Electronic Money: Threat to Law Enforcement, Privacy, Freedom, or all Three?
By John Dillon
Digital cash offers competing visions of a financial system that either protects consumer anonymity or shields global criminals.
These different scenarios -- part doomsday, part utopia -- were sketched out Friday at CFP96 by developers of electronic money systems and those in industry and government who are trying to regulate it.
David Chaum, who as managing director of DigiCash is credited with inventing digital money, gave a brief overview of how the system works. The banks hold the bits representing money. An encryption system allows a customer to use blind signature techniques to pay a store or business for goods. Only the account holder will know where the money is spent. However, the customer themselves can track where the money goes.
"It means when you go buy a pack of gum with digital cash, you are not forced to disclose who you are. What you can do, however, is allow that payment to be traced, if you want to," Chaum said.
Rafael Hirschfeld of CWI in the Netherlands, who is working on the CAFE digital money project in the European Union, also underscored the privacy virtues of electronic cash.
"CAFE is a step in the right direction, but it's not enough. I would envision a world where one could receive electronic money via e-mail, load it in a card take it down to the store to buy a quart of milk or a pack of condoms and no one would be the wiser," he said.
But the possibility of untraceable money frightens federal law enforcement officials, who have worked to tighten controls on money laundering. Stanley Morris, director of the Treasury Department's Financial Crimes Enforcement Network, said criminals from Al Capone and Meyer Lansky to modern drug dealers have built empires by hiding their money.
"I would opine that the biggest problem in the 21 Century will not be state based but will be from the power of organized criminals... Illicit gain is power," Morris said.
New laws have limited the options for organized crime by requiring banks to disclose large financial transactions, Morris said. "We made it not anonymous. You can't be very successful in bringing large amount of drug money to a bank."
Yet the new "cyber payment" system "brings strength to organized crime," he said. "With this new technology, governments and nation states are irrelevant. We do not have answers to these problems."
Governments and financial institutions could pierce the veil of anonymous electronic payment systems by requiring escrowed identity. Session organizer Simson Garfinkel called this idea of conditional anonymity "Clipper cash."
Kawika Daguio of the American Bankers Association offered an industry perspective on digital cash. Banks aren't interested at all in what type of toothpaste a customers buys. Financial institutions don't access or track that kind of information, he said. But they are concerned about fraudulent transactions and risk management.
Regulations covering electronic funds transfer and credit cards limit a consumer's exposure to $50, even in cases of gross negligence, he said. And if electronic money systems crash, banks would be the victims. "If one system fails, consumers may rush from all of those systems causing runs and failures" across the banking network, Daguio said. "That creates certain risk management problems."
The panel was asked to consider three hypothetical scenarios involving digital money. In the first, an elderly woman finds her digital cash account depleted without her knowledge, yet the bank can't help her since the system is anonymous and untraceable. In fact, the bank thinks she probably did it herself.
In the second hypothetical, Special Agent Jenkins with the U.S. Secret Service is tipped by a Stanford economist that the money supply is growing inexplicably. A digital counterfeiter is the culprit; he has the government's secret key and is electronically minting money.
In the third scenario, a criminal named Tangent makes malicious use of the anonymity afforded by digital cash to kill people and steal their digital wallets. But now the government wants to make conditional anonymity illegal. How will Tangent protect his livelihood?
In the case of the elderly woman who lost her savings, Chaum said her money should be more secure than it is now, even against insider theft. With "multi-party" security, each withdrawal is signed for with an electronic signature. The bank can't take money from her account unless it has a signature at each point, he said.
Counterfeiters could be controlled or defeated by the standard technique of changing keys used for encryption, according to Chaum. "Electronic cash is far more secure," he said. The murderous mugger scenario would not be unique to the world of electronic cash, said Hirschfeld. If the thief got sick of robbing digital wallets, he could always go back to stealing regular cash, he said.
One member of the audience asked Morris of the Treasury Department how the government intended to control digital laundering of money. Morris said the effort now is to focus on large transactions. "We have focused on measures that do not allow large transactions to occur without some tracks," he said.
One simple solution would be for the government to simply set a dollar limit on how much money could be spent using a CAFE card or DigiCash, he said.
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