The total virtualisation of payments finds striking expression in digital money. These are bits of data, representing money, which are purchased for consideration from an issuer and stored on the computer's hard drive or in an electronic wallet. Legally, digital cash constitutes the issuer's obligation to convert it into legal tender when the electronic bits are returned to it.
Digital money can solve many of the drawbacks involved in credit cards as a means of payment over the Internet: the use of credit cards is awkward and requires numerous particulars to be input; they are not suitable for small payments called micro-payments; their charge dates are inflexible; the credit card customer's privacy is not maintained since the transaction data is divulged to the credit card company or bank; credit cards are essentially suitable for the purchase of products by individuals rather than contracts between commercial companies and they are "one-way", that is to say that only the card holder can pay the site, whilst the site cannot credit the holder with payment.
Set out below is a schematic description of the steps involved in the purchase and use of electronic currency.
- The customer remits full payment in money to the currency issuer.
- In consideration the issuer loads the customer's electronic wallet or appropriate computer program with the bits representing the digital value of the amount purchased. For example, if $ 100 is paid to the issuer, it will transfer 100 virtual dollars to the customer (or a similar amount, net of commission). At this stage the digital money can be given a unique number to identify it.
- At the same time the issuer keeps the money that it has received from the customer in a suspense account until it needs to convert the bits which it has sold into legal tender.
- The customer then makes payments with the digital money. Since it is a substitute for cash, he can purchase cheap products (e.g. a newspaper) or valuable services (e.g. an insurance policy).
- The merchant which has received the cash can return it to the issuer and convert it into legal tender or it can in turn pay it to another trader which honours the same payment medium and so on until the bits find their way back to the issuer which will convert them into real money.
- If the digital money has been given identification numbers, the issuer will now mark those numbers as used currency. Thenceforth, digital currency bearing the same numbers will not be redeemed. In this way the risk of forgery is reduced, although the possibility of identifying the money with its drawer is increased in such a way as might infringe the user's privacy. In order to overcome this problem "blind signature" techniques have been developed which enable the issuer to sign the digital currency through a virtual envelope in such a way that it does not know the drawer's identity.
- At the time of conversion the issuer subtracts the consideration from the customer's suspense account. This is a possible source of profit for the issuer since it can invest the customer's money during the interval. Thus, issuers might not charge customers a purchase commission (see, e.g. Internet Dollar). Similarly, in some cases the electronic money might be lost (e.g. if the electronic wallet in which it is stored is destroyed or the computer's hard disk crashes) and the bits may never be redeemed.
Electronic cash projects are already in the early stages of implementation on the Internet (e.g. DigiCash or CyeberCash). Having regard to the size of the market and the power of the players, it is only a question of time until digital money becomes a dominant means of payment. It will be difficult for the law to keep up with the rapid pace of technological innovation. The legal arrangement will have to provide an answer to a range of technological possibilities and applications in respect of electronic money, both on-line and physically, by means of electronic wallets (smart cards which can be recharged with money). A flexible and open arrangement, which can be modified relatively easily is therefore necessary, otherwise at the end of protracted legislative proceedings it will be found that the law is irrelevant to the new commercial and technological reality.
Is digital money legal tender? The clearest indicator of legal tender is that it can be used for the payment of debts and the refusal to accept it is a criminal offence (section 489 of the Israeli Penal Law, 5737-1977). In Israel, the New Shekel Currency Law, 5745-1985 provides that the currency of the State is the shekel. Although digital money can represent an acknowledged currency, e.g. the US dollar or the Israeli shekel, it can also represent a completely new currency, created solely for Internet trade, like an Internet-dollar or E-cash. It is almost certain that this type of electronic money would not be deemed legal tender.
Next Article: several of the specific legal issues
raised by digital money.
Translated by Word Power