Electronic money

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For electronic payments in conventional currencies, see Electronic funds transfer.

Electronic money (also known as e-currency, e-money, electronic cash, electronic currency, digital money, digital cash, digital currency, cyber currency) is money or scrip that is only exchanged electronically. Typically, this involves the use of computer networks, the internet and digital stored value systems. Electronic funds transfer (EFT), direct deposit, digital gold currency and virtual currency are all examples of electronic money. Also, it is a collective term for financial cryptography and technologies enabling it.

While electronic money has been an interesting problem for cryptography (see for example the work of David Chaum and Markus Jakobsson), to date, the use of e-money has been relatively low-scale. One rare success has been Hong Kong's Octopus card system, which started as a transit payment system and has grown into a widely used electronic money system. London Transport's Oyster card system remains essentially a contactless pre-paid travelcard. Two other cities have implemented functioning electronic money systems. Very similar to Hong Kong's Octopus card, Singapore has an electronic money program for its public transportation system (commuter trains, bus, etc.), based on the same type of (FeliCa) system. The Netherlands has also implemented a nationwide electronic money system known as Chipknip for general purpose, as well as OV-Chipkaart for transit fare collection. In Belgium, a payment service company, Proton, owned by 60 Belgian banks issuing stored value cards, was developed in 1995.[1]

A number of electronic money systems use contactless payment transfer in order to facilitate easy payment and give the payee more confidence in not letting go of their electronic wallet during the transaction.

Contents

Electronic money systems

In technical terms, electronic money is an online representation, or a system of debits and credits, used to exchange value within another system, or within itself as a stand alone system. In principle this process could also be done offline.

Occasionally, the term electronic money is also used to refer to the provider itself. A private currency may use gold to provide extra security, such as digital gold currency. Some private organizations, such as the United States armed forces use independent currencies such as Eagle Cash.

Centralised systems

Many systems—such as PayPal, WebMoney, Payoneer, cashU, and Hub Culture's Ven—will sell their electronic currency directly to the end user, but other systems only sell through third party digital currency exchangers.

In the case of Octopus card in Hong Kong, electronic money deposits work similarly to regular bank deposits. After Octopus Card Limited receives money for deposit from users, the money is deposited into a bank. This is similar to debit-card-issuing banks redepositing money at central banks.

In Kenya, the M-Pesa system is being used to transfer money through mobile phones.[2]

Some community currencies, like some local exchange trading systems (LETS) and the Community Exchange System, work with electronic transactions.

Decentralised systems

Decentralised electronic money systems include:

Offline "anonymous" systems

In the use of offline electronic money, the merchant does not need to interact with the bank before accepting money from the user. Instead merchants can collect monies spent by users and deposit them later with the bank. In principle this could be done offline, i.e. the merchant could go to the bank with his storage media to exchange e-money for cash. Nevertheless the merchant is guaranteed that the user's e-money will either be accepted by the bank, or the bank will be able to identify and punish the cheating user. In this way a user is prevented from spending the same funds twice (double-spending). Offline e-money schemes also need to protect against cheating merchants, i.e. merchants that want to deposit money twice (and then blame the user).

Using cryptography, anonymous ecash was introduced by David Chaum. He used blind signatures to achieve unlinkability between withdrawal and spend transactions.[4] In cryptography, e-cash usually refers to anonymous e-cash. Depending on the properties of the payment transactions, one distinguishes between online and offline e-cash. The first offline e-cash system was proposed by Chaum and Naor.[5] Like the first on-line scheme, it is based on RSA blind signatures.

Hard vs soft electronic currencies

A hard electronic currency is one that does not have services to dispute or reverse charges. In other words, it only supports non-reversible transactions. Reversing transactions, even in case of a legitimate error, unauthorized use, or failure of a vendor to supply goods is difficult, if not impossible. The advantage of this arrangement is that the operating costs of the electronic currency system are greatly reduced by not having to resolve payment disputes. Additionally, it allows the electronic currency transactions to clear instantly, making the funds available immediately to the recipient. This means that using hard electronic currency is more akin to a cash transaction. Examples are TokenPay, Pecunix, Western Union, KlickEx and Bitcoin.

A soft electronic currency is one that allows for reversal of payments, for example in case of fraud or disputes. Reversible payment methods generally have a "clearing time" of 72 hours or more. Examples are PayPal and credit card.

A hard currency can be softened by using a trusted third party or an escrow service.

Relevance to business and electronic commerce

Even though there are more than 25,000 companies conducting business on the Internet, consumers are still not that confident with having transaction done over the Internet. This is mostly due to a lack of a readily available and secure payment system. With credit cards, consumers are concerned with the security of their information and thus deterring them from directly making purchases from the Internet. With ecash, hopefully consumers will be more comfortable with transactions over the Internet as it is a one-time transaction that cannot be traced back to the user, whereas with credit cards, hackers can obtain information of the card holder and commit frauds.

With the appearance of ecash, the need for commercial banks to be involved in electronic banking and to back the electronic currencies becomes more apparent. However, there remains a skeptical view about having monetary transactions done over the Internet as it is a fairly public domain where there is easy access. Thus increasing and promoting commercial bank's interest in the Internet and conducting business over the Internet is necessary in order to further the development of ecash and commerce in the Internet, as well as improving cryptography and security features of the systems.

While it is a grand idea to mimic the real world transactions with cash on the Internet through the use of an anonymous transaction system, at this moment it still poses a lot of logistics and legal problems and possible security hazards. There are still questions of the regulation of electronic money, how will the ecash be backed and redeemed, determining how much of money in the economy are circulated in ecash since the Internet covers such a vast area internationally. Moreover, with Internet business companies,taxes will be applied to them when they conduct business all over the world.

Ecash is not completely anonymous as with hard cash since there is always the computer and the network, which can be traced. But people do really care about anonymity. Some people may want to track expenses if they're conducting businesses through the Internet. Also, there is the issue of possible criminal activity within the system by allowing criminals to spend illegal money easier if ecash is untraceable. The US Department of Treasury's Financial Crimes Enforcement Network provides some information on how it is addressing these issues.

History

DigiCash was a pioneering electronic currency corporation founded by David Chaum in 1990; also Bram Lebo was involved in the project. DigiCash transactions were unique in that they were anonymous due to a number of cryptographic protocols developed by its founder. DigiCash declared bankruptcy in 1998, and subsequently sold its assets to Ecash, another digital currency company, which was acquired by InfoSpace on Feb. 19, 2002.[6][7][8][9]

See also

References

  1. ^ Good, Barbara Ann (2000). The changing face of money: will electronic money be adopted in the United States?. Taylor & Francis. pp. 80–81. ISBN 978-0-8153-3809-3. http://books.google.com/books?id=iTVf8v_OIyUC&pg=PA80&dq=Belgium+Proton+money. Retrieved 28 December 2010. 
  2. ^ http://www.nextnature.net/2008/12/cell-phone-minutes-the-next-currency/
  3. ^ Loom
  4. ^ David Chaum, Blind signatures for untraceable payments, Advances in Cryptology — Crypto '82, Springer-Verlag (1983), 199–203. (PDF)
  5. ^ Chaum, D., Fiat, A., and Naor, M. 1990. Untraceable electronic cash. In Proceedings on Advances in Cryptology (Santa Barbara, California, United States). S. Goldwasser, Ed. Springer-Verlag New York, New York, NY, 319–327. (PDF)
  6. ^ Presenting Digital Cash, p. 99-106, 226-229; Seth Godin (ISBN 1-57521-062-2)
  7. ^ E-Money (That's What I Want), Wired, Issue 2.12, December 1994
  8. ^ Boom then Bust: How Electronic Cash Faltered
  9. ^ How DigiCash Blew Everything translated by Dutch natives and edited by Ian Grigg from original article Hoe DigiCash alles verknalde in Dutch magazine NEXT!, accessed on Apr 27, 1999

External links