[Clips] Soft cash in, hard cash out

[R.A. Hettinga]

--- begin forwarded text


 Delivered-To: clips at philodox.com
 Date: Fri, 22 Jul 2005 08:10:17 -0400
 To: "Philodox Clips List" <clips at philodox.com>
 From: "R.A. Hettinga" <rah at shipwright.com>
 Subject: [Clips] Soft cash in, hard cash out
 Reply-To: rah at philodox.com
 Sender: clips-bounces at philodox.com



 <http://www.newscientist.com/channel/info-tech/mg18725091.800>

  Soft cash in, hard cash out

      * 23 July 2005
      * From New Scientist Print Edition.
      * Dana Mackenzie
      * Dana Mackenzie is a science writer based in Santa Cruz, California


 MONEY makes the world go around, but not always as conveniently as one
 might wish. There's never enough cash in your wallet; the coins in your
 purse only weigh you down. Then there is the pile of bank cards to squeeze
 in, and as if that weren't enough, store cards just keep multiplying.

 But that is all set to change. A raft of new technologies is appearing that
 will suck up that cash and dump it into a handy electronic device,
 liberating our pockets from crumpled notes, jangling change and wads of
 cards. These electronic alternatives are promising to bring about an
 explosion in the number of ways of paying for things and perhaps usher in
 currencies that work quite differently from dollars, pounds and euros.

 We are already used to paying with credit or debit cards rather than
 cheques or cash. But what if you want to make a payment online that is as
 anonymous as cash? An international system now being developed could do the
 trick. Other times you might buy goods with your frequent-flier miles. Or
 if you commute every day, you might use a payment card that will net you a
 discount on your next subway ride. You might even choose a payment system
 that's designed to benefit your community. And because it will all be
 computerised, the pain of managing all these accounts will be handled
 automatically.

 Today most currencies are issued by national central banks. But there is no
 fundamental reason it must be this way. Anyone can legally issue a
 currency. All it needs to make it work is a large enough community of
 people who respect its value. For that to happen, there have to be
 safeguards against counterfeiting - for an electronic currency this means
 cryptographic protection.

 And what about the hardware that will make wallets, purses and cards
 obsolete? In Japan, millions of people are already getting a taste of
 electronic cash in the form of a service run by the cellphone operator NTT
 DoCoMo. The company sells handsets with built-in wireless electronic
 payment systems for small cash transactions. It looks as though in the near
 future the mobile phone will double as a personal banking device, keeping
 track of your money and maintaining order in your electronic wallet.
 The coming of cards

 Is it really possible that the way we pay for things will change so
 dramatically that the need for cash might completely evaporate? The story
 of credit cards suggests that this is not a pipe dream. Just two
 generations ago, they did not exist: they arrived in the US only in 1958,
 the UK had to wait another eight years, and Australia eventually caught up
 in 1974. Yet worldwide, there are now more than 1.7 billion credit cards in
 circulation. Credit cards, and their younger siblings debit cards, dominate
 our payment habits.

 But they are no longer alone. Other payment options have begun to appear on
 the scene, and some have many key attributes of an alternative currency.
 Take frequent-flyer miles. As well as buying flights, AirMiles "earned"
 with British Airways can be used to pay for shopping at Sainsbury's
 supermarkets in the UK. Frequent-flyer miles given to Cathay Pacific
 passengers can even be used to pay for surgery at one private hospital in
 Thailand.

 While credit cards are used mainly for large or medium-value purchases,
 other options are starting to appear for "micropayments" down to just a few
 pence. In Hong Kong, a smart card called Octopus, which was designed to
 speed access to public transport systems, has since 2000 also been accepted
 in shops as a way to buy low-value items like newspapers and drinks. And in
 London, the Oyster card now widely used to pay for journeys on London's
 buses and underground trains will soon go on trial in a similar system.

 Yet despite the high-tech alternatives, cash has proved remarkably hard to
 dislodge from our lives. In the mid-1990s there were high hopes for e-money
 systems such as Mondex and Visa Cash, but they failed to catch on. At the
 time, it was argued that electronic money was more convenient than cash.
 But it turned out that most people did not agree.

 Perhaps these attempts were too ambitious. "One thing that Mondex did wrong
 was that it tried to be everywhere," says Jean Camp of Harvard University,
 the president of the International Financial Cryptography Association. On
 the other hand, a new payment system can't afford to be too small, either.
 It's the chicken-and-egg problem: merchants won't accept a new currency or
 payment method unless they know that customers are going to use it;
 customers won't use it unless they know merchants will accept it. As Camp
 puts it, "To succeed, you have to pick the right kind of 'everywhere'."

 For the Oyster card, "the right kind of everywhere" means the nearest bus
 stop or station. With 150 tube stations and 8000 buses across London
 accepting it as payment for journeys, 3.2 million people already use one.
 In January payment devices in 3850 London shops will allow people to use an
 Oyster card to pay for such things as newspapers, food and drink. At the
 same time the cards are expected to entirely replace cash on buses.

 That large pool of existing users is why Oyster might succeed where Mondex
 failed. But it started out with humbler ambitions. Originally it was seen
 as a straight replacement for the magnetic-stripe cards previously issued
 as tickets, says Charles Monheim, director of the Oyster project at
 Transport for London, which oversees public transport services. Oyster
 cards are read simply by waving them in front of a pad, and these
 "contactless" reader pads were deemed more reliable than the magnetic
 readers they are replacing. But they also allowed passengers to charge up a
 card with credit for multiple journeys, and to have free travel once they'd
 spent a certain amount in one day. It's that flexibility and adaptibility
 that gives Oyster extra potential.

 According to Leo Van Hove, an economist at the Free University of Brussels
 (VUB), commuters in Hong Kong use their Octopus cards on average 24 times a
 month, and 15 per cent of those purchases are for items other than
 transport tickets. That works out at one retail purchase a week on the
 Octopus card.

 Like Octopus and Oyster, other e-payment systems are concentrating their
 efforts on a limited geographical range. In the mid-1990s, when Renah
 Persofsky was the chief executive officer of the Bank of Montreal's
 e-commerce division, she witnessed the failure of numerous digital cash
 schemes. "I felt that I knew how to make it work," she says, and the
 electronic micropayment system she has since set up has drawn on that
 experience. Called Dexit, it began by blanketing downtown Toronto. Now the
 system counts about 50,000 users and 500 merchants in the area.

 For users, one of the big advantages of the Dexit card over ordinary cash
 is that it can recharge itself automatically. "We'll move funds for you
 from any bank in Canada," she says. "That way you are always sure that
 there is something in your wallet." It's like having a wallet that goes to
 the cash machine for you.

 Strictly speaking, the Dexit card isn't even a card any more. The chip that
 started out at the heart of the smart card can now be built into a keyring
 tag, or a sticker that you attach to your cellphone or PDA. And customers
 can sign up to be sent an SMS message to remind them when their account
 needs a top-up.

 All this activity has not gone unnoticed by the giants of traditional
 electronic payment. After watching from the sidelines for a decade, Visa,
 MasterCard and American Express have started issuing cards that can be used
 to pay sums as small as a few pennies simply by waving them in front of a
 reader. No signature or PIN required.

 Japan shows where these payment cards may be going. Last year NTT DoCoMo
 began selling mobile phones containing chips based on Sony's FeliCa smart
 card system (New Scientist, 24 July 2004, p 26). Today there are more than
 3.7 million of these i-mode FeliCa phones in circulation. Users can use the
 phones to pay for transport or goods at hundreds of locations across the
 country. Other mobile phone companies are following suit. Nokia and Philips
 are developing their own versions of the technology, and the three
 companies have signed agreements to make their systems compatible.

 Electronic payment systems may also help alternative currencies grow. Many
 such socially or politically motivated currencies have been around since
 long before e-payment systems became practical. Ithaca Hours, a currency
 circulating in the college town of Ithaca, New York (population 30,000), is
 one well-known example. Founded in 1991 by a social activist called Paul
 Glover, Ithaca Hours reflects the idea that an hour of labour should always
 have the same value, no matter whether it's for babysitting or running a
 company. The currency itself is printed on locally made paper by a local
 printer. There are over 12,000 Ithaca Hours in circulation, and around 600
 members are listed in the Ithaca Hours directory, including both
 individuals and merchants who accept Hours as payment. Ithaca Hours has
 spawned well over 30 imitators in the US alone. And there are other
 organisations with similar objectives, such as Time Banks.

 Ithaca Hours has inspired a new generation of high-tech currencies.
 "Conventional money is, in my view, not designed for social purposes," says
 Bernard Lietaer, who worked for Belgium's central bank on the introduction
 of the euro but is now based in the US. "It is more appropriate for
 competitive purposes." Lietaer thinks the solution to many social problems
 lies in linking economic reward to social behaviour. "We've been throwing
 money at social issues for a long time, but it just doesn't work." As an
 example, he cites the paradoxes thrown up by the US healthcare industry.
 "It makes money when you're sick, and it's remarkably effective at doing
 that," he says. But if you stay healthy, only the health insurance
 companies win out. "Imagine that you could earn a currency by doing healthy
 things. That is one of the projects I'm working on, a health-promoting
 currency that would tie in with insurance companies." The root of all evil?

 Lietaer believes that social currencies will soon go mainstream. It's a
 matter of merging two separate concepts: local currencies that have the
 social goals but not the means to implement them, and business currencies
 such as airline miles and customer-reward programmes that have commercial
 backing but no social purpose. "I can tell you that they are about to
 merge," says Lietaer, who is now a visiting professor at Naropa University
 in Boulder, Colorado. He predicts that the breakthrough will happen in the
 next three years, and that when it does it will be in the form of an
 electronic currency.

 Lietaer isn't the only one developing a high-tech social currency. Agnes
 Koltay, a Hungarian based in Dubai, and Daniel Nagy, who lives in Toronto,
 are treading a middle path between Lietaer's idealism and the
 profit-oriented pragmatism of Oyster, Dexit and their ilk. The two have
 come together in their spare time to create ePoints, a system that people
 can use to create their own electronic currency. Unlike the ill-fated
 internet currencies of the 1990s, the payment system itself is not intended
 to make a profit; that will come through the distribution of enabling
 software, allowing the payments themselves to be fee-free, just like cash.
 "Some other systems make the mistake that they want to keep it very
 centralised, to make a profit on exchange rates and service," Koltay says.
 By contrast, ePoints will be totally decentralised, much like the internet
 itself. Anyone can set themselves up to issue electronic ePoint "notes",
 and anyone can use them (see "An e-currency of your own").

 That might sound radical, but in fact a world full of different currencies
 is nothing new. As far back as the 17th century, privately printed
 currencies coexisted with, and often outnumbered, government-issued cash in
 Europe and America. In the future the single currency economies we've been
 living in might seem like a quaint hiccup. An e-currency of your own

 Anyone who has used eBay will know about PayPal. It's a system that allows
 individuals selling goods to receive payments from the buyer's credit card,
 a facility normally reserved for established businesses. PayPal has made
 person-to-person payments possible, internationally as well as nationally,
 but it has downsides. Every time money is withdrawn from a PayPal account
 into a normal bank account, PayPal takes a cut. And unlike cash payments,
 PayPal is not anonymous.

 The ePoints system set up by Agnes Koltay and Daniel Nagy is different. It
 allows anonymous person-to-person transactions over the web, and though the
 software itself costs money, Nagy says every subsequent transaction will be
 free. Charles Cohen, founder of failed e-currency Beenz, supports this
 thinking. People will only adopt new payment systems if they are free, he
 says.

 To use ePoints, a person requests an ePoint "note" - in reality an
 encrypted code that represents some amount of ePoints - from an ePoints
 issuer. The issuer is the person or body that administers the system and
 ensures that ePoints aren't duplicated. The issuer cryptographically signs
 each ePoint note in exchange for some money of equivalent value in another
 currency, say pounds or dollars, or for some work done, or as payment for
 some other service.

 When someone spends ePoints, the person receiving them in payment contacts
 the issuer to verify they are not counterfeit. The cryptographic algorithms
 ensure the issuer cannot tell where the ePoint originated, nor the chain of
 hands it has passed through, only that he has been asked to confirm an
 ePoint is authentic.

 But anonymity alone is not going to make people use it. If ePoints is going
 to catch on, it will have to find a niche that makes it attractive to a
 large pool of users. That's where ePoints' cheap and borderless nature
 comes in. ePoints can be seen as an international electronic currency and
 this, Nagy and Koltay believe, along with security and anonymity, will
 provide the niche it needs.

 ePoints may also be attractive to companies that want an electronic method
 for handling payments of a few pennies. Credit card companies charge a
 minimum fee for each transaction they process, and for transactions of less
 than a few dollars this can represent a large slice of the total. In
 return, credit card companies provide a high level of security. But as Nagy
 points out, this is overkill when only small sums are changing hands. A
 penny transaction should not need a lot of security, Nagy says. A thief
 will gladly invest five pennies of effort to steal a credit card, but no
 smart thief will spend five pennies to steal a one-penny ePoint.

 Nagy and Koltay are not the only ones aiming at the micropayments niche. In
 spite of the rocky beginning of digital cash in the 1990s, several
 alternative micropayment systems have sprung up, including Peppercoin,
 PayCash and Open Money.

 And recently a big name has shown interest. Nagy says a test version of the
 entire ePoints software system was recently downloaded by engineers at
 Google. News reports suggest the company will soon launch a competing
 service to PayPal. As with a cash transaction, only the two parties to the
 transfer need know each other's true identity.

 --
 -----------------
 R. A. Hettinga <mailto: rah at ibuc.com>
 The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
 44 Farquhar Street, Boston, MA 02131 USA
 "... however it may deserve respect for its usefulness and antiquity,
 [predicting the end of the world] has not been found agreeable to
 experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'
 _______________________________________________
 Clips mailing list
 Clips at philodox.com
 http://www.philodox.com/mailman/listinfo/clips

--- end forwarded text


-- 
-----------------
R. A. Hettinga <mailto: rah at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

---------------------------------------------------------------------
The Cryptography Mailing List
Unsubscribe by sending "unsubscribe cryptography" to majordomo at metzdowd.com