
http://www.epic.org/

Federal Deposit Insurance Corporation. Important Banking Legislation
http://www.fdic.gov/publish/banklaws.html

Federal Deposit Insurance Corporation’s Public Hearing Concerning Stored Value Cards and Other Electronic Payment Systems, September 12, 1996.  Summary of Testimonies.

Fisher, Rosalind L.  Executive Vice President, Visa U.S.A., Testimony before the Subcommittee on Domestic And International Monetary Policy of the Committee On Banking and Financial Services, United States House of Representatives, July 25, 1995
The Future of the Payment System
http://www.house.gov/castle/banking/fisher1.htm

Froomkin, A. Michael.  “The Essential Role of Trusted Third Parties in Electronic Commerce,”  Published at 75 Oregon L. Rev. 49 (1996).
http://www.law.miami.edu/~froomkin/articles/trustedf.htm

Froomkin, A. Michael. “Flood Control on the Information Ocean: Living With Anonymity, Digital Cash, and Distributed Databases,” Published at 15 U. Pittsburgh Journal of Law and Commerce 395 (1996).
http://www.law.miami.edu/~froomkin/articles/ocean.htm

Froomkin, A. Michael.  “The Unintended Consequences of E-Cash,”  A position paper for the Panel on ‘Governmental and Social Implications of Digital Money’  Computers, Freedom & Privacy Conference (CFP’97), Burlingame, California, USA, March 12, 1997.
http://www.law.miami.edu/~froomkin/articles/cfp97.htm

Greenspan, Alan. Remarks at the U.S. Treasury Conference on Electronic Money & Banking: The Role of Government (Washington D.C.: Sept. 19, 1996).
http://www.bog.frb.fed.us/BOARDDOCS/SPEECHES/19960919.htm

Group of Ten. “Electronic Money:  Consumer protection, law enforcement, supervisory and cross border issues,” Report of the working party on electronic money
April 1997
http://www.jya.com/g10emoney.htm

Konvisser, Joshua B.  Coins, Notes and Bits:  A Case for Legal Tender on the Internet.
http://roscoe.law.harvard.edu/courses/techseminar96/konvispaper/7369294.html

Miller, Jim. “E-money mini-FAQ (release 2.0)”
http://www.ex.ac.uk/~RDavies/arian/emoneyfaq.html

The Mortgage Mart. Truth In Lending Act – Regulation Z
http://www.mortgagemart.com/regz.html

Orlikowski, Wanda. "Improvising Organizational Transformation Over Time: A
Situated Change Perspective", Information Systems Research, Vol.7, No. 1,
March 1996

U.S. Department of Treasury, Office of Tax Policy.  “Selected Tax Policy Implications of Global Electronic Commerce,”  November 1996.

W3C Activities Related to the US “Framework for Global Electronic Commerce,”  President William J. Clinton and Vice President Albert Gore, Jr., Washington, D.C., Author:  Joseph Reagle Jr., W3C.
http://www.w3.org/TR/NOTE-framework-970706.html

Product Web Sites

CAFÉ (Conditional Access for Europe)
http://www.cwi.nl/cwi/projects/cafe.html     

Clickshare
http://www.clickshare.com/

CyberCents
http://www.outreach.com

Digicash
http://www.digicash.com/

IBM Commerce Point
http://www.internet.ibm.com/news/2ada.html

Java Wallet
http://www.sunlabs.com/research/javaWallet.html 

Millicent
http://www.millicent.digital.com/index.html

Millicent in use at UCB's Haas School of Business
http://host.millicent.digital.com:3190/~cmit/entry.html

Mondex
http://www.mondex.com/

NetBill and CyberCash
http://www.netbill.com/netbill/about.html
http://www.cybercash.com/

NetCash and NetCheque 
http://gost.isi.edu/info/netcash and
http://gost.isi.edu/info/netcheque

VeriFone
http://www.verifone.com/home.html  (BAD link)

Virtual PIN
http://www.fv.com/