The Age of e-Cash

Casey Research, Inc. c/o InvestorsInsight Publishing, Inc. 14900 Landmark Blvd, Suite #350, Dallas, Texas 75254.

(c) Casey Research, Inc. 2005

He's big, he's bad. He sidles up to you on an otherwise deserted street and growls: "Your phone or your life."

This alternate take on the highwayman's traditional choice for his victim--life vs. money--has probably not yet been uttered, at least not in this country. But it may not be far off.

Japan, as it so often does with things electronic, has taken the lead in exploring the possibilities of "e-cash" as the preferred form of retail transaction. Increasingly, that brings into play an interface between the ubiquitous cell phone and the bits and bytes that pass for a medium of monetary exchange these days.

Modern life is, to a large extent, about convenience and saving time. Take dining out, for example. You eat, you chat with your companions, you conduct a business deal, whatever. Then, at the end, you have to settle your bill. This takes time. It has to be brought to you, then you have to wait in line at the register, then you have to wait some more while your credit card is processed, or submit your PIN for a debit card, then you have to sign.

Suppose you could just get up and walk out of the restaurant, pausing only long enough to wave your cell phone at the check-out desk. In a growing number of establishments, that's exactly what you can do in Japan today.

All you need is an e-cash card or a properly equipped cell phone. These smart cards and phones feature built-in antennas and integrated circuits that allow for the transmission and receipt of electronic signals. When you swipe one of them near a compatible scanner, e-money is deducted from your account--which can be replenished with paper money at thousands of automated docking stations around the country (reverse ATMs), or over the Internet with a credit card.

What began four years ago as a time-saving alternative payment method for high-speed rail commuters has rapidly morphed into a staple of Japanese life. An estimated 15 million people (projected to reach 40 million by 2008) now use e-cash for 15.8 million transactions per month, a 100% increase over 2004. E-cash is accepted by a wide range of retailers, including convenience stores, restaurants, department stores, newsstands, electronics dealers, furniture stores, and supermarkets. There are even vending machines where a wave of the hand will net you a Coke. Many shoppers are thus able to leave home with nothing in their pockets but their cell phone.

Time savings can be significant, especially in a crowded restaurant at lunch hour or in a supermarket. One study indicates that supermarket shoppers save a minimum of 10% of their time over those who pay with cash, and even more over those who pay by credit card.

In the confident words of Makoto Yamada, an executive at bitWallet, Inc., the country's largest virtual money service, "Japan is moving toward the cashless society."

Will the concept make its way across the Pacific? That's a good question. It might seem like a no-brainer, given the speed with which Internet e-commerce has been accepted in the U.S. But there are other considerations.

For one thing, the American consumer is hooked on debt, with credit cards playing a major role. E-cash is, in a way, the opposite of a credit card. As with a debit card, you have to prepay for your purchases. Whether the domestic buyer is going to want to take a further step away from his or her "buy now, pay later" mentality remains to be seen.

Another stumbling block is philosophical. Privacy is a strongly held traditional value in the States, unlike Japan, and Americans are acutely aware that every day more and more of it is being stripped away. Many will see the rise of e-cash as just another way of letting the government/corporate complex know what you're doing and where you're doing it.

It isn't only drug dealers and burglars who benefit from the existence of cold, hard cash; it's everyone who appreciates the value of being able to conduct transactions in private, with no paper trail, when the need arises.

Could there be a way around this objection? The answer, satisfyingly, is yes. Anonymous e-cash is not just a possibility, it's here. And it's been here for a decade.

Microsoft, for instance, was issued a 1998 patent for technology that allows e-cash transactions to remain anonymous. I.e., it lets consumers spend their e-money without the bank or other repository being aware of the specifics, including user identity. Such is the general mistrust of Microsoft, however, that at the time Chris Oakes warned in Wired that "the development raised speculation about . . . whether the patent could be an effort to stymie the proliferation of anonymous cash." Oakes went on to write that "No patents in the area of anonymous micropayment are fundamental enough to make all businesses dependent upon one company's technology."

No Microsoft-type suspicions attached to DigiCash, founded in the early 1990s and the acknowledged pioneer in the field.

How DigiCash's system works is too technical to explain in depth, but it basically uses public-key cryptography (the public-private key pair system employed by PGP, for instance) to anonymize a transaction. In essence, it boils down to this: The user spends e-coins issued by his participating bank, which supplies them to him without knowing where they are going. The accepting merchant knows only that the bank stands behind the e-cash, without knowing the identity of the buyer. Each step in the process is fully encrypted and secure.

So how come we haven't heard more about this? Well, unfortunately for lovers of the concept, DigiCash filed for Chapter 11 in September of 1998, and no one else has stepped up. Hmmm, maybe Microsoft never intended to market their product after all.

This makes the future of DigiCash, or some similar form of anonymous electronic money, murky indeed. Even absent an MS conspiracy, it still requires an intricate arrangement among consumer, bank, and merchant that must be agreeable to all. But beyond that, there's the problem of government (isn't there always?). Washington loves the idea of a cashless society, provided it isn't one that comes with privacy attached; there's that misbegotten drug war to fight, y'know. Thus we can be pretty sure that anonymous e-cash transactions will be resisted by the feds, and perhaps prohibited by law.

Steven Levy envisioned a rosy future in Wired in 1994, one which will "shatter the Orwellian predictions of a Big Brother dystopia, replacing them with a world in which the ease of electronic transactions is combined with the elegant anonymity of paying in cash."

But will we ever get there? Right now, chances don't look especially good.