The End Of Money?

You're cruising the Net, hopping from link to link with your favorite browser. In a small window in the corner of your screen sits a ledger. "$100.00," it reads. As you land on a favorite Web site, something strikes your fancy--an annotated bibliography of every article ever written about Sandra Bullock! Only five bucks. You click on a button, and the file is downloaded to your computer. That tiny ledger on your screen now reads "$95.00."

It feels like a computer game. Until now, it has been a game--the currency, electronically minted by a company called DigiCash, was imaginary, and the "cyberbucks" were traded as freely as Monopoly money. But starting this week, it gets real. The Mark Twain Bank of St. Louis, Mo., is using the DigiCash technology to allow holders of a special account to download assets directly into its computer. That running on-screen total will now refer to cold, hard cash, sitting inside your trusty Windows box as a string of digits. (If your hard disc crashes, those hard-earned simoleons will vaporize with the rest of your data-yet another argument for making frequent backups.) And with a click of the mouse, you've not only spent a fin, but bought into the exciting -- and unnerving -- future of money.

Our millenniums-old experience with hard currency--from shells to metals to pa-per-is coming face to face with the Age of Bits. Though one purveyor of this new medium--"e-money" --has boasted "We can replace cash quicker than the motorcar replaced the horse," it's not yet time to bid a final farewell to your beloved greenbacks. But a new industry is emerging from both within and outside the financial-services world, convinced that a significant percentage of the transactions now made with cash will soon be made with a more versatile kind of digital replacement.

The new entrepreneurs are in business quite literally to make money. Their ideas include a wide range of Internet-based payment services from secure credit-card transactions to cashlike schemes. Then there are the so-called smart cards (they look like credit cards embedded with a glossy computer chip) that store monetary value. MasterCard will test its stored-value cards in Australia this year; Visa will offer cash cards to visitors to the 1996 Olympics. Perhaps the most ambitious player of all is Britain-based Mondex (page 64), whose goal is no less than to create an electronic world currency.

Visionaries contend that eventually all of these payment services will be linked. Within the next few years, says Frank Trotter III, a Mark Twain Bank VP, "you will have the ability to send a friend e-mail with money at the bottom of it. You can transfer that to a card, walk into your local retailer and use it to pay for something. You will even be able to transfer money from card to card, or directly into your computer." You think the ATM changed your spending habits? Wait until e-money gets you.

The idea of electronic money is not particularly novel. For decades, trillions of dollars in trades, bank transactions and currency exchanges have moved electronically. Credit cards and automatic tellers have dug deeply into the fabric of American life. And millions of subway riders and pay-phone callers routinely use coded cards that in essence are a cyber kind of money. But e-money drives the technology straight into our wallets. We've heard the techno-babble for years about a cashless society. But only now is the propeller-head contingent putting its digits where its mouth is.

There's definitely an argument for e-money. Contrary to public perception, cash costs money. It's expensive to count it, to move it, to store it and, especially, to protect it. As Mondex's CEO Tim Jones says, "Cash is easily stolen, and once it's stolen, it's easily used." The current alternatives to cash aren't cheap, either. Once you factor in processing, the 30 billion checks written each year cost banks (and ultimately, us) up to a buck apiece. And credit cards cost merchants a fee averaging 2 percent of the charge.

Figures like that make smart-card manufacturers salivate. They assume that merchants are hungry for a new way of collecting receipts. What's in it for consumers? Not only the convenience of never having to dig for change, but also a host of features that money can't buy. Like a means to control spending. "If a family had a college student, they could allow him to load a certain amount of money a month," says Diane Wetherington of MasterCard, which plans to smarten up every single one of its credit cards by 2000. A more draconian family could even limit which purchases could be made with the card. (Books OK, beer uh-uh.) Still, the real urgency behind the e-money revolution is coming from the brushfire spread of the Internet. On the Net convenient and secure forms of payment are desperately needed today.

There's a variety of different approaches to making purchases on the Net. The most basic involves creating a secure channel for people to use their current credit-card numbers. MasterCard and Visa have agreed in principle to develop a joint standard, but when Visa joined with Microsoft in releasing its own standard last month, MasterCard called foul, and then released its standard. In any case, credit cards have limited value on the Net; they have high minimum costs and can be used only in transactions with authorized merchants.

What you really want on the Internet is a way to make smaller purchases, particularly when you are buying information directly. One company, First Virtual Holdings, is already providing this through a scheme that aggregates charges so your credit card isn't loaded with 50-cent purchases. Ultimately, though, people want the equivalent of cash on the Net. The goal is to allow you to move your e-money around freely, paying it not only to "authorized" merchants but to friends, creditors, ad hoe entrepreneurs and maybe a digital gambling hall.

Countless new businesses will be enabled by the liberation of money from the landlocked world of atoms: think of the Internet as an endless mall, with unlimited accessibility, with no fee for setting up shop and almost no labor cost to maintain it. "The beginning of the biggest market in history!" says First Virtual founder Lee Stein. It is no wonder that e-money has become a favored apocalyptic device among science-fiction writers. Typical is Bruce Sterling's "Heavy Weather," which describes an e-money dystopia where "all workable standards of wealth had vaporized, digitized, and vanished in a nonstop hurricane of electronic thin air." Obviously none of the players promoting digital cash believes such dire predictions will ever be fulfilled. But the advent of e-money introduces a host of threats that may develop if the technology is implemented carelessly or improperly regulated or not regulated at all. Among them:

E-money purveyors are confident that they have initiated safeguards that will prevent outlaws from establishing desktop mints. The two best ones involve tamperproof chips and strong cryptographic protocols that can prevent even techno-savvy crooks from copying the specific strings of bits that make up the e-money certificate of value. But can mistakes happen? Netscape Communications Corp. thought its security was sound when it rolled out its standard for Internet commerce. Then two Berkeley graduate students demonstrated how a crafty outsider could crack a "secure" transaction in just under a minute. Netscape fixed the flaw, but the episode--along with the discovery of subsequent bugs--was sobering. "The Netscape crack was good for the industry," says Bruce Schneier, author of "Applied Cryptography." "It taught people a lesson: this stuff is hard."

Right now, anyone can put up a shingle and peddle his own private form of currency. Of course, you have to convince other people that the money will have value. Generally, only governments and banks have that confidence. But traveler's checks aside, we haven't accepted bank-issued cash for more than a century. Are we ready now?

Would the U.S. government ever consider creating its own e-money? Two weeks ago that possibility was raised at a congressional hearing by Philip Diehi, director of the U.S. Mint. But Federal Reserve vice chairman Alan S. Blinder, testifying at the same hearing, advised against it for now, on the basis that government involvement might stifle the innovative impulses of the e-money community.

Unlike cash, e-money has the potential to be traced, just as credit cards are now. In theory, every single transaction, from paying the nanny to buying a copy of Hustler, could be scanned by prying eyes. "The good news is that there are new technological possibilities that could protect privacy," says Marc Rotenberg of the Electronic Privacy Information Center. "The bad news is that the U.S. has not taken seriously the possibility of pursuing those options." One company that takes it very seriously is Digicash, founded by cryptographer David Chaum, a lifelong believer in personal privacy. " We call it one-way privacy. When you buy something you aren't forced to reveal who you are, but you know who they are and have proof they took your money," says Chaum.

Another concern is that smart cards may evolve into a universal ID with a wealth of personal information about the holder--information the holder can't necessarily control. "We think everything will migrate toward a single card," says Visa CEO Carl Pascarella. "I might want to have my driver's license, frequent-flier miles, medical information and HMO data on my card." Privacy experts blanch at this prospect. "I want to know what the risk is," says EPIC's Rotenberg. "When they swipe my card at the health club, are they also getting my insurance information?" Christian fundamentalists have also spoken out against that idea, identifying smart cards with the Biblical mark of the beast without which "no man might buy or sell."

What if e-money goes in the other, untraceable direction? Even ff some governments regulate audit trails, there is already active speculation about the establishment of offshore Internet-based banks--which could be just as easy to reach via the Net as the bank around the corner. "A government cannot tax what it cannot see," says John Perry Barlow, cofounder of the Electronic Frontier Foundation. "It may be that because of e-money, income tax will be voluntary, and governments can only collect on tangible goods."

Stanley Morris, who heads the U.S. Treasury's Financial Crimes Enforcement Network, worries that e-money might benefit money-launderers. A million dollars in $20 bills weighs 111 pounds. A cool million in e-money weighs zero, and moves at the speed of light. "Suddenly someone may be coming up with a technology that says you can buy your dope and put the money on somebody else's card," says Morris. "The government will have no ability to know you bought it."

People are often conservative with their assets, reluctant to step into the unknown. Recognizing this, e-money purveyors are now backpedaling from initial exclamations that their products represent giant leaps. For example, Magdalena Yesil, a CyberCash company VP, insists, "Our cash implementation is completely boring." But Sholom Rosen, who helped develop an e-money system for Citicorp, speaks plainly: "It's definitely new, it's revolutionary--and we should be scared as hell." As with other technological leaps into the void, however, e-money is too rich to pass up.