W e b w o r d

Vol. 1, No. 6: NOVEMBER-DECEMBER 1997



Charles Petrie

Stanford Center for Design Research


Privacy is clearly an overrated concern. HR

Who needs it? Don't you trust your credit card company? You must: they know everything you buy with their card. Your bank doesn't know so much, but you trust them with the accounting of your money. If you think of the banks and credit card companies together, they collectively already know so much about you that it's clear you do trust them. Just like you trust your ISP not to gather and resell information on your browsing habits.

What? You don't trust these authorities? You only put up with the situation because it's necessary to get the services they provide? Well, credit card companies and banks as we know them may no longer be necessary.


We're at another Internet choice point now.

There are various schemes currently in play for retail electronic money exchange that would keep the existing institutions and mechanisms with which we are familiar. The good news is that we know and trust these institutions and mechanisms. We trust the mechanisms.

CyberCash has developed one such mechanism. It provides an electronic gateway for credit card companies and banks that lets consumers pay for purchases using the new electronic payment mechanisms on the Internet, This gives you more privacy than you can get with a telephone, but everything will still work the same way it always did in the background. The same institutions can get the same information.

While CyberCash is an independent company, a consortium of credit card companies is establishing a standard called SET (see the special news brief) that will allow them to do the same, but without any middleman like CyberCash. Either way, almost nothing changes.

But it should. With phone technology, merchants call single number for verification of your card, regardless of which bank issues your card. But once a merchant connects to the Internet, new bank-issued cards could set the URL directly to the bank's own verification service. Internet-based cards alone would eliminate the need for a merchant to enter into an agreement with a credit card company to honor your purchase. "Vastercard" could disappear with the millennium.

But how would banks charge the merchant for accepting their card, the way they do now? Wait, that's a pretty funny notion, isn't it: the banks charge the merchant for using the bank's customers' cards? Well, if this odd practice doesn't go away, they can use e-cash, like that offered by Mondex and DigiCash.


But here's where it really gets fun. Your unforgeable and authenticated electronic coins are recognized by everyone. So along with credit card companies go banks as you know them. Now your money is protected by cryptography instead of walls. So who will issue this virtual money? Banks?

Think about it: What does a bank do for you? They safeguard your money and process your payment transactions. They already do most of this electronically (bank lobbies are already a fit subject for nostalgia painters). But now these functions can be done completely with e-cash under control of the user. The main roles left for banks are to issue e-cash and grant credit. Retail banking as we know it changes radically. More important, you don't have to be a "bank" to do either of these functions.


It's up for grabs as to who could issue e-cash. The answer could be even individuals, or perhaps multinational firms. It depends upon legislation.

The US Federal Reserve says, along with the White House, that they are keeping their hands off electronic commerce. But it is hard to believe that they won't have something to say about who can issue electronic money. The European Monetary Institute (EMI) is already making recommendations on this subject in favor of banks. Whether countries can control this or not is questionable. If, say, Cisco Systems, were to augment its electronic commerce system with e-cash to be exchanged among consumers and suppliers, who knows what would happen?

And there are other legal considerations. Currently credit card companies warrant their participating merchants. This might go away with e-cash. The US Federal Deposit Insurance Corp. has announced it will probably not insure e-cash the way it insures US bank deposits. And fraud liability always falls on the verifying agency. E-cash would be like paper money and checks, versus credit cards for which merchants need not be liable.


Privacy is the real kicker for e-cash. DigiCash's technology is unique because David Chaum (see the interview) holds some unique patents. These patents would let you pay your bills essentially in secret. Your bills would be paid, and you could prove they were paid. But no one could find out what you spent your money on without your permission. That's pretty radical.

Who will honor this new, private, currency? There's the catch. Here's this great new privacy technology. And it's catching on in Europe, rather than the US. Apparently, Europeans trust authority somewhat less than the US. The Germans even have a law that makes banks provide whatever technology offers the greatest privacy: people are guaranteed the privacy of e-cash.

So what? Personally, it simply means that if I want more privacy and the fun and freedom of electronic money, then I should go with the single US provider (Mark Twain Bank, St. Louis, Missouri), or one of the European banks. Globally, this means that electronic money is inevitable. You can bank anywhere on the Internet. If European banks offer a superior service, US consumers who are Internet savvy will follow, and eventually so will everyone.


This causes an international problem. There are two Internet issues that will soon necessitate something similar to the international maritime laws: cryptography and banking. Different countries have different laws that determine who can be a bank and what can be encrypted how. On the Internet, with electronic money and virtual banks, the money will float to the best place for the consumer. Countries will be forced to deal with the situation.

They may not deal with it in the best way. You can expect to hear soon about national legislation being proposed by the credit card companies and banks "to protect" the consumer. This legislation will be to protect the vested interests and taxing authorities in your country and will restrict the use of electronic money to particular institutions and mechanisms.

This is where you come in. Check out the facts. Decide who you would like to trust, if anyone. Then vote. And hold onto your wallet.

Back to IC Online

Copyright (c) 1997 Institute of Electrical and Electronics Engineers, Inc., All rights reserved.