Digital Money (Part 2)

Ever since the time of the Bar Kochba revolt, currency has been a clear symbol of national sovereignty. The power to issue it rests solely with the state or its authorities (section 28 of the Bank of Israel Law, chapter 34 of the US Code). At the same time, currency represents the economic stability of the issuing state. In this respect digital money will be a revolution.

  • Most states are not themselves intending to issue electronic money (one exception being Finland, where an electronic wallet is being issued by a company wholly owned by the central bank). The result will be that the central banks will relinquish their legal monopoly to issue money or money substitutes.

    On 12th January 1997 the members of the Israeli Electronic Wallet Commission submitted their report to the Governor of the Bank of Israel. The Commission found that it would be undesirable for the Bank to be directly involved in the issue of electronic wallets and that such involvement might be a disincentive to appropriate technological initiatives being taken by the private sector.

  • Who will be permitted to issue digital money? The obvious answer is that the banks will deal with it. The European Commission has decided that such should be the case, although the USA is hesitating before similarly limiting commercial initiatives by private entities. In any event, this is a sphere which cries out not only to pure financial institutions but also, for example, to software and telecommunication companies and even Internet service providers. The Israeli Commission recommends that non-banking institutions should be allowed to act as issuers in Israel, subject to certain restrictions.
  • The issue of digital money by private concerns will necessitate appropriate controls. The Commission recommended that the issue of electronic wallets be supervised for the same reasons as the banks are superintended - protecting depositors and safeguarding the economy's system of payments. The main elements of control should include the licensing of issuers, regulation (security, compatibility between systems, liquidity, customer protection), reporting and audit. The obvious entity to supervise the issue of money or money substitutes is the Bank of Israel, by virtue of the powers vested in the Governor of the Bank in accordance with existing law and having regard to the control already exercised over the banks by the central bank. However the task facing the Bank of Israel is not a simple one.

  • The central bank will have to exercise its power over concerns which are not banks at all since they will be dealing with the issue of money substitutes.

  • Entities outside Israel are already issuing digital money and offering it for sale through the Internet. It is difficult to see how the Bank of Israel will be able to supervise the issue of virtual money outside Israel, even if it is offered to Israeli residents. On the one hand this shortcoming opens the way to complaints by Israeli issuers, who will have to contend with foreign issuers whose licensing conditions are less stringent and on the other hand it constitutes a breach in foreign currency control, since the customer will have to pay in foreign currency for the money substitutes he purchases abroad.

The Privacy Of E-Cash

Electronic cash is classified into identifiable and anonymous money, depending on one of its main characteristics. Identifiable money carries with it information about the identity of the person who drew it from the issuer. On its way back to the issuer it accumulates information about the purchases made through it. The issuer can know what was bought with the money, at what price, when, what the seller did with the money and more. Information about the user can be obtained and stored from a wide range of routine acts: purchases, banking transactions, health and insurance payments, entertainment etc. The information stored might be given to third parties for purposes of which the customer never conceived.

Anonymous money operates very much like cash. The moment it is drawn it can be spent without leaving traces. The route taken by the money can still be identified, if it has been forged, which should help deter possible forgery.

The security of information is paramount in creating confidence in electronic cash. In this context mention can be made of the tension between law enforcement and government interests on the one hand (which necessitate access to databases) and the individual's right to privacy on the other hand. In Israel, the use of databases is controlled by statute in the scope of Chapter Two of the Protection of Privacy Law, 5741-1981, although it is not effectively enforced. The use of electronic cash will necessitate strict enforcement of the Law's restrictions in order to create confidence in electronic cash as a means of payment.

Adaptation Of The Criminal Law

It is doubtful whether the forgery of electronic money would constitute the offence of forging currency under Israel's current criminal law, since the relevant provisions of the Penal Law, 5737-1977 only prohibit the forgery of bank notes or legal tender. Although payment with forged electronic currency could be construed as an act of theft or fraud, the very act of forging the electronic cash - for example cracking the computer protections and copying the bits in the wallet on the hard disk - is prima facie not prohibited by criminal law. A revision of the law is therefore necessary in order to make it clear that forging digital currency is just the same as forging bank notes. Moreover, concern is growing that anonymous digital money could be used for money laundering (see, for example: The law's agencies will have to make arrangements to frustrate these possibilities.

Israeli Electronic Cash

It is not clear how quickly we shall see "blue and white" digital cash, used only on computer networks, without a protective chip on an electronic wallet or smart card. The Electronic Wallet Commission has made a recommendation to the Governor of the Bank of Israel not to permit products which are based solely on software (and do not include a protective chip).

Any legislative arrangement which is formulated in connection with digital cash must be flexible so as to conform with changing technology and different commercial environments - both the physical environment and the virtual one that exists on-line. The test of such an arrangement will be its giving certainty to merchants who receive digital payment for their goods and to customers who purchase the money substitute in the hope and belief that it will be accepted and honoured by third parties as though it were real cash.

Back in January 1997 the Electronic Wallet Commission made a recommendation to the Governor of the Bank of Israel to act without delay to regulate the matter, since waiting until various projects are formulated might cause developers unnecessary expense because of the need to adapt their products to new laws and regulations. The necessary legislative amendments have yet to appear in the law books.

Translated by Word Power