Electronic Currency

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              Electronic Currency New Mediums of Exchange
                                          Jason Madden

In this paper, a brief overview of the history of money will be given and principles of what make
money useful in business commerce. Then, categories with electronic money will be described
and bring a distinction with electronic payment systems. Next, the impact electronic money has
had in general in our globalized economy will be discussed. Then, opportunities that computer
science has involved in the field of electronic money will be discussed such as in data security,
privacy, and traceability. In addition, drawbacks and risks involved in the use of electronic
money will be discussed. Finally, a summary will be made about the future expectations for
electronic money in the global market place.


What is money or currency?
Beginning our discussion on electronic money, it will be helpful to first start with a short review
of the history of the development of money before describing the forms of electronic money and
their impact on our society and application of computer science in this field. There are important
principles to realize from the history of money as new electronic currency systems are going
back to older concepts of money. Previously, currencies were backed by precious metals and
free banking was widespread where private banks issued their own currencies. An appreciation
of the past will aid our understanding of the present and forewarn us of difficulties in the future.

Early Moneys

From early-recorded history, humanity has engaged in commercial trade through simple barter
and social gift-debt obligations, such as I-owe-you arrangements. Although negotiation and
social expectations are not simple activities, these exchanges lacked any direct intermediary that
we would call money that would facilitate the ease of exchange. The difficulty of matching
people with surplus goods and services available with those who needed or desired them and
could make an agreeable exchange was evident very early in our history. Early forms of money
were items that acted as intermediaries of exchange that were generally acceptable forms of
payment. These early forms of money were mostly commodity items such as rice, seashells, and
precious metals. The principle function of the intermediaries was to store the value of the
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original items being exchanged until the person could find another person to exchange the money
for the desired goods or services. [3]

Minted coins became even more useful in facilitating trade as standardized units of the
commodity metal used for money. The Code of Hammurabi, which was one of the first written
legal codes, was instrumental in positioning coined money into center stage of civilization. The
legal code gave more security to the community by specify the moral requirements and the
punishments for breaking them. This inhibited arbitrary judgments by the ruling authorities.
These also contained specific laws enacted for compensation by money for breaking of laws,
fines and fees to be collected, and defined how much interest was given for debts. This set
standards of expectations on payment of debt as the receiving party had to accept the payment in
the authorized currency and could not require payment in another form. [3]

Thus for certain moneys to be functional they needed to possess three major qualities. First
principle is that the money token had to be a unit of account such that it had a defined empirical
measurement like the weight of a metal coin, volume of rice, or size of seashell. Secondly, the
money token needed to be an accepted medium of exchange in the community or political region
such that a person could take their money tokens and exchange them with anyone who had their
desired goods or services available for sale. Third, the money tokens needed to be able to be a
store of value such that they were not easily perishable and in the case of commodity tokens had
their own perceived value, such as with the content of gold and silver coins as precious metals.
These principles of money tokens are essential to the making commercial trade easy and help
economic growth. [9]

Beginning Paper Fiat Money

During the middle ages in Europe, trade bills started to be used as a statement of certificate of
credit for production commodities to be delivered to the seller at a later point in time. This was
much like a personal loan to a small business. These trade bills began to be traded at discount
and face value and could be redeemed at local merchant banks. The convenience of carrying a
few certificates instead of a large amount of coins or precious metals became attractive for
traveling merchants. This lead into the popularized of goldsmiths creating the first paper notes
as certificates of deposit or receipts for the gold entrusted for storage that were payable on
demand. This also developed into customers using these as promissory notes to the goldsmiths
who could use the gold on hand for advances to other customers or to fund their own work. With
public trust and stable deposits, risks were low and so the goldsmiths became predecessors to the
modern banks with new credit based paper money. These early private merchant banks were
creating money or banknotes by issuing loans from the deposits held in reserve. The security of
this representative money was it could be easily redeemed for either gold or silver deposits that
could be considered legal tender to pay debts. National governments caught on and began also
to issue paper notes that could be redeemed for actual gold or silver that represented
convertibility. [3]

Fiat Money:
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Towards the end of the ninth century as paper currency issuance and circulation expanded, gold
was no longer converted for paper money within nations, as deposits became small fractional
representations of the currency in circulation and only used for foreign transactions. However,
during World War 1, England was forced to no longer use gold in foreign currency transactions
due to scarcity and so many countries followed the example. The gold standard was abandoned
in the Great Depression as governments allowed their currencies to float in value according to
market demands and central bank fiscal actions. Thus, currencies were no longer backed by
reserves of precious metals or other commodity, but had a stored value by the fiat or decree of
the national governments to be legal tender. Fiat money is only backed by the ability of the
issuer or government to repay their debts and thus susceptible to public distrust and avoidance in
cases of uncontrolled inflation or deflation. [3]

What is electronic currency?

The term electronic money has several widely inclusive usages. Broad views of electronic
money include both online and electronic token representative value holders as well as
authorizations of payments transmitted electronically. Such that both online purchases with
credit or debit card accounts and currencies such as Facebook Gold, Digital Gold Currency, or
other gaming currencies as well as private script or certificates of deposit would be included.

In a narrower view, electronic money is those moneys or tokens of exchange that are only
transacted electronically. This would exclude currencies and payments that have physical
representation as in US Dollars, EU Euros, and Japanese Yen. The narrower view of electronic
money is preferred for distinction from national government issued fiat currencies. Later
discussion will be made for the benefits of electronic only base moneys over credit/debit account
transfers in respect to online e-commerce. [9]

Types of Electronic Money

Community and Private Currency

As discussed earlier, some business such as a few private banks continue to issue their own form
of currency in contrast to government central banks. These are mostly backed by precious
metals or other currencies held in reserve. Private bank currency can take the form of paper
notes, debit cards, and formal electronic only tokens. These bank currencies are much more
regulated now than in the days of free banking in the United States in the early ninth century.
Private and Free banks are required to collect taxes and have their currencies fully convertible
back into US dollars. The primary feature of these forms of electronic money is that they have
acceptability only in a very limited geographic area. The current movement to support local
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businesses in areas in response to globalization has been aided by community currencies, where
local businesses will give discounts for payment in that local money.

Ithaca, New York has a local currency Hours which is Fiat with a pegged exchange rate of 1
Hour = $10 USD as a perceived measure of hourly wage. The Hour has the slogan “In Ithaca
We Trust” emphasizing the desire the build their local economy being in operation since 1994
[11]. Likewise, Berkshire Massachusetts also has a local currency called the BerkShare in which
local businesses off a five percent discount on purchases for using it [12]. Hong Kong has
implemented an Octopus Card as a local currency debt card to facilitate easier banking where
deposits are held at central banks of that providence [14]. Additionally, Toronto Ontario has its
own local dollar currency. Instead of offering a consumer discount, the Toronto Dollar
Community Project collects ten percent of sales for donations to non-profit community
organizations such as homeless shelters, women and children health programs, and food pantries

These local banking systems are opportunities for computer science professionals to use their
talents to promote efficiency, transparency, and economic development. Programmers have the
opportunity to increase efficiency in point of sale registers in communicating the transaction to
the financial network in a quick and reliable amount of time. By decreasing the time required to
checkout, customer experience greater satisfaction with the vendor. Programmers can also help
improve transparency in financial reporting by the local businesses that promotes greater public
trust that funds are not being siphoned to fund corporate investment or expansion projects in
other parts of the world. Thirdly, programmers’ participation in developing local banking can
help in growing the local economy by promoting more local startup companies as the increased
income from the local bank can be used for capital investment. [13]

Private currency can have significant risks in the long term stability and management. The
Liberty Dollar was produced in Idaho issuing warehouse receipts for gold and silver that could
be redeemed on demand. However, in 2007, the Federal Bureau of Investigation and Secret
Service raided the facility, which lead to charges being filed in May 2009 and the shutdown of
the currency in July 2009. The co-founder was found guilty on several charges including
producing counterfeit coins in March 2011. [10]

Hard and Soft Currencies

Soft electronic currencies are those that allow for payment disputes for fraud with the
transactions reversed. Credit cards use this as a major lure to customers promoting that their
customers do not have to worry about their cards being stolen. PayPal also allows for reversed
payments with a clearing or float time from three-to-five or five-to-seven business days.
Additionally, some hard electronic currencies can be softer when using a third party escrow
service. [8]

Hard electronic currencies do not have disputation services such that transactions are not
reversible in order to simplify the system and reduce operating cost from not needing to resolve
disputes. If your account information was stolen and fraudulent transactions were made, then no
form of restitution is possible. However, in this type of hard currency system, the payments are
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transmitted faster by automatic clearing of the bank so that the funds are instantly available to the
receiving party. Conversely, sellers have to wait to receive payment while the transaction is
cleared through a central bank with soft currencies. Thus, the costs of making transactions to
both the seller and buyer are greatly reduced, even though some risks increase. [8]

Hard Currencies could also be somewhat soften by using a third-party escrow services. An
escrow service would guarantee payment at the time of the transaction is made. Once the goods
or services are delivered upon, then the payment would be sent to the seller. This does add an
extra cost to the buyer, but is a form of insurance that what was purchased is delivered.

World Currency

The most efficient currencies are those that do not need exchanged often for another currency.
Thus, the desire to have one universally accepted currency for international trade is a large
concern for international businesses to reduce the risk of losing value during currency exchange
fluctuations. Before World War II, the British Pound Sterling had the greatest dominance as the
world reference currency. After World War 2, the US Dollar held dominance and the US
economy was the least negatively affected by the war of major super-power nations. With the
introduction of the European Union’s Euro currency, the US Dollar’s dominance has been
eroding as fewer nations peg their money to the value of the US Dollar. In effort to smooth trade
relation issues from currency exchange rate fluctuations, proposals are being made for a single
new currency from the United Nations that would be balanced or pegged according to weighting
of the US Dollar, British Pound, EU Euro, and Japanese Yen. Broad acceptability is still an
issue in these efforts, but this would greatly increase innovations in electronic currency and
electronic payment systems being more standardized globally. [6]

The Internal Monetary Fund [IMF] also has Special Drawing Rights (SDRs) that allow it to
withdraw reserves from central banks of UN participating countries in order to receive payments
from debts. Some people advocate for a supra-national currency similar to SDRs to provide
more balance in international trade [6]. However, SDRs would still need to deal with exchange
rates of national currency as so would not make an ideal world currency. An electronic only
currency, independent of national currencies, would be more suitable for a world trade currency
in that transactions could be made efficiently and reduce exchange rate risk.

Electronic Currency Example
Bitcoin is a recent entry into the electronic currency market. It is based on an open-source peer-
to-peer payment network. Bitcoin’s main difference from other electronic currencies is that it is
decentralized from a central bank or server system. This means that users of the bitcoin system
make direct payments to each other using encrypted messages. Bitcoin is a hard currency in that
transactions that have been authenticated are final and non-reversible. Each user is responsible
for protecting their account information. The source code of the bitcoin client was developed
and released as open-source by Satoshi Nakamoto in January 2009. [4]
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Installing the bitcoin client software or wallet is the starting point for using bitcoins. The wallet
is a combination of address book for recording other bitcoin users and a log file of transactions
that a person has made. The client software allows each user to request up to one hundred
addresses in order to send and receive bitcoins [5]. The wallet itself is a simple ‘.dat’ text file,
but the client software provides a method to encrypt that file. Users can also use e-wallet
website services to maintain their transactions and balances from a webserver in order to reduce
risk from losing their wallet from a personal computer crashing, receiving viruses, or corrupting
of files.

Bitcoins are attainable through purchase at online currency exchanges, such as the largest Mt
Gox [mtgox.com]. As well, Dragon’s Tale MMO online casino offers bitcoins for exploring
their virtual world [www.dragons.tl]. A person can also earn bitcoins from joining a bitcoin
mining pool and allowing the mining program to run during idle time on the user’s personal
computer [5]. There are multiple private mining pools in the bitcoin network. Mining refers to
the running of problem solving algorithms for about two to four months that has variable
difficulty according to the number of other users currently mining and the amount of bitcoins in
circulation [4]. So then, there are several inherent cost in trying to mine bitcoins such as the
electricity used by your computer and the cost of the computer equipment, namely an advanced
graphics card so then your primary central processing unit chip is not bogged down by the
mining software and cooling equipment. Consideration of the expected exchange rate and the
expenses incurred for the mining activity needs to be made by prospective users to determine
affordability of participating in a mining pool.

Bitcoin transactions are sent public throughout the entire network using private-public key
encryption in order to ensure only the intended recipient can decrypt the send bitcoins. The
privacy avowed is such that only the user’s wallet address is sent with the transaction without
any other personal identifiable information. Additionally, a person’s wallet address can only be
individually identified by their network card adapter’s serial number, which can help to prevent
identity theft as bank account or personal information is not used in clearing transactions. The
recent cases of account theft has been from the compromise of the security of e-wallet services.
The bitcoin transactions are confirmed through block chaining such that the network keeps a
history of all attempted transactions and can reject attempts to reuse bitcoins [4]. From reading
the source code for bitcoin wallet client [www.github.com/bitcoin/bitcoin], use of mutex
semaphores are evident to enforce mutual exclusion in the recording of sent and received

What issues surround electronic currency?
Data Security is a huge issue protecting and encrypting bank accounts and transaction records for
both traditional banking with physical currencies. As well, electronic currencies have more
vulnerability to exposure across the internet for personal information being intercepted or
account passwords being broken. Password strength and protection is an issued shared between
consumers and merchants. Consumers are responsible for selection passwords that are not easily
figured out and not sharing it. Merchants are responsible for maintaining their files securely.
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Additionally, use of SHA-256 hash encryption can greatly ensure less vulnerability of
transmissions from being decoded by illegitimate parties [1].

Duplication Fraud is another major topic with electronic token currencies and why some are
strictly hard currency with no payment dispute resolution so as to not allow already used digital
currency certificates to be used more than once. Bitcoin network prevents this upfront as
transactions are not completed until six blocks are received confirming the currency was not used
in a previous transaction in the database of all transactions. Electronic or Automatic Clearing
Houses (ACH) are used by softer currency payment systems to check that the available funds are
sufficient and accurate also that the parties are authentic users of the system [2].

Identity Theft is another issue and balancing act for how much of a customer’s information
should be shared in electronic transactions as more electronic currencies agencies are pushing for
anonymity to protect their clients [9]. However, allegations are not without some merit that
completely anonymous currency transactions would easier money laundering and funding of
illicit drugs, gangs, and terrorists [1]. Consumers assume risks of using electronic wallet
services as well as how they protect their passwords and other personal data

Traceability and Privacy are also balancing points. Customers often desire to be able to keep
purchasing records in one place. Law Enforcement also wants to have the ability to track down
criminal activity [17]. However, not all customers want their even basic information or
purchasing trends made available as we already get enough junk mail and email sent to us. The
principle concern by United States financial regulators is to be able to catch those who engage in
money laundering by tracking their activities over time. This goal is accomplished by stopping
single transactions, but developing cases against organized crime [1]. However, financial
institutions also desire to minimize the amount of information stored containing customer’s
personal information that could be used in identity theft reducing their liability risk for the data
they must protect [4].

What is the future of electronic currencies?
There are several electronic currencies aimed to being Complementary or Parallel National
Currencies in the effort to become trans-national in the global market providing cheaper
processing and easier international exchange. Convenience is the major hurdle for private
currencies for consumers to adopt using their money and services. Convenience is also a main
need for merchants to provide quick customer service in payment transaction [9]. Electronic
currencies do provide much quicker payment confirmation and dispute resolution from having a
traceable history. It would be inconceivable going back to paper & coin money from the
convenience and cost effectiveness of electronic money and payment systems [16]. Financial
institutions that make their profit on the margins of transactions will always be looking for ways
to reduce costs. It will take a long time for pure electronic currencies to gain widespread
acceptability, but it will continue to grow as benefits are realized from transitioning away from
paper money.
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The basic expectation for regulation is that no new policies or laws will be issued in the future.
Some advocates would say that enough laws are already on the books from the advent of credit
cards for transactions in the United States. However, there is a mix of regulations for foreign
transactions which likely continue to be difficult to sort through in the larger perspective [1].
Currency and payment systems that shield the location and identity of users will remain popular
among individuals as distrust of governmental financial institutions never goes away. Peer-to-
Peer networks seem to be the best option for private currencies to reduce the opportunity for
government interference.

Smart cards, those with value / currency information stored directly on them, seem to show the
most near future growth potential [1]. Consumers are mostly familiar and accepted use of credit
cards so it is not a far jump to using smart cards. These cards are limited from holding much
consumer information and so not posing much threat in the area of identity theft. The cards can
be used offline by reader devices and are becoming more cost efficient for merchants. Advances
have been made to use cellular or smart phones as shored value cards that would be either linked
to an account or stored value such as a debit card. Already smart card chips can be placed in
cellular phone cases for consumer convenience [16]. Some speculation has been made that cell
phone minutes would be a commodity for electronic payment transaction, however, cellular
phone service providers are turbulent and highly competitive reducing the chance of widespread

The global banking industry is becoming a new frontier for computer science. As necessity is
the mother of most innovation, electronic money will continue to be a solid driving force for
programmers to develop stronger encryption methods for secure data transmission. As our
American culture is moving away from carrying physical cash, business will continue to
innovate in the area of electronic money and payment to attach customers by convenience while
attempting to reduce costs for greater profits. Online anonymity will continue to be a priced
value for consumers online as private banking systems will use it as an appeal to electronic
money from other credit card services providers. With the major developments in the integration
of the global marketplace, community electronic currencies provide an affordable venue for local
community development. Thus, programmers have more options that only employment with
large corporations in the financial field. Electronic payment systems are not fading into the
future but are replacing paper currency. Electronic currencies are new in respect to computer
technology, but are a return to the basic fundamental principles of money.

[1] A report to the Congress in accordance with section 359 of the Uniting and Strengthening
       America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
       Act of 2001 (USA PATRIOT ACT) [electronic resource] Retrieved from
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[2] Financial Crimes Enforcement Network (U.S.), A survey of electronic cash, electronic
       banking, and internet gaming [electronic resource]. Financial Crimes Enforcement
       Network, U.S. Dept. of the Treasury, 2000. Retrieved from

[3] The History of Money Original from PBS Nova broadcast Secrets of Making Money

[4] About Bitcoin. (n.d.) Retreived from http://bitcoin.org/about.html

[5] Getting Started (n.d.) Retrieved from http://www.weusecoins.com/getting-started.php

[6] No Risk is Unsafe: Simulated Results on Dependability of Complementary Currencies

[7] Foldvary, Fred E. (Nov 2008). Who should control the money supply? Free Banking
       Explained. The Progress Report. Retrieved from

[8] Good, Barbara Ann (2000). The changing face of money: will electronic money be adopted
      in the United States? Retrieved from

[9] Kelley, E.W., Jr.; "The future of electronic money: a regulator's perspective," Spectrum,
       IEEE, vol.34, no.2, pp.20-22, Feb 1997 Retrieved from

[10] Tom Lovett (Mar 19, 2011) Local Liberty Dollar 'architect' Bernard von NotHaus
      convicted Evansville Courrier & Press Retrieved from

[11] What are Ithaca Hours? (n.d.) Ithaca Hours. Retrieved from

[12] What are BerkShares? (n.d.) BerkShares Inc. Retrieved from

[13] About the Toronto Dollar. (n.d.) The Toronto Dollar Community Projects Inc. Retrieved
      from http://torontodollar.com/aboutus/index.php

[14] About US (n.d.) Octopus Holdings Limited. Retrieved from
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[15] Emergence of Payment Systems in the Age of Electronic Commerce: The State of Art.
      Retrieved from http://ieeexplore.ieee.org/stamp/stamp.jsp?tp=&arnumber=5340318

[16] ter Maat, M.; The economics of e-cash, Spectrum, IEEE, vol.34, no.2, pp.68-73, Feb 1997
       Retrieved from

[17] Gemmell, P.S.; , "Traceable e-cash,"Spectrum, IEEE, vol.34, no.2, pp.35-37, Feb 1997
      Retrieved from

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