Money Ain't What It Used To Be

[R. A. Hettinga]

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 Date: Tue, 3 Jan 2006 12:44:40 -0500
 To: Philodox Clips List <clips at philodox.com>
 From: "R. A. Hettinga" <rah at shipwright.com>
 Subject: Money Ain't What It Used To Be

 <http://www.businessweek.com/magazine/content/06_02/b3966101.htm>

 Business Week



 JANUARY 9, 2006   *  Editions: N. America | Europe | Asia | Edition Preference



 INVESTIGATIVE REPORT


 Money Ain't What It Used To Be

 However the complicated tale of e-gold Ltd. plays out, it and a few of its
 rivals have already reached a milestone: For the first time, stand-alone
 digital currencies have real customers, even if some of those customers may
 engage in illicit activities.



 That's big news, since until recently digital money has been a failure. The
 idea of replacing paper money -- messy and expensive -- with its electronic
 equivalent seemed immensely logical in the mid-1990s, as the Internet took
 off. "Digital money is the ultimate -- and inevitable -- medium of exchange
 for an increasingly wired world," intoned a June, 1995, Cover Story in
 BusinessWeek (MHP ) entitled "The Future of Money." Congressional hearings
 with the same title soon followed, and Citicorp patented a proprietary
 version of digital cash. "I think money is about to remake itself," former
 Citicorp CEO Walter B. Wriston told Wired magazine in 1996.

 At the time, experts feared that privately issued digital money,
 untraceable and not controlled by central banks, would facilitate money
 laundering and tax evasion. They also worried that digital money, on a big
 enough scale, could undermine central banks' ability to steer economies by
 setting monetary policy. Government officials sounded desperate to stop the
 threat. "We are nowhere near the issue of regulating it," Stanley E.
 Morris, then the director of the Treasury Dept.'s Financial Crimes
 Enforcement Network, told BusinessWeek in 1995. "We're one step back."

 Well, it turned out that the regulators had plenty of time to catch up.
 DigiCash, the most innovative and best-publicized digital cash scheme,
 sought bankruptcy protection in 1998. CyberCash, a competitor, followed
 that route in 2001, the same year Beenz and Flooz, two rivals, closed their
 doors and left holders of their currencies high and dry. "Technologists
 thought that notes and coins would disappear," says David G.W. Birch, a
 director of Consult Hyperion, a British consulting firm that runs an annual
 conference on digital money. "But money is a very conservative technology."

 For the past ten years, digital cash has been a solution in search of a
 problem. Credit cards do just fine for most online transactions, especially
 since consumers have good legal protection against fraud and mistakes. By
 contrast, "we don't have the same kind of protection in place for the new
 forms of payment," says Anita Ramasastry, associate professor at the
 University of Washington Law School and an expert on laws governing digital
 money.

 That's why the apparent success of e-gold (and rivals like GoldMoney) in
 attracting customers is so striking. Besides the anonymity -- which
 previous digital money systems also offered -- the link with gold seems to
 provide enough solidity to overcome the potential dangers of putting your
 assets into a private currency. A gold-based banking system, which is what
 e-gold really is, appeals to people who fret about inflation and exchange
 rate fluctuations and don't trust the paper currencies central banks issue.

 Still, even if digital currencies survive the e-gold controversy, they will
 never be a serious challenger to credit and debit cards. No one's going to
 buy a newspaper with e-gold. The best bet for small retail purchases in the
 future is either a smart card, like the Octopus Card issued by Hong Kong's
 mass transit system, or a payment capability built right into cell phones,
 like the Edy system in use in Japan. These systems, tied closely to
 respectable institutions, don't provoke the same worries as a stand-alone
 private currency like e-gold.

 But a successful digital currency again raises the issues that regulators
 fretted over a decade ago, especially now that the world is far more
 tightly networked. The future of money is not here yet, but it may be a lot
 closer than you think.



 By Michael Mandel in New York

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 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'

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-- 
-----------------
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'