Digital Money: Future Trends and
Impact on Banking, Financial Institutions, and eBusiness
Federico Fiallos
Cell: (585) 355-7589
federicofiallos@hotmail.com
Liying Wu
West
Phone: (585) 359-9643
wu_liying@hotmail.com
Liying Wu (B.S. Business Administration – SUNY
Brockport) is currently a full-time graduate student pursuing a MBA with a
concentration in Finance at the
Rochester Institute of Technology,
Federico Fiallos (B.S. Food Science and Human Nutrition/Environmental Horticulture –
Submitted
February 21, 2005
Systems Concepts
Jack Cook, Ph.D., CFPIM, CSQE
All authors contribute equally to this paper and
are listed alphabetically
Digital Money:
Future Trends and Impact on Banking, Financial Institutions, and eBusiness
ABSTRACT
This research paper
examines the nature of digital money.
The purpose of this study is to
provide CIO’s and CFO’s with information necessary
for assessing the effectiveness of implementing digital
money in their respective firms. This report provides examples of different
types of electronic payment system and analyzes the major
advantages of digital money over traditional
electronic systems. Recommendations for planning and implementing digital
money and the future directions for further research are
concluded at the end of report.
INTRODUCTION
According to a study by the Federal Reserve
Financial Services Policy Committee electronic payment transactions in the
The idea of paying for goods and services
electronically is not a new concept. Since the late 1970s and early 1980s, a
variety of schemes have been proposed to
allow payment to be completed through a computer network. The arrival of Internet has really taken
electronic payment to an
exponential growth level. At the early stage, goods and
services began being traded on the network without the use
of any supporting technology. Consumers could purchase goods from WWW and
send unencrypted credit cards number across the network. But a wide variety of new secure network
payment schemes were being developed and implemented as customers became
more aware of their privacy and security.
There are many different types of electronic
payment systems available across the network. Our paper focuses on one
specific kind of electronic payment – digital money. It is an
electronic payment technology, which can provide fully anonymous flexible
electronic payment like paper cash but with the added
security required for the Internet transaction. Digital
money has become more and more popular among consumers
because of its convenience, privacy and anonymity features.
Today’s digital marketplace is becoming more
insecure each and everyday. Mechanisms
to provide customers with convenience, anonymity and privacy must be further
researched and documented. Digital
money will impact the way every company does business in
digital marketplace. If companies fail to recognize
and respond digital money, they can face the risk of
losing revenue and customers.
The research conducted in this paper is important
because it alerts CIO’s, CFO’s, and other interested parties of the benefits
digital money has along with the implications of setting up such a payment
system. Although a complete economical
impact study is not provided, the paper will identify and point out trends and
patterns that CIO’s and CFO’s should analyze for future payment systems to be
implemented and architectured within their
companies.
This paper examines and tries to evaluate the
impact digital money will have on financial institutions, banks, and
merchants. First of all the subject
addressed is summarized in an abstract and then briefly introduced in an
introduction section. The paper then
goes on into a literature section, were research information gathered is
summarized and critiqued. During the literature review section, we
will review the concepts of digital
money, compare features of digital money with those of traditional electronic
payment and analyze the major advantages of digital money such as its convenience, security and privacy features. The next section addresses
the key problem and provides questions and answers regarding issues of
relevance and importance such as some potential problems
faced by digital money and/or the prospects for the future payment systems. Finally
research procedures for the paper are described and a conclusion is given
providing key insights and takeaways that should be considered after reading
through the paper.
LITERATURE
REVIEW
Brands Digital
Cash Scheme
The Brands’ digital cash
scheme is an offline anonymous cash scheme involving three different
entities and consisting of four protocols.
A bank plays the role of an authorized digital cash issuer, a user
withdraws digital cash from the bank and pays the digital cash to a merchant in
exchange for goods and services. The merchant finally deposits the digital cash
back to the bank. To use the
digital cash in the payment protocol the user needs to prove his ownership over
the digital token or cash. (Teo, et. al., 2003)
As
it can be established this digital cash system involves banks, merchants,
services providers and the customer.
This technology takes place in a TCP/IP (transaction
control protocol/internet protocol) environment,
already existent and available for any of the
parties involved, thus hardware
investment is little to none. This particular
payment scheme consists of four protocols: setup, withdrawal, payment, and
deposit. The user only sets up once and thereafter only needs
to carry out the remaining three protocols for digital cash transactions. A high security level is critical in maintaining
privacy and anonymity for the user, Brands’ scheme relies
on the bit lengths of parameter p and q for the security level, the longer the bit length
parameter, the safer the system is. Usually p and q have standard bit lengths of 1024 and 512
respectively. As long as proper thread priority is given to
digital cash system executables, optimal safety and operating system conditions can
be reached for both consumer and service provider. (Teo, et. al.,
2003)
This
is article then concludes that the Brands’ digital cash system is feasible to work in TCP/IP
networking environments. By maintaining proper parameter bit lengths and thread
priority the system does not consume noticeable time to complete in terms of
computation and communication while providing high security and privacy for the
consumer. (Teo, et. al., 2003)
A Study on
Contents Distribution Using Electronic Cash System
As information is shared more commonly over digital
channels, concerns such as copyrights are becoming more important. The
Digital Rights Management is now adopting digital money systems in order to
protect intellectual property because digital cash
is an independent, untraceable, secure, and transferable form of payment over
digital channels. Since digital
money can trace double spending, and double spending protects contents by
exposing the double spender’s identity,
digital cash is a fool proof way of guarding against illegal redistribution of
intellectual property and materials. Digital money
can also be used to deter illegal content copying and distribution by inserting
tracing content factors into the digital cash payment scheme that prevents
users from individual replication activity. By using this
function legal, anonymous purchasers can spread contents to other paying
anonymous users.
In conclusion using digital money in industries
like digital entertainment can increase the demand of products through easier and safer dissemination channels. Digital money
can trace who is illegally reproducing and distributing copyrighted
intellectual material, therefore
increasing security for authors and at the same time deterring lost revenue and
sales for digital media entertainment companies. (Lee, D.G., et. al., 2004)
Traceability of
Double Spending in Secure Electronic Cash System
When consumers purchase multimedia contents such as
multimedia books, online game, music, and movies by credit card, it exposes the consumer’s private information. Digital money on the other hand provides the
consumer with privacy and anonymity, maintaining the value of paper money and
its characteristics. A secure
electronic cash system can guarantee anonymity of legitimate users but also
provides traceability about illegally issued cash or laundered money. If illegal
activity did take place, it can cancel the anonymity of the digital cash in
order to protect the
bank. This study proposes four basic protocols regarding digital money: a
withdrawal protocol, a payment protocol, a deposit protocol, and double
spending check protocol where banks check whether digital money is doubly used. (Lee, H.J., et.
al., 2003)
A fair blind signature provides an anonymity-revocable mechanism which can cancel the user’s
anonymity under explicitly defined conditions. This model includes two protocols, a signing
protocol which includes users, brokers, and a trusted party such as a bank and
link recovery protocol. A trusted party
provides two kinds of fair blind signature schemes which are received from
users by the link recovery protocol. Type 1 transmits information which guarantees the efficient authentication on
message-signature pair. Type 2 enables
the trusted party to verify the sender of messages efficiently. (Lee, H.J., et. al., 2003)
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Distributed
Digital Commerce
Distributed digital commerce is an approach to
relocate digital commerce from client-server structures towards decentralized
architectures. Digital money can be used for payment without
involving a server-based bank and therefore supports the decentralized idea. Peer-to-peer (P2P) is a system architecture that
does not depend on the traditional client-server set up to communicate and
transact business processes. Every peer can share its resources by direct
exchange with other peers with all participants in this network holding the ability to act as both client and server. However, resource sharing is a problem concerning
P2P networks; whenever digital products are offered for free, there is an
unbalanced ratio between their providers and consumers causing overload
problems on the network’s
infrastructure. One possible solution is
to offer only digital goods that are liable for costs. Compared
to online –shops that deal only with digital goods, a dMarketplace
maintains the freedom and autonomy of its participants. (Schmees, M.,2003)
Most
people prefer to use cash when paying for liabilities or simply put, when shopping
online. Therefore
digital money is the solution to providing consumers with the equivalent of hard cash when
conducting business through a dMarketplace. Several requirements have to be met in order
for this to work; digital
money must be independent, the money itself and its security may not depend on
a single location and it must not depend on smartcards to be portable. Digital
money must never expire, must be available for use by any
participant and be exchangeable in any direction with business transactions. No one can
alter or reproduce it, and customers may not reuse digital money unless they
are getting it back. Ideal digital money
is always available and may be exchanged at any time. There is no
need for business partners to connect into a bank’s server to
transfer digital money. Digital money must feature
divisibility, so a certain
amount can be split into minor entities and their sum matches the starting amount. A peer may
contact a banking node at any time to convert a certain amount from an existing
account into digital money and back. (Schmees, M.,
2003)
Literature
Discussion
As it can be appreciated throughout the literature
reviews, banks and financial institutions play a key role in the adaptation,
implementation, and acceptance of digital money. Banks and financial institutions can play several
roles such as deterring double spending and money laundering, issue
verification services, lend transaction services, convert currencies from hard
cash to digital money and back, provide authorization services, and
simply lend a name of trust and solid standing to a transaction. Banks must also be aware that digital money can
support a decentralized structure that will usher customers away from the
traditional way of eBanking. Therefore it is critical for banks and
financial institutions to start implementing and researching ways to offer
digital money services in order to reap from the benefits this technology is
capable of delivering.
Digital
media entertainment as well as intellectual property providers and distributors
can also implement this technology and its safety features in order to ensure greater copyright compliance between consumers.
By adopting such a method of payment and distribution software and
intellectual property piracy can be stopped dead in its tracks.
The Size and Structure of Electronic Payment
Transaction
The newest technologies have made an almost
instantaneous delivery of vast amount of money possible. But there is a gap between the average or
small business and the multinational corporation regarding the uses of
electronic payment. Right now, physical
money such as coin and paper currency still accounts for the bulk of individual
money transaction by number. However, electronic payment transaction
dominates the values of transactions since large corporation are transferred to others
by electronic wire (Solomon, 1999).
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Insert Figure 2 Here
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THE PROBLEM
RESEARCH
PROCEDURES
According to Glass, Ramesh and Vessey's study, the
computing field can be broken down into three major subdivisions: computer
science (CS), software engineering (SE), and information systems (IS).
Different from CS and SE, IS focus heavily on Organizational concepts and
partly on Systems/software management and Systems/software concepts (Glass,
Ramesh & Vessey, 2004, p.3). Our paper falls into the subdivision of IS
because we focus on how digital money impact the business function of financial
institutions, banks and merchants. In
generally, IS predominantly use Evaluative research approach and use following
five research methods: Field Study, Laboratory Experiment, Conceptual Analysis,
and Case Study (Glass, Ramesh, & Vessey, 2004, p.4). Because of time
constraint, we cannot conduct field study or case study. The primary research approach and method we
use are evaluative deductive along with literature review and analysis.
CONCLUSION
“The only way to
successfully predict the future is to invent it.”
§
Alan Kay
It is clear that in the
area of electronic payment the industry has converged on the Secure Electronic
Transactions (SET) method of effecting payment. We have given an overview of
the size and structure of the current electronic payment
market. Clearly, electronic methods will
continue to grow worldwide. The unstoppable growth of Internet and the
tidal wave of electronic commerce indicate new forms of electronic
payment systems will continue to invent and develop in the years to come.
REFERENCES
1.
Glass, R. L., Ramesh, V., & Vessey,
computing disciplines. Communications of theACM, 47(6), 89-94. (Liying)
2.
Lee, D.G., Oh,
H.G., & Lee, I.Y., (2004) A
study on contents distribution using electronic cash
system.
Proceedings of the 2004 IEEE International Conference on e – Technology, e –
Commerce, and e – Service, IEEE Computer
Society. Retrieved January 2, 2005,
from IEEE Xplore Database. (Federico Fiallos)
3.
Lee, H.J., Choi, M.S., & Rhee, C.S., (2003)
Traceability of double spending in secure electronic
cash system.
Proceedings of the 2003 International
Conference on Computer Networks
and
Xplore Database. (Federico Fiallos)
4. Schmees, M. (2003, September) Distributed digital
commerce. Proceedings of the 5th
International
Conference on Electronic Commerce. 131-137.
Retrieved January 2, 2005,
from ACM Digital Library Database. (Federico
Fiallos)
5.
Solomon, Elinor (1999). Virtual money:
understanding the power and risks of money’s
high-speed journey into electronic space.
(Liying Wu)
6.
Teo, P.,
Sha’ameri, A.Z., & Ashourian, M.
(2003) Performance evaluation of brands’ digital
cash system in TCP/IP
environment. TENCON 2003. Retrieved
January 2, 2005, from
IEEE Xplore Database
(Federico Fiallos)