digital cash

Also called digital money or e-cash, digital cash represents the attempt to create a method of payment for online trans-actions that is as easy to use as the familiar bills and coins in daily commerce (see e-commerce). At present, credit cards are the principal means of making online payments. While using credit cards takes advantage of a well-estab-lished infrastructure, it has some disadvantages. From a security standpoint, each payment potentially exposes the payer to the possibility that the credit card number and possibly other identifying information will be diverted and used for fraudulent transactions and identity theft. While the use of secure (encrypted) online sites has reduced this risk, it cannot be eliminated entirely (see computer crime and security). Credit cards are also impracticable for very small payments from cents to a few dollars (such as for access to magazine articles) because the fees charged by the credit card companies would be too high in relation to the value of the transaction.

One way to reduce security concerns is to make trans-actions that are anonymous (like cash) but guaranteed. Products such as DigiCash and CyberCash allow users to purchase increments of a cash equivalent using their credit cards or bank transfers, creating a “digital wallet.” The user can then go to any Web site that accepts the digital cash and make a payment, which is deducted from the wallet. The merchant can verify the authenticity of the cash through its issuer. Since no credit card information is exchanged between consumer and merchant, there is no possibility of compromising it. The lack of wide acceptance and stan-dards has thus far limited the usefulness of digital cash.

The need to pay for small transactions can be han-dled through micropayments systems. For example, users of a variety of online publications can establish accounts through a company called Qpass. When the user wants to read an article from the New York Times, for example, the fee for the article (typically $2–3) is charged against the user’s Qpass account. The user receives one monthly credit card billing from Qpass, which settles accounts with the publications. Qpass, eCharge, and similar companies have had modest success. A similar (and quite successful) ser-vice is offered by companies such as PayPal and Billpoint, which allow winning auction bidders to send money from their credit card or bank account to the seller, who would not otherwise be equipped to accept credit cards. True micropayments would extend down to just a few cents.

“True” digital cash, allowing for anonymous payments and micropayments, has been slow to catch on. However, the successful digital cash system is likely to have the fol-lowing characteristics:

•  Protects the anonymity of the purchaser (no credit card information transmitted to the seller)

•  Verifiable by the seller, perhaps by using one-time encryption keys

•  The purchaser can create digital cash freely from credit cards or bank accounts

•  micropayments can be aggregated at a very low trans-action cost

As use of digital cash becomes more widespread, it is likely that tax and law enforcement agencies will press for the inclusion of some way to penetrate the anonymity of trans-actions for audit or investigation purposes. They will be opposed by civil libertarians and privacy advocates. One likely compromise may be requiring that transaction infor-mation or encryption keys be deposited in some sort of escrow agency, subject to being divulged upon court order.