Smart Card Bulletin: October 1996 To Regulate or Not to Regulate? By Theodore Iacobuzio US banking regulators are seeking comment on whether, and under what circumstances, it should take action over electronic money. Though US banking regulators are focusing more and more of their attention on smart cards, most insiders both at banks and at advocacy groups say they are not overly concerned with the degree of scrutiny the new technology attracts. In fact, contradicting recent alarmist press reports, they told CI they were glad the federal government has decided to call for comment. Through a process of public hearings and forums beginning last month, two powerful federal agencies sought to air important regulatory issues involving all aspects of electronic money, with a special emphasis on smart cards as among the most mature technologies. It is all part of an effort to find out more about the new payment system now, rather than later, when it is up and running. This way, according to the government, the industry can both educate the regulators and address their concerns before the market has become too established to change easily. "The regulatory agencies are actually working quite well to understand the technology and not to rush to regulate," said Catherine Allen, president of the Santa Fe Group, a New Mexico-based electronic commerce think-tank and the former head of Citicorp's smart card initiative and board member of the Smart Card Forum. "The hearings are being held to get the issues into the open," Allen said. "I don't sense heightened concern from the industry." In fact, many smart card insiders more suspicious than Allen were considerably mollified having heard Treasury Secretary Robert Rubin address an agency-sponsored forum on electronic money on September 19. The forum, which attracted some of the nation's top bankers, concentrated heavily on smart cards. In his keynote speech, Rubin explicitly sought to restrict government's role in the new technologies to issues of law enforcement: fraud, money-laundering and privacy. "As we think about these concerns, let us put aside our ideological views with respect to regulation and take an intensely practical approach to finding the right balance so that we can minimise impediments to growth and at the same time meet the needs that I just described," Rubin said. "It seems to me that as we look at the benefits and ask the questions, we must achieve two objectives at the same time: minimising impediments to the growth of electronic money, but at the same time, address the difficult issues it raises in an appropriate fashion. "To some extent, there may be trade-off judgements that will have to be made, but I believe to a large extent the meeting of these two objectives will be complementary." Rubin said that electronic money should increase, rather than decrease, access to financial services and the mainstream economy for those in the inner cities or poor rural areas. "This is a great challenge and I think an absolutely critical challenge given that these groups lack access to computers, financial services and many of the benefits of our modern economy". But his comments were so vague as to limit any discussion of possible US government intervention. While the Treasury Department meeting was also notable for Citicorp chairman John Reed's assertion that the Internet is not yet secure enough for banking transactions, its major effect was to reassure most smart card insiders not to expect any aggressive move by the US government to regulate smart cards. On the contrary, they felt the federal government's hitherto hands-off approach is a textbook example of how regulation of a new technology should proceed. The latest efforts at regulatory clarification come not from the Treasury Department, but from the Federal Deposit Insurance Corporation (FDIC), the US banking agency established during the Great Depression that both insures bank deposits of up to $100,000 and oversees the safety and soundness of banking practices. The agency has sought comment on whether the funds underlying smart cards are deposits and hence insurable under the law. It has also issued its own opinion that for most purposes, funds underlying smart cards are not in fact insurable. So eager is the FDIC to air the issue, that it took the unusual step (for a bank regulatory body) of calling a public hearing on September 12 in Washington. There, banks, technology vendors, card associations and industry groups aired their opinions. And indeed, most of the bankers commenting pleaded with the government to let the market grow before imposing any kind of rigid regulatory structure. The Federal Reserve Board raised a thornier issue when it recently sought comment on its effort to exempt from Regulation E those stored- value cards bearing less than $100 in value. Reg E, as it is called, establishes banks' responsibility for providing an audit trail for money moving through the electronic funds process. "This is sort of technical bank-lawyer stuff that people are going to have to know about but that is going to have very little effect on how the market develops as a whole," said John Wright, vice president and senior counsel with Wells Fargo Bank and head of the legal and public affairs policy arm of the Smart Card Forum, the leading industry advocacy group. Regarding the FDIC request for comment, he said:"It depends how you structure it. I dont think that at the level of what consumers are going to do, they would be deposits." Wright added that as it was proposed, he did not think the Reg E piece represented something people ought to worry about. New York Times: Monday, October 28, 1996 Regulators Vexed By Gambling Over Internet By JAMES STERNGOLD There are few patches of legal turf the states guard more fiercely than gambling, which is why it seemed strange this summer when the National Association of Attorneys General urged the federal government to seize control of wagering on the Internet -- even though hardly anyone was doing it. Even more bizarre was that the recommendation, including an alarming proposal for arresting gamblers from in front of their computers, was turned down by the Justice Department. ``The department does not agree that federal law should be amended so broadly as to cover the first-time bettor who loses $5, particularly when Internet gaming is expected to mushroom and federal resources are shrinking,'' John C. Keeney, an official in the criminal division at the Justice Department, wrote the states. The episode highlighted the growing anxiety and confusion over one of the least developed, but potentially most vexing areas of Internet business - gambling. The reach of the World Wide Web is erasing not only borders but also the ability of the authorities to control wagering (not to mention their ability to tax it). And gambling over computer networks is still new enough that it remains unclear exactly what is legal and what is not. ``We built it to be Russian-proof, but it turned out to be regulator proof,'' said Craig I. Fields, the former head of the Pentagon agency that helped create the Internet during the cold war, and who is now vice chairman of Alliance Gaming, a Las Vegas concern developing on-line gambling. In principal, gambling by computer sounds promising, placing an increasingly popular habit, which can quickly become a compulsion for some individuals, within just about anyone's reach. Indeed, nearly every worker in the country with a personal computer and a few minutes to spare will soon be able to slip in some blackjack, poker, slots or baccarat for money at almost completely unregulated, virtual casinos. To give some notion of the potential, Americans wagered $550 billion last year at traditional operations, from lotteries and horse races to bingo and casinos, and gambling companies had revenues of $44.4 billion. The Internet operators need to take only a fraction of that business to produce explosive growth - or explosive scams. ``In my view, gambling is the fastest way to destroy the credibility of the Internet system,'' said John Kindt, an economics professor at the University of Illinois at Champlain and a gambling critic. ``If you lose you'll lose, and if you win you could lose because there's no way to collect from these offshore operations.'' He added that with personal computers now ubiquitous the on-line casinos could prove a devastating temptation for the growing numbers of compulsive gamblers. ``People will be trapped,'' Kindt said. ``They won't be able to get away from it.'' All that is driving some law enforcement officials crazy, especially since the business, though made up of a tiny number of marginal companies operating from offshore havens like Antigua, Belize and Monaco, is on the cusp of a major expansion. A showdown, in short, is looming in the one area of the Internet that may well produce billions of dollars of commerce in just a couple of years. Minnesota has sued Granite Gate Resorts, a Las Vegas company preparing to offer sports betting on-line, called Wager Net, as a test case, claiming that it is a consumer fraud because the service says, improperly, it is legal. The state court hearing the suit has yet to rule on whether the state has jurisdiction. California is attacking by threatening the telephone companies with prosecution if they do not cut off service to Internet gambling concerns in the state. Several states are also insisting that they will not recognize the use of offshore sites if the companies are attracting American gamblers. ``We're going to take an aggressive stand on this and we'll interpret the law as broadly and prohibitively as we can, and there will be no havens,'' said Tom Gede, a special assistant to the attorney general of California. Sen. Jon Kyl, R-Ariz., offered a bill earier this year that would have made all Internet gambling explicitly illegal. Although it was killed in committee, he has insisted he will offer it again. A National Gaming Commission was established by the Congress this year and a big focus of the study it will be conducting will be on-line wagering, which could also lead to legislation. And there is an even trickier issue, some believe. ``There's another I-word that really scares the government, Indian gambling,'' said I. Nelson Rose, a professor at the Whittier Law School here and a gambling law expert. ``If the Indian tribes get involved in this then the way the law is written all sorts of sports betting and other kinds of on-line betting could take place from Indian lands in an unregulated fashion.'' That has left many state officials worried, but unwilling to just wait for the explosion. ``The federal government is either going to want to get into it now or they'll be drawn into it later,'' insisted Hubert Humphrey III, the attorney general of Minnesota and a prime mover behind the request this summer for federal involvement. ``This is moving so fast that we have to get out in front of it.'' All these worries are over a business that is, at the moment at least, underwhelming. Sue Schneider, managing editor of Rolling Good Times On-Line, an e-zine that tracks the industry, said that there are fewer than a half dozen virtual casinos that are taking real bets at the moment, and many of the games are frustratingly slow. There are also unresolved concerns over the security of on-line transactions and whether an unlicensed casino would maintain fair odds on the games. In fact, the established casino companies, while watching warily, appear unfazed. ``My personal view is it's not very interesting,'' said Stephen Bollenbach, chief executive of Hilton Hotels, the country's largest casino concern. ``It's a different business than we're in.'' Nevertheless, about 40 prospective operators have set up Web sites and many offer games that, at some point in the future, could easily be transformed into gambling for real money. Ms. Schneider said that as many as a dozen more on-line casino or bookmaking operations may open for business within the next few months. While all the companies are seeking essentially the same thing - to get into the lucrative gambling business without the costs of building casinos or having to pay dealers or other high-priced staff - they are taking many different approaches because of the murky legal status of the business and the uncertainty over just who will really want to spend their money this way. Virtual Vegas is one of the more active on-line casinos, and one of the most cautious. The company's formula is simple: treat Internet gambling as another type of computer game, and leave the money out of it for now to avoid hassles with the police. David Herschman, chief executive of the company, which is based in the hip Venice district of Los Angeles, said Virtual Vegas had already spent $3 million developing its technology, and would spend another $10 million. It has created twists on traditional games to make them more like computer games, and therefore more appealing to the people who already spend perhaps more time than they should in front of their personal computers. Virtual Vegas offers Turbo Black Jack and Assault Poker, which is like combining Doom and five card stud. Virtual Vegas will be available on Time Warner's cable on-line service. Peter Demos Jr., president of World Wide Web Casinos, which is based in Orange County, said his company had decided to trust the idea that having an offshore computer location will keep it out of jail. World Wide Web Casinos has acquired a tiny casino on Antigua, the St. James Club. ``It does provide us with a little credibility,'' Demos said. He added: ``We want to be a huge grind joint. We're not going to attract high rollers. We're looking for someone who will blow $20 or so in an hour and a half.'' World Wide Web Casino, which will offer black jack, five kinds of video poker and slots, is in testing and hopes to open around Thanksgiving. Internet Gaming Technologies Inc., based in San Diego, is also using an offshore strategy: It has a gambling license in Ecuador, acquired through a company registered in Monaco. Joseph R. Paravia, president of the company, said he is less confident in the offshore loophole, so the company will offer its games only to people outside the United States, which he insisted is technically feasible. Paravia said the company plans to pursue known gamblers, giving them computers if necessary. ``We didn't want to take a propeller-head and have to teach him how to gamble,'' Paravia said. ``We want to go after a known market.'' You Bet International Inc., however is what might be called an anti-Internet Internet gambling company. The company, which will operate through the New York Racing Association, offers a horse race bookmaking service that makes only tangential use of the Internet: to register accounts and download software. ``The Internet as it exists is the wrong place for this kind of application,'' said Stephen A. Molnar, executive vice president of the company. ``The biggest problem is political. We believe that at some point the government is going to come down on this.'' You Bet, which expects to begin taking bets in February 1997, has constructed a private on-line service over which its account holders will get information and place their wagers. And it appears to be legal, since it operates within New York state parimutuel betting laws. ``It's all interesting, but most of what is being bandied about is hocus pocus at this point,'' said Jason Ader, an analyst with Bear Stearns & Co. ``It's a very scary situation. There's no regulation. There's tremendous potential for abuse out there, and maybe a little fun until then.'' News Release (NationsBank): Friday, October 25, 1996 NationsBank Announces Service For Trading New And Used Stored Value Cards Antiques are too dusty. Model cars are old news. The hot collectible today? Stored Value Cards. NationsBank (NYSE: NB) today announced it will establish a collector service to support an open, free and knowledgeable marketplace for buying, selling and trading new and used NationsBank Stored Value cards. "Many of our customers have told us that they wanted to collect our stored value cards," said Richard F. Shaffner, NationsBank Senior Vice President. "We want to respond by providing a professional service that our customers and the marketplace can count on for accurate information regarding the production and availability of new and used NationsBank cards." The NationsBank Collector Service will provide a variety of services to collectors: -- information about NationsBank cards and designs; -- card reproductions; -- information about how and where new and used cards may be purchased. The service will also facilitate the sale of new and expired NationsBank cards to dealers and collectors. The bank has also established a set of Stored Value Card Principles that it plans to follow in producing and distributing its stored value cards. "NationsBank was the first bank in the United States to introduce VISA Cash to the public in 1995, and now is the first card issuer to establish and communicate principles designed to protect customers who are card collectors," said Shaffner. NationsBank Stored Value Cards provide customers the opportunity to collect the first samples of an entirely new payment system. The cards include the first VISA Cash card, the series of commemorative VISA Cash cards from the 1996 Summer Olympic Games, and the FANCash cards introduced by NationsBank at the 1996 Carolina Panthers home games. "These cards are generating a great deal of interest among collectors," said Shaffner. "Some $5 cards are already trading for as much as $300. We want to make sure that card collectors know that NationsBank's principles for the collection of stored value cards are solid and well thought-out." NationsBank's principles for the issuance of stored value cards state the bank's position regarding the availability, production, and the dissemination of information about each card design. NationsBank Card Services, with more than $8.3 billion in outstanding loans, is the llth largest issuer of Visa and Mastercard credit cards. NationsBank is the fifth-largest banking company in the U.S. with primary retail operations in nine states and the District of Columbia. As of September 30, 1996, NationsBank had total assets of $188 billion. Sunday Times (London): October 27, 1996 Banks Move into Online Robbery By David Hewson There are only two things you can guarantee of a British clearing bank. First, that avarice will be its primary motivating force. And second, that it will pursue this avarice with such naked stupidity that a three-year-old could spot it with his eyes closed. The announcement that Barclays has decided to enter the world of online banking is a case in point. In principle, the idea of handling your finances through a home PC is an interesting one. Provided the security is tight and there are enough advantages to justify the time online, I might even try it myself. But, not in several million years, the way Barclays has the cheek to suggest. If you want to join the game, here is what the bank demands that you -- the customer, if I am not mistaken - will need. First, a computer capable of running Windows 95 -- #1,000 will do nicely if your otherwise adequate 3.1 machines is not up to snuff. Second, a modem. Third, a copy of Microsoft Money 97 -- #29.99, thanks very much. And fourth, a benign desire on your part to save Barclays internal transaction costs by doing the work yourself and adding the ensuing phone charges, probably long distance, to your BT bill. And what do you get in return? Well, you can check balances, transfer money between accounts, settle bills and change standing orders -- all of which is already possible through 24-hour, voice-based phone banking down an ordinary line, for a local-call charge, and with someone who is paid to tap the keyboard. Oh, yes. You can also "analyse and display account history using the in-built graphics packages". Oh joy. Forget Doom. Let's watch the gas bill turn from bar graph to pie chart, all with a click of the mouse. So now you know why you bought a home PC... If more than a thousand or so deluded souls sign up for this package of dross I will be truly surprised. The general public may be happily ignorant of the more obscure parts of the personal computing world but they do understand that there are just two reasons to run financial matters on a home PC. It has to make life easier, and it must extend your choice. All Barclays offers over 24-hour phone banking is the marginal curiosity value of transferring your account information straight into a personal-finance package. And in return? You are locked into them with a proprietary communications package that works with no other bank, and one, moreover, that forces you to pay the Microsoft tax -- for Money 97 and Windows on top. It is difficut to decide whether this is pure ignorance or simply misguided greed on Barclays' part. Even the banking industry must have heard of the Internet. The ostensible reason Barclays has eschewed the Net is that it is inherently insecure. This is rather like saying aircraft are inherently prone to crash, regardless of how well they are maintained or flown. There is clear proof that the Net can be made sufficiently secure simply in the huge number of American banks now racing to open online services. Take a look at the beautifully organised Bank of America service (www.bankamerica.com) and judge for yourself. What's more, Net banking activities run through a Web browser, can talk to Microsoft Money as well as the more popular Intuit Quicken in ex actly the same way as Barclays' proprietary code. You get all the bar charts of your Visa bills and lose those leg-irons along the way. Only a bank could believe that it is offering some added value by allowing you access to your own money through a PC. The real service online banking will offer is beyond the understanding of Barclays. One day the Net will act as an active, independent, intelligent agent of choice. It will shop around for the cheapest loans, mortgages and savings accounts across a broad spectrum of providers. The inertia selling of bill-paying, insurance and other financial services that featherbeds the clearing banks today will be gone once you find the magic button marked "Find cheapest..." on your Net browser. Barclays would do well to try to work out how it will survive in that newly competitive era instead of trying to enslave further its hapless, captive customers just as the walls that imprison them start to come down.