From: rah@shipwright.com (Robert Hettinga)
Date: Wed, 20 Dec 1995 01:05:52 +0800
To: cypherpunks@toad.com
Subject: (fwd) Economics of Digital Money.
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Date: Tue, 19 Dec 1995 12:42:23 +0700 (GMT+0700)
From: Patiwat Panurach <pati@ipied.tu.ac.th>
To: ecash@digicash.com
Subject: Economics of Digital Money.
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        The Economics of Digital Commerce: An analysis of
        Digital Cash, ElectronicFund Transfers, and eCash

By: Patiwat Panurach
Faculty of Economics
Thammasat University
Bangkok, Thailand


The extraordinary growth of international interconnected computer networks
and the pervasive trend of commerce to utilize these networks as a new field
for there operations has catalyzed the demand for new methods of payments.
These new methods must attain unprecedented levels of security, speed,
privacy, decentralization, and internationalization for digital commerce
to be
accepted by both consumers and entrepreneurs.

This paper seeks to analyze 3 such methods of electronic payments.  First shall
be the generic type of electronic fund transfer that is widely in use.  Second,
the ongoing proposals for an open digital cash standard.  Lastly is a real
world technology currently in implementation called eCash.  These 3 methods
are examined in terms of the dynamics of transaction clearance, the effects on
money supply and the macroeconomy, there classification in terms of money
or cash, and the comparative viewpoints of monetary authorities, financial
institutions, and consumers.  This paper will not attempt to go into detail on
the myriad of encryption systems, protocols, algorithms and other technical
matters concerning the new systems.  These are all secondary aspects of
electronic payment.   As there basis, electronic payment systems are simply
logical evolutionary steps that began  with the realization of the limits of
barter.  The need to pay for  transactions is the root of all electronic
payment
systems.

The first method of electronic payments that shall be examined  has been in use
for a relatively long time.  It is the electronic checking system.  For many,
Electronic Checking and Electronic Payment are the same thing, although
this is not always so.  Electronic Checking simply uses the  existing banking
structure to its fullest potential by eliminating paper checks.  Electronic
Checking is an extremely varied system.  Some examples of it include

... paying for university fees via ATM card
... paying telephone bills via monthly bank account deductions
... large value overseas fund transfers

Conceptually, Electronic Checking, and almost all Electronic Payments,
involves 3 agents1:

1. buyer
2. seller
3. intermediary

The buyer initiates a transaction with the seller and the seller demands
payment.  The buyer then obtains a unique certification of payment (physically
called a check) from the intermediary.  This debits the buyer's account with
the intermediary The buyer then gives the certification to the seller and the
seller gives the certification to the intermediary.  This credits  the seller's
account with the intermediary.

Schematically, this is a conventional checking transaction.  But when it is
conducted electronically, the certification is an electronic  flow that is
documented by the intermediary.  Most important, the  attainment of the
certification, the transfer of the certification, and  the debiting and
crediting of
the accounts occurs instantaneously. If the buyer and seller don't use the same
intermediary, some standardized  clearing house system  between
intermediaries is usually used.

Since electronic checking is essentially checking, it can be analyzed as
checking.  Payments made via electronic checking would be conducted outside
of cash and paper.  Instead of sending a check or paying at a counter, the
buyer would initiate an electronic checking certification.  If this is done
as a
substitute for paying in cash, electronic checking could susbstantually reduce
the transactions demand for money.  In essence, this is not electronic checking
but electronic cash.  But if it is a substitute for conventional checking,
it would
just increase the speed of the transaction.  From the economic standpoint,
there
is no difference in the dynamics of the checking process from normal checks

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-----------------
Robert Hettinga (rah@shipwright.com)
e$, 44 Farquhar Street, Boston, MA 02131 USA (617) 958-3971
"Reality is not optional." --Thomas Sowell
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