The trouble with E-cash

Marketing Computers, Vol. 15 ; No. 4 ; Pg. 25, April 1995

Recently, I browsed a "cybermall" selling smoked Vermont hams and sailboats on the World Wide Web. The smoked ham looked particularly tasty: thick slices surrounded by a bed of parsley. Below beckoned a button marked "order"; I decided to take a brave step into electronic commerce, took a deep breath, and clicked. Up came the order form ... sort of. "The Internet is the world wide network that carries your order form to us," I read, "while it is massive, fast, and convenient, it is not, unfortunately secure. If you were to include credit card information in your order form, it might be read by someone else before it arrives here." The proposed solution? Pick up the phone and order the old-fashioned way--with your voice.

The electronic agora is open, but few are shopping. Many think that's about to change, thanks to the arrival of electronic money, or e-cash. The Internet, still growing at 10% a month, passed a magic point sometime last year, call it the moment when the Net stopped being just a network and became a "market"--a market of 20 million people without a medium of exchange. Over this vacuum looms a format war, except what's at stake here is not CD- ROMs or VCRs, it is the nature of money There's a rush underway to establish the protocols that will define what electronic money, or e-cash, is. The players range from the big--Visa, Microsoft, Citibank--to the obscure-- DigiCash, CyberCash, and First Virtual Holdings, to name a few.

The Wild Frontier

The process, for now, resembles the free-for-all that surrounded the U.S. banking industry in the 19th century, until the creation of the Federal Reserve. Before the Fed, banks circulated their own private currency and bank checks weren't as widely accepted, since you couldn't trust the solvency of the issuer. The same pattern is being repeated in the digital marketplace; government agencies like the Federal Reserve, Department of the Treasury, and the Office of Technology Assessment have no official opinion on how e- cash should be implemented. Without clear ground rules, uncertainty will undermine e-cash's usefulness. What's at stake here? At worst, we'll be left with an inflexible currency that's costly to use, easy for marketers' to trace, and hard to trade between individuals; at best, we'll get the digital equivalent of a dollar bill--the benefit of cash without the cost of paper.

Cash or Credit? That's the central question. Early pioneers, like First Virtual Holdings, which launched a service to handle financial transactions over the Internet last October, basically act as referees authenticating Marketing Computers, April, 1995 credit-card transactions. The process overcomes gaps in Internet security, but it comes at a price. Transactions between individuals cannot take place. And the cost of each transaction is high, as commissions go to both the credit-card agency and First Virtual. Critically, it offers no way to buy things without using credit.

A slightly more advanced option does allow individuals to trade things directly using digital "tokens" that correspond to real money. Last May, a company named Software Agents created a "NetBank" that offers "NetCash" as a means of exchange. Send the NetBank a check by fax, and once it clears, your NetBank account is credited with the equivalent sum. For instance, as $ 10 deposit might look like this: NetCash US$ 10.00 E123456-H789012W. This string of digits can be passed onto a merchant, or anyone else. Once the transaction is cleared by NetBank, that account shows a deposit. These tokens can be passed around at no charge. NetBank charges a 2% commission at the end, when you convert NetCash into cash and withdraw it.

Both First Virtual Holdings and Software Agents rely on Internet e-mail to process transactions, and neither is seamless the way handling real money is. A lot of other concerns loom as well --you have to trust these institutions not to resell your transaction history, and, considering that Kevin Mitnick, the hacker arrested in February, stole 20,000 credit card numbers stored on the Internet, Marketing Computers, April, 1995 the security behind these "banks" can't be trusted, no matter how well- intentioned.

A deeper solution, one which can travel over public networks in such a way that hackers listening could never spend the e-cash, exists, and one person controls the patents that can make it possible. A company based in the Netherlands, named DigiCash, holds patents that resolve most security concerns around e-cash using cryptographic techniques belonging to them. DigiCash's founder, David Chaum, worked on a form of cryptography which allows information to be encrypted using a combination of digital "signatures" and a process of authentication called a "blind signature."

Simply put, this allows for the creation of unique serial numbers that can be verified by the bank issuing the currency, without revealing the identity of the money-holder. And each "bill" can only be spent once, putting would-be counterfeiters out of business.

But two hurdles block the distribution of these algorithms; Chaum has yet to widely license them, and, because this e-cash is so similar to cash, it is unclear governments will permit its use. For now, DigiCash is limiting trials to select vendors on the Internet, including the Encyclopedia Britannica. Marketing Computers, April, 1995 Vested Interests The worst case scenario is one where no standard for e-cash exists. Instead, digital walls keep the flow of money in separate pools. Crossing over from one to the other would then resemble today's foreign- exchange markets--an expensive process hobbled by commissions, dominated by institutions, and mostly off-limits to individuals. This makes little sense in cyberspace. Nations maintain their own currencies to protect national interests. Cyberspace is not a nation, and does not require this kind of compromise. The same e-cash could go from New York to Tokyo with minor transaction costs. However, governments have a good reason to oppose this: A universal digital dollar would undermine the monetary conventions of the "real" world by unifying currencies in cyberspace, creating a means to avoid paying conversion fees on international transactions. This tender would be hard to tax, since it crosses borders so easily.

What we need now is a universal protocol for electronic money, something similar to the way TCP/IP acts as a universal language for communication over networks. No one should own this protocol, charge for its use, or limit its availability. To do otherwise would put an unprecedented burden on security, anonymity, and our confidence in this fledgling digital marketplace.

by David S. Bennahum