Possible economic consequences of digital cash

First Monday

Volumn 1, Issue 2, 1996, Pages

  Tanaka, Tatsuo ^a,b  

^a INTERNATIONAL UNIVERSITY OF JAPAN   (Japan)

^b The Sanford C Bernstein Co Center for Leadership and Ethics   (United States)

Author keywords

[No Author keywords available]

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EID: 37949054341     PISSN: 13960466     EISSN: None     Source Type: Journal    
DOI: 10.5210/fm.v1i2.474     Document Type: Article

References (67)

1. See, for example, Mark Bernkopf, "Electronic cash and monetary policy," First Monday, vol. 1, no. 1 (May 1996), http://www.firstmonday.org
2. See Friedrich A. von Hayek, 1976. Denationalisation of money : an analysis of the theory and practice of concurrent currencies (London : Institute of Economic Affairs), 107 p.
3. For a brief survey of electronic payment systems, see L. Jean Camp, 1995. "Opportunities, options and obstacles in electronic commerce," paper presented at Columbia Institute for Tele-Information Conference on the Future of Electronic Banking, in October 1995.
4. For a comprehensive description of various types of electronic money, see Michael Froomkin, 1996. "Flood control on the information ocean: Living with anonymity, digital cash, and distributed databases," draft version 1.7, presented September 21, 1995 at the Conference for the Second Century of the University of Pittsburgh School of Law: The Adequacy of Current Legal Paradigms to Meet Future Challenges. To be published in a symposium volume of the University of Pittsburgh Journal of Law and Commerce, http://www.law.miami. edu/∼froomkin/ocean1-7.htm
5. Also see Jason Solinsky, "An Introduction to electronic commerce" at http://www.worldquest.com/wqu/elecomm.htm;
6. Michael Peirce, "Network Payment mechanisms and digital cash" at http://ganges.cs.tcd.ie/mepeirce/project.html;
7. and, Hal Varian, "The Information economy" at http://www.sims.berkeley.edu/resources/infoecon/
8. It has been estimated that social cost of an automatic electronic clearing system was 34 cents; see Allen N. Berger and David B. Humphrey. 1986. "The Role of interstate banking in the diffusion of electronic payments technology," In: Technological innovation, regulation, and the monetary economy. Colin Lawrence and Robert P. Shay (eds.), Cambridge, Mass.: Ballinger, pp.13-52. Therefore, micro-payments are impossible. In the United States, an average credit card transaction was approximately $20 to $40 in the late 1970s;
9. see Ralph C. Kimball, 1980. "Wire transfer and the demand for money," New England Economic Review (March/April), pp. 5-22. It is now thought to be $60.
10. Electronic money has many other features which have to be considered such as non-refutability, divisibility, time limits, and portability. For further details, see XIWT Cross-Industry Working Team, "Electronic cash, tokens and payments in the National Information Infrastructure," http://merlin.enri. reston.va.us:3000/XIWT/documents/dig_cash_doc/ElecCashToC.html
11. See the First Virtual home page at http://www.fv.com
12. It has been estimated that the cost of check clearance is 68 cents, which is greater than the cost of automatic electronic clearance at 34 cents. Hence, it has been estimated that the users of checks receive an average subsidy of 15 cents per check. See Allen N. Berger and David B. Humphrey. 1986. "The Role of interstate banking in the diffusion of electronic payments technology," In: Technological innovation, regulation, and the monetary economy. Colin Lawrence and Robert P. Shay (eds.), Cambridge, Mass.: Ballinger, pp.13-52. Checking in the real world is not suitable to micro-payments. But electronic checks on the Internet may reduce operational costs significantly.
13. See the CyberCash home page at http://www.cybercash.com and NetCheque at http://gost.isi.edu/info/NetCheque/
14. See Stephen Crocker, Brian Boesch, Alden Hart, and James Lum, "CyberCash: payment systems for the Internet," http://info.isoc.org/ HMP/PAPER/181/abst.html
15. Chaum and other digital cash proponents stress untraceability and anonymity thoroughly. See, for example, David Chaum, 1987. "Security without identification: Card computers to make big brother obsolete," http://www.digicash.com/publish/bigbro.html, originally appeared in the Communications of the ACM, vol. 28, no. 10 (October 1985), pp. 1030-1044.
16. ∼brchkind/cyphernomicon/12.html
17. ∼phantom/cpunk/cpunk.manifesto
18. Chaum established his company, DigiCash, and started an experimental system in 1994 (see http://www.digicash.com). Digicash's system has been realized with the establishment of the Mark Twain Banks, operating since the end of 1995.
19. See David Chaum, 1989. "Online cash checks," Advances in Cryptology - EUROCRYPT '89, pp. 288-293, http://www.digicash.com/publish/online. html
20. and David Chaum, 1992. "Achieving electronic privacy," Scientific American, (August), pp. 96-101, http://www.digicash.com/publish/ sciam.html
21. Okamoto and Ohta's system was implemented by NTT and is scheduled to be used experimentally sometime in 1996. See Tatsuaki Okamoto and Kazuo Ohta, 1991. "Universal electronic cash," Advances in Cryptgraphy-Crypto91, Lecture Notes in Computer Science, vol. 576, pp. 324-337.
22. Visit Mark Twain Banks at http://www.marktwain.com/
23. If the cost of connecting the Internet and personal computers is taken into account, the cost of electronic cash is high. But with the recent explosion of the Internet and its attraction to businesses, banks, and individuals, the actual cost of electronic cash transfers will be recognized as negligibly small. To put this another way, the cost of the personal computer and its Internet connections will be seen as a "sunk cost." Another point is that when many banks begin to issue their digital cash, there will appear a different cost, the cost of inter-bank transfer of real cash. Let assume that Alice and Bob use different banks. Assume Alice sends one digital cash dollar to Bob, and Bob brings it to his bank. Bob's bank communicates with Alice's bank and raises his account by one dollar. Now Bob's bank holds digital cash issued by Alice's bank. If Bob's bank does not claim to exchange that digital cash with real cash, there is no need to use the expensive normal banking network to transfer one real dollar. But eventually Bob's bank may want to exchange it with real cash for some reason. If so, Bob's bank have to use the traditional expensive banking network and this transaction will have some cost. If many banks begin to issue digital cash, there may be a convertibility problem among various forms of digital cash. For further details on convertibility, see Mauro Cipparone, 1996. "Digicash convertibility - a look into the future." Journal of Internet Banking and Commerce, vol. 1, no. 1 (January), http://www.arraydev.com: 80/commerce/JIBC/9601-5.htm
24. and David S. Bennahum, 1995. "The trouble with E-cash," Marketing Computers, vol. 15, no. 4 (April), p. 25, http://www.reach.com/matrix/ troublewithecash.html
25. In the case of the Mark Twain Banks, however, it imposes 4% to 5% fee when you change digital cash to real cash. This fee is high especially for shops who have to pay their operational costs with real cash. This exit cost is expected drop in the near future.
26. On superdistribution, see Ryoichi Mori and Masaji Kawahara, 1990. "Superdistribution: The Concept and the architecture," Transactions of the IEICE, vol. E73, no. 7 (July), http://www.virtualschool.edu/mon/ ElectronicProperty/MoriSuperdist.html
27. and Brad Cox, 1994. "Superdistribution", Wired, Issue 2.09 (September), http://www.hotwired.eom/wired/2.09/departments/idees.fortes/ superdis.html
28. Of course, a foreign bank may not accept digital cash. It may also demand extra fee for accepting it because of the "convertibility" problem. See Mauro Cipparone, 1996. "Digicash convertibility - a look into the future." Journal of Internet Banking and Commerce, vol. 1, no. 1 (January 1996), http://www.arraydev.com:80/commerce/JIBC/9601-5.html
29. ∼nick/multi.small.html
30. Conventional sales taxes are based on the actual geographical location of merchants and customers. In the United States, sales tax rates vary from state to state. American tax authorities are examining this issue critically, as a new source of tax revenues. See Catherine Yang, 1996. "New Tolls on the info highway : States see big revenues in cyberspace," Business Week (February 12), pp. 96-97.
31. Regarding money laundering and digital cash, see Anonymous, "Electronic money: So much for the cashless society," Economist, vol. 333 no. 7891 (November 24), pp. 23-27,
32. and Sarah Jane Hughes, 1995. "Cyberlaundering," http://w3.win-uk.net/cybercon/art 0795/launder.htm If digital cash is completely traceable, money laundering and tax invasion would become almost impossible. It is important to note that strong traceability is not realized even for current, conventional currencies and monetary systems. Although traceable digital cash would be welcomed by government authorities, the loss of privacy would be upsetting to many. Regarding this confrontation between anonymity and money laundering,
33. see Robert Hettinga, 1996. "Internet banking & commerce: Security," Journal of Internet Banking and Commerce, vol. 1, no. 1 (January), http://www.arraydev.com:80/commerce/JIBC/9601-2.htm
34. ∼froomkin/oceanl-7.htm
35. ∼froomkin/arbitr.htm
36. The American Bankers Association is reluctant to adopt full anonymity because of criminal usage such as money laundering, kidnapping and extortion. See Steven Levy, 1994. "E-Money (that's what I want)," Wired, Issue 2.12 (December), http://www.hotwired.eom/wired/2.12/features/emoney.html It has been reported that CyberCash Inc. chose not to provide anonymity in light of the potential for criminal activity. On the other hand, DigiCash Inc. argues that untraceable digital cash does not cause serious tax evasion or encourage criminal activities. Because all digital cash must be given to a bank for confirmation, and because any customer can prove that a certain payment was made, DigiCash thinks that these problems are not significant.
37. See DigiCash, Inc, "Ecash and crime," at http://www.digicash. com/ecash/aboutcrime.html
38. Jon Matonis, 1995. "Digital cash & monetary freedom," Proceedings of INET'95, June 27-30, 1995 at Hawaii, http://info.isoc.org/HMP/ PAPER/136/html/paper.html
39. For more on this sort of monetary freedom, see Friedrich A. von Hayek, 1976. Denationalisation of money : an analysis of the theory and practice of concurrent currencies (London: Institute of Economic Affairs), 107 p.
40. Under this assumption, a 100% reserve system and a fractional reserve system are possible. In the latter case, digital cash will be created beyond the deposited real cash, just as in conventional systems.
41. If digital cash is a new currency equivalent to the dollar and yen, it should have its own unit (cyber-dollar or e-dollar). Convertibility to other currency would not be guaranteed by issuing banks but performed in the foreign exchange market. In other words, the exchange rates between digital cash and real cash would vary from time to time in the market just like exchange rates among real currencies. Since digital cash is not a proxy of real cash, electronic cash will be issued without backup reserves of real cash.
42. See, for example, Peter Rappoport and Eugene N. White, 1994. The New York stock market in the 1920s and 1930s: did stock prices move together too much? (Cambridge, Mass.: National Bureau of Economic Research), NBER working paper no. 4627, 21 p.
43. On the most famous bubble of this century, see Frederick L. Allen, 1931. Only Yesterday: an Informal History of the Nineteen-Twenties. New York: Harper & Brothers, 370 p.,
44. and John K. Galbraith, 1955. The Great Crash, 1929. Boston: Houghton Mifflin, 212 p.
45. Exchange rate volatility is said to have increased after the liberalization of international capital markets; see, for example, Giancarlo Corsetti, Vittorio Grilli, and Nouriel Roubini, 1990. Exchange rate volatility in integrating capital markets. (Cambridge, Mass.: National Bureau of Economic Research), NBER working paper no. 3570, 23 p.
46. "When you instruct Mark Twain to transfer money to the Ecash system, the Bank moves the funds to the Ecash Mint. While there are plans to do this in real time, the transfers will be done once a day for now. Once a withdrawal has been made from the WorldCurrency Access account [editor's note: this account is insured by the FDIC] your money is no longer on deposit at Mark Twain Bank and is no longer insured by the FDIC." See http://www.marktwain.com/money.html
47. "Perhaps I was overly indoctrinated during the 6 years I spent working at the Federal Reserve, but I believe that banking is inherently fragile and requires careful regulation. Absent any regulation, banks have the power to issue notes that are not backed by assets. They have the power to accept deposits and then invest the money unwisely or divert it to the banker's personal use. These powers are inherent in any company that performs banking functions. This will be as true of the banks and funds transfer services sprouting up on the Net as it is true in traditional finance. If banking on the Net takes place in an entrepreneurial, unregulated environment, then I predict that within 12 months we will see a bank failure of traumatic proportions. Some bank somewhere on the Net will not have enough real-world cash reserves to redeem its notes or to cash out its depositors. This will lead to a loss of confidence and "runs" on every bank on the Net. Commerce based on entrepreneurial banking will come to a halt. To avoid this scenario, somehow we have to integrate the innovative technology of the Net with traditional (or enhanced) mechanisms that promote safety and soundness. The technology without the regulation strikes me as too risky." From Arnold Kling, 1996. "Banking on the Internet," at http://www-e1c.gnn.com/gnn/meta/finance/ feat/archives.focus/bank.body.html
48. There are several crude forecasts indicating an explosion of electronic payments. One report stated that consumers will spend as much as 10% of their total expenditures in the form of electronic cash by the end of the century; from Anonymous, 1995. "The Future of money: E-cash could transform the worlds' financial life," Business Week (June 12), pp. 36-46.
49. The introduction of electronic funds transfer system (EFT or wire transfer) permitted new cash management services such as security repurchase agreements and cash concentration accounts. These new services let corporations retain much less cash leading to a decline for money. Some insist these financial innovations were responsible for the decline of the money aggregate in the late 1970s in the United States; see, for example, John P. Judd and John L. Scadding, 1982. "The Search for a stable money demand function: A Survey of the post-1973 literature," Journal of Economic Literature, vol. 20 (September), pp. 993-1023,
50. and Ralph C. Kimball, 1980. "Wire transfer and the demand for money," New England Economic Review (March/April), pp. 5-22.
51. There were several arguments on the effect of electronic fund transfer during 1970s and 1980s. The focus of those arguments dealt with consumer protection, management, and regulation. For example, see Arthur D. Little, Inc., 1975. The Consequences of electronic funds transfer : A Technology assessment of movement toward a less cash/less check society. Washington, D. C., National Science Foundation, 351 p.,
52. and Electronic funds transfer: plastic cards and the consumer. Paris: Organisation for Economic Co-operation and Development, 1989, 136 p. There have been discussions of the impacts of EFT on macro-economics from Keynsian and monetarist points of view;
53. see James Tobin, 1987. "Monetary rules and control in the brave new world," In: Electronic funds transfers and payments: the public policy issues (Elinor Harris Solomon, ed.). Boston, Kluwer-Nijhoff, pp. 137-158,
54. and Thomas Havrilesky, 1987. "Monetary modeling in a world of financial innovation," In: Electronic funds transfers and payments: the public policy issues (Elinor Harris Solomon, ed.). Boston, Kluwer-Nijhoff, pp. 159-188. While there are disagreements on the role of monetary policy, all seem to agree that EFT has had no substantial impact on conventional monetary policy.
55. "Mondex is electronic cash on a card. Instant cash is the preferred method of payment around the world, accounting for 90 per cent of all transactions. Now smart cards - storing electronic cash on an encrypted microchip - are set to revolutionise spending habits. Mondex uses a smart card to store electronic cash, which can be used to pay for goods and services in the same way as cash, but with some key benefits over traditional cash. Mondex has an electronic locking system, which makes it more secure than cash. Because it is electronic, Mondex value can be sent and received instantly across phone and computer lines, making it an ideal vehicle for paying for goods and services on the internet. As with cash, Mondex payment transactions do not need authorisations or signature and just like cash Mondex value can be moved directly between individuals." From "Mondex at a glance," at http://www.mondex.com/mondex/glance.htm
56. Smart card systems do not necessarily contradict digital cash because both systems use the same protocols. This convergence may be useful because smart cards are much more mobile than even the most portable computers.
57. A recent survey of 204 respondents on the Internet indicated that over half would use electronic cash but only if it was secure. The sample was not random but based on visitors to a specific questionnaire on the Web; see Roy Weiler, "Internet money survey," http://graph.ms.ic.ac.uk/money
58. See, for example, Melanie L. Fein, 1995. "Regulating cyberspace: What does it mean to banking?" Bank Management (September/October), http://www.bai.org/Magazine/RegCyber.htm
59. On the sale tax, there is a growing discussion in the United States on differential sales tax rates between different states. Software for locating customers is expected to help the enforcement of the rule. See Catherine Yang, 1996. "New tolls on the info highway: States see big revenues in cyberspace," Business Week (February 12), pp. 96-97.
60. ∼froomkin/ocean1-7.htm
61. Although regulations may reduce the benefits of digital cash to a considerable extent, taxation and criminal investigation will become far more easier. In reality, to provide for anonymity, "almost" anonymous digital cash may be proposed. "Almost anonymous" means that banks mainly issue untraceable digital cash, but only under specific conditions. For example, banks could issue traceable digital cash under the proper demand of a tax authority, a police force, or court order. For further details on "almost anonymous" digital cash, see XIWT Cross-Industry Working Team, "Electronic cash, tokens and payments in the National Information Infrastructure," http://merlin.enri.reston.va.us:3000/XIWT/documents/ dig_cash_doc/ElecCashToC.html
62. Perhaps the weakest regulatory solution would be only international cooperation on a few aspects of digital cash, such as taxation and crime, without a reduction in the anonymity of digital cash. As noted earlier, DigiCash Inc. does not see a problem with untraceable digital cash. See DigiCash, Inc, "Ecash and crime," at http://www.digicash.com/ecash/aboutcrime.html
63. Some anticipate that government will not allow digital cash to bypass regulated conventional foreign-exchange markets; see Anonymous, 1994. "Electronic money: So much for the cashless society," Economist, vol. 333, no. 7891 (November 24), pp. 23-27.
64. ∼hauben/project_book.html
65. Creating new money in cyberspace may sound strange. But there are analogs in the real world: the ECU (European Currency Unit) of the European Union and the SDR (Special Drawing Right) of the International Monetary Fund. The idea of a transnational currency has a long history; see, for example, the proposal for a Supernational Credit Money to stabilize the international monetary system in Robert Guttmann, 1994. How Credit money shapes the economy: The United States in the global system. Armonk, N. Y., Sharpe, 561 p. A new cyberspace currency represents an evolutionary path for digital cash;
66. see Anonymous, 1994. "Electronic money: So much for the cashless society," Economist, vol. 333, no. 7891 (November 24), pp. 23-27.
67. John Barlow, one of the founders of Electronic Frontier Foundation, recently circulated a declaration on the independence of cyberspace to action by the United States Congress to exert some legal control over the Internet; see http://www.eff.org/pub/Publications/John Perry Barlow/barlow_0296.declaration Though Barlow is concerned with freedom from government censorship, this declaration could be interpreted as a foundation for independent, Internet-based controls rather than those founded on legal structures of specific states.