THE NATION’S BUSINESS

E-cash: a looming financial revolution

It will change the way we think about money, eliminate automatic tellers, cheques, cash, and drastically alter the banking system

Peter C. Newman June 26 1995
THE NATION’S BUSINESS

E-cash: a looming financial revolution

It will change the way we think about money, eliminate automatic tellers, cheques, cash, and drastically alter the banking system

Peter C. Newman June 26 1995

E-cash: a looming financial revolution

THE NATION’S BUSINESS

PETER C. NEWMAN

It will change the way we think about money, eliminate automatic tellers, cheques, cash, and drastically alter the banking system

Last week’s G-7 summit, like the 20 other meetings that have been held since these circuses began in 1975, accomplished exactly what was expected of it: nothing much. But its session on international currency transactions, inconclusive as it was, at least drew attention to how difficult it is to control the speculators. They’re the men and women who spend their lives bathed in the green glow of computers programmed to send a trillion dollars a day, along with other currencies, coursing around the globe in search of an extra hundredth of a percentage point or two, which, in these quantities, can yield a fortune. That the value of weaker currencies (those of every country except Germany and Japan) are hurt in the process and that no taxes are paid on these transactions (and often not on the profits either) poses an apparently insoluable dilemma.

It’s about to get worse; a lot worse. In fact, the introduction of e-cash, the latest wrinkle on the information highway, is about to project the currency traders out into cyberspace, where they will be beyond the reach of any present regulations. The countless applications of e-cash (smart cards with imbedded microchips and special accompanying software) will change the way we think about money, eliminate cash and drastically alter the world’s banking system.

At the moment, e-cash remains in the experimental stage, but CyberCash software is already being sold and several networks (in the United States and in Holland) have been activated. Volume on one American system, First Virtual, is growing at the rate of 16 per cent a week. (Moving on-line this month is Internet’s Offshore Casino, which operates out of the Turks and Caicos Islands tax haven and is especially geared to accept e-cash.)

Once fully operational, financial transactions will take place through plastic e-cash cards with embedded microchips, their funds downloaded—for now—from banks or

other financial institutions. Just about every fiscal exchange imaginable will then take place electronically. Teller machines, cheques and eventually cash will become obsolete. “E-cash represents the biggest revolution in currency since gold replaced cowrie shells,” reported Business Week recently.

As at the start of any revolution, the full impact of e-cash is difficult to predict, but here are some of the issues:

• Unlike real money, which is issued by central banks and can be easily tabulated, no one can figure out how to keep track of the amount of e-cash. That’s not a theoretical hangup; the extent of a country’s money supply governs its monetary policy.

• Funds floating in cyberspace will become the ultimate tax haven. The more money that vanishes into the untaxable ether, the less tax will be paid by sophisticated computer traders—which will place an extra tax burden on society’s computer-challenged citizens, who will be least able to carry the burden. There’s a geographical quandary here, too, because the sellers of goods or services could be in one country, the buyers in another, and the computer that brings them together in a third.

• What kind of security will guard e-cash accounts? What happens when there’s a computer crash? Rights to privacy will vanish if a hacker breaks into the system, not to mention the likelihood of the biggest money heist in history. That’s how vulnerable electronic transactions are.

• Money laundering will become fast and simple. The existence of untraceable funds will encourage criminal activities.

• Currencies will become unmanageable. The peso devaluation earlier this year will, in retrospect, seem like a mild rehearsal for a time when only half a dozen or fewer of the world’s strongest currencies will survive— not including the Canadian dollar. This will mean a separation between nations and their own economies, the 21st-century equivalent of the church-and-state split of the 19th century. The consequences of such a move can only be guessed at.

• Significantly, most of the research on the means of transmitting e-cash is, at the moment, being carried on outside the banks. Yet, if they don’t move in and participate, or buy out some of the more viable encryption technology, banking, at least in its moneytransfer function, could lose business significantly by the end of this century.

It was the massive profit potential of e-cash that prompted Bill Gates, the Microsoft King, to take his $2.8-billion run at personalfinance software maker Intuit Inc. recently. The deal was blocked by the U.S. justice department, but Gates has no intention of giving up; the 70 million people now hooked into his Windows software will be the basis of his e-cash network. Four American banks (First National of Chicago, Chase Manhattan, U.S. Bank and Michigan National) already offer electronic banking through Microsoft.

It’s all part of the global village trend, which will eventually mean that multinational—or as they now prefer to call themselves, transnational—companies have no fixed address, and thus no jurisdiction for collecting taxes from them. These homeless corporate giants are rapidly dominating world commerce, with the United Nations recently reporting that fully one-third of of the world’s private sector productive assets are already owned by these new-breed, mega-companies. They practise “free production,” which means that they have removed the meaning of borders in their strategic considerations. All that counts is where something can be made most cheaply and efficiently. They are held together by fibre optic circuits and private computer networks. E-cash is a significant part of that revolutionary equation.

These firms are subject to virtually no accountability, except to their owners. Eric Kierans, that one-man think-tank who has studied the issue, has concluded: “What is a borderless world? It is a world emptied of every value and principle—except one, accumulation.”

That may be true, but like it or not, we’re all about to become children of that electronic world.