Electronic cash is referred to the electronic store of monetary value on a technical device representing a virtual format of real money. This transformation of traditional paper based monetary system is considered to be one of the milestone achievements of rapid technological developments. Certain powerful forces embodied with electronic cash such as enhanced privacy and security, reduced transaction and handling costs has allowed electronic cash to take over paper money over the time. Despite of the benefits associated with electronic cash it will also have adverse impacts on certain economical factors such as taxation and money laundering. Furthermore the low penetration of electronic cash into the economy is identified to be one of the biggest challenges electronic cash will face ahead into the future.
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The World is moving rapidly with vastly changing technological developments and innovations. We are currently experiencing an era, where everything is getting automated and digitalized. Along with this technological transition, international monetary system is one significant aspect that is getting transferred from its current state of paper based monetary system to electronic monetary/cash system. According to the 1994 report of European Central bank, electronic cash can be defined as an "electronic store of monetary value on a technical device that may be widely used for making payments to undertakings other than the issuer without necessarily involving bank accounts in the transaction, but acting as a prepaid bearer instrument". Like the serial number on general dollar bills, electronic cash issued by a bank or any other institution will also consist a unique number and will represent a specified value of real money. Hence with the current accelerated phase of changes and innovation, money is becoming "virtual". In the sense, it is expressed as an "assemblage of ones and zeros which can be displayed on millions of computer screens throughout the world, can be transferred at the speed of light and yet is located nowhere" . This research report will provide an analysis about Electronic cash in the following ways. The section 2 will present an overview of the rise of the electronic cash over the traditional paper money. The section 3 will elaborate the step by step process involved with electronic cash system.
The section 4 will describe different types of electronic cash while section 5 will provide examples of real world implementation of electronic cash. Furthermore the section 6 will emphasis on risks and issues associated with electronic cash while section 7 describes the challenges ahead for electronic cash.
2. The rise of electronic cash
In an economy without a standard medium of exchange, trades were executed based on different methods. Where as in the earliest period of human civilization people exchanged several commodities they possess in order to buy goods they required. This was referred as 'commodity money'. Later on commodity money changed into 'metallic money' where people traded based on certain metals such as gold, silver and copper. Thereafter with the progress in human civilization, the 'paper money' was invented marking a milestone in development of the monetary system. Even as at today paper money is extensively used for transactions within the economy. Nevertheless, the financial services been the early adopters of information technology, the concept of electronic cash, which is also known as virtual money was invented and introduced. As per the economic theories if anything to be considered as real money, it need to fulfill three important functions. They are, it should act as a medium of exchange, should have a unit of account and should have the ability to store of value . Therefore it was guaranteed that electronic cash can be used as general medium of exchange as it fulfills all three criterias.
Gradually electronic cash got widely spread throughout the world as it embodied powerful forces that contributed to its success compared to existing forms of money. In comparison with paper money, which uses only physical security features, electronic cash use cryptography to authenticate transactions and to protect the confidentiality and the integrity of data . Whereas both security and privacy of a transaction is determined by electronic cash. It must also be noted that banks currently incur large cost to handle notes and coins. For instance, in USA alone, the clearing of cheques cost financial institutions $60 billion per year .The handling cost of cash is that much high. Hence in the virtual world these handling and transaction costs are aimed to reduce. Electronic cash is considered as a superb accounting unit, as it can be converted from one currency to another, or be transformed into bonds or stocks almost instantly. It takes up virtually no room, it can be counted automatically, and it never wears out, rusts or tarnishes . Furthermore electronic cash is superior to paper money for distant transactions . While notes and coins need to be carried in bullet-proof vans manned by armed guards, electronic cash can be moved easily and quickly. Hence these properties have allowed electronic cash to take over paper money and mark a dominating position within the monetary system.
3. The process involved with electronic cash
The basic idea of Electronic cash implementation involves at least three parties. They are, issuer not necessarily financial institutions, consumers as the end users who use the electronic cash and merchant who accept electronic cash in exchange with products or services provided .The steps involved with the process are as follows.
- Consumer needs to open an account with the bank. The merchant who need to participate in the electronic cash transactions will have to open multiple accounts with various banks in order to support customers who use different banks.
- When the consumer decides to purchase goods he or she will transfer the electronic cash from their account to his or her electronic purse. The electronic cash can then be transferred to the merchant. These transactions done through internet are normally encrypted.
- Once the merchant received the electronic cash payment, he will then get it verified by the bank. The bank will then authenticate the electronic cash transaction. Upon verification merchant will deliver the goods to the consumer. At the same time bank will debit the agreed amount from the consumers account and deposit the same into the merchant's account.
4. Types of Electronic cash
Following the above process of electronic cash implementation, electronic cash can be classified in two ways. In one way, electronic cash is classified based on whether it can be tracked or not. Under this category, electronic cash is divided as "identified electronic cash" and "anonymous electronic cash" .
4.1 Identified Electronic cash
Identified electronic cash works more similar to a credit card. From the very first time it is issued by a bank to one of its customer, up to its final return to the bank can be easily tracked by the bank . Consequently it allows the bank to track the payment throughout the economy, hence the bank will hold each and every detail of who the original customer is, and how he has spent the money. To make electronic cash identifiable like this, electronic cash contains a unique serial number that is generated by the bank itself. So that if the customer tried to spend the same money more than once, it can be easily caught and prevented. As per the graphical representation shown in Figure 1, the steps involved with identified electronic cash can be listed as follows.
- The bank generates a serial number SR100, for electronic cash worth $100.
- The customer will purchase goods from a merchant, by spending electronic cash worth $100 and send the corresponding electronic file to the merchant.
- The merchant will then go back to the bank handover the electronic cash and get real money in exchange.
- At this point the bank receives the electronic cash with the serial number SR100 back. Therefore the bank knows that the customer has spent the electronic cash on a specific date to buy a specific product from a specific merchant.
Figure 1: Steps involved in identified electronic cash .
4.2 Anonymous electronic cash
Anonymous electronic cash also known as 'blinded money' works like real hard cash. There is no trace of how the money was spent and there will be no trail of the transactions involved in this type of electronic cash. The key difference between identified electronic cash and anonymous electronic cash is that in case of identified electronic cash, bank creates the serial number, but in case of anonymous electronic cash the customer is the one who create the serial number using a blind signature process . This mean that the issuing bank cannot connect the customer with the serial number of the deposited coins and, in this respect, the customer's transactions remain private . As shown in Figure 2 the steps involved in anonymous electronic cash are as follows,
- The customer will generate a random number called PQP1. From that he creates another number called blind number. Suppose the blind number is BABC.
- The customer will send the created blind number to the bank.
- The bank will send back the electronic cash with the blind number to the customer.
- During a transaction the customer will not use the blind number. Instead he will use the original number.
- Therefore both the merchant and the bank will only have the original number. They cannot trace the money as they are not aware about the relationship between the blind number and the original number.
Figure 2: Steps involved in anonymous electronic cash .
The second method which the electronic cash can be classified is based on the involvement of the bank in transactions. Based on extend of the involvement it can be further classified as online or as offline electronic cash. When it comes to online electronic cash, the bank should actively participate in the transaction between the customer and the merchant. Such as before the purchase transaction of a specific customer get complete the merchant can verify from the bank on real time, whether the electronic cash offered by the customer is acceptable and it has not been spent before or the serial number is valid . Offline electronic cash does not require an involvement of the bank to complete the transaction between the customer and merchant. If the customer offers electronic cash to a merchant, to pay for a purchase the merchant will accept the money and will not validate it online. The merchant might collect all the electronic cash and validate them together at a fixed time of everyday . Hence out of these distinct types of electronic cash, it can be seen that there could be four possibilities of electronic cash. They are identified online, identified offline, anonymous online and anonymous offline electronic cash. Out of these four types, anonymous offline electronic cash creates the most complex type of electronic cash because of the double spending problem .
Where as if the same piece of money is spent twice at two different places it cannot be tracked or prevented as the bank is not involved at any level of the transaction. Risk of double spending is consisted in other types of electronic cash as well. But upon detection such situations can be easily tracked and prevented as the bank is a part of the transaction at some point between customer and the merchant.
5. Some of the Electronic cash implementations in real world
Out of the electronic cash implementations DigiCash and Mondex are known as the most famous implementations of electronic cash. These two systems are similar in what they trying to achieve but different in the means of how they achieve it.
DigiCash was founded by David Chaum in 1994. DigiCash allowed cash to be transmitted as electronic signals. The advantage of this system was that it can be used directly from the computer and did not require any additional hardware. DigiCash system used digital signature for encryption and "blind" signature for authentication to ensure the security of transactions and to protect consumers, merchants and banks from illegal activities . The figure 3 given below indicated the steps involved in the process of DigiCash.
Figure: 3 Visualization of the process DigiCash .
DigiCash utilized a digital currency called "cyberbucks". It offered both anonymity and identified for both of its online and offline services and it allowed transfers from consumers-to-consumer in addition to consumer-tomerchant . The biggest drawback of this system was, since the necessary data and electronic cash saved in the user's computer, and if the user formatted the computer's hard drive, then the user would lose his electronic cash as well. Even though DigiCash has the potential to revolutionize the monetary industry, it was failed to gain support from relevant authorities. This lead to the downfall of the system and the company.
The development of the concept for Mondex was initiated in the early 1990s.Its an E cash application based on smart cards where as electronic cash is stored in the chip located in the smart card . The design of Mondex smart card allows users to transfer any amount of money electronically to the card and utilize the card to make purchases up to the value held in the card. Also Mondex accommodate card-to-card transfers as well. Mondex does not need third party to settle and clear the transactions between users. Hence it provided the advantage of speeding up the transaction. Mondex is recognized as the most secured E-cash application available as at today . It has security which is based on digital signature where each message transferred between bank customer and merchant can be authenticated and it also protects consumer privacy by using blind signature. Mondex also declares that it has the ability to handle micropayments as small as one cent. The banks that currently support the Mondex smart card include National Bank of Canada, Scotiabank, Canada Trust, Bank of Montreal, Le Mouvement des caisses Desjardins, and Toronto Dominion Bank . Presently, Mondex can be operated via the telephone network. In conjunction with British Telecom, the Swindon pilot allows users to load value onto their Mondex chip card using the public telephone network .
6. Risks and issues associated with electronic cash
Despite of the great benefits associated with electronic cash, there are few problems caused by electronic cash towards the economy. One of the key problems identified is the taxation and money laundering . Since electronic cash allows transactions across globe without any barriers taxation and money laundering has become potential problems. As for example if an Australian software provider use the American server to sell his software to a Chinese buyer ,it become questionable as if which sales tax rate should be applicable, to whom it should be applied to and whom should benefited from taxation. Since some of the electronic cash are untraceable and not leaving enough information for tax authorities to follow, it will make taxation more complicated and the adjustments toward tax regulations useless. On the other hand the untraceability ability of the electronic cash will encourage criminal activities such as money laundering .Electronic cash can also be used to deal with transactions of illegal products such as drugs, weapons and pornography. Even if the investigators wanted to conquer any evidence they will have to check for all the packets around the world and crack all cryptographies which is merely impossible. Electronic cash will potentially increase instabilities in exchange rates .The exchange rates in the real world and the cyber space could not be equal due to several reasons. One is, the fee of exchanging electronic currency in cyber space is lower than fee of exchanging currencies in real world as in real world the banks and financial institutions that perform currency exchange operations will have to incur additional costs such as storing bills in various currencies, managing branches and hiring workers. Electronic cash will eliminate most of these costs hence the exchange fee for electronic cash will be very low and this will encourage people for greater participation in the foreign exchange market using electronic cash. The massive participation may cause instability of exchange rates. Secondly, users of electronic cash will broaden their transaction geographically. Hence they will buy and store different varieties of electronic currencies in their hard disk to support their purchases. In the real world consumers will most likely have one currency in their hand, most probably the currency of the country or the state which they belong to. Therefore at the time of currency depreciation the consumers of electronic cash will have an incentive for speculation where as they will exchange the depreciated currency into a strong and less volatile currency in order to perform transactions. A great proportion of speculation will also lead to destabilization of the exchange rate as well.
Furthermore electronic cash will affect the money supply in the real world . Consumers of electronic cash will deposit real cash in a bank or in a financial institution and request electronic cash in exchange of the real money. If by any chance the bank or the provider of the electronic cash provide loans or lend money in the form of electronic cash, then new money will be created. On the other hand the value of electronic cash will exceed the total deposited real money. The creation of extra money could even lead to a financial crisis.
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Another issue that the users of the electronic cash will have to face is the risk of asymmetric information . A situation where as one party in the contract will possess more information about the object of the contract than the other party and there is a risk that the well informed party can misuse their position. In the case of electronic cash, between issuer and user, user of the electronic cash can assess the issuer only through the information published by the issuer. Yet, the issuer might face situations and circumstances which are out of the published information. Such as problems in the technology used to produce the electronic cash, not having required level of expertise, legal issues in conducting such businesses and misuse of funds which can be disadvantageous to users which will prevent users from using electronic cash.
7. Challenges ahead for electronic cash
The biggest challenge electronic cash face as at today is that paper money still rule in retail transactions and are extensively used by small and medium sized firms. Therefore despite of the early success electronic cash has still become unable to mark its victory over the paper cash and exhibits a low level of penetration. Several factors could impact on the slow penetration of the electronic cash in to the economy. They are, consumers will like to hold on to paper money because people are more familiar with usual cash transactions as it can be carried anytime anywhere and they do not require additional electronic devices as for electronic cash. Cash can be easily withdrawn from any ATM at any time of the day. On the other hand cash transactions are also untraceable which satisfies the customer demand for privacy. In Europe, paper money may account for 76-86 per cent of retail transactions in volume, compared with 75 per cent in the USA and 90 per cent in Japan . Paper money is widely used in other countries as well typically for transactions with smaller value. As for a survey conducted by Visa in 1997, taking 29 countries into consideration verified that cash transactions represented an annual value of 8.1 trillion Euros of which 22 percent was for transactions with a value of 10 Euros or less . If electronic cash is making major inroads into the payment world then that evolution of volume could be visible as a rise in the share of the GDP. Yet a recent study conducted by Bank of International settlements suggest that share of coins and notes in GDP remained relatively stable in most of the OECD countries and it has only increased in the three largest OECD economies which are USA, Japan and Germany .
Another challenge that will delay the adoption of electronic cash in to the system of transactions is the startup cost. The initial cost of investment and the cost of installation will be really high with regard to the electronic cash system which will have to be passed on to the customer as a transaction fee which will cause customer to get away from these new innovations. This factor will stand out as a resistant for new entrants as it will be difficult for them to overcome the cost advantage. At the same time the speed of the technology changes and the uncertainties about these innovations discourage investors to invest in new systems.
Foot dragging by financial intermediaries such as banks is another challenge that electronic cash will face ahead. Where as in USA, consumers, businesses and the government generated nearly 650 billion paper money payments with a total value of $22 trillion. The intermediaries that handled these payments received about $190 billion in revenue, 53 per cent of which (about $100 billion) accrued to banks . If a paperless cash society become a reality banks will lose all these profits and enduring benefits. Therefore the sole strategy of intermediaries is to resist and delay the adoption of electronic cash transaction systems which often have lower profit margins compared to the paper based operations.
In order face the challenges ahead and to avoid or to mitigate the impact of the prevailing risks, adequate regulatory, technical and protection measurements should be taken into considerations. Such as effective supervision on issuers of electronic cash and clearly defined and disclosed solid, transparent legal agreements indicating the rights and obligations of respective participant in the scheme of electronic cash should be enforceable under all jurisdictions. Laws and regulations should be drafted to protect users against criminal abuses such as money laundering. On the other hand merchants such as restaurants, supermarkets and hotels should be stimulated to accept electronic cash by giving them additional advantages. Furthermore enhancing the infrastructures to deal with electronic cash such as ATMs and providing adequate publicity and educating the participants about the electronic cash and the privileges to holders will help the electronic cash scheme to overcome the challenge of low penetration of electronic cash.
Along with significant development and progresses made, electronic cash has begin to play an important role among the key segments of the economy such as payment systems, retail transactions and international trading. The digital signature and blind digital signature play an important role in implementing the electronic cash. It has enhanced the security and privacy of electronic cash which tempt users to select electronic cash over traditional paper money. Even though the market share of paper money is yet to be more than the electronic cash in most of the countries it is gradually increasing among the countries with large economies. Likewise with the introduction of new electronic cash instruments will provide a broader acceptance for electronic cash for a range of transactions into the future. Hence it is required for such instruments to overcome the strong obstacles which curtail the fast penetration of electronic cash into the economy. At the same time it is mandatory to have appropriate regulatory and institutional systems in place to handle the economic forces which are at play as consequence of electronic cash. With these factors been taken into consideration, electronic cash will have the potential to acquire larger segment of the payment and transaction market into the future and even to totally replace paper money lead the world toward an networked economic environment.
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