Electronic Currency

How convenient would it be if we could click on bank notes. As e-commerce is being practiced more widely, more transactions will be made. From payments of buying clothes from an online boutique to subscription fees to an online news provider. The stores could be made virtual from bricks to clicks. However, conventional payments still require physical substance like gold and banknotes. Of the development of currency, from cowrie shells to cattle, to banknotes and cheques, and now to credit cards.


Because e-commerce is relatively new, consumers choose payment methods of credit card rather than other electronic payments systems made to them. The reason is simply the familiarity of the method. Besides that, credit card provides consumer with advantages such as a credit purchase that exceeds the amount of salary the person makes, provided he pays off his account every month. On the other side of the coin, credit cards are also vulnerable to theft and fraud. Internet sellers especially dislike credit card payments because it is subjected to percentage fees which erodes profit margin.

Soon, Internet sellers who do not like the cost or risk associated with credit cards will demand money from buyers, just as sellers in real space often do. When that happens, the market will need electronic currencies that can circulate from computer to computer, around the world. Electronic money, e-money, electronic cash, electronic currency, digital money, digital cash or digital currency refers to money and scrip which is exchanged only electronically.

Based on the book: A History of Money from Ancient Times to the Present Day by Glyn Davies, beginning of 1995, over 90% of all transactions in United States are made electronically. In the same year, trials of the Mondex smart card which is intended as a replacement for cash was introduced in Swindon in Britain while cryptographer Dr. David Chaum developed anonymous form of digital money. And in 1999, Euro becomes the currency of 11 of the member states of the European Union (Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland). Therefore Europe enters the 3rd millennium with a new currency.

The link between them?

The main idea of electronic currency is to create a single currency only transferable electronically which is not affected by currency exchange rate like real cash do.
Global electronic currencies will benefit Internet commerce in two ways. First, the currencies can serve as universal media of exchange. Once a user acquires a global electronic currency, he can enter into transactions around the world without having to pay exchange fees. Second, the currencies will provide global units of account, enabling buyers and sellers all over the world to understand what goods and services are worth without calculation.


Now how is E-currency made possible?

Public-key cryptography and digital signatures (both blind and non-blind signatures) make e-money possible. The basic gist is that banks and customers would have public-key encryption keys. Public-key encryption keys come in pairs. A private key known only to the owner, and a public key, made available to everyone. Whatever the private key encrypts, the public key can decrypt, and vice verse.

Banks and customers use their keys to encrypt (for security) and sign (for identification) blocks of digital data that represent money orders. A bank "signs" money orders using its private key and customers and merchants verify the signed money orders using the bank's widely published public key. Customers sign deposits and withdraws using their private key and the bank uses the customer's public key to verify the signed withdraws and deposits.

The 2 types of E-currency.

In general, there are two distinct types of e-money: identified e-money and anonymous e-money (also known as digital cash). Identified e-money contains information revealing the identity of the person who originally withdrew the money from the bank. Also, in much the same manner as credit cards, identified e-money enables the bank to track the money as it moves through the economy. Anonymous e-money works just like real paper cash. Once anonymous e-money is withdrawn from an account, it can be spent or given away without leaving a transaction trail. You create anonymous e-money by using blind signatures rather than non-blind signatures.

(Sources:
http://en.wikipedia.org/wiki/Electronic_money
http://projects.exeter.ac.uk/
http://www.law.berkeley.edu)