The interest in electronic replacements for traditional forms of payment has exploded in recent years. In addition to many field trials for value stored in chips on plastic cards (smartcards), many major software, telecommunications, and financial services organizations are working on their own electronic payment techniques. While most of these aim at enhancing credit cards, a few companies have gone further and developed electronic replacements of traditional cash payment. However, the extent to which the different systems succeed in preserving the unique benefits of traditional cash and exploiting the new medium's advantages varies substantially.
Traditional cash money is a bearer instrument. It allows instantaneous payment from person to person. Cash payments are not normally traceable by a third party and therefore offer privacy. On the other hand, transporting, protecting, and refreshing coins and bank notes make them very costly for banks to handle. Bank notes can be forged on sophisticated color copier machines, coins are too heavy to carry around in any large number, and both are easily lost or stolen. Because coins are virtually indistinguishable, and coins and bank notes can be passed from person to person many times without the involvement of a bank or other third party, cash is the preferred method of payment in criminal activities like extortion, money laundering, and bribery. Another inherent shortcoming has become particularly confining of late: the requirement for physical proximity of payer and payee.
The introduction of debit and credit cards has helped to overcome many of these problems. With these payment forms, the actual value resides at all times within the banks, and so the risks of large-scale theft and loss are reduced. A fundamental problem of these payment forms is that payments must be verified on-line by the bank; this makes transactions more expensive and can lead to unacceptable delays. Another problem is that the actual transfer of value is performed by banks, from source to destination account, and thus payments are inherently traceable. This traceability enables intrusive profiling of spending behavior and, by inference, all sorts of other characteristics on personal information. Data protection laws can offer only limited protection against criminal use of spending and inferred habits, since such use typically becomes visible (if at all) only once the damage has already been done.
Electronic cash can combine the benefits of traditional cash with those of payment by debit and credit card, while circumventing both their shortcomings. As with traditional cash, electronic cash should have high acceptability and be suitable for low-value payment from person to person. With the possible exception of on-line payment platforms such as the Internet, it is preferred that payments be verifiable off-line, without the bank's involvement, for reasons of cost-effectiveness and speed. To facilitate electronic cash payments over the phone and the Internet, physical proximity of payer and payee should not be necessary.
Moreover, electronic cash should offer privacy of payments. In particular, payments by an honest payer should be untraceable, and information about transaction content should remain privy to payer and payee. Yet a payer ought always to be able to trace the payee; traceability suits electronic cash just as little to extortion, money laundering, and bribery as a check or wire transfer. Lastly, as with payments by debit and credit card, electronic cash should be convenient to store and transport, while protecting users against loss, theft, and accidental destruction.
A basic model
Each participant in an electronic cash system is represented by at least one hardware device, equipped with a chip having computing capabilities and nonvolatile memory. How to embody the devices depends on: the target payment platform (say, a PC, possibly in combination with a PC Card or a smartcard, may be used for Internet payments, while a hand-held device with display and keyboard is more appropriate for on-the-street payment); the offered functionality (smartcards may be most appropriate for purposes of cross-platform portability); and the required security and privacy levels. When the holder of an account at a bank that issues electronic cash wants to withdraw some of it, his computing device engages in an execution of a withdrawal protocol with a computing device of the bank, when connected to one of its terminals (by direct or infrared communication, dial-in, the Internet or other methods). At the end of the protocol execution, the computing device of the account holder holds an amount of electronic cash, represented in some suitable form, and his bank has charged the account holder by taking an equivalent amount of traditional money out of his bank account and moving it into a float pool; electronic cash is pre-paid by the account holder.
To transmit to a payee who accepts electronic cash issued by the payer's bank, the account holder connects his computing device to that of the payee (again, by direct or remote communication), and the two computing devices execute a payment protocol. As a result, the representation of the electronic cash amount held by the account holder's device is adjusted to reflect the new amount. In the case the payer's bank is not involved in the payment, the payee's computing device should correspondingly represent in some way the received payment amount; this is called an off-line payment. Otherwise, the payee must communicate with the bank during the payment; this is called an on-line payment.