Foreign Exchange. e-cash will markedly lower existing barriers to the transfer of funds across borders. This might relegate weak national currencies to a single residual function: paying taxes. If you could only use Sterling to pay taxes or purchase government services (the Pound as just another loyalty scheme, this time for the British government) then you would naturally prefer to hold other, more flexible, currencies. Even if the government were able to determine how much currency is out there, it would have no idea where any of it was. This is already true in the case of the US Dollar: some two-thirds of all dollar bills are outside the US.
Regulating Issuers. Should anyone be allowed to issue e-cash? If nonbanks are allowed to issue, could they be made subject to the same extensive regulatory controls as banks? If I was a bank, I would be lobbying extensively for this, because the lack of a level playing field would mean that consumers would find it cheaper to play online games paid for in Microsoft Dollars than in US Dollars. A company issuing value in a sufficiently monetised form has an unfair advantage over bank issuers of cash because the bank will be subject to many kinds of regulationfrom capital adequacy to monitoring and compliancethat add to its costs. There are two broad camps: e-cash should be issued by banks or nonbank financial institutions (NBFIs) only, or e-cash should be issued by anyone. Federal Reserve Chairman Alan Greenspan has already said
"We could envisage proposals in the near future for issuers of electronic payment obligations, such as storedvalue cards or digital cash, to set up specialised issuing corporations with strong balance sheets and public credit ratings. Such structures have been common in other areas, for example, in the derivatives and commercial paper markets."
Contrast this with Bundesbank Director Edgar Meister, who said that in Germany the issuing of e-cash should be restricted to commercial banks and has major implications for monetary stability and control.
National Management. If e-cash becomes widely used as a means of payment, then it would be nearly impossible to effect national economic management. How would the government know whether GDP growth is good, bad or indifferent when it had no way of knowing what GDP was? In this category, e-cash is really a symptom of fundamental change: as the developed economies have become information economies, the problem of trying to measure, assess and control those economies has sharpened. I dont know, but I strongly doubt that MasterCard sends a report to the Bank of England each month detailing my online purchases, so when I download software from a US web server and pay for it using my MasterCard, it doesnt show up in the books anywhere. When I use an electronic purse (a smartcard capable of storing e-cash) to pay for playing a game online, the server providing the service could be anywhere, and that same server couldnt care less who I am (since Im paying in cash).
Tax Evasion. e-cash can provide a cost-effective way to switch value outside of conventional financial networks. I commission you to write a report for me. When the work is done, my copy of Microsoft Money 2000 talks to your copy of Quicken 2000. Between them, they agree that $1000 needs to be transferred from my Bahamian bank account to yours. My Money connects to my Bahamian bank account and draws out $1000 in DigiCash, which it immediately sends to your Quicken. Quicken deposits it in your bank account: in a few seconds the transaction is complete, with no recourse to SWIFT transfers. Since the value is cash, you dont even need to know my real identity: what do you care if you were commissioned to do the work by johnny.mnemonic@pobox.com provided you got paid. It's the lack of intermediaries in the transfer that is the root of the problem here. Tax reporting, the essential precursor to tax collection, depends heavily on intermediaries and institutions that are rendered useless in an e-cash world. Jurisdictional issues would also become problematic. Note that this does not mean no taxes, since people still have to eat and sleep somewhere, but it does rather imply a different kind of taxation. It also means, I would have thought, that tax authorities will have to compete for small businesses much as they do with multinational companies today.
Social Policy. Participation in the e-cash powered new economy will require infrastructure and knowledge. Is it socially acceptable to envisage economic structures that lower transaction costs for the e-cash users (the rich) while raising them for the e-cash disenfranchised (the poor)? While it's early days in the e-cash world, its clear to me that different sections of society respond to e-cash in different ways. Compare the progress of Mondex in Swindon, the English town where the pilot scheme was launched (to a crosssection of the population), with the campus schemes at Exeter and York Universities. In Swindon, less than a quarter of the expected number of cardholders has been achieved after a couple of years and in many retailers tendering the card gets you a blank stare. In Exeter, by comparison, Mondex has already entered the language: to dex, meaning to purchase something using e-cash, as in "Can you dex me a beer, please". The young and techno-hip will eventually tire of subsidising Automated Teller Machines (ATMs), armoured cars and night safes for their less well-off brethren.
Seigniorage Loss. The US Treasury estimate that seigniorage amounted to $773 million in 1994 and that if people started to hold e-cash rather than government debt it could cost the US government some $3.5 billion per annum. This seigniorage loss comes about either through commercial banks issuing e-cash, thus reducing the demand for governmentissued notes and coins, or through the use of monetary substitutes reducing the demand for national currency as a whole at the retail level. There must be some commercial pressure for this to happen. Oldham NHS Trust, to pick one example, would not be planning to pay nurses' bonuses in Air Miles unless they thought the nurses would find Air Miles a desirable alternative to the folding stuff.
Criminal Activity. New financial crimes and frauds could arise through the use of e-cash and money laundering might be rendered easier through the widespread anonymous and untraceable transfers of e-cash across organisational and jurisdictional borders. Is this the end of civilisation as we know it? I wouldnt have thought so. After all, money laundering has become a massive enterprise without electronic purses or Net banks. In fact, there may be reasons to think that law enforcement agencies will be able to pick up and exploit these new technologies to their benefit. As the old saying goes, In cyberspace, noone know youre a dog but on the other hand noone knows youre with the FBI either. Come to that, no-one knows whether youre a real person or a police-controlled software agent, cruising the Net looking to ensnare miscreants in dirty deals!
I know that this article hasn't come up with answers, but I hope that it's helped to frame the right questions.
------------------------------------------------------------------ David G.W. Birch, Director. Hyperion, 8 Frederick Sanger Road http://www.hyperion.co.uk/ Guildford, Surrey GU2 5YD, UK mailto:daveb@hyperion.co.uk Tel:+44(0)1483 301793 Finger for my PGP public key Fax:+44(0)1483 561657 Where people, networks and money come together....consult Hyperion