Ray Van Eng (06/16/97)                           

In order for electronic commerce to come to fruition, one of the most fundamental questions needs to be addressed -- Is electronic cash (e-cash) really legal tender?

How can those bits and bytes of data memory stored in a smart card, a computer, a point-of-sale (POS) device or a digital banking system be reliably counted on as something that represents real monetary value?

One could argue that e-cash is not legal tender. It is like a casino issued dollar token which you can use to interact with an in-house slot machine. You can redeem the chip for cash in that casino but will likely carry no face value at another gambling establishment unless special arrangement has been made beforehand.

All that sounds fairly limiting, and to a certain degree it is more or less the same with the so called stored value smart cards such as Mondex and VisaCash or a micropayment scheme like CyberCoin.

We may not have heard of a case in which someone actually challenges the use of stored value smart card yet, but the truth is unlike cash which a merchant is obliged to accept by law, the same merchant can refuse to take e-cash as a substitute for cash payment.

So what makes cash real money? What is the trick here?

With real notes and coins, they are "trusted" as legal tender because they are minted by banks or financial institutions with real assets and government regulations to back them up. This would ensure the currency that these banks produce be honored at least in that country and perhaps in other parts of the world as well.

In the United States, money deposits at banks are federally insured by the Federal Deposit Insurance Corp. (FDIC) for up to $100,000. Electronic fund transfers are also guarded against abuse since 1978 by federal laws.

But with smart cards or other micropayment systems, the stored value is not FDIC insured, at least not now. That is because money is transferred from a bank account to an intermediate non-bank institution e.g. Mondex, CyberCash, etc. who will in turn assign monetary value to a person's electronic container.

The danger here is that if these non-banks went bankrupt or become insolvent, the consumers could be left with what was used to be an acceptance medium suddenly rendered practically worthless because the money resided on the medium is not FDIC insured.

It is interesting to note here that with a system like DigiCash, a Netherland system, the money that is stored in a smart card or a computer actually never leaves the bank. The monetary value on the user's electronic container acts only as an indication of how much money that person is allowed to spend.

With DigiCash, once a transaction is initiated, the appropriate amount is subtracted from the consumer's ecash container, and the merchant will eventually settle with the bank to get paid. It is only at that point that the money is transferred from the customer's account to the merchant's account.

Every DigiCash transaction is tagged and can be audited. If the user's ecash container got lost or destroyed, the consumer is protected from losses as the 'money' will never be spent with any merchant. Contrast that with a system like Mondex or Visa Cash, a lost card means lost cash and can not be recovered or re-claimed with the bank.

One of the drawback with DigiCash is that since every transaction is monitored and audited, one can not spend the money without the bank knowing it. Mondex, on the other hand, promises total anonymity as it allows money to be transferred from one person to another without going through a central computer system. This opens up avenues for money laundering, a loophole Mondex will have to deal with.

Of course, all of these drawbacks or merits could change as e-cash technology and monetary regulatory laws continue to evolve and it will be extremely interesting to see how "the future of money" as Mastercard International is fond of saying will change with the times.