Ahti Rissanen
Telecom Research
Telecom Finland Ltd.
Ahti.Rissanen@tele.telebox.fi
The global money is not a new concept to people using money. Even before people know how to trade with paper money there exist a universally accepted method of making payments. Introduction of internet have fuelled the change from physical method of paying to electronical version. It can be seen that electronic cash is going to evolve into a commonly acceptable method, but there still are open issues that have to be solved.
As long as human has been able to reason they have wanted to have goods that are in posession of somebody else than themself. If there has not been enough power for gaining that item some other means had to be developed so that transfer of goods could be completed. In the early days this meant trading goods. For sometime this could continue, but what if as people/tribes nomaded far away and things valued by someone were not valued by others. There was a need to develop means to trade with something else than goods. As people began to trade more and more there rose a need to establish a common substance to be used in commerce.
The thing which people would select to keep by them for making purchases, must be one which, besides being divisible and generally desired, does not deteriorate by keeping. This reduces the choice to a small number of articles. By a tacit concurrence, almost all nations, at a very early period, fixed upon certain metals, and especially gold and silver, to serve this purpose. [1]
Gold, silver and salt in early years can be wieved to have been global methods of payment as nearly all of the human at that time considered them to be convenied to be used. The advantage of them is that at that time they were not traceble so people could use them without worrying being identified. As it can be seen global money is not a new invention.
Global money was of cource threat to governments as nobody could control money that had no identification marks. Few persons with amble amount of non-traceable money could act agains governments to gain personal advantage. Governments started to limit it's subjects right to own gold and other valuable materials to protect they institutions. Coins were casted from valuable metals that identified them as being used under governmental supervision. As coins were impractical way of making purchases governments started to print paper money. Usually in these notes it said that government of this country would pay for the bearer of the note xx units in gold. By this way governments very easily controlled their economy and by it people living in that country.
Shopping at these days is easy and convenient with home shopping networks and mail order catalogs. What has been added is internet shopping. As you surf in the internet and come across to some vendors home page you'll be able to purchase commodities.
In the internet there are two common ways to make payments.
Phone orders: Vendors use Web only for advertising and endorsing products. To order customers have to phone in their orders. The vendor takes order in as the contact had been made in TV, in newspaper or sowhere else.
Credit card orders: By using some secure methods of transfering credit card information to vendor. For some customers the idea of sending credit card information over internet is not appealing.
Small purchases: Pay-per-view articles and information could be considered to be small purchases. The value of the transaction is often so small that they don't warrant the use of credit cards. Several solutions exists for micropayments.
Medium and large purchases: These kind of payments are the normal usage for credit cards. Sums usually range from ten's to thousands. For these kind of payments credit cards probably be the most often used method. Sums are high enough that it is warranted to use credit cards for payment. Credit card companies have tried for security reasons to come up with a scheme that could answer to this issue.
Private purchases: People everywhere are concerned what kind of trace is left from their purchases to the "Big Brother". Among these purchases might be special gifts that customer doesn't want his/her spouse to see or people just doesn't want authorities to mingle their life. In these cases electronic cash is a convenient way to provide anonymity.
Will customers and vendors risk investments into a service that is just coming onto the markets. If customers doesn't use system vendors doesn't provide products and if vendors doesn't provide products customers doesn't use services. This seems to be a newer ending circle.
Customers that are willing to make purchases are worried about the security in the internet. They doesn't want to give their credit card information to someone without knowing who can use that information. Interesting enough people easily give credit card information over telephone conversation when buying items but doesn't like to do it from their computer.
Some of the systems have a very strict policy on privacy as power users of the internet feel that privacy is the most important thing in the internet. The rest of the users on the contary have become very open to buy with credit cards.
Digital money makes it possible for customer to transfer money to their account to be used for making purchases in the internet. Some systems makes it possible to convert money to electronic cash, which is then stored to users hard drive. This electroni cash is used when customer makes purchases in the internet, provided that seller is willing to accept that kinf of payment. Seller then converts the electronic cash to money by sending needed information to system provider.
Privacy: By using electronic cash customer doesn't leave trace of himself/herself. System cannot link used electronic cash to customers. It is impossible to identify customers of the system. System provides total anonymity of the customer and so himself/herself doesn't have to worry about getting added to unwanted mailing lists. Of cource if customer have purchased something that has to delivered there is going to be trace left from the transaction. But when the merchandise is information that is send over internet there is no trace left after the purchase.
Limited liability: If, for some reason, something goes wrong user only looses that amount of money that was stored into the hard drive. And in some cases even in this case lost money can be saved. People will more easily use system, if the only risk is loosing money in the electronic wallet compared to sending credit card information, that has 10 000 limit on it, over internet.
Customers will be using credit cards as they have done it so far and companies will continue to offer this service to them. With credit cards customers can make purchases directly from vendors. What have changed is that major credit card companies have introduced a new way of securing transactions. In this system customer doesn't send credit card information to vendor. Instead what is sended is a token that vendor can deliver to credit card company. Credit card company then uses this token to get the credit card information and validates the usage of the card. Vendor can be sure that card is good and deliver wanted merchandise to customer. Also customer gets a digital reciept from the transaction. This system is essentiality more secure than traditional one.
Customers money is at the bank: If the card is lost account still have link to customer unlike in electronic cash systems where if customer looses his/her electronic cash it is gone. In this scheme customer doesn't have to open a new account at the bank. They can use credit card they have already unlike in electronic cash systems where customer have to open a new account.
Lack of privacy: Unlike in electronic cash systems where transactions hides the identity of the customer in this scheme transaction always links customers name to purchase. System so cannot maintain anonymity of the customer. There also could be a risk that customers name is added to unwanted mailing lists.
There has been attempts to transfer electronic checks over internet, but these systems have not been developed as far as other forms of money transfer. In a simplest scheme electronic version of the check could be a email that authorise vendor to draw funds from customers bank account. Identification of the customer is done by digital signature and attached certificates. This system looks like to be a compromise between credit card and electronic cash payments.
Processing: Electronic checks can be processed the normal methods. The appearance of the check is different but it will still be a check.
Making change: Electronic checks can be made out to exact amount of money needed.
Money is in the bank: Customers doesn't have to worry about their money as it is stored safely at the bank.
Privacy: Electronic check reveals the real user of the money.
The motivation of criminals have always been, with few exeptions, money. As criminals collect money from several sources there is a problem how to introduce this illigal money to legitimate financial system. Term money laundering refers to process where illigally-gained money is by some ingenius scheme transformed to legal methods of payment.
The criminal organisation can only succeed if it has method to launder money. By laundering money criminals convert money received from criminal activities so that it seems to be coming from legal sources.
Money laundering gives fuel to several unwanted elements of the society, as drug dealers, terrorists, arms dealers, etc. With "legal" money they can function and expand their operation. If criminals can manipulate financial institutes of the world it can erode countries.
United States Treasure Department has a major role in implementing and overseeing actions against international organised crime. It's main areas of prevention money laundering are detection, stopping and enforcement of financial crime. The Financial Crimes Enforcement Network (FinCEN) is a key component of the U.S. international strategy to combat organized crime. The Department of the Treasury uses FinCEN as one of the primary agencies to define, direct and execute policies to prevent and detect money laundering. It functions as a link between the law enforcement, financial and regulatory communities. By doing this it has a goal to be world leadership in the prevention and detection of the movement of illegally derived money.
As FinCEN is a tool for U.S. Treasure Department it can only apply in United States counter-money laundering laws agains criminals. Despide of this shortage it can provide intelligence and analytical case support to international investigators and regulators.
Although FinCEN can function only inside U.S. it's role has influenced the fight agains financial criminals and it has become an international leader of this fight.
In the global scale the Financial Action Task Force (FATF) is one of the key organizations that functions against financial crime. The G-7 Economic summit in 1989 set it up to promote the deveploment of effective means to control money laundering and to improve information exhange between its members.
Due cource of FATF's work Financial Intelligence Units (FIU) have been established into several countries to to protect financial institutions. FIU's also try to notice illigal attempts to use financial systems. U.S.'s FinCEN is one example of FIU. There are these kind of models also in Great Britain, France, Belgium, Netherlands, Argentina and Australia.
One of the most important assest of the FIU's are that several of them function separately from the Ministries of Justice. They are directly connected with banks, central banks and law enforcement agencies. This makes it possible for FIU's to co-operate jointly in the fight against money laundering and financial crime.
The term "Cyberpayments" can be used to define methods that have been implemented to transfer money. Cyberpayments refer to evolving new methods of financial transactions as today banks already can transfer money with computers. Cyberpayment is going to change the way people makes payments. These payments could happen in internet or in stores with "smart cards" that contain microchip, where the value of the card is stored.
These systems have being designed to give both to consumer and vendor a fast, easy to use, secure and possibly anonymous way to transfer money. After this system have been implemented completely it'll affect users globally and ables normal commerce to profit from it. Unfortunately it also have undesired side effects as international transfer of illicit money becomes easier to do.
As home banking and internet payment systems are more commonly used there are fewer and fewer face to face transactions. This makes it hard for the financial institutions to really know their customers. These faceless transactions makes it harder to control and analyse movements of money as transfers could be anonymous and paperless.
The overall efficiency and security of the system influences customers opinions in favor of the system. These features makes it also very vulnerable against those who are willing to exploit it for illicit purposes. It also makes it difficult for the law enforcement agencies to get enough information of it's users.
FinCEN has executed several actions that enables it to comprehend these technologies. It is co-operating with companies developing solutions to cyberpaying ensuring that financial criminlas could be identified and that the veaknesses of the systems could be removed. FinCEN strives to greatest extent possible so that financial crime could be prevented and criminals could be detected and prosecuted.
The development of cyberpayment systems has not been straight forward action from cash-based system to electronic cash. Between these two stages there are several hybrid systems. First electronic way of payment was credit cards and Automatic Teller Machine cards (also bank cards is Finland) that contained a magnetic strip that stored information connecting card's user to a credit comppany or a bank account. Concurrently with this deveploment there was deveploment of only one time usable cards that hold a magnetic strip where the value of the card was stored. In the next step magnetic strip was changed to microchip that increased the storage, security, applicability of the card and abled them to be used more than once. These kind of cards, when applied to communications terminal such as telephone, functions as both access devices and self contained strorages. Same could be also applicable to computers, with internet access, as they serve as a interface to payment systems and also can store values.
In U.S. banks and other financial institutions have streamed the transfer of money so that the flow goes through "chokepoints" which gives to law enforcement and regulatory officials a means to control it. FinCEN is administering the Bank Secrecy Act that is drafted so that financial institutions have to keep records and file reports of money transfers.
In the internet where transactions takes place between customer and vendor or between customers, there is no financial institution that handels money transfer. Officials have then lost chokepoints where they before could have interfered to these transactions . So as knowledge of of money transfer systems in internet grows goverments must define, what kind of regulatory actions they should take to control it.
As cyberpayments are not limited inside certain countries it's going to be an international challenge for law enforcement agencies to determine jurisdictional authorities. Rapid and inevitable change of money transfer mandates enhanced co-operation among international regulators to ensure that same law is applied globally. This loop hole can be seen very easily. Imagine a situation where almost in every country there are very strict laws, that regulates money transfer in internet, and there still exists countries, that has not taken any action to control it. Obviously this makes it easy for financial criminals to act.
FinCEN has actively started a discussion of cyberpayments on international forums such as Financial Action Task Force. FATF is one of the major organisation that functions globally to prevent money laundering. It's role is concentrated on development of effective controls against money laundering and on co-operation between it's members.
There are two different kind of electronic cash: identified and anonymous. Identified electronic cash contains information of it's user. With identified electronic cash, both offline or online, the bank can always reconstruct the path the electronic cash went through the economy. The bank will know what everyone bought, where they bought it, when they bought it, and how much they paid for it. And what the bank knows, the IRS [taxation authority] knows. Anonymous electronic cash is like notes. After it has been withdraw from bank you can used it without trace. The big difference between offline anonymous electronic cash and offline identified electronic cash is that the information accumulated with anonymous electronic cash will only reveal the transaction trail if the electronic cash is double spent. If the anonymous electronic cash is not double spent, the bank can not determine the identity of the original spender nor can it reconstruct the path the elebtronic money went through the economy.
If everyone would use identified money there were no need to file tax returns as government already would know every transaction you have done or have taken a part. Wouldn't that be nice?
The change from paper notes to electronic cash is literaly going to affect your wallet. Notes we are now using are being replaced with cryprographically sealed digital eqvivalents that are stored into a microchip that resides in a plastic card or at the hard disk of your computer. Financial institutes are doing money transfer already digitally. No physical money is transfered during this process, instead what is transfered is streams of bits. Taking the final leap from physical money to all digital money is going to show, for coins and paper money, the way of the Dodo.
Is electronic cash really going to happen? In the long run yes. Coins and notes have been used for a long time but at the information age the old way has to move away in the front of better way. The security of the coins and notes is so low that newest color and off-set copying can produce high quality look-alikes. Also handling of the physical money is expensive. Printign notes, minting coins, trasnportating them, stoking of the automatic teller machines and generally all physical action with money takes time and adds to expenses that in the end customer have to pay. Not all of the physical money is going to be replaced with electronic cash, but notes and coins will increasingly be replaced. This means for the governments that they have to agree on global transformation to this new system in orderly way. Unfortunately not all officials see the importance of this.
If governments are not taking actions, companies will make movements that quarantees for them means to make profit. One of the major developer in this are is going to be Microsoft. Presumably Microsoft has plans to take advantage of the digital transactions. The question that could be asked then is, will dollar bills be replaced by Bill dollars?
As companies are rushing different systems to markets what can be seen is that in the begining the road to electronic cash is going to be a multi-lane cloverleaf with infuriating turnoffs, circles, and dead ends. It could even be so that in the future there are different way to do digital payment. Today there exists many alternative way of paying, cash, credit cards, money wiring, traveller's checks, etc. Each of them suited to variety of situations. In the digital money there probably is going to be a same kind of situation. The situation could be analogous to last century - before centralised system -where every bank and financial institution had it's own money. Sholom Rosen, a vice president at Citibank, puts it more succinctly: "There are going to be winners and losers, but everybody is going to play."
But what actually do you put into your wallet? This is a good question as you as a user won't be abe to see the money. So it is important that those who develop electronic money have chosen right protocols and correct sequences of transactions to take place. In the worst nightmare, a system implemented in a wrong way or with loop-holes, hachers could find out how to make elecronic money. A mint at their computer! This could devastade world's economies so that the hyperinflationary Weimar Republic would look like stable monetary system.
What is that authority that controls electronic money? Whome does people trust? Will it be governments, banks, Visa ? [5] Or is it going to be Helsinki City Transport?
"A dollar bill is a piece of paper - what's the difference between that and another piece of paper?" asks Sholom Rosen of Citibank. "It is the ability to present that piece of paper and get assurance of a return. It's not backed. There was a time when it was backed, but those times are gone. What gives it value? The banking system. The paper is the liability of the banking system. The supply of money is grown and disappears in the banking system." [5]
At this moment no one is controlling electronic money. Companies have notised this and are taking advantage of it. Each of them are rushing to get their solution to be recognised as to be the best solution. This situation is possible as at this moment there isn't controllers who could intervene. [6]
Electronic commerce as a term means trade that is made in electronic way. Commodities and services traded in the internet can be devided into two groups depending wheter they are distributed over the internet or internet is just part of the delivery chaing. Electronic commerce makes it possible to sell commodities in a cheap, efficient, easy and global way. [7]
Electronic commerce can only be done if the payment methods are secure and usable. Also possible jurisdical issues have to be solved before commerce can be done on a global scale. [7]
As we can see, the number of people using internet is increasing by 100% each year. Very soon just plain surffing isn't going to be enough for them. Internet access providers, service providers, vendors and companies involved in internet deveploment have to come up with fast, secure, anonymous and easy to use solution to be used by customer, in order make payments, who want to fully exploit internet. The first company that hit's global market big time, with application that is accepted by everyone (customers, vendors, official agencies, etc.), is going to be a major player.