December, 1997

Exploring Digital Cash

Consumer Issues

Definition

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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