IS VIRTUAL CASH A REALITY?

by Reynolds Griffith

INTRODUCTION

Science fiction writers and futurists have long envisioned the replacement of physical cash with electronic or "virtual" cash [e.g. Warwick, 1992]. They cite advantages such as efficiency and convenience. Others have been concerned about the maintenance of privacy in electronic payment systems [e.g. Szabo, 1993]. Individual users need to be able to judge whether a system is true virtual cash, which protects their privacy, or not. Is a headline such as that on a Wall Street Journal article which said "C/Base, Others Make Virtual Cash a Reality" [Bulkeley, 2000] true? How can an individual judge such claims? This article will show how, with illustrations from actual systems.

C/Base provides "Web Certificates" and online debit cards. Others advertise "send money by email" or "pay your bills online". There is a tendency on the part of many to label any online payments system as "virtual" or "electronic" cash. This article begins by setting out the requirements for a payments system to be virtual cash. The many varieties of electronic payments systems are then examined and compared to these requirements to determine which, if any, qualify for the virtual cash designation. If none do, then what is the outlook for electronic cash developing?

VIRTUAL CASH

"Virtual cash", "electronic cash", or "digital cash" - by whatever name it is called - should have some of the characteristics of physical currency in order to be called cash. Webopedia ("the #1 online encyclopedia dedicated to computer technology") defines digital cash as follows

"A system that allows a person to pay for goods or services by transmitting a number from one computer to another. Like the serial numbers on real dollar bills, the digital cash numbers are unique. Each one is issued by a bank and represents a specified sum of real money. One of the key features of digital cash is that, like real cash, it is anonymous and reusable. That is, when a digital cash amount is sent from a buyer to a vendor, there is no way to obtain information about the buyer. This is one of the key differences between digital cash and credit card systems. Another key difference is that a digital cash certificate can be reused." [http://webopedia.internet.com/TERM/d/digital_cash.html]

This definition incorporates two essential characteristics, comparable to physical cash, for electronic money to be cash: its use should be anonymous and it should be able to circulate from person to person. Coates and Bonorris [1998] add several other desirable characteristics for digital cash, that it be:

Portable - that is, transferable between different devices such as computers and smart cards.

Widely accepted - able to be spent in many different places.

Indefinite - not expiring at a certain time.

Divisible - large units easily broken down into smaller ones.

While these attributes are not essential, the last two are important and the second is needed for digital cash to be truly practical. In the following sections, various payments systems are examined in light of these criteria. The conclusions are summarized in Table I.

 
ONLINE SYSTEMS

Let's consider online payment systems, beginning with the C/Base products cited by the Wall Street Journal article. Here's a description from an internet.com review:

"Webcertificates, the only "same as cash" gift certificate on the Web, and Ecount, the first personal Web account that allows consumers to send, spend, and receive cash online are both online alternative payment mechanisms offered by leading e-commerce incubator C/Base.

Webcertificates are similar to paper gift certificate, except that it's digital. Recipients are e-mailed a personal account number for a specific dollar amount that can be used for payment anywhere online. As a merchant, you don't have to take any extra steps to accept Webcertificates. If your merchant account can accept Visa and MasterCard, it can accept Webcertificates. …To a merchant's payment system, Webcertificates look like a MasterCard number.

Ecount can be used directly for consumer-to-consumer transactions, such as auctions, and have no expiration dates associated with them. As such, ecount is the only C2C payment method that can be spent instantly with a merchant. If a consumer receives an ecount in payment for an auction, then he can turn around and spend it just as he does with a Webcertificate. Alternatively, once some upcoming product enhancements are introduced, he will be able to complete the necessary paperwork (online) to have it directly deposited into his bank account or to receive a check by mail." [Gutzman, 2000 ]

The ecount system is actually an online debit card (a physical card is also available) with the feature of being able to send amounts to others by email. Because it uses the Mastercard payment system, it meets the criteria of being widely acceptable. It also appears to be divisible and non-expiring, except for the Webcertificates. It can pass from person to person, but only among those who have email and are willing to open an ecount account. It is also not portable in the Coates and Bonorris sense. Finally and most importantly, it is not anonymous. Listed as an advantage on the ecount page is: "Real-time transaction history for all ecount holders. Know exactly where you stand with your balance and purchases at all times by checking your online transaction history." [http://www.ecount.com/learnmore.asp] Thus, the C/Base ecount system is not true virtual cash.

PayPal is another online payment system. It describes itself as follows: "PayPal provides the world's first instant and secure online payment service. With PayPal, individuals and businesses can send and receive payments through the Internet. This revolutionary new service provides a safer, faster, easier, and cheaper way to move money in today's digital economy. …PayPal is the world's largest Internet-based payment network." [http://www.paypal.com]

The comparison of PayPal to the requirements of digital cash is similar to that of the ecounts system. It is not as widely acceptable by merchants, but has more individual users (claiming more than 8 million individual and business users). Again the key element is lack of anonymity.

There are other similar services, including ProPay [http://www.propay.com], e-gold (which provides gold denominated accounts [http://www.e-gold.com/], c2it from Citibank, [https://www.c2it.com/bannerD/] and Yahoo! PayDirect [http://paydirect.yahoo.com], which for the same reasons likewise do not qualify as digital cash. Another one, Bank One Corp's eMoneyMail [http://www.emoneymail.com] was discontinued as of June 7, 2001.

Another Wall Street Journal article [Angwin, 2000] classified as digital cash the certificates offered by Flooz.com. However, from the description on its web site:

"The Online Gift Currency™ that can be spent at a collection of the Web's best stores" [http://www.flooz.com/] we find that it does not meet the key requirements of anonymity and person to person transferability, nor most of the desirable secondary features. The article also listed GiftCertificates.com and InternetCash under the digital cash heading. GiftCertificates.com [http://www.giftcertificates.com] is almost identical in its arrangements.

InternetCash describes its system as follows:

"First, you buy your InternetCash™ cards at convenience stores, retail outlets or over the Internet at our site. Cards are available in various denominations up to $100. Second, you log onto www.internetcash.com to activate your card and create a personal PIN. We ask for NO INFORMATION ABOUT YOU. The PIN is only for your added security." [http://www.internetcash.com/go/0,2383,40,00.html]

Thus, it provides some degree of anonymity if the cards are purchased for cash at a physical location (it claims 5,000 locations so far). However, most of the other elements of true digital cash are not present, including transferability and acceptability. Consequently, the Angwin Wall Street Journal article is another example of the careless use of the term "digital cash".

IBM and Digital Equipment Corp.(acquired by Compaq) have each worked on payment systems for handling small amounts electronically. Here's a report from IBM on the progress of its system:

"In 1998, after a successful technical-feasibility pilot with TeleDenmark -- the Danish telco and the country's largest ISP -- MiniPay was renamed IBM Micro Payments and released in version 1.0. This past March, ATOS, a major European payment systems provider and IBM business partner, announced an OEM version called Poseidon MP. ATOS offers to help telcos and financial institutions establish IBM Micro Payments billing servers across Europe. …It is slated for deployment by several major telcos and financial institutions." [Sacharen, 1999]

We might note that it was being tested in Europe and not the United States. Subsequently, the technology was spun off into a separate company, Newgenpay, in which IBM retained an ownership interest. Its focus was broadened to providing technology for all size payments and enlisting technology partners to apply it to specific uses. [http://www.newgenpay.com/]

The first application of the Newgenpay system was launched in April, 2001, in the Netherlands. Initially it provided for sales of articles from cooperating newspapers for micropayments, with plans to add additional merchants offering other items. [http://www.newgenpay.com/mpay/newsletters/nlmay.html]

Compaq describes its system as follows:

In June, 2001, Compaq had not rolled out its system for public availability, but was signing up vendors and users on a "pre-launch" basis. However, by December, it had suspended work on the system. Both the IBM and Compaq systems have promise in facilitating internet commerce, but neither seem to meet the requirements of digital cash. It is possible that they might develop further and become a form of digital cash. Newgenpay claims that its system can support true digital cash, but it has not been implemented in that way.

OFFLINE ELECTRONIC PAYMENT SYSTEMS

Are offline electronic systems such as pre-payment cards or smart cards digital cash?

Prepayment cards store value on magnetic, electronic, or optical media, often in appearance much like a credit card. When used, e.g. in a pay phone, the accepting device erases the proper portion of the value. (The old paper multi-ride tickets which were punched each time they were used were a precursor of the more modern cards.) Prepayment cards have long had substantial use in Japan. By the early 1990s Nippon T & T alone sold hundreds of millions of them a year. [Harrop, 1992] Their use was also rather wide-spread in Europe by then, but not in the United States. [Harrop, 1989, 1992 ] Some were being used on college campuses and Sprint had begun issuing them for long-distance phone calls, but they were not common. One estimate is that by the late 1990s there were over 1.8 billion prepayment cards in the world. [Stewart, 1998]

Smart cards are in a sense an extension of the prepayment cards. Like the prepayment cards, they can store value for future use, but they also include an internal microchip based processing capability. Smart cards have been little used in the United States, but are common in Europe. By the early nineties the leading manufacturer (a French firm) was shipping over 100 million of the cards, but only 2 million of them to the U.S. [Violino, 1993] According to Business Week, analysts estimate that only 2% of all smart cards are used in the Americas, while Europe claims 90%. [Cortease, 1997]

In the United States, the Visa credit card association has been working to gain acceptance for its smart card, which it calls a cash card. It explains to potential users that:

Visa Cash cards work like "electronic money". A microchip embedded in each plastic card stores monetary value. Each time you use Visa Cash to pay for something, your purchase amount is automatically deducted from the balance. It's fast, convenient, and easy! [http://www.visa.com/pd/cash/main.html]

Prepaid cards do provide anonymity, but do not meet the other requirements of true digital cash. Smart cards may or may not incorporate anonymity, depending on what they are programmed to keep track of. At this stage of their development, they do not provide transferability or portability.

THE DEVELOPMENT OF TRUE DIGITAL CASH

There was a flurry of interest in digital cash during 1995-97 as some efforts were being made to develop it commercially. (See for example [American University, 1997], [Gleick, 1996], [Sandberg, 1996], [links from http://www.yy.cs.keio.ac.jp/~suzuki/sub/ecash.html])

DigiCash, founded by David Chaum, was a pioneer in the commercial development of digital cash. Chaum had developed mathematical protocols which enabled the anonymity of digital cash. (see e.g.[Chaum, et.al., 1990]) DigiCash had problems signing up banks to offer its digital cash and gain widespread acceptability. While a number of major banks in Europe and Australia offered or tested DigiCash’s system, it had only one in the U.S. The only U.S. bank offering its cash, Mark Twain Bank, dropped the offering after being acquired by another bank which had no interest in the project. DigiCash then filed for Chapter 11 bankruptcy protection in November, 1998. [PRIVACY TIMES, 1998] It transferred its technology to eCash Technologies, Inc. which has developed and promoted electronic payment systems, but not digital cash. [http://www.digicash.com]

Cybercash claimed to be offering a form of digital cash. In its 10K for 1996, it said:

"The CyberCoin(SM) service, the Company's low denomination payment service, is designed to provide a secure, convenient and cost-effective means of making small payments (generally between $.25 and $10) rapidly and efficiently over the Internet." [Cybercash 10k http://www.sec.gov/Archives/edgar/data/1004232/0000950133-97-001859.txt]

However, it appears that the CyberCoins were not true digital cash. One reviewer wrote:

"Unfortunately, it's all a lie. That's because your CyberCoin wallet doesn't really hold coins; it's just an ordinary bank account that happens to be linked to the Internet. When you buy something from a CyberCoin merchant, all you're really doing is sending a message to the bank, which in turn is transferring money from your account to the merchant's."[Garfinkel, 1996]

In spite of the past failures, not everyone has given up on the idea of digital cash. The Economist observed:

" Digital currencies are sprouting all over the Internet. But virtual money does not yet pose a serious threat to the real thing…. electronic cash has flopped badly…. On the Internet, almost all payments are still made by unsexy credit cards. In fact, digital cash was always a long shot…. Despite that sobering experience, a second generation of financial firms is now giving e-cash another go, online." [Economist, 2000]

One of these is Mondex. On its web page, it claims:

"Mondex offers the most technologically advanced electronic cash system in existence and its unique security architecture enables a range of functionality not offered by any other electronic cash scheme. … Mondex electronic cash can be transferred directly to a retailer, merchant or other outlet to pay for goods or services, and like cash, Mondex enables transactions between individuals, without the need for banks or other third parties." [http://www.mondex.com/]

This sounds promising. However, the fact that "the microchip maintains a record of the last ten transactions" casts some doubt on the complete anonymity of its system. Mondex is offering its card through regional franchises. The Mondex card has gained some acceptance in Europe and Japan. However, in the United States it is still in preliminary stages through Mondex USA. The company is owned by seven equity partners: five banks, Mastercard, and Discover. [http://www.mondexusa.com/]

Work is being done at the University of Southern California on a form of digital cash:

"The NetCash research prototype is a framework for electronic currency developed at the Information Sciences Institute of the University of Southern California. NetCash will enable new types of services on the Internet by providing a real-time electronic payment system that satisfies the diverse requirements of service providers and their users. Among the properties of the NetCash framework are: security, anonymity, scalability, acceptability, and interoperability." [http://www.isi.edu/gost/info/netcash/]

However, there is no immediate prospect of it being made available commercially.

CONCLUSION

At this point virtual cash or digital cash is not a reality, though it is intriguing. However, there must be a sufficient array of possible users to provide the potential demand to move it from experiment to practical medium. Its development has been hampered by both technical and acceptability problems. Nevertheless, it seems inevitable that at some time in the future it will be a viable alternative to physical cash. Other forms of electronic money are already becoming fairly widely used. Some have the potential of evolving into true digital cash. However, it will be a big jump from sophisticated computer users to the ordinary consumer. The role of digital cash is likely to be that of a supplement to, rather than replacement for, physical cash for many years to come.

REFERENCES

The American University's Washington College of Law Symposium On The Future Of Electronic Cash April 18, 1997 http://www.wcl.american.edu/pub/journals/lawrev/electronic_cash/schedule.htm

Angwin, Julia, "And How Will You Be Paying For That?", Wall Street Journal, October 23, 2000, pR37

Bulkeley, William M., "C/Base, Others Make Virtual Cash a Reality", Wall Street Journal, August 3, 2000, pB6

Chaum, David; Fiat, Amos; Naor, Moni; "Untraceable Electronic Cash", Advances in Cryptology - CRYPTO88, New York: Springer- Verlag, 1990

Coats, Vary and Bonorris, Steven, "Digital Money", The Futurist, August-September 1998, p22-25

Cortese, Amy, "SMART CARDS: THE ULTIMATE PLASTIC",  http://www.businessweek.com/1997/20/b3527107.htm

Economist, "E-cash 2.0", Feb 19^th, 2000, pp67-72

Gutzman. Alexis D., "Payment Solutions -Ecount and Webcertificates",June 1, 2000, http://ecommerce.internet.com/reviews/article/0,1467,3691_384961,00.html

Harrop, Peter, "The electronic purse", IEE Review, June 18,1992 v 38 n 6

Harrop, Peter, "New electronics for payment", IEE Review, October 5, 1989 v 35 n 9

NEWGENPAY: BI-MONTHLY NEWSLETTER, "Launch of Cartio, the first Newgenpay powered PSP", May 2001 - No. 3, http://www.newgenpay.com/mpay/newsletters/nlmay.html

Sacharen, Chan. "A Penny Earned: On the Web, small change equals big change", http://www.research.ibm.com/resources/magazine/1999/number_2/micropay299.html

Sandberg, Jared, "Cash Advances Aid Electronic Commerce", Wall Street Journal, Sept. 30, 1996, pB4

Smart, David J., "The money meter", Metering International, Issue 3 1998

Szabo, Nick, posting to the alt.privacy Usenet newsgroup, September 22. 1993. Cited with permission.

Violino, Bob, "The Cashless Society", ^SInformation Week^S, October 11, 1993

Warwick, David R., "The Cash-Free Society", The Futurist, November, 1992 v 26 n 6

Table I                             Back to text