Electronic Money
Introduction
Electronic money or e-money, is the electronic equivalent of traditional paper money. E-money is a series of computer bits, encoded by a certain encryption method, that can be stored on the hard disc of one's computer or on a microchip. E-money works just like traditional money, but without the risk, inconvenience and cost associated with handling, administering and safeguarding traditional currency.
Types of Electronic Money
There are types of e-money, identified and anonymous e-money. Each of these 2 classes is further divided into 2 subclasses, online, and offline e-money. Identified e-money contains information about the identity and transaction trail of the person who is using the e-money, while anonymous e-money does not necessarily reveal the identity and the transaction trail of the user.
The online and offline aspect of e-money complicates the issue further. Online suggests when conducting a transaction, one needs to interact with a bank via the Internet or a network to conduct a transaction with a third party. Offline suggests an e-money transaction without the involvement of the bank, and this is when the matter gets complicated. Without the direct involvement of the bank to verify the e-money actually exists in the account of the buyer, the buyer could duplicate the bit and bytes that constitute e-money as much as he likes, and buy goods with infinite numbers of copies of the original e-money. This problem is called the double-spending problem. However, this could be solved by structuring the e-money as well as the encryption protocols in such a way that would reveal the identity of the double spender by the time the e-money is deposited back into the bank. Another solution to this problem is to create a database on the microchip in which the e-money is stored, this way any double spending is detected and prevented.
Technology that Enables Electronic Money
There are a number of technological advances that has enabled the use of e-money, these are the public key infrastructure, digital signatures and digital certificates.
This public key infrastructure uses two asymmetric keys, one that was kept private and one that was made publicly available. Both parties could agree on a symmetric secret key, by exchanging their public values and combining them with their private keys.
A digital signature is a digital code that can be attached to an electronically transmitted message that the holder of a given private key could have generated it, but anyone with the corresponding public key can verify the signature's authenticity.
However, the user sending a message might not be who he/she claims to be, thus a digital certificate is also used to provide total security. Individual wishing to send an encrypted message applies for a digital certificate from a certificate authority (CA). The CA issues an encrypted digital certificate containing the applicant's public key. The recipient of an encrypted message uses the CA's public key to decode the digital certificate attached to the message, verifies it as issued by the CA and then obtains the sender's public so that it could send an encrypted reply.
Advantages and Disadvantages of Electronics Money
There are a number of advantages to e-money:
1. Much faster, instant transactions;
2. Financial record keeping is done automatically, since a database is built to record every e-money transaction
3. Less physical handling of currency thus vastly reduces cost
4. For businesses, it is much easier for them to collection marketing information on customers, since all they need to do is to scan the e-money database built.
However, there are also disadvantages to e-money:
1. E-money user might not want their spending pattern to be observed
2. The offline anonymous e-money is untraceable and mobile, makes it advantageous to organised crime groups. For example, money laundering.
Impact of Electronics Money
The use of e-money has significant impact both on global commercial and personal lever. Traditionally, the two most important constraints on trade were time and distance. E-money systems effectively removes both barriers, thus making trading totally globalised. On a personal level, the use of e-money means lower cost, but which also means lose of personal privacy. This arises because the bank will be able to obtain the transaction trail of all of its customers. An interesting implication is that the ATO will have a record of everyone's spending thus making tax evasion impossible.
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©Jason Zou - Last updated 10 April 2001.