Digital Cash - Risks And Limitations

Digital cash systems pose unique risks for both online merchants and consumers, including questions about security, the ability to safeguard users' privacy, susceptibility to counterfeiting, and suitability as a medium for online fraud. All of these generate fears among e-commerce merchants over increased legal liability. While traditional monetary systems combat fraud by using closed networks that block unauthorized access to the system, the open networks along which e-cash payments are transmitted often lack adequate safeguards against fraudulent access. Therefore, they must utilize elaborate encryption methods to code the information in such a way that only authorized parties can read it. Furthermore, a new security apparatus and infrastructure must be devised to protect payment instruction transfers. A new public key infrastructure, which can be fairly expensive to implement, is required to diminish fraud risks.

Operational disruptions can generate serious hazards for e-cash systems. Even natural phenomena jeopardize e-cash operations. In 1993, a heavy snowstorm caused the roof-collapse of an Electronic Data Systems (EDS) facility that processed ATM transactions, interfering with 5,000 ATMs across the United Sstaes. Since digital cash is networked, difficulties with the Internet's physical networks, associated hardware, or software can compromise the system's efficiency and reliability. Computer viruses, damage to a centralized switching facility, or even software updates can all pose threats.

While digital cash renders online purchases more convenient for users, it poses risks for them as well. Foremost is a lack of anonymity. Unlike regular money, most e-cash systems track users' purchases, thus failing to protect their privacy. Concerns that anonymous e-money could encourage tax evasion and money laundering have led to demands that digital cash be traceable. The issuer's integrity also raises problems. The collapse of a branded network bank could free it of all liability for the e-cash it issued.

Finally, digital cash complicates the world's central banks' ability to formulate monetary policies and manage national monetary supplies. According to a 2000 Survey of Electronic Monetary Developments in 68 countries, conducted by the Swiss Bank for International Settlements, digital money works best in selected areas, such as public transportation, telecommunications, and potentially coin-free venues. E-cash easily crosses international borders, since any bank can issue digital cash and anyone can use it. E-money also can cheapen foreign exchange transactions, facilitating the shift from weak currencies to stronger ones and thereby impeding a country's effective management of its monetary policy.

The achievement of widespread, worldwide adoption will take time for digital cash. For this to take place, it must match old-fashioned, hard currency for liquidity, anonymity, reliability, and universal acceptability. The versions of e-money that come closest to mimicking the advantages of traditional currency seem the most likely to succeed in the long run.