How to encourage global electronic commerce:

How to encourage global How to encourage global electronic commerce:electronic commerce:

The case for private currencies on the internetThe case for private currencies on the internet

by Kerry Lynn Macintoshby Kerry Lynn MacintoshProfessor of Law, Santa Clara University School of LawProfessor of Law, Santa Clara University School of Law

How to encourage global electronic commerce: The case for private currencies on the internet

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• July 1st 1997 B. Clinton & A. Gore noted the importance of e-commerce as a July 1st 1997 B. Clinton & A. Gore noted the importance of e-commerce as a business that could be worth 10s of billions by the turn of the century; to be business that could be worth 10s of billions by the turn of the century; to be realized „...governments must adopt a non-regulatory, market oriented realized „...governments must adopt a non-regulatory, market oriented approach to e-commerce“approach to e-commerce“

• electronic payment system identified as a key componentelectronic payment system identified as a key component

• until then their approach was a conservative one: adapted more familiar until then their approach was a conservative one: adapted more familiar payment devices to the online environment (e.g. magnetic stripe cards, credit payment devices to the online environment (e.g. magnetic stripe cards, credit cards ...)cards ...)

• romantic view of these early days: internet is a New World - a unique place romantic view of these early days: internet is a New World - a unique place that transcends geographical or national boundaries : truly global commerce is that transcends geographical or national boundaries : truly global commerce is possiblepossible

• Therefore the author argues, that the internet needs its own private currenciesTherefore the author argues, that the internet needs its own private currencies


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There might be two different approaches:There might be two different approaches:

• Global electronic currencies that serve as media of exchange within Global electronic currencies that serve as media of exchange within the global marketplace that the internet has createdthe global marketplace that the internet has created

• Community electronic currencies that are designed to circulate only Community electronic currencies that are designed to circulate only within specific internet communitieswithin specific internet communities


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Global electronic currencies - Clinton’s five principlesGlobal electronic currencies - Clinton’s five principles

• The private sector should lead...The private sector should lead...

• Government should avoid undue restrictions on e-commerceGovernment should avoid undue restrictions on e-commerce

• Where governmental involvement is needed, its aim should be to Where governmental involvement is needed, its aim should be to support and enforce a predictable, minimalist, consistent and simple support and enforce a predictable, minimalist, consistent and simple legal environment for commercelegal environment for commerce

• Government should realize the unique qualities of the internetGovernment should realize the unique qualities of the internet

• E-commerce should be facilitated on a global basisE-commerce should be facilitated on a global basis


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Global electronic currencies - Hayek and the Denationalization of MoneyGlobal electronic currencies - Hayek and the Denationalization of Money

• About 20 years ago Friedrich A. Hayek postulated already a free market in About 20 years ago Friedrich A. Hayek postulated already a free market in money with private enterprise offering currencies money with private enterprise offering currencies

• Institutions would be allowed to issue notes in competition; the name of the Institutions would be allowed to issue notes in competition; the name of the currencies would be protected like a brand name, it would be made available currencies would be protected like a brand name, it would be made available to the public against other currenciesto the public against other currencies

• Each issuer would regulate the quantity of its own currency, so that the value Each issuer would regulate the quantity of its own currency, so that the value would remain stable to a diversified basket or portfolio would remain stable to a diversified basket or portfolio

• Hayek reasoned that government monopoly over the issuance of money was Hayek reasoned that government monopoly over the issuance of money was harmful: easy money led to inflation, neutrality not always sure, politics harmful: easy money led to inflation, neutrality not always sure, politics corrupts monetary policycorrupts monetary policy

• Hayek reasoned, so long as several issuers of different currencies were Hayek reasoned, so long as several issuers of different currencies were allowed to compete, there would always be one who found it advantageous to allowed to compete, there would always be one who found it advantageous to maintain stable value and a stable currency would provide more stable maintain stable value and a stable currency would provide more stable business conditionsbusiness conditions


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Global electronic currencies - The Rise of global electronic currency - Global electronic currencies - The Rise of global electronic currency - The basic ModelThe basic Model

• Currency as digital promissory notes, that bear the issuing company’s Currency as digital promissory notes, that bear the issuing company’s digital signature and designed in a way that it could be moved from digital signature and designed in a way that it could be moved from one computer to another, but not duplicatedone computer to another, but not duplicated

• The currency would be given away for government money, the issuing The currency would be given away for government money, the issuing companies gets revenue as exchange fees (see traveler’s checks)companies gets revenue as exchange fees (see traveler’s checks)

• The issuing company would regulate the quantity to keep its value The issuing company would regulate the quantity to keep its value stable (has to compete with other companies)stable (has to compete with other companies)

• Engineers and computer experts would be hired to provide technical Engineers and computer experts would be hired to provide technical design and develop software for the exchange from one PC to the design and develop software for the exchange from one PC to the otherother


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Global electronic currencies - The Rise of global electronic currency - Global electronic currencies - The Rise of global electronic currency - A World of competing currenciesA World of competing currencies

• An unregulated market should generate many companies and An unregulated market should generate many companies and currencies that would compete for the business of internet userscurrencies that would compete for the business of internet users

• Only the most stable and efficient currencies would survive this Only the most stable and efficient currencies would survive this competitioncompetition

• Seeking to avoid transaction costs of exchanging one currency for Seeking to avoid transaction costs of exchanging one currency for another, users would gravitate to more popular currencies with greater another, users would gravitate to more popular currencies with greater market sharemarket share


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Global electronic currencies - Marketing the ProductGlobal electronic currencies - Marketing the Product

• Self-Disclosure: advertise the most desirable characteristics of their Self-Disclosure: advertise the most desirable characteristics of their currency, statistics to prove the stability (long-term), reports by currency, statistics to prove the stability (long-term), reports by independent financial advisorsindependent financial advisors

• Financial Health: maintain and disclose a positive net worth, a Financial Health: maintain and disclose a positive net worth, a portfolio of prudent and diversified investments and liquid assetsportfolio of prudent and diversified investments and liquid assets

• Eliminating the risk of Hyperinflation: because of reasons of Eliminating the risk of Hyperinflation: because of reasons of competition a strong interest in maintaining stability, issuer should be competition a strong interest in maintaining stability, issuer should be in a country with a stable government and structure, asset diversifi-in a country with a stable government and structure, asset diversifi-cation helps to protect property value cation helps to protect property value

• Association: at the beginning possibility of mistrust, but after a time Association: at the beginning possibility of mistrust, but after a time brand names create trustbrand names create trust


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Global electronic currencies - Why have Global Electronic CurrenciesGlobal electronic currencies - Why have Global Electronic Currencies

• Medium of Exchange: buyers and sellers often far away from each Medium of Exchange: buyers and sellers often far away from each other, but internet offers opportunity to meet; here global electronic other, but internet offers opportunity to meet; here global electronic currencies could greatly reduce exchange feescurrencies could greatly reduce exchange fees

• Unit of Account: currency must provide provide a measure of relative Unit of Account: currency must provide provide a measure of relative worth that users can understand on a deep intuitive level, as worth that users can understand on a deep intuitive level, as competition should ensure that just a limited number of currencies competition should ensure that just a limited number of currencies should emerge, these dominant currencies could establish should emerge, these dominant currencies could establish transnational units of account that could be understood w/o translationtransnational units of account that could be understood w/o translation

• Store of value: competitively advantageous to keep currency values Store of value: competitively advantageous to keep currency values stable, sellers would not accept a currency, if its value declines stable, sellers would not accept a currency, if its value declines because of inflation, private companies would answer to market forces because of inflation, private companies would answer to market forces rather than policies of national governmentsrather than policies of national governments


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Global electronic currencies - Would Global Electronic Erode Global electronic currencies - Would Global Electronic Erode Government Power?Government Power?

• A ban of private currencies would be an unfortunate overreaction:A ban of private currencies would be an unfortunate overreaction:

• Global electronic currencies would not unduly complicate daily Global electronic currencies would not unduly complicate daily money management, because the the combined value is too small (see money management, because the the combined value is too small (see stored-value cards and e-cash do not threaten FED’s operations)stored-value cards and e-cash do not threaten FED’s operations)

• G.e.c. would not significantly limit the ability of government to G.e.c. would not significantly limit the ability of government to achieve economic goals through monetary policyachieve economic goals through monetary policy

• G.e.c. would not seriously threaten the political power of government, G.e.c. would not seriously threaten the political power of government, because government would still have their own currencies as well and because government would still have their own currencies as well and would not give them upwould not give them up


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Global electronic currencies - Should Government regulate Global Global electronic currencies - Should Government regulate Global Electronic Currencies ?Electronic Currencies ?

• Clinton/Gore raised this question w/o resolving itClinton/Gore raised this question w/o resolving it

• ““Government action may be necessary to ensure the safety and Government action may be necessary to ensure the safety and soundness of electronic payment systems, to protect consumers, or to soundness of electronic payment systems, to protect consumers, or to respond to important law enforcement objectives”respond to important law enforcement objectives”

• Critical question: Should the issuance of g.e.c. be considered as Critical question: Should the issuance of g.e.c. be considered as banking?banking?

• If the answer is “yes” federal and state banking laws and regulations If the answer is “yes” federal and state banking laws and regulations could make it very difficult for private companies to enter the marketcould make it very difficult for private companies to enter the market


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Global electronic currencies - Should Government regulate Global Global electronic currencies - Should Government regulate Global Electronic Currencies ? - What is banking?Electronic Currencies ? - What is banking?

• Modern banking is mainly defined by two types of activities: Modern banking is mainly defined by two types of activities: accepting demand deposits and making commercial loansaccepting demand deposits and making commercial loans

• Issuer of g.e.c. need not be involved in either of theses activities: the Issuer of g.e.c. need not be involved in either of theses activities: the holder of the digital notes would be making a loan to the issuer and the holder of the digital notes would be making a loan to the issuer and the issuer would not receive demand deposits, because these have to be issuer would not receive demand deposits, because these have to be represented by individual accounts with a determinate value; this is represented by individual accounts with a determinate value; this is here obviously not the casehere obviously not the case

• Despite its treatment in the 19th century as an ordinary bank function, Despite its treatment in the 19th century as an ordinary bank function, currency issuance falls outside the boundaries of banking as it is currency issuance falls outside the boundaries of banking as it is presently conceivedpresently conceived


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Global electronic currencies - Should Government regulate Global Global electronic currencies - Should Government regulate Global Electronic Currencies ? - Preventing Runs and PanicElectronic Currencies ? - Preventing Runs and Panic

• One commonly asserted reason for regulating banks is to prevent runs and panicsOne commonly asserted reason for regulating banks is to prevent runs and panics

• Lawmakers could pass new laws that would subject issuers to banking regulations; Lawmakers could pass new laws that would subject issuers to banking regulations; this would restrict issuance to banksthis would restrict issuance to banks

• Alternatively could enact laws modeled after state laws governing traveler’s checks Alternatively could enact laws modeled after state laws governing traveler’s checks and money transmittersand money transmitters

• There are several reasons to favor market rather than regulatory solutions: There are several reasons to favor market rather than regulatory solutions: oppressive and inflexible regulations could prove harmful to the development of oppressive and inflexible regulations could prove harmful to the development of electronic payment systems, a legal framework should be consistent across state, electronic payment systems, a legal framework should be consistent across state, national and international borders, hasty enactment of laws is unnecessary, because national and international borders, hasty enactment of laws is unnecessary, because g.e.c. are no threat to users or economies in the near future anywayg.e.c. are no threat to users or economies in the near future anyway

• It would be much better, if the US (Congress, FED ...) take the lead in providing a It would be much better, if the US (Congress, FED ...) take the lead in providing a legal framework, which other countries might adopt afterwards in order to create legal framework, which other countries might adopt afterwards in order to create an equal environment worldwidean equal environment worldwide


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Community Electronic CurrenciesCommunity Electronic Currencies

• One of the unique qualities of the internet is that individuals are freed One of the unique qualities of the internet is that individuals are freed from the constraints of physical space and can exercise their liberty to from the constraints of physical space and can exercise their liberty to form new and diverse communities in cyberspaceform new and diverse communities in cyberspace

• Recognizing this fact, Part II devises a model for community Recognizing this fact, Part II devises a model for community electronic currencies -- that is, private electronic designed to circulate electronic currencies -- that is, private electronic designed to circulate only within specific Internet communitiesonly within specific Internet communities

• Part II explains how community electronic currencies would Part II explains how community electronic currencies would strengthen Internet communitiesstrengthen Internet communities


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Community Electronic Currencies - Internet CommunitiesCommunity Electronic Currencies - Internet Communities

• As a global communications network, the internet allows individuals As a global communications network, the internet allows individuals to associate freely across geographical and national boundariesto associate freely across geographical and national boundaries

• Individuals can associate w/o regard to race, ethnicity, nationalityIndividuals can associate w/o regard to race, ethnicity, nationality


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Community Electronic Currencies - Strong PrivacyCommunity Electronic Currencies - Strong Privacy

• Professor Friedman sees encryption as key to establish and maintain Professor Friedman sees encryption as key to establish and maintain Internet community. It keeps not only the content of messages private, Internet community. It keeps not only the content of messages private, it also enables individuals to make anonymous cash paymentsit also enables individuals to make anonymous cash payments

• With defensive technologies like these, a world of strong privacy can With defensive technologies like these, a world of strong privacy can be created in which individuals can communicate w/o suffering be created in which individuals can communicate w/o suffering interference by the government or other individualsinterference by the government or other individuals

• Groups that need privacy protection could be victims of AIDS, pro-Groups that need privacy protection could be victims of AIDS, pro-democracy activists in China or feminists in Irandemocracy activists in China or feminists in Iran

• Unfortunately the future of strong privacy remains an open question, Unfortunately the future of strong privacy remains an open question, because some politicians and law enforcement agencies are worried because some politicians and law enforcement agencies are worried about identifying and punishing criminalsabout identifying and punishing criminals


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Community Electronic Currencies - The Rise of Community Electronic Community Electronic Currencies - The Rise of Community Electronic CurrenciesCurrencies

• Basic Model: Local Exchange Trade Schemes are small-scale barter Basic Model: Local Exchange Trade Schemes are small-scale barter systems; their members trade skills and services with each other, systems; their members trade skills and services with each other, earning and spending points that are often equivalent with a earning and spending points that are often equivalent with a governmental currency; for a nominal fee participants receive a governmental currency; for a nominal fee participants receive a checkbook and can issue checks to each other, cleared by a treasurer checkbook and can issue checks to each other, cleared by a treasurer who sends regular statements to participants (British System)who sends regular statements to participants (British System)

• ““Ithaca HOURS” as a similar US systemIthaca HOURS” as a similar US system

• In translating to the internet there are two possible ways to deal with In translating to the internet there are two possible ways to deal with “cyber units”: the clearing could either be based on a central “cyber units”: the clearing could either be based on a central computer/ bookkeeper, that debits the buyer’s account and credits the computer/ bookkeeper, that debits the buyer’s account and credits the seller’s or digital promissory notes, consisting of electronic promises seller’s or digital promissory notes, consisting of electronic promises could be exchanged between buyer and sellercould be exchanged between buyer and seller


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Community Electronic Currencies - Why have community electronic Community Electronic Currencies - Why have community electronic currencies?currencies?

• If prices were quoted in a wide variety of currencies, confusion would If prices were quoted in a wide variety of currencies, confusion would resultresult

• One solution would be to use a Global Electronic currency, which has One solution would be to use a Global Electronic currency, which has the advantage that it could also be spent outside the specific the advantage that it could also be spent outside the specific communitycommunity

• According to the author a C.E.C. would offer special social benefits: According to the author a C.E.C. would offer special social benefits: he argues that the group could lack the sense of togetherness, because he argues that the group could lack the sense of togetherness, because as an Internet community they are not sharing a physical location and as an Internet community they are not sharing a physical location and the currency could symbolize a sense of togetherness - of belonging to the currency could symbolize a sense of togetherness - of belonging to a unique group (? - honestly, that sounds not very scientific to me - ?)a unique group (? - honestly, that sounds not very scientific to me - ?)

• Increased Opportunities to trade with each other (? because they have Increased Opportunities to trade with each other (? because they have to get rid of the currency nobody else accepts ?) - social solidarityto get rid of the currency nobody else accepts ?) - social solidarity


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Community Electronic Currencies - Should Government regulate Community Electronic Currencies - Should Government regulate Community Electronic Currencies ?Community Electronic Currencies ?

• Any organization, that brings like-minded individuals together Any organization, that brings like-minded individuals together increases opportunities to engage in profitable trade; c.e.c. could increases opportunities to engage in profitable trade; c.e.c. could promote the widest range of electronic commerce,enriching society as promote the widest range of electronic commerce,enriching society as a wholea whole

• Given their limited circulation they would not pose a serious Given their limited circulation they would not pose a serious competitive threat to the dollar or monetary policies, nor undermine competitive threat to the dollar or monetary policies, nor undermine political powerpolitical power

• Therefore if the US government is sincerely interested in encouraging Therefore if the US government is sincerely interested in encouraging e-commerce, it should work to provide a legal environment that would e-commerce, it should work to provide a legal environment that would permit the rise of c.e.c.permit the rise of c.e.c.


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Conclusion

• Global e-commerce would benefit from both types of privately issued, Global e-commerce would benefit from both types of privately issued, denominated and managed electronic currenciesdenominated and managed electronic currencies

• At this time, neither type would pose a serious threat to government At this time, neither type would pose a serious threat to government control over economic or monetary policy, nor jeopardize the payment control over economic or monetary policy, nor jeopardize the payment systemsystem

• Accordingly the US should act to eliminate unnecessary regulatory Accordingly the US should act to eliminate unnecessary regulatory clutter and should enact new laws specifically authorizing the private clutter and should enact new laws specifically authorizing the private sector to develop global and community electronic currencies, subject sector to develop global and community electronic currencies, subject to as few regulatory restraints as possibleto as few regulatory restraints as possible

• The government can take a step in the right direction, by encouraging The government can take a step in the right direction, by encouraging private companies to issue their own currencies for use on the Internetprivate companies to issue their own currencies for use on the Internet

Documents

How to encourage global electronic commerce: