Introduction: Evolution of Money and Trade
Money is any valuable item that is that is legally recognized by a given jurisdiction as medium of exchange and store of value for goods and services. Money has evolved over the centuries from commodity money to digital cash. Today, money has been coupled with technology –its supply and use is dependent on computation technology.
In the infant years of trade, goods were exchanged for other goods, in a system called barter trade. At the time, money was in the form of commodities. With time, precious, rare and attractive items took the role of medium of exchange and store of value. These items included beads and cowry shells. After a period, valuable metals replaced these precious items. The most common precious metal used was gold. It is from these valuable metals that coins were made, and later paper money got onboard.
The origin of money is not very clear. The philosopher Aristotle points the duality of utility of any object as accounting for the origin of money: the use for which it was made, and the conception of it as a product to barter. He argues that the assignment of more value to an item than it is really worth is a consequence of gradual psychological trust among the traders and the authority overseeing the economy. The anthropologist Graeber disputes Aristotle, arguing instead that on the account that, in his opinion, Aristotle has not evidential backing for his claims. Contrary to Aristotle, Graeber argues that money started out as a record of debt in the quantification of ‘I owe you’ before acquiring the rest of the functions of money as they are known today.
Whatever the right recount is, money has transformed from commodity money to modern money, which is cash and coins. From the earliest twentieth century backwards, goods and services were bought and sold in cash. Money was also saved in cash.
In the early 19th century, digital cash entered the economic scene. Initially, firms used credit cards. Then cheques came in. Transactions started to be done in credit cards and check, a replacement of the traditional cash.
The development of the computer meant that bank accounts would now be computerized. There was no need for storing cash anymore. All one needed was to have an account with the bank with the number and name indicated and the amount one has in one’s account. Later in 1996, a monetary value system for the entire globe was set up. The system allows the use of money in any country for any purpose.
Currently, there exists a variety of systems of digital cash.
Forms of Digital Cash and Forms of Payment
This paper is about digital cash. Digital cash is money that allows for payment of goods and services through electronic means. Berentsen defines digital cash as the different electronic means of payment enabled to help consumers pay for goods and services.
Some of the most common electronic forms of payment include credit cards, debit cards, smart cards, e-wallets and peer-to-peer method.
A debit card allows a client to spend the money that the client has as indicated in his/her current account without interacting with the money physically. Whenever the customer makes pays for a good or service, there is a transfer of money from the bank account of customer to the vender’s through internet banking.
A credit card runs up money that the client will be required to pay in the future. The amount the banker fixes on a client’s credit card depends on the financial track of the client with the bank. All parties involved in the transaction using a credit card are expected to comply with the security procedures and protocol.
A smart card differs from a credit card in the sense that a smart card has a microprocessor embedded in it and it uses electronic cash. The cash is transferred, during a transaction, from the client’s card to the vendor’s device. A Visa Smartcard allows customers to transfer electronic money from their bank accounts to their cards, and use the card to make payments on the internet, besides various retailers.
E-Wallets are a form of payment in which a financial institution partners with a member e-Commerce site, in which a customer can make payment with a click of on a member site.
In peer-to-peer method, the digital cash is conveyed through email. The sender is required to set up an account before he/she can request to make a payment. The sender then can transfers the digital cash into the receiver’s account using a credit card. The receiver is notified by an email, upon which he/she can transfer the money into hi/her bank account.
The “Minting” of Electronic Coins
An account of how digital coins, or digital cash, are made is outlined in OMahony et al.
Every digital coin has an associated serial number. The serial number is produced by the client’s electronic wallet. The serial numbers generated are random and large to prevent replications. The bank signs the serial number. The serial numbers are not open to the bank hence the bank cannot tell the identity of the owner of the phone. Different coin denominations are given different values.
An electronic coin contains a serial number, a key from which value, currency and expiry date can be told, and a signature coded with one of the secret keys the bank uses.
General Cycle of Transaction in Digital Cash
The system based on digital cash is made of three parties: the client, the vendor and the bank. Any client, if qualified, can procure a digital coin from a bank or any other financial institution. The client, or the payee, can then change ownership of the digital coin as a payment for a vendor’s goods and/or services, or simply as a means of sending money to a relative or friend. The vendor or receiver of the digital cash may then deposit the coin in the bank for storage, saving or whatever reason. Owing to the anonymity of the payee, the bank cannot identify the transaction that the coin was involved in. Neither can the vendor tell the client from the digital coin.
Mu et al states that besides the normal digital cash, there are two other forms of digital cash: the divisible digital cash and fair digital cash. The divisible digital cash allows for the division of a single digital coin into smaller units, each of which can be used as a digital coin by itself. The sum of the values of all the coins is equal to the value of the coin that was divided into them. Unconditional privacy of the payer is restricted under fair digital cash. The normal digital cash fully facilitates the anonymity of the client, unless the bank and the vender unless they break the theoretical assumptions that underlie it.
Three kinds of executions in a digital cash transaction: deposit, withdrawal and payment. Money is deposited when one puts the money he owns into a bank account. Withdrawal is done when one moves money from ones account into one’s wallet or to another account or as payment. Payment is said to have been done when one transfers one’s ownership of money to another person as a resettlement for one’s reception of goods and/or services. The three participants in a digital cash system are a payer, a financial nexus and a payee.
Security and Privacy of Digital Cash
In terms of the use of digital cash, security means the ability of digital cash to avoid being copied and/or being reused. Two security problems that the use money presents is counterfeiting and, as a result of the possibility of money being counterfeited, authentication. Besides avoiding forgery and double spending, it is a requirement that digital cash has the properties that prevent digital coins from being traced, and that there be an assurance that the payer or client remains anonymous.
To accomplish security and privacy, digital cash or a digital coin must possess the following features: unforgeability, untraceability, anonymity, double spending detection and fairness. They are the properties of digital cash.
Properties of Digital Cash
Forgery is one of the plainest problems with payment. Forgery is achieved in paper cash through either creation of an authentic-looking copy of the paper cash or double spending.
To safeguard digital currency against copied, reliance is placed on the authentification of user identity and consistency of the message. This is successfully achieved by the use of encryption.
As for double spending, the bank keeps account of all electronic coins spent. This prevents multiple spending when the payment is done online. However, as for offline payment, one has to notice that multiple spending has taken place.
Consequent to the possibility of forgery, measures of evaluating the authenticity of before and during a transaction have to be put in place. With digital cash, the measures include identification of the user; surety that a copy of the transaction message remains the same throughout; and a warranty that the transaction would not be denied later.
Digital cash or a digital coin has the property that once it has been used, its path in form of the transactions that it has been gone through cannot be traced. This means that given a digital coin, there is no way of telling who has ever owned the electronic coin, from its ‘minting’ to its current owner.
The identity of the owner of the electronic coin should remain hidden. It means that given any digital coin, whoever ever owns it should not be able to be told from that digital coin.
Privacy means not just the anonymity for the paying party, but also intractability of the payment, in such a way that the intermediary cannot identify whom the money that was used for that particular payment belonged to.
Similarly, digital cash has this anonymity: traceability to the paying individual is strictly speaking impossible. In spite of the inability to identify the payer from a transaction, the transaction intermediary is assured of that the digital cash is authentic.
This property of anonymity has its downsides. Issues like illegal buying, money laundering, extortion, and forgery that are more serious than paper cash.
Digital cash does not depend on the locations of the parties who do the transaction, unlike paper cash. Transfer of digital cash is done through the internet or mobile networks, other than in cases where plastic money such as credit cards is involved, in which case proximity is needed. Otherwise it can be done anywhere at any time. A portability advantage of plastic money over paper cash is that one can move around with as much money as one likes, unlike paper cash. There are some products that cost a lot of money and that would mean moving around with bags of cash, which would not be convenient.
Transfer occurs when a payer decides to pass ownership of money to a payee as a settlement for goods and/or services provided by the payee, and the payees accepts the money as such. Digital cash can easily be transferred at by phone or desktop computer upon an agreement between the two parties.
Usually goods and services come in varying prices. These prices are usually different that the available denominations of money. However, even in the rare cases where prices happen to be the equal to a multiple and/or sum of the available denominations, the coincidence that they payer has that combination of cash at that particular time is also very rare. Hence, any payment will require that change be possible to make.
While use of paper cash may subject users to such complexity, use of digital cash overcomes this inconvenience. Digital cash come in very small denominations like cents or even smaller. This provision makes it possible to make any quantity of transactions online.
Encryption: The Digital Wallet
Encryption is a method of preventing data from being accessed by an unauthorized person. When data is encrypted, one needs to have a secret key to decrypt it, or access its content. That data being talked about here is computer data.
Digital money exists as computer data. To achieve digital coin security, the data that is the digital coin needs to be encrypted. The method of encryption is the same as for any other computer data. An encrypted digital coin or digital cash is called cryptocurrency. A cryptocurrency is just another name for digital currency since almost all digital currencies are encrypted.
There are two most known methods of encryption: symmetric key encryption and public key encryption. In the case of symmetric key encryption, the keys used to encrypt and decrypt data are identical. For that matter, the parties involved in a transaction need to have the very same key before a transaction or transfer of money can be accomplished successfully. On the other hand, in the case of public key encryption, the encryption key is release into the public domain for anyone to encrypt and decrypt digital cash. However, not everything is revealed. The decryption key that allows one to read messages is reserved for the recipient only.
Encryption is achieved through the application of some complex computer algorithms. Encryption is responsible for the security and privacy of digital cash.
Pros and Cons of Digital Cash
Digital money is convenient and portable. It is not convenient to move around with paper notes and coins. They could be lost or stolen in which case a different person would use them. Furthermore, there are products that cost a lot of money, which, in the absence of digital money, would mean walking around with loads of cash in bags. In such a situation, digital money is effective in terms of portability.
Digital cash is convenient for making payments over long distances. In fact, it has played a part in the development of online businesses. Payments and transfers can be made across vast geographical regions and overseas at the click of a mouse, helping save time and the cost of transportation.
As was seen earlier, digital cash has the properties of anonymity, privacy and untraceability, all of which in most cases the parties involved in a transaction may need.
Wide acceptance and use of digital cash could disrupt the financial system. Money supply needs to be regulated by banks, financial institutions and governments through their central banks. While there can be control on credit cards, debit cards, and some form of digital cash can be checked and controlled, there are other forms like the Bitcoin cannot be regulated. In the case of a potential economic catastrophe that would be prevented by regulating money supply, digital cash would make the economy collapse.
Digital cash can also encourage and achieve illegal activities. Some of the activities include money laundering, funding of terrorist activities and online fraud. Some of the available digital cash allow for transactions or transfer of money without involving any intermediary. This means the buyer and the seller remain anonymous. Crime cannot be identified, leave alone the unavailability of clues that would facilitate forensic investigation.
It is feared a widespread adoption of digital money is a threat to the banking system-the use of digital money could collapse the banking system. The banking system not only provides employment to the people working in the banking sector; it also lends money for business startups and business development, which is a major contributor to economic growth. The collapse of the system would mean an economic recession. Digital cash can also be used to evade taxation. This behavior hinders the development of the economy.
In addition to the pros and cons, the use of digital cash, or more specifically digital card technology, is not without challenges. Prasad et al. identifies technology and infrastructure, and security as two of the major challenges. They argue that governments would be confronted with the big task of developing and implementing the necessary infrastructure model, besides the need to be ahead in implementing and maintaining new technologies. On the part of security, governments and financial institutions will need to put in robust measures to defend themselves against cyber attacks. If these attacks do not lead to theft of digital cash, they may lead to the collapse of the country, banks, or institution’s digital cash system.
Companies that Offer Digital Cash Services
Several companies offer digital money transfer services. A popular player is Paypal. Mobile service providers have also entered the digital cash transfer service business. An example is a service called Mpesa offered by Safaricom, which is one of the mobile service providers in East Africa.
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