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E-Cash could transform the world's financial life.
In his pinstriped suit and wire-rimmed glasses, Timothy L. Jones looks every bit the traditional British banker. Sure enough, he has spent a dozen years at National Westminster Bank PLG. But ask Jones what he is doing now, and he responds with an intensity worthy of a Silicon Valley entrepreneur. Leaning across a table, he waxes eloquent about his new enterprise, Mondex, and the future of the product he's selling: a new kind of electronic money.
Mondex, which was launched by NatWest, is not alone: A raft of companies are developing their own forms of electronic money, known as E-cash. E-cash is money that moves along multiple channels largely outside the established network of banks, checks, and paper currency overseen by the Federal Reserve. These channels enable consumers and businesses to send money to each other more cheaply, conveniently, and quickly than through the banking system.
Some of the E-cash players are faceless, dubious outfits that exist in cyberspace and can be traced only to a post-office box -- in the physical world. But there are plenty of others, ranging from techno-savvy startups with names such as DigiCash and CyberCash, to corporate icons Including Microsoft, Xerox, and Visa Citicorp is even developing what it calls the Electronic Monetary System, an entire infrastructure for using electronic money to be issued by Citi and other banks.
These companies are part of a mass experiment that could transform the way we think about money.
In the process, it could change consumers' financial lives and shake the foundations of global financial systems and even governments.
Digital money is the ultimate and inevitable medium of exchange for an increasingly wired world. With E-cash, you'll no longer need to carry a wad of bills in your pocket or fumble for exact change. Instead, you might carry a credit-card-size piece of plastic with an embedded microchip that you will "load" up with E-money you buy with traditional currency. Or, you might store your digital coins and dollars -- downloaded over phone lines from your bank or other issuer of E-money on your PC or in an electronic "wallet," a palm-size device used to store and transmit E-money.
This digital money will let you shop online, zapping money to a merchant over the Internet, or perhaps paying for a movie on demand over an interactive TV network. It also has the potential to replace cash and checks for everyday purchases -- in stores, restaurants, or taxis that accept E-cash. Businesses could also keep a stash of E-cash on hand for buying office supplies, or use it to transact directly with each other instead of going through banks and electronic funds transfers.
The State of the Revolution
In many ways, E-cash, which can be backed by any currency or other asset, represents the biggest revolution in currency since gold replaced cowrie shells. Its diversity and pluralism is perfectly suited to the anarchic culture of the Internet and the evolving web of networks known as the Information Superhighway. "Electronic commerce will literally change the way business is done worldwide," says James G. Cosgrove, Vice-President and General Manager for business multimedia services at AT&T. "We're about to see another revolution similar to the Industrial Revolution." Adds Richard W Crone, Senior Manager in the financial-services group at KPMG Peat Marwick: "We're in the beginning stages of the cash-replacement cycle."
But the advent of E-cash raises all sorts of questions, most of which remain unanswered: Who should be allowed to issue E-cash, and who will regulate those issuers. How will taxes be applied in cyberspace which transcends physical boundaries? Who will set the standards? How do you ensure that payments made over the Net will be secure? How will consumers be protected? How will regulators police money laundering and counterfeiting on private networks?
While regulators wrestle with these questions, technology is remaking the monetary system.
That's what Microsoft CEO William H. Gates III had in mind when he bid for personal-finance software maker Intuit Inc. He saw programs such as Intuit's as the gateway that would draw millions of consumers onto his online network where they could pay bills, get financial advice, or shop, perhaps paying him for access. But the Justice Dept. worried about Microsoft's reach, and he abandoned the deal on May 20.
Tough break, but it will hardly slow Gates down. Microsoft is working with Visa on a system for securing credit-card transactions over the Net. But that's just one piece of a much bigger problem Microsoft is trying to solve. Gates has dozens of programmers busy devising a sweeping system, Microsoft Network, to help people do business safely in cyberspace or more specifically, in Microsoft's own network and interactive TV systems -- using a range of payment options.
Microsoft won't reveal much about its E-cash plans, but, says Nathan P. Myhrvold, Microsoft's top advanced technology expert, "We're very interested in the area."
The should be. The stakes are enormous. Seamus McMahon, a vice-president at Booz, Allen & Hamilton, sees as much as 20% of total household expenditures taking place on the I-way just 10 years from now. If any operation, whether Citicorp or a startup such as Mondex, gained control of a new medium for even part of those exchanges, it would have the opportunity to charge royalties or fees for its use and earn interest on the E-money sitting in its accounts. Even a tiny charge, when applied to millions of transactions, would be highly lucrative.
E-cash could also create a competitive free-for-all. Because the Internet knows no boundaries, a company offering E-money can gain direct access to millions of consumers and businesses-no matter what state or country they are in. The retail banking market will collapse and give way to global competition," says Eric Hughes, president of Open Financial Networks, a Berkeley (Calif.) consulting firm. "Those [regional] separations don't work on the Internet."
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