Sunday, May 31, 2009

Book Review: State Banking in Early America

Business History Review from Harvard Business School published a book review of State Banking in Early America: A New Economic History (2003) by Howard Bodenhorn. Of importance to readers of The Monetary Future is the theme that the United States benefited from its free banking philosophy where state governments were independent of a centralized authority to address specific, local needs. This is especially relevant to the recent states' legislative initiatives for sound money. For more on states' initiatives, please see Judy Shelton's "Capitalism Needs a Sound-Money Foundation", The Wall Street Journal, February 11, 2009.

The Economic History Association also published a book review of Bodenhorn's book.

ISWC 2002 and Tim Berners-Lee

The First International Semantic Web Conference took place on the beautiful Mediterranean island of Sardinia, Italy from June 9th-12th, 2002, immediately preceding the OntoWeb workshop. I attended the conference as CEO of London-based Network Inference, Ltd., which later became Cerebra, Inc. The intellectual property of Cerebra was later acquired by webMethods in 2006.

The Semantic Web is the extension of the World Wide Web that enables people to share content beyond the boundaries of applications and websites. It has been described in rather different ways: as a utopian vision, as a web of data, or merely as a natural paradigm shift in our daily use of the Web. Most of all, the Semantic Web has inspired and engaged many people to create innovative semantic technologies and applications. is the common platform for this community.

Shortly after the Sardinia conference, I flew to MIT in Boston, where I met with Tim Berners-Lee. The hidden agenda of my lunch meeting with Tim was first to persuade him to join the board of directors of our company, Network Inference, Ltd., and second, to ensure that our flagship inference engine, Cerebra, had an active standing as one of the designated W3C-compliant standards.

On the first objective, I was turned down, because in his position as W3C chairman, Tim explained that he was prevented from accepting any board seats, corporate or advisory. This conflict of interest and resulting academic purity has kept Tim from participating in many lucrative companies. After a cheeseburger and iced tea, Tim took a Polaroid of me and placed in on his office wall that contained all of the other CEOs that had offered him board seats. I felt humbled. On the second objective, I was relatively successful since the Manchester-based software technology observed many of the requirements of the W3C and remains one of the leading inferencing engines for the semantic web.

Saturday, May 30, 2009

Dubai Vault May Store Region's Gold Reserves

Shashank Shekhar
Emirates Business
Wednesday, May 13, 2009

Much of the region's gold that has so far been held in London may soon return.

The new vaults of Dubai Multi Commodities Centre (DMCC) will be a home to the gold allocated to the Dubai Gold Securities (DGS) Exchange Traded Funds (ETFs). The vault may also become a natural choice for storage of gold reserves by central banks in the regional market, analysts said.

While the gold allocated to DGS is kept at HSBC's vaults in London, the gold reserves held by GCC's central banks are held by various other vaults in London, market sources said. Gold vaults have existed in London for more than 150 years.

DMCC's new vault became operational on April 26 this year. "We want to bring the gold held under DGS ETFs at the HSBC vaults in London to Dubai. What has been holding us back is the difference in gold specification between London and Dubai," a DMCC official told Emirates Business. Until May 11, the total number of DGS traded stood at 15,200. Each security approximately amounts to one-tenth of an ounce of gold.

Though DMCC officials have declined a direct comment on the matter, a spokesperson with the centre said that ample care has been taken to make the vault "better than the others".

Another DMCC official said that the vault will also be used to store precious metals associated with the ETFs that may be launched in Dubai later this year. At a press conference organised recently, senior DMCC officials had disclosed that they plan to launch new "precious metal ETFs" in Dubai. The ETFs will be traded at Nasdaq Dubai, the Dubai-based regional security exchange where the DGS trades.

Prominent gold dealers in Dubai say that it's "only natural" for the central banks in the region to store their gold in DMCC instead of London, where they have typically held their bullion reserves so far.

"It's a natural home for the central banks in the region to store their gold in Dubai rather than in London where they have typically held their gold. Particularly when DMCC has a state-of-the-art facility to store such precious metals," said Jeffrey Rhodes the CEO of INTL Commodities DMCC, a Dubai-based gold dealer.

In a statement released recently, the DMCC had claimed that its vault combines the advantages of a "unique" location together with the "highest" security standards.

"The vault is intended for both short and long term storage of precious metals and other high-value products. The vault will be open to local and international banks, corporates, HNWIs and DMCC members and uses the latest security equipment and inventory management systems," the statement said.

"With the DMCC vault commencing operations, we can now further support this tradition by offering state-of- the-art infrastructure and storage facilities that are an essential feature of a successful commodities hub," David Rutledge, CEO of DMCC was quoted as saying. Gold imports into Dubai jumped 15 per cent in the first quarter of 2009, the Dubai Multi Commodities Centre announced recently.

The emirate imported a total of 140 tonnes of gold in the first quarter of 2009 up 15 per cent as compared to 122 tonnes imported during the January-March 2008 period, DMCC said.

For further reading:
"Global players in talks with DMCC to set up gold refineries in Dubai", Emirates Business, May 28, 2009
"DMCC in talks with China, Canada firms to double gold trade", Emirates Business, May 27, 2009
"Dubai to get back gold reserves from London banks", Commodity Online, May 26, 2009
"DMCC's state-of-the-art vault begins operations from Sunday", Emirates Business, April 23, 2009

Friday, May 29, 2009

Interview with Liberty Reserve

Interview with Arthur Budovsky of Liberty Reserve
Conducted by Ragnar Danneskjold, editor
Monday, May 20, 2002

planetgold: Today, Planetgold is pleased to interview Arthur Budovsky, of Liberty Reserve.

planetgold: Welcome, Arthur. Thank you for agreeing to be interviewed.

Arthur: It’s my pleasure.

planetgold: Please tell us about Liberty Reserve.

Arthur: Liberty Reserve was originally an escrow service for our private clients engaged mostly in the international import and export business. We have been operating for about three years, and only recently decided to expand Liberty Reserve into a digital currency.

planetgold: Why the expansion?

Arthur: In effect, it was our clients who asked us to provide digital currency type services (similar to e-gold). For example, we would see more and more clients simply accumulating money in their escrow accounts and then calling us with instructions to send money to one place or another or to simply debit and credit their accounts between various third party accounts. We were transformed into a stored value type system without even realizing it. The next step was obvious.

We started work on an online digital currency but with a slightly different edge. We are currently backed by the U.S. dollar, and in the near future, we will add an option for gold backing. We may also add backing for other popular currencies, depending on demand.

planetgold: Do you still provide escrow services?

Our clients can use escrow at no additional cost

Arthur: Of course. We have integrated the Liberty Reserve digital currency business into our escrow and fulfillment services. From our experience with our clients, trade on the internet is still viewed as risky, and clients demand a service where risk can be limited. More can be done to assure the security of business transactions. Nobody wants to pay $1,000 for a product at an auction and then never receive the goods. Our clients can now use our escrow service online, at no additional cost, to make sure the seller delivers before he is paid. It’s built into the system. We are, in fact, the first digital currency to have an escrow service built in. We’ve been doing escrow for three years, although without a web presence. And we also need entities such as the eCTA or GDCA that you mentioned to help consumers distinguish between reputable businesses from dishonest ones.

planetgold: Tell us a little about your family background.

Arthur: I am a single child of a German mother and Ukrainian father. My parents immigrated to the United States about 15 years ago from Ukraine. I have a wonderful wife, and two beautiful daughters.

planetgold: What about your professional and educational background?

Arthur: I have a university degree in international business and economics from the International Management Institute of Kiev. In the states, I started a business exporting computers and electronics. During the ten years of running my business, I got acquainted with my current partner, Michael Klein. Together, we developed the business to include escrow services for a myriad of import and export companies.

We started transferring millions of dollars of client funds

The rest, as they say, is history. There was a greater demand for escrow services, and we were only too happy to accommodate our clients. Eventually, clients started to bypass banks and simply let their money accumulate with us. We started transferring millions of dollars of client funds from one client account to another. We were like a central clearing house for a bunch of import and export companies. The evolution to a digital currency was a logical development.

planetgold: Do those clients still use your service?

Arthur: Sure they do. Except now, instead of calling ourselves, “International Import/Export Exchange,” we transformed into, “Liberty Reserve,” and “Liberty Escrow.”

Our interface is top notch. Lots of stuff that we did before manually is automated. Exchanges are instantaneous. I don’t need to be awakened in the middle of the night by a client from Eastern Europe who needs to transfer funds to a third party. He can do it all by himself now.

planetgold: How does Liberty Reserve distinguish itself from other digital currencies?

We intend to link anonymous debit cards to client accounts in the near future

Arthur: Well, the escrow service is one way; plus, we’ve been around longer than most (except maybe e-gold) as a hybrid stored value/escrow service type company; we have an excellent staff; we are negotiating with several market makers in various countries to make a market in Liberty Reserve currency for the benefit of our clients; we intend to link anonymous debit cards to client accounts in the near future so that clients can have easy and discreet access to their funds, at any time; and most importantly, we are first and foremost dedicated to exceptional customer service. We are not a bank, and don’t treat our clients with a suspicious or haughty attitude.

I’d like to add that I was pleasantly surprised at the revolutionary idea behind e-gold. I must admit that it was looking at e-gold that gave us the final push to realize that we were doing something similar. We just never realized, until we saw e-gold, that someone would have the audacity to compete with the Federal Reserve, to claim that their money is better money. e-gold changes the way people think about money, for the better! We hope to one day be able to integrate our service with e-gold to provide our clients with seamless currency transactions across most avenues of worldwide commerce. We see how other digital currencies are popping up and offering their own currencies and it is up to so-called, exchange providers, to make a market in all of these currencies so that the public can have some integration. But it is far from seamless. We looked at, and that service is a very good start to aid in seamless integration between fiat and digital. But the digital currency world needs even more integration. We are currently looking into the idea of backing our currency with e-gold.

planetgold: Do you have any legal concerns about this type of business, such as government regulation or invasion of privacy?

We don’t collect much in the way of personal information

Arthur: Since we’re based in the Caribbean (Nevis to be exact), we have not to date, nor do we anticipate any sort of problems of that type. We do respect our clients’ privacy and only a subpoena served in Nevis would prompt us to consider providing anyone’s personal information to a third party. However, since we’re not a bank, we don’t collect much in the way of personal information anyway.

Because we’re based in Nevis, you have to be a murderer, kidnapper, or drug kingpin for us to be forced to divulge any sensitive information. Of course, if you ARE such a person, we do not want you as a client, and we would be only too happy to cooperate with authorities in situations like that. As far as client privacy, all our files and communications with clients are encrypted and stored on offshore servers. All online transactions are conducted through a secured socket layer protocol (SSL). We have taken other steps, but they are proprietary in nature.

planetgold: Have you had any problems with fraud?

Arthur: We’ve had no fraud attempts in the past because most of our clients were well established. I know that fraud is a prevalent problem in this industry because better money attracts thieves. But we are ready to face the challenges, and we are working on proprietary systems to help alleviate fraud problems.

planetgold: What are your fees?

Arthur: There is no fee to obtain or to store Liberty Reserve digital currency.

planetgold: How’s that?!

Arthur: It’s true. You can obtain Liberty Reserve currency dollar for dollar, plus bank fees. There are no storage or set-up fees. Spends are only 1% with a maximum fee of 25 cents. For example, you can obtain LR digital currency of $100,000 (minus bank charges), and spend it to a third party for a fee of 25 cents. We want to encourage the growth of digital currencies outside the snooping banking environment. We’d like people to recognize that Liberty Reserve (especially once we have gold-backing) is better money and hoard it. Therefore, there is a 2% fee for out-exchanges (we have to make at least a little money for providing the valuable service).

planetgold: Why don’t you offer gold-backing immediately? Why wait until later?

Arthur: We considered waiting. But there is really no reason to wait. Once Liberty Reserve obtains gold-backing, current customers will have an option to convert their currency to gold at extreme discounts. I guess it was a business decision to enter the online digital currency market as soon as possible.

planetgold: What information or procedures do you require for people to open an account at Liberty Reserve?

Arthur: Anyone can enjoy the benefits of Liberty Reserve. Signing up is a cinch. All you need to do is fill out an online form, and you will instantly receive an account number that you can use right away.

planetgold: What are your plans for the future?

Arthur: We plan to integrate Liberty Reserve with online bill paying services so that our clients can pay most or all of their bills with digital currencies. We are constantly on the lookout for ideas and services that would help our clients make the most of Liberty Reserve and to switch their financial transactions from the established bank monopoly to a better form of currency and value storage system.

planetgold: So when is the official launch date for Liberty Reserve online?

Arthur: We’ve set a launch date for the online business for Tuesday, May 28, 2002.

planetgold: This concludes our interview with Arthur Budovsky of Liberty Reserve.

Book Review: Gold Wars

Jim Puplava interviews Ferdinand Lips, author of Gold Wars: The Battle Against Sound Money as Seen From a Swiss Perspective (2002). From the book's introduction:
"A 'gold war' is an attempt by the government upon the constitutional rights of the individual. Why do governments resort to gold wars? Sometimes they want to wage shooting wars without raising taxes; at other times they want to indulge in 'social engineering' through the redistribution of income. But in every instance there is one common thread: governments have correctly identified gold as the only antidote against their effort to build the Tower of Babel of irredeemable debt."
Mr. Lips was born in Switzerland in 1931 and he is a respected authority on gold and the gold market. He started his career in banking where he became a co-founder and managing director of the Rothschild Bank AG in Zurich. In 1987 he opened his own bank, Bank Lips AG, retiring in 1998 on an equity sale.

Mr. Lips continues to be very active in the banking and gold world and he is on the board of various African mining companies, among them, Randgold Resources Limited and the Afrikander Lease Limited. He is also a trustee of the Foundation for the Advancement of Monetary Education, the publisher of the book. Mr Lips states:
"Gold sales by central banks have always been announced three times. First when the central banks announce the sale; second, when they sell the gold; and, third, when the gold is sold. But they never tell the public who bought. Somebody's buying. I think it's Eastern people who are buying. Gold is moving from West to East."
"The Turks are buying. The Indians are buying. The Chinese are buying. The Russians are buying. Asian people know the value of gold. There has always been a market for gold, and it will become more dramatic when Western investment managers and portfolio managers discover that the stock market will be a problem for the next five to ten years. Then, they might also buy some gold for their portfolios. Then it will become interesting."

Thursday, May 28, 2009

Book Review: Carl Menger and the Evolution of Payments Systems

The Review of Austrian Economics published Neil Skaggs' excellent book review of Carl Menger and the Evolution of Payments Systems: From Barter to Electronic Money (2002). Michael Latzer and Stefan Schmitz edit a compilation of various papers that anticipate modern monetary systems in the Mengerian tradition. The book also includes the first ever English translation of Menger's long version of "Money" (1909).

An included article by George Selgin and Lawrence White cautions against accepting the forecasts of multiple private monetary standards, and that market forces related to wide acceptance portend a long-term role for government base money. While I disagree that private monetary standards will not emerge spontaneously, especially when it comes to the international providers of digital gold currency, I sympathize with the viewpoint that building upon government-provided base money will facilitate acceptance. Precisely, that is why it may be necessary to convince a renegade, non-U.S.-aligned central bank to launch anonymous digital currencies in an effort to garner early market share. It will be the cash-like attributes of anonymity, untraceability, and real convertibility that prevail in the marketplace of economic participants.

Another included article by Stefan Schmitz, "The Institutional Character of Electronic Money Schemes: Redeemability and the Unit of Account", is the first economic discussion that I have seen regarding the digital money transition from the existing dominant unit of account to alternative unit of account.

The Importance of Digital Currencies in the 21st Century

From The Gold Economy Magazine
Friday, July 13, 2001

Are Digital Currencies merely toys for “techies” and gold-buffs, or do they represent a deeper change in the currents of history? It is my belief that digital currencies will change the face of global politics and economics for centuries to come.

Over the course of history there have been technological developments at certain junctures that changed the balance of power in the interaction between states, people and their religious institutions.

From approximately 800 AD until 1,250 AD the feudal era in Europe was characterized by microstates bound to the Church and to each other by oaths of fealty and by marriage. In war, the advantage was to the defender, with castle walls to hold out invaders, and suits of armor being something that only the rich could afford. This prevented massive scale invasions and accumulations of new territories by conquest. It simply took too long to successfully capture your neighbor’s territory, and cost too much to amass huge armies of knights on horseback. This, combined with the lack of money, prevented kings from being able to maintain standing armies.

Land was the currency, hence kings hired their armies with land and oaths of fealty. This decentralization and weakness of the State allowed the Roman Catholic Church to become extremely powerful. The State bureaucracies that we see today were mirrored by Church bureaucracies in the 1,400’s.

Three technological advances contributed to the decline of Feudal Era and the rise of the Nation State. Gutenberg invented the printing press which had the most far reaching consquences of any invention in the past thousand years; the longbow was developed which was powerful enough to penetrate a knight's armor; and gunpowder brought the advent of artillery, ending the defensive advantage of the castle.

The invention of the printing press brought the price of publishing information down so much that it effectively destroyed the Roman Catholic Church’s monopoly on religious and philosophical teaching. This resulted in the Protestant Reformation that laid the ethical and philosophical foundations for a new social order and mercantilism that changed the face of Europe and then the world.

Gunpowder changed the balance of power between States.

Previously the advantage was to the defender. Empires were built by intrigue, treaties, oaths and strategic marriages. Yet gunpowder allowed cannons to destroy castle walls. The longbow brought about the extinction of the kight as a military unit. The new weapons could be mass-produced at a fraction of the cost of suits of armor and warhorses, allowing an ambitious ruler to arm the peasantry and invade his neighbors. More territory gave him a larger tax base, which allowed him to build an even larger army, and invade yet more of his weak neighbors. Thus began the 500 yearlong rise of the nation state.

Economies of scale required that the state grow in size and strength in order to defend itself from other states that were attempting to grow. This contributed to an inevitable arms race as nations conglomerated either voluntarily or by force of invasion. The final century of the nation-state witnessed two world wars and the development of weapons of mass destruction. The twentieth century was the bloodiest in history. In 1989 the five largest nations or alliances of the world contained over half of the earth’s population and two thirds of its land mass (Russia, Canada, The United States, The United Kingdom, and China).

Yet, at the beginning of the 21st century, there are new technological developments that promise to change the Industrial World just as dramatically as gunpowder, longbows and the printing press changed the world of Feudalism.

The Internet

The Internet has been the subject of unbelievable hype over the past decade. The dotcom’s came and went as a stock market phenomenon and many of the promises turned out to be pipe dreams. But the Internet has brought about underlying changes to society that are here to stay.
The combination of the microcomputer with global telecommunications networks has fundamentally altered the economy of scale that existed in the Industrial Era.

As Moore’s Law continues to produce the doubling of processing power every eighteen months, the microprocessor is putting power in the hands of individuals and small organizations with a decentralizing effect that has forced corporations to downsize, and soon nation states as well.

The industrial era gave us “one size fits all” mass production and mass media. The Internet brings us customization and niche markets. I write this article on a Gateway Computer that was custom-ordered through a web site and delivered by UPS to my home. This is the new era of micromarkets and microbreweries. Rather than building empires on mass production, there are now millions of niches waiting to be carved out by enterprising small entrepreneurs.

In the same way that microcomputers have allowed individuals and small businesses to successfully compete against mega-corporations for niche markets, this new development is now allowing microstates to compete against the empire states for customers (citizens) and their money.

The advent of financial cryptography combined with the Internet now makes it possible to move money and assets around the globe using a laptop computer or a cellular phone.

Not only can money and assets be moved, but cryptography enables these transactions to be shrouded in a veil of privacy from snooping government eyes.

Small jurisdictions such as Andorra, Liechtenstein, Belize, and Panama are now able to compete for the capital flows that had previously been domiciled in the G7 nations. Tax competition is forcing the large nation states to curb their appetites for unlimited tax money. This is why the OECD (a cartel of populous, wealthy, socialist countries) is so intent on controlling “global tax competition” by threatening small countries with blacklisting and other sanctions. To quote the OECD’s paper on the subject of “tax distortions” the reason it is so terrible for microstates to offer low or zero-tax domiciles to international business is that producers and wealthy individuals of socialist countries will move their business offshore to escape high taxation, which will "take away the source of funding for welfare programs." This outcome is, of course, unthinkable.

The members of the OECD are trying to keep their wage slaves from escaping the big government plantation. Unfortunately for the OECD, the new state of affairs was produced by fundamental changes in technology and markets. The only way to reverse it is to eliminate the Internet itself.

Attempts to browbeat microstates into raising their tax rates, or to regulate international capital flows, will only accelerate the process and create an international “black market”. The world is a different place now. OECD bureaucrats may think “there’s no place like home” but there are no magical ruby slippers that will turn back the clock and take us back to Kansas. We’re in Oz now, and the Welfare State is definitively obsolete. The patient has terminal cancer but hasn't given up the ghost yet.

Weapons of Mass Destruction

History sometimes “repeats” itself, or at least, parallels itself. Just as the invention of the printing press was accompanied by the proliferation of gunpowder, the new info-revolution is being accompanied by the proliferation of weapons of mass destruction. However, unlike gunpowder, which allowed the nation-state to grow to giant proportions, these new weapons will do the opposite. They will raise the cost of being "big" and reward those who are small, decentralized, and polite to their neighbors and enemies alike.

It took Nation States to concentrate the resources to develop the Atom Bomb. However, now that the Internet and the microprocessor have made it extremely cheap to publish and procure information and materials, it is becoming easier for anyone to produce nuclear, biological, and chemical weapons. In fact, it is so inexpensive, that most wealthy individuals could afford to purchase a few for their own private arsenals. A determined individual could put together a biology lab and create enough botulinum toxin to kill everyone in New York City for under $100,000.

The implications of this are only beginning to be worked out, but some can already be seen in the news. Who is considered to be the greatest threat to the United States of America: Russia or China? The answer is... neither. Public Enemy #1 is an individual man: Osama Bin Laden and his followers. Why? Because he possesses nuclear, biological, and chemical weapons and the will to use them against “The Great Satan.” Likewise, Russia is still smarting from the sting of the Chechnian separatists who took credit for bombings in Moscow and the sinking of The Kursk. China has cracked down on the Falun Gong, but has failed to eliminate the sect. Japan was shocked by the Sarin gas attack in the Tokyo subway system. It is only a matter of time until one of these nations experiences the first terrorist-deployed nuclear weapon against a major city. (This article was first published in “The Gold Economy Magazine” on July 13th, 2001, two months prior to the tragic World Trade Center & Pentagon Attacks.)

Weapons of mass destruction fundamentally alter the balance of power between nation states, because they are extremely potent against large, centralized targets; but they are worthless against a decentralized individual or cell group. What city would the US nuke to get rid of Bin Laden’s network? Even if you killed him, his network would take revenge. This fact was demonstrated by President Clinton’s fruitless Tomahawk Missile attack on terrorist base-camps in Afghanistan in response to the bombings of U.S. Embassies in Africa. It is doubtful that the missiles killed any key personnel, and there is no doubt that the cost to the United States of expending the missiles was hundreds or thousands of times more than the cost of the damage done to Mr. Bin Laden. However, President Clinton DID give his enemies more fuel for their hatred and determination to use weapons of mass destruction against the United States by launching a missile attack into the sovereign territory of a country with which the USA was not at war. Two years later it has been verified that Bin Laden now has nuclear weapons in his arsenal.

What this means is that a tiny country can now theoretically defend itself against a monster like China with the last resort use of biological weapons.

The balance of power has also changed with conventional weapons. The microprocessor has allowed the development of smart shoulder-launched missiles that can destroy aircraft (Stinger Missile) and armor (Copperhead Missile). The Mujahadeen in Afghanistan successfully repelled the Soviet invaders in the 1980’s with the help of US-supplied Stinger Missiles. The new Copperhead anti-armor missile can be carried and deployed by a single infantryman, yet it is effective against even M1 Abrams tanks, and only cost $10,000 per unit. This means that for the cost of one tank, a nation can purchase approximately 100 Copperheads. Armor and aircraft are the primary weapons of invasion, whilst light infantry is the premier weapon of defense. Economically, the military advantage has swung back to the defender because microprocessors have now made it two orders of magnitude cheaper to defend than to attack. Meanwhile the cost of producing offensive weapons continues to soar into the stratosphere.

The low cost and easy availability of weapons of mass destruction now allow cell groups or dissidents to take revenge upon large centralized governments or corporations. The United States has spent the past decade making enemies by gallivanting around as the world’s policeman, prosecutor, and judge. The new balance of power will punish arrogant bullies with terrorist attacks on the home front. Over several centuries, this logic will necessarily produce nations that are small, decentralized, and polite to their enemies, whether they are of the ideological or national variety.


If the mantra of the Industrial Era was “bigger is better”, the defining motif of the new age might be “move away from the center”. As the mega-states degenerate into microstates the proliferation of national jurisdictions will create a need for private digital currencies.

International trade requires money to lubricate the gears of market transactions. The Internet now makes it possible for private companies or individuals to offer asset-backed digital currencies from small friendly countries that desire to attract capital. These digital currencies transcend political borders and will facilitate a new era of international mercantilism while simultaneously freeing businessmen from the tyranny of national fiat currencies and the draconian controls that go along with them.

As Bob Hettinga has pointed out, digital bearer instruments are three orders of magnitude cheaper to use than book entry money. So again, digital currencies, once they come to full maturity, will take the world by virtue of the fact that they are the most secure, the most efficient, and the most inexpensive way to complete business transactions.

While the transition to this new world has been and will continue to be turbulent, the end result of these new technologies will probably be a world that is safer, more peaceful, and more prosperous than the previous century.

For further reading:
"The International Gold Community Digital Currencies", The Gold Economy Magazine, July 13, 2001
"Why Use Digital Currencies?", The Gold Economy Magazine, July 13, 2001
"Honest Money through bearer shares, a proposal", Paul Birch, October 20, 2000

Wednesday, May 27, 2009

Dot Coms Take Golden Opportunity to Trade in New Global Currency

By Leo Lewis
The Independent
Sunday, June 24, 2001

Struggling to find its feet after a disastrous 12 months, the dot-com world has turned to the depths of the old economy for inspiration.

In an attempt to prompt more e-commerce activity across the globe, internet companies are hoping to establish gold bullion as an international web currency.

The idea, which was first devised about six months ago, has finally started to blossom. A variety of gold-based "currency" exchanges have now opened and the online bookseller is among a large number of websites that have now signed up to trade using the new system. Bought online, the going price for a Palm Pilot is 1.7oz of gold.

The thinking behind the project is to provide a secure, internationally recognised, unit for buying and selling goods over the web. Several Caribbean-based companies have begun storing gold in vaults in the main metals trading centres of London, Zurich and Dubai.

Instead of relying on credit cards, internet users can then buy pieces of that stored gold to make purchases anywhere in the world. The gold never actually leaves the vaults, making the whole transaction instantaneous.

As the inventor of this trading system, the Bahamas-based GoldMoney, has given the currency its name. A single GoldGram represents a gram of gold held in safekeeping, and at the current market price of $272 an ounce, a gram is worth about £6.

Although GoldGrams are aimed at all internet users, GoldMoney believes that the currency will be of most interest to businesses. Most transactions in cyberspace still involve national currencies, and companies doing business online have found the experience fraught with exchange-rate risks. The commission charge of $1 per trade is also far cheaper than bank fees for wiring currency.

GoldMoney, backed by the New York investment group Hyde Park Holdings, is now just one of several groups that believe gold is the future of the internet. E-gold, based on the island of Nevis in the Caribbean claims to have $14m worth of gold in circulation, and Virgin Islands-based Standard Reserve is equally bullish on its prospects. The idea of creating a global currency for the internet is not new. Cybercash, Digicash and Beenz all tried to set up digital money that could be used anywhere, but all three are now out of business. The founders of the various digital gold ventures argue that humans have used gold throughout the ages, and will turn to it in the new economy.

But the project has attracted the concerns of various crime-fighting organisations, and the US Treasury Department. They worry that the ease of hiding ill-gotten gains in virtual gold creates "tremendous opportunities for money laundering".

The digital currency entrepreneurs claim they seek only legitimate customers, but the speed and volume of transactions have left authorities fearing that the system will be virtually ungovernable.

Is There a Better Solution to Online Security?

By Jon Matonis, President and CEO, Hush Communications Corp.
Customer Interaction Solutions
Friday, June 1, 2001

It took radio 38 years to reach 50 million people, television 13 years, and the Internet a mere 4. -- United States Commerce Department

What information is worth protecting? It might be a private opinion, business-critical data such as a customer list or a negotiating strategy; all of it is sensitive, and all of it has value to you and your messaging partners. The need to ensure totally secure electronic communications is highlighted by the explosive growth of e-commerce. The biggest challenge to the continued growth of the e-commerce market is the competitive necessity for instant information contrasted with the equal necessity for privacy and confidentiality.

Companies will continue to make significant capital expenditures on technology to ensure their future viability in the modern world. Until recently, companies that require security solutions have been forced to build in-house security systems or purchase expensive "turnkey" solutions. As either option is a tremendously costly endeavor that requires skilled staff, hardware and software, more and more companies are choosing to outsource their security needs to trusted third parties.

What Are The Solutions?
Revenues from PKI products and services are predicted to reach a total of $8.56bn by 2004. -- International Data Corporation
Most vendors of online security solutions, if they're at all credible, offer PKI-based solutions. PKI or Public Key Infrastructure is a significant departure from less sophisticated forms of coded communication available prior to its emergence in the 1970s. In a PKI cryptosystem, each individual is issued with a pair of keys. These keys are used both to encrypt and decrypt electronic information. The compelling feature of PKI is that whichever key out of the pair is used to encrypt a piece of information, the other key is required to decrypt it. This is in complete contrast to conventional cryptography, where the encryption and decryption process require the same key.

The roster of companies that offer either consumer or business security solutions is constantly growing. Our of the PKI family, two encryption methods have distinguished themselves: the X.509 and the OpenPGP, or PGP, standard. X.509 is generally associated with SMIME (Secure Multipurpose Internet Mail Extensions) and certificate-based products. Most SMIME vendors require that the end user install software, remember a password and manage both the public and private keys. The other system that has enjoyed success in the marketplace is the PGP standard, PGP requires the end user to manage a password and the public and private keys. Further, users of this system must exchange keys with other users of the system so that they may encrypt and decrypt messages.

Both systems have their champions, Neither system has ever fully penetrated the consumer or corporate markets, Generally, either cryptosystem is only available at a particular computer terminal, making roaming use impossible. Further, regardless of the level of security offered by either system, people and companies will not purchase, deploy or use products that are hard to use.

If the security industry is to adequately address the ongoing market need for security solutions, it must provide solutions that are easy to use and enable users to protect messages from any computer terminal on the planet with an Internet connection,

The Importance Of Interoperability

OpenPGP is set to become global standard.
-- James Middleton,

The other more technical step the security industry must make to fulfill the market's need for reliable, sophisticated security solutions is to create products that support more than one encryption standard. As time and technology progress, the number of available standards will surely increase. If a company sells a product that is built to operate using only one standard (remember PGP and X.509), then the product's ability to work with the widest range of customers is greatly diminished.

Security products must be designed to be platform independent, allowing for further development or interoperability when appropriate and possible.

The Way Forward: Managed Key Security Technology
PKI services will make up the most significant part of ongoing costs incurred by any institution implementing a PKI solution. -- Datamonitor
The only way for aspiring vendors to provide online security solutions to the mass market is to avoid ibuprofen versus aspirin debates over which standard is better. The real challenge is to create and maintain technology that allows users to enjoy the best available standards as well as being extremely easy to use. To create true global access to secure communications, a system of key server networks could act as repositories for users' public and private keys. Companies and end users will be able to create key pairs using their chosen programs, leaving third parties to manage the keys. Whenever possible, the network would allow key pair holders of any standard, whether it be X.509 or PGP, to exchange electronic communications with each other in a completely secure environment. The key server network will manage the cryptosystem standard as well as key pairs. The expansion of key serving networks can be assured only if the network works toward the greatest level of communications between standards.

Why Outsource Security?

The best reasons to outsource the online security function of a business or organization is to keep internal resources focused on the core competencies of the group and to eliminate the cost of acquiring, operating and maintaining an internal solution, Further, companies should look for outsourcing solutions with a low cost of entry with enough infrastructure to allow for rapid scalability. Companies that choose to outsource their security requirements to PKI-based managed security vendors will benefit from the latest security standards in the industry as well as provide instant access to a secure platform for all electronic communications.

Jon Matonis is the president and chief executive officer for Hush Communications. He has over 15 years' managerial experience in the areas of security and encryption technology, embedded software systems, international payment systems and foreign exchange.

Tuesday, May 26, 2009

Why the War on Money Laundering Should be Aborted

Richard W. Rahn made an important presentation on February 20, 2001 at FC 2001 in the Cayman Islands entitled, "Why the War on Money Laundering Should be Aborted". Dr. Rahn is a senior fellow of the Cato Institute and the Chairman of the Institute for Global Economic Growth. He also served for two terms (2002-2008) as the first non-Caymanian member of the Board of Directors of the Cayman Islands Monetary Authority, which regulates the world’s largest offshore financial center. Rahn states:
"Financial cryptographers are heroes, because their efforts both increase the economic well being of most of the world’s peoples, and more importantly, preserve their liberty."

"As a result of easily usable and almost unbreakable public key encryption, the Internet, and rapidly developing digital money products, the ability of governments to detect and control the movement of money and other financial assets will be almost impossible without governments knowing everything about everyone’s financial affairs. History teaches us that governments abuse the information they have about their citizens. Both the US Constitution and the UN Declaration of Human Rights recognize and guarantee basic privacy rights, including financial privacy."
Typically a cryptography-oriented event organized by the International Financial Cryptography Association, Financial Cryptography and Data Security Conference is a major international forum for research, advanced development, education, exploration and debate regarding information assurance in the context of finance and commerce. The conference covers all aspects of securing transactions and systems. Submissions focusing on both fundamental and applied real-world deployments are solicited.

The goal of the conference is to bring security and cryptography researchers and practitioners together with economists, bankers, implementers and policy-makers. Intimate and colorful by tradition, the FC program features invited talks, academic presentations and panel discussions.

For further reading:
"The $7 Billion Laundry Bill", Daniel J. Mitchell, Forbes, April 17, 2006
"Anonymous Money, Moral Sentiments and Welfare", Vesa Kanniainen and Jenni Pääkkönen, August 2004
"Money Laundering: Past, Present and Future", Peter C. Wayner, February 27, 1997

PGP Creator Bolts to Hush

Wired magazine published this article on February 20, 2001 after Phil Zimmermann decided to move to Hush Communications as their Chief Cryptographer. Phil remains on the Hush Advisory Board and HushMail operates profitably today out of Vancouver, Canada.

For further reading:
"PGP Creator Defends Hushmail", Ryan Singel, Wired, November 19, 2007
"Hushmail To Warn Users of Law Enforcement Backdoor", Ryan Singel, Wired, November 19, 2007
"Encrypted E-Mail Company Hushmail Spills to Feds", Ryan Singel, Wired, November 7, 2007
"Correspondence Between Kevin Poulsen and Brian Smith", September 19 to November 7, 2007
"Feds use keylogger to thwart PGP, Hushmail", Declan McCullagh, CNET,
"E-Mail Privacy Remains Elusive", Wired, March 11, 2001
"Hush push for secure privacy", The Guardian, March 8, 2001
"Hush targets $20 million in fundraising", The Sunday Business Post, February 25, 2001
"Hush Communications Appoints World-Renowned Cryptographer, Philip R. Zimmermann", Business Wire, February 20, 2001
"PGP creator Zimmermann joins Hush", ZDNet, February 20, 2001
"Hush on target for 2002 float", The Independent, January 23, 2001
"Hushmail backs UK anti-snooping efforts", ZDNet, November 1, 2000
"Web-Based Encrypted E-Mail", Bruce Schneier, August 1999

Saturday, May 23, 2009

Digital Identity Forum Presentation by Jon Matonis

On October 18, 2000, I presented at the first annual Digital Identity Forum in the Marlborough Hotel, London, UK. My topic was "User-Friendly Digital Signatures" made available through the deployment of the Hush Encryption Engine.

The Digital Identity Forum is a not-for-profit event designed to bring together decision makers in political, economic, business, social and technical areas to discuss digital identity in Europe today. Sponsored by Consult Hyperion, it allows key players and commentators to engage in valuable education, interesting discussion and genuine, interactive debate.

Thursday, May 21, 2009

The Future of Electronic Payments: Roadblocks and Emerging Practices

Statement of Thomas P. Vartanian
Subcommittee on Domestic and International Monetary Policy of the Committee on Banking and Financial Services
U.S. House of Representatives
Tuesday, September 19, 2000

Mr. Chairman, ladies and gentlemen of the Subcommittee. I appreciate the opportunity to be here to discuss electronic payment systems.

In March of 1996, I experienced first hand the Mondex smart card pilot program in Swindon, England.(1) It initially characterized itself as "money." The card contained a microprocessor chip that could hold and transfer electronic value, as well as record the last ten transactions involving that value. In addition, the electronic wallet that accompanied the card allowed the value on the card to be transferred from person-to-person in a manner that was both immediate and final. The product was crisp, clean, efficient and easy to use. As my wife and I experimented with the Mondex-enabled phones in the city and dipped the card in Mondex point of sale ("POS") terminals throughout the city, we concluded that this form of money would revolutionize payments systems and would be immediately embraced by the consuming public. Four years later, neither has occurred.

Since then, I have represented banks, diversified financial services companies, payments systems participants, governmental entities and trade groups in a variety of matters involving the development of alternative payment instruments and systems. Based on these experiences, I offer the following views for the Subcommittee's consideration.

Since the debut of Mondex, there have been dozens of electronic payment products and systems introduced to the public, such as VisaCash, Digicash, CyberCash, Millicent, Proton, PayPal, eMoneyMail, BillPoint,, PayTrust and Propay. While each of these products are efficient and innovative, to date, most have attracted customers only in limited consumer and business applications. At the same time, electronic bill presentment and payment products and systems are beginning to infiltrate the payments landscape. There are significant and traditional reasons for the relatively glacial evolution of electronic payment instruments and systems in a world that is eager to adopt any new technological product that comes along.

1. The current money and payments infrastructure is well-established, reliable, and businesses and consumers understand it and feel comfortable with it.

2. New products and systems usually require the creation or adoption of standards so that every machine and network is speaking the same language.

3. Businesses and consumers are slow to change their financial habits without compelling reasons.

4. The value proposition for businesses and consumers to shift to new electronic value systems is not yet clear and may not come into focus sharply until there is a supporting infrastructure and a critical mass of users.

5. The online movement of money may not yet be as reliable, convenient, safe and easy as it needs to be.(2)

6. Unfamiliarity with new payment instruments and systems, concerns over the potential loss of funds in accounts, increasing apprehensiveness about the loss of privacy, and the temptation to offer new payment products before they are perfected create an environment that makes both businesses and consumers wary.

7. There is significant market competition and controversy concerning what entities can control the point of customer entry for these products.

8. Current laws are often ill-suited to, or incompatible with the way that electronic payment instruments and systems work.

As I discuss electronic money and payments systems today, I use the term loosely to include a wide array of electronic money (card, chip and PC-based), electronic checks, new credit card and electronically based person-to-person money products.

The Comfort Factor

There is one immutable and daunting truth that affects the acceptance of all new financial products and systems: every human being has an emotional attachment to his or her money. That usually means their use, investment and transfer of money fall into behavioral patterns that they are comfortable with and that change only when the cost, convenience and confidence factors related to these products become overwhelming. When I was in Swindon, I asked a woman in a drug store why she wasn't using a Mondex card. She told me that she didn't need it; she had real money and it worked just fine, thank you. She also said that she was not interested in becoming addicted to a form of money that she would actually have to pay to use.

The lesson here is clear. Just because technology provides a new, glitzy product to the public does not necessarily mean that consumer and business acceptance will automatically follow. Many will not use it until they fully understand it or absolutely need it.(3) Looking back at periods where other financial services evolved at a much slower pace, we see that even with a clearly worthwhile product, staying power is essential since it may take a generation in order to reach a loyal audience.

Examples of this in the financial services history are numerous. In September 1958, the Bank of America introduced the BankAmericard, the predecessor of the Visa card. Some very bright people in the bank developed the revolving credit card idea and a way of marketing it to a generation of post-depression consumers who were emerging from the dominant pay-as-you-go economic memories of that era.(4) Bank of America made a bold move. It printed and mailed 60,000 credit cards to every customer in the Fresno, California market. This event, known as the "Fresno Drop," primed the credit card pump. While consumer and business acceptance eventually followed, economic success was slow in coming. Within fifteen months, the BankAmericard lost $8.8 million, a huge sum of money at that time.(5) Nine years later, the predecessor to MasterCard was formed and the rest, as they say, is history. Today, the credit card is one of the most successful financial products ever created. That might suggest that the pioneers of the credit card probably had their names enshrined in the financial services hall of fame. Hardly. At Bank of America, many were reassigned or quietly left their jobs because of the enormous losses the bank suffered, since it distributed the card indiscriminately without underwriting the creditworthiness of its users. Initially, the BankAmericard was considered a failure.(6)

This story is important and may suggest some lessons for the future of electronic payment instruments. Consumers, businesses and governments will eventually become comfortable with new forms of money and payments systems, but it will take time to build both the physical and emotional infrastructure. Perhaps not the time it took for credit cards and ATMs to be accepted. But, history teaches us that some fraction of a generation must mature with a new financial product in order for it to find its way into the lexicon of consumer financial markets.


For new electronic payment instruments and systems to be attractive to consumers and businesses, they should save money and reduce the costs in the current systems. In short, if consumers can spend their money more cheaply, they will be more likely to adopt the new electronic products that let them do so. It appears that the savings are there for the picking in the electronic money and payments area. The cost of dipping a smart card, which requires no closed proprietary or open network to transmit its electrons from chip to chip, is less than $0.01. An ATM transaction costs about $0.27, while a teller generated transaction in a financial institution costs about $1.07.(7) The average cost of swiping a credit card ranges from $0.08 to $0.15.(8) Squeezing as much as $1.06 out of the trillions of financial services transactions that occur each year is a very meaningful reason why electronic payment instruments and systems will change.

The instantaneous movement of money is a phenomena that will change many of the conventions to which we are currently accustomed. For example, new payments systems could challenge and disenfranchise the sponsors and owners of the current system, including the banking industry and governmental entities like the Federal Reserve. They will also change revenue and expense models to the extent that payments systems are connected from the current overnight or several day batch processing and netting systems to real time finance. Gone will be traditional money-making strategies that have relied upon the float in the system and the incompatibility of parallel payments networks. At the same time, the government could lose the profit it makes on seigniorage.(9)


As the speed at which transactions increase with the pace of life in a technologically charged environment, new financial products will have to be easy to use and save businesses and consumers time, computing space and resources. But the fact that they are quicker won't necessarily make them viable. They will have to fit naturally into the current structure of financial services, as the logical outgrowth of where businesses and consumers would go, left to their own devices.

In Crossing the Chasm, Geoffrey Moore refers to this issue, drawing distinctions between what he calls "discontinuous innovations" -- changes that require the consumer to change a behavioral pattern -- and "continuous innovations."(10) While it does not require disruption of one's traditional behavioral patterns to buy the new and improved Tide, for example, -- it's in the same spot on the shelf that the old unimproved Tide was -- it may require a shift in consumer behavior to begin banking online or to pay bills electronically. Electronic payment instruments and systems will become a part of the financial environment, but it will take time, and it will require the confluence of the needs of all of the constituents in the financial marketplace.


No payment instrument or system can work without the trust and confidence of its users. The money that we have in our pockets is no more and no less than a symbol of a trusted system that works. Green dollars could as easily be pink pineapples, as long as people trusted the underlying value of those pineapples.

Interestingly enough, because of the trust factor, which forms the backbone of money and payments systems, governments and quasi-governmental entities play a critical role in making them work. In the final analysis, businesses and consumers have to know that the form of value that they are using will be accepted and that the system that handles it does so without delays, disruptions or challenges.

This necessary confidence factor translates into governments playing a more prominent role in the development of new electronic payment instruments and systems. For example, if the federal government required the 30 million Americans who receive some form of financial assistance to use smart cards to receive and transfer that value, smart card technology would be more readily salable to the public by private businesses for a wide variety of purposes. When federal and state governments require the use of digital signatures for governmental transactions (e.g., to apply for a license, pay taxes or receive a student loan), the use of digital signatures will become more widely accepted by the public, and private sector businesses will be able to more easily market other electronic signature applications to them.

Money and payments systems, therefore, require a unique blend of governmental, business and consumer participation in order for them to succeed. Until those factors are all aligned at the right time and in the right place, what may seem to be significant developments in financial services products may limp along, garnering market acceptance on an evolutionary rather than a revolutionary pace.

Current Electronic Payments Institutions

Let's fast forward from Fresno in 1958, to the Upper West Side of New York City in 1998. In the Upper West Side pilot, two of the city's largest banks teamed up to experiment with the deployment of electronic value cards. The project followed the Atlanta Olympic pilot of 1995, as another attempt to achieve consumer and merchant acceptance of card-based electronic value. In the Upper West Side pilot, consumers reportedly found modest value in placing value on a card that could only be used a limited number of locations. Merchants encountered operational and training difficulties.

On the other hand, consumers have shown much more enthusiasm for a wave of person-to-person, Internet-based, money transfer services. These services, which vary widely in their structure, have apparently found a niche that is attractive to buyers and sellers in online auctions and to individuals who are looking for an online-based method to send funds to other individuals.

The Future of Electronic Money and Online Payments Systems

There are, in my view, critical reasons why electronic payment instruments and systems will eventually be accepted and find their niche in the payments environment.

1. The cost savings are substantial, and businesses and consumers will not be able to ignore that fact once other issues are resolved.

2. The exponential growth of electronic commerce, online financial services, electronic bill presentment and payment products, and new financial communication networks will demand greater velocity in the movement of value which are efficient and instantaneous.

3. The proliferation of business-to-business ("B2B") electronic commerce will force payments systems to adapt to even greater speeds and standards of efficiency.

4. The adults of the future will not be wed to bricks and mortar, checkbooks or passbooks or even ATM cards.

But we should not be fooled into thinking that 21st century electronic payments products will totally replace checks, credit and debit cards, or cash. They will simply find their niche in the financial products landscape like very other product did in the 20th century.

Legal Considerations

There are a variety of policy, operational and legal considerations confronting any entrepreneur who attempts to tackle the challenge of creating a new form of value or a new way to transmit it. Because most current banking and payments systems laws and regulations have been constructed to deal with more traditional payment mechanisms, they often do not provide a clear picture of whether and how they apply to new payment vehicles or systems. That creates a sense of uncertainty that is not helpful to developing markets. If the government does anything in the near future, it should foster legal predictability in this area.

Jurisdictional Considerations

Money and payments systems are by their vary nature, multi-jurisdictional products. If there is one thing that is meant to be in commerce, it is money. Thus the creation of new global electronic payment instruments and systems raises a threshold issue - whose laws apply? While today, there is a well worn path of understanding regarding the application of check clearing, ACH, credit card, Fed Wire and other traditional payments systems rules, the development of new forms of money and new payments systems that are based in Cyberspace necessarily raise jurisdictional questions. Which state or country will regulate the activities of the entity or the movement of the electronic value it creates?

This, among other things, has been the subject of a two-year study and Report issued by the American Bar Association, which I chaired.(11) To the extent that new forms of money and payments systems are to succeed, a certain level of predictability and certainty is necessary so that the sponsors and participants can fairly evaluate the rules that will apply and estimate their obligations and liabilities.

State Banking Laws

The creation of a new electronic payment product raises the possibility that it may unknowingly conflict with banking laws in one of the fifty states. To the extent that a non-bank creates a payment product that is linked to an "account," that entity may be engaging in the business of banking without a license under state law. It may also have established an illegal deposit relationship with its customers that subjects it to criminal penalties under federal law.(12) When Florida State University issued a smart card to its students, which could be used in a variety of ways at a variety of places, it probably did not anticipate that it would be considered to be improperly engaging in the business of banking without a license to do so.(13) But the State of Florida thought so. The "account" issue also raises interesting questions in this regard in relation to the status of certain person-to-person money transfer services.

State Money Transmitter Laws

Most of the states have money transmitter laws and regulations that require licenses and impose regulatory burdens, obligations and rights upon non-banking entities that are involved in the movement, distribution or clearing of payments.(14) Conformity with these laws on a nationwide basis creates a significant regulatory consideration for anyone contemplating the development of electronic payment products and networks. State regulators have recognized that their laws were not designed to address this new range of Internet and card-based payment instruments that have begun to emerge. They are seeking a uniform law that will establish a consistent nationwide approach for dealing with such payment mechanisms.(15)

FDIC Insurance Considerations

The extent to which funds are insured is generally a question of whether they are a "deposit" as that term is defined by the Federal Deposit Insurance Act. There are two different considerations in this regard: (1) some sponsors of new products may not want their products to be insured, so that they can create their product outside the purview of federal banking regulators; (2) others may want their product to be insured so that they can market that feature to the public. The extent to which an electronic payment product is insured by the FDIC is generally a question of "where the money actually is."(16) If it resides in an account, notwithstanding the transmission of a representative digital equivalent of that value, it is likely that the value remains insured.(17) Like most other situations in which "old economy" banking laws are applied to new electronic products, they may not translate well, and there may be confusion as to the application of those laws. Another important issue in this regard is the extent to which consumers and businesses appreciate the relationships they have established, who holds their money, how it moves to other parties and the risks that they face based on the conduct and solvency of those parties.

Regulation E

Another significant issue presented in connection with electronic money and payment systems is the application of the Federal Reserve Board's Regulation E, which implements the Electronic Funds Transfer Act. In circumstances where Regulation E applies, consumers are entitled to certain disclosures and protections, financial institutions and other parties are subject to certain responsibilities and obligations. In many areas of electronic financial services, the application of Regulation E remains unresolved or open to dispute. For example, no final action has yet been taken with respect to this on the Federal Reserve Board's ("FRB") 1996 proposal regarding the treatment of various types of stored value systems for purposes of Regulation E. Similarly, it is unclear how Regulation E may apply to various types of Internet-based payment services. At the same time, the FRB is currently considering how Regulation E may apply to data aggregation services that permit consumers to execute transactions in their financial institutions accounts.

State Escheat Laws

Electronic payments, like other forms of money, may be subject to the escheat laws of the various states. However, the application of such abandoned property laws to electronic assets raises interesting questions, such as how one knows when a non-traceable electronic asset, like an electronic dollar, is subject to escheat, when it is not possible to tell where it is, where it's been or if it has been abandoned?(18)

Law Enforcement

While the issue of anonymous, non-traceable economic value in the form of electronic money and payments systems may raise complex questions concerning the application of network rules, significant concerns have also been expressed by law enforcement agencies, which conceivably could hinder the development of new payment products.(19) Clearly, law enforcement agencies that are responsible, for example, to monitor money laundering, are very concerned about the development and proliferation of anonymous, non-traceable electronic payment products. To the extent that organized crime figures can merely email electronic money around the globe or load it on to a smart card or a piece of jewelry containing a microprocessor chip, their jobs get significantly more difficult. In this regard, one of the most difficult decisions that Congress and the agencies responsible for combatting money laundering will have to make is how to balance the interests of the private sector in developing more efficient money and payments systems, and the interests of law enforcement agencies who are charged with protecting the public.

Who Should Facilitate Electronic Payments?

In a similar vein, there are intriguing legal, regulatory and policy questions that must be answered when it comes to the question of who may mint, distribute, circulate and transmit electronic payments? While most systems really aren't creating money in the technical legal sense, in the economic and practical sense, they may be. If the medium of exchange is trusted and the scale of acceptability is large, several critical questions arise:

1. Do electronic payment products affect the money supply?

2. Should non-regulated companies be permitted to mint, distribute, circulate and transmit electronic money?

3. What protections should be constructed to deal with the failure of companies that create, distribute or clear electronic money and liquidity crises in the resulting electronic payments markets?

4. How should new electronic payments systems be protected, regulated and made safe and secure?

5. Who provides the ultimate liquidity and stability that makes these new money and payments systems work?

Most governments do not generally allow anyone but governmental entities to create money. While private entities are able to create and distribute substitute money products such as travelers checks, generally, they are viewed as special purpose instruments and are not used in the same frequency, volume or scale as traditional money. Indeed, if one form of electronic money offered by a private company or consortium of companies, became ubiquitous, there would be economic downsides to consider alongside the economic benefits it might confer. For example, if most Americans used electronic money on smart cards, any hint that the sponsor of the system was in financial difficulty or that the security of the system had been broken could result in a "run" on that form of money. Merchants might refuse to accept the card. Card holders would rapidly retreat to the bank whose name was co-branded on the smart card and demand "real money" in exchange for their electronic money. If on the way to their bank, they passed an off-line vending machine that accepted the card, they might use it to purchase a car load of sodas to wipe out the value on the card, thus shifting the risk of loss to the owner of the vending machine. Such monetary crises have not occurred in this country. While regulators are well equipped to handle bank failures, the collapse of a form of currency is another matter altogether.

Similarly, the emerging area of electronic bill payment and presentment raises new issues for payments systems. Today, a growing number of consumers pay their bills electronically (electronic bill payment) without writing a check, finding an envelope or licking a stamp. They may also receive their bills electronically (electronic bill presentment) without ever receiving a paper bill in the mail. This system potentially offers enormous cost savings to both consumers and billers. Yet, it also raises new issues as to who bears responsibility should payments not be made. As the system has evolved to date, the third party processors that facilitate electronic bill payment and presentment, and through which a consumer's funds may travel, typically are not insured financial institutions. Once value leaves the insured banking system and becomes the property of such processor, even overnight, the failure of such entity raises significant financial issues for businesses and consumers, each of whom would assert a claim to the funds. In short, new products, players and systems implicate new rules of management and risk.

The Stamp Payments Act of 1862

The Stamp Payments Act of 1862 declared it to be a felony for anyone to create or circulate any coin, token or obligation in a denomination of less than one dollar if it is meant to circulate as "money."(20) This statute is still on the books. It was referenced by the Department of Treasury in its 1996 review of electronic money,(21) but was not considered when the Comptroller of the Currency approved the acquisition of an electronic money business by several national banks in December 1996.(22) To the extent that the statute raises questions that may discourage the development of electronic payments instruments and systems, its status and application should be considered and/or clarified.(23)

* * * * *


We are at the beginning of perhaps the most radical revolution in the adoption of electronic payment instruments and systems. The government plays a critical role in this process, as does the private sector.

1. Governmental agencies and instrumentalities should do whatever they can to facilitate and encourage the private sector to develop cost effective electronic payment instruments and systems that correlate to the movement of financial services on to the Internet.(24)

2. Regulators should seek to clarify the law and create greater predictability regarding the application of financial services laws to new financial products.

3. Financial regulators should be encouraged to meet with their counterparts around the world and agree upon the manner in which jurisdiction will be determined.

4. Laws and regulations should enable the development of electronic payment instruments and systems, rather than establish regulatory bureaucracies before there is an industry or accepted product to regulate.

5. Governments and regulators should thoroughly explore the new risks and security challenges that electronic payment instruments and systems create and address the economic, political and legal risks that are suggested.

Again, I appreciate the invitation to appear before you today and look forward to your questions.

Thank you.


1. Thomas P. Vartanian, Mondex's Swindon Test Points to Future of Electronic Cash, Am. Banker Future Banking, April 15, 1996, at 14A.

2. See, e.g., Fried, Frank & Peter Wayner, The Management of Risks Created by Internet-initiated Value Transfers (NACHA 1997).

3. Businesses should not make the mistake of confusing the enthusiasm of "Early Adaptors" with the much more conservative approach displayed by the market segments one expert labels as the "Late Majority" and the "Laggards." See Geoffrey A. Moore, Crossing the Chasm 46 (Harper Business 1995).

4. Joseph Noscera, A Piece of the Action 20-21 (Simon & Schuster 1994).

5. Id. at 31.

6. Id.

7. Loretta J. Mester, The Changing Nature of the Payments System: Should New Players Mean New Rules, Bus. Rev. (Fed. Res. Bank of Philadelphia), March/April 2000, at 3. See also Thomas P. Vartanian, Robert H. Ledig, & Lynn Bruneau, 21st Century Money, Banking & Commerce 286 (1998).

8. Kevin P. Sheehan, Electronic Cash, Banking Rev. (FDIC) 1 (Vol. II, No. 2 1998).

9. The Department of the Treasury defines seigniorage as the difference between the face value of a coin and the coin's cost of production. See H.R. 534, One Dollar Coin Act of 1995: Hearing Before the Subcomm. on Domestic and International Monetary Policy of the House Comm. on Banking and Financial Services, 104th Cong. (1995) (testimony of L. Nye Stevens, General Accounting Office). Of course, if traceable electronic payments become the norm and replace cash, the government should see increased tax revenues from the sudden appearance of cash income that has often been "off the books."

10. See Moore, Crossing the Chasm, supra note 3, at 10.

11. American Bar Association, Achieving Legal and Business Order in Cyberspace: Jurisdictional Issues Created by the Internet (July 2000), available at ; see also Thomas P. Vartanian, Georgia Internet Law Raises Jurisdictional Questions for Electronic Commerce, Electronic Banking L. & Com. Rep., Feb. 1997, at 15; Thomas P. Vartanian, The Confluence of International, Federal, and State Jurisdiction over E-Commerce, J. of Internet L., Nov. 1998, at 11; Thomas P. Vartanian, The Confluence of International, Federal, and State Jurisdiction over E-Commerce,, J. of Internet L. (Dec. 1998); Thomas P. Vartanian, A US Perspective on The Global Jurisdictional Checkpoints in Cyberspace, Internet L. & Reg. (Pike & Fischer), May 1999, at JU-A11; Thomas P. Vartanian, It's a question of jurisdiction; irreconcilable differences in cyberspace, Bus. L. Today, July/August 1999, at 22.

12. See 12 U.S.C. § 378. Section 21a of the Glass-Steagall Act, which states:

[I]t shall be unlawful -

(1) For any person, firm, corporation, . . . to engage at the same time to any extent whatever in the business of receiving deposits subject to check or to repayment upon presentation of a passbook, certificate of deposit, or other evidence of debt, or upon request of the depositor . . . .

13. See Inter-Office Communication from J. Ashley Peacock, Assistant General Counsel to Terry Straub, Director, Division of Banking (Nov. 16, 1990); see also Thomas P. Vartanian & Robert H. Ledig, The Business of Banking in the Age of the Internet: Fortress or Prison, Banking Pol'y Rep., March 4-18, 1999, at 6.

14. See State Legislation: Sales of Checks/Money Transmitter Statutes - Part I - Alabama to Kentucky, Electronic Banking L. & Com. Rep., Nov. 1996, at 13; State Legislation: Sales of Checks/Money Transmitter Statutes - Part II - Missouri to Wyoming, Electronic Banking L. & Com. Rep., Jan. 1997, at 12.

15. See Unif. Money Services Business Act (2000 Annual Meeting Draft) (July/Aug. 2000), available at (visited Sept. 15, 2000).

16. Thomas P. Vartanian, Key Questions for Emerging Systems: Where is the Money?, Am. Banker Future Banking, June 17, 1996, at 6A.

17. General Counsel's Opinion No. 8; Stored Value Cards, 61 Fed. Reg. 40490 (1996) (indicating that some stored value products would be eligible for deposit insurance while others would not).

18. Unif. Unclaimed Property Act (1995), available at (visited Sept. 15, 2000).

19. See Internet Fraud; Illegal False Identification Web Sites: Hearing Before Subcomm. on Investigations of the Senate Comm. on Governmental Affairs, 106th Cong. (2000) (testimony of Brian L. Stafford, Department of the Treasury, Secret Service).

20. Act of July 17, 1862, ch. 196, sec. 2, 12 Stat. 592 (codified at 18 U.S.C. § 336):

Whoever makes, issues, circulates, or pays out any note, check, memorandum, token, or other obligation, for a less sum than $1, intended to circulate as money or to be received or used in lieu of lawful money of the United States, shall be fined under this title or imprisoned not more than six months, or both.

21. See U.S. Department of The Treasury, An Introduction to Electronic Money Issues (Sept. 1996).

22. See OCC Corp. Decision, Conditional Approval No. 220 (Dec. 2, 1996).

23. Thomas P. Vartanian, Robert H. Ledig, & Yolanda Demianczuk, Echoes of the Past with Implications for the Future: The Stamp Payments Act of 1862 And Electronic Commerce, Banking Rep. (BNA), Sept. 23, 1996, at 465.

24. Organizations such as the National Automated Clearing House ( and the Financial Services Technology Consortium ( have conducted important pilot programs dealing with digital signatures, electronic checks etc. Such pilot programs are vital to the efficient modernization of payments systems.

Thomas P. Vartanian is the Chairman of the Electronic Commerce & Financial Services Transactions practice in the Washington, D.C. office of the law firm of Fried, Frank, Harris, Shriver & Jacobson. He is the Chairman of the American Bar Association’s Cyberspace Law Committee and its Transnational Jurisdiction Project, which produced a report on global jurisdictional principles entitled Achieving Legal and Business Order in Cyberspace: A Report on Global Jurisdiction Issues Created by the Internet. He is an Adjunct Professor of Law at Georgetown University Law Center and Boston University Law School and is the author of numerous books and articles, including his latest technology book entitled 21st Century Money, Banking and Commerce.

Mr. Vartanian is testifying on his own behalf as an electronic commerce expert and attorney and represents no entity for this purpose.