From: "Vladimir Z. Nuri" <vznuri@netcom.com>
Date: Thu, 30 Oct 1997 01:39:55 +0800
To: cypherpunks@toad.com
Subject: digital cash & politics
Message-ID: <199710291706.JAA14952@netcom7.netcom.com>
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Date: Thu, 16 Oct 1997 11:40:46 -0500 (CDT)
To: believer@telepath.com
From: believer@telepath.com
Subject: IP: End of National Markets

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>From the USIA Daily Washington File
>http://www.usia.gov/products/washfile.htm
>
>15 October 1997
>
>THE END OF NATIONAL MARKETS (Electronic cash makes regulation difficult)
>
>by Stephen J. Kobrin
>
>(Copyright (c) 1997 Carnegie Endowment for International Peace.
>Reprinted with permission from FOREIGN POLICY magazine, Summer 1997.
>Permission has been obtained covering
>republication/translation/abridgment by USIS and the local press
>outside the United States.)
>
>----------------------------
>
>Twenty-six years ago, Raymond Vernon's "Sovereignty at Bay" proclaimed
>that "concepts such as national sovereignty and national economic
>strength appear curiously drained of meaning."
>
>Other books followed, arguing that sovereignty, the nation-state, and
>the national economy were finished -- victims of multinational
>enterprises and the internationalization of production. While
>sovereign states and national markets have outlasted the chorus of
>Cassandras, this time the sky really may be falling. The emergence of
>electronic cash and a digitally networked global economy pose direct
>threats to the very basis of the territorial state.
>
>Let us begin with two vignettes. Fact: Smugglers fly Boeing 747s
>loaded with illicit drugs into Mexico and then cram the jumbo jets
>full of cash -- American bills -- for the return trip. Fiction: Uncle
>Enzo, Mafia CEO, pays for intelligence in the digital future of Neal
>Stephenson's novel Snow Crash: "He reaches into his pocket and pulls
>out a hypercard and hands it toward Hiro. It says 'Twenty-Five Million
>Hong Kong Dollars.' Hiro reaches out and takes the card. Somewhere on
>earth, two computers swap bursts of electronic noise and the money
>gets transferred from the Mafia's account to Hiro's."
>
>The 747s leaving Mexico are anachronisms, among the last surviving
>examples of the physical transfer of large amounts of currency across
>national borders. Most money has been electronic for some time.
>Virtually all of the trillions of dollars, marks, and yen that make
>their way around the world each day take the form of bytes -- chains
>of zeros and ones. Only at the very end of its journey is money
>transformed into something tangible: credit cards, checks, cash, or
>coins.
>
>Hypercards are here. Mondex, a smart card or electronic purse, can be
>"loaded" with electronic money from an automatic teller machine (atm)
>or by telephone or personal computer using a card-reading device.
>Money is spent either by swiping the card through a retailer's
>terminal or over the Internet by using the card reader and a personal
>computer. An electronic wallet allows anonymous card-to-card
>transfers.
>
>It is not just the current technology of electronic cash (e-cash) or
>even what might be technologically feasible in the future that
>presents policymakers with new challenges. Rather, policymakers must
>confront directly the implications of this technology -- and, more
>generally, the emergence of an electronically networked global economy
>-- for economic and political governance. As the U.S. comptroller of
>the currency, Eugene Ludwig, has noted, "There is clearly a freight
>train coming down the tracks...Just because it hasn't arrived yet
>doesn't mean we shouldn't start getting ready."
>
>ELECTRONIC MONEY
>
>Many different forms of "electronic money" are under development, but
>it is useful to look at three general categories: electronic debit and
>credit systems; various forms of smart cards; and true digital money,
>which has many of the properties of cash.
>
>Electronic debit and credit systems already exist. When a consumer
>uses an ATM card to pay for merchandise, funds are transferred from
>his or her account to the merchant's. Credit cards are used to make
>payments over the Internet. Computer software such as Intuit provides
>electronic bill payment, and it is but a short step to true electronic
>checks --authenticated by a digital signature -- that can be
>transmitted to the payee, endorsed, and deposited over the Internet.
>
>Electronic debit and credit systems represent new, more convenient
>means of payment, but not new payment systems. A traditional bank or
>credit card transaction lies at the end of every transaction chain.
>Smart cards and digital money represent new payment systems with
>potentially revolutionary implications. Smart cards are plastic
>"credit" cards with an embedded microchip. Many are now used as
>telephone or transit payment devices. They can be loaded with currency
>from an atm or via a card reader from a telephone or personal
>computer, which can then be spent at businesses, vending machines, or
>turnstiles that have been equipped with appropriate devices. At this
>most basic level, a smart card is simply a debit card that does not
>require bank approval for each transaction; clearance takes place each
>day and the value resides in third-party accounts. There is no reason,
>however, that smart cards have to be limited in this way.
>
>Banks or other institutions could provide value on smart cards through
>loans, payments for services, or products. The immediate transfer of
>funds between bank accounts is not necessary; units of value can
>circulate from card to card -- and from user to user -- without
>debiting or crediting third-party accounts. Assuming confidence in the
>creating institution, "money" could be created on smart cards and
>could circulate almost indefinitely before redemption.
>
>Finally, electronic money can take true digital form, existing as
>units of value in the form of bytes stored in the memory of personal
>computers that may or may not be backed up by reserve accounts of real
>money. The money could be downloaded from an account, supplied as a
>loan or as payment, or bought with a credit card over the Internet. As
>long as digital cash can be authenticated and there is confidence in
>its continued acceptance, it could circulate indefinitely, allowing
>peer-to-peer payments at will. These are big "ifs," but they are well
>within the realm of the possible.
>
>Imagine a world where true e-cash is an everyday reality. Whether all
>of the following assumptions are correct or even immediately feasible
>is unimportant; some form of e-cash is coming, and we need to begin
>the process of thinking about its as-yet-unexplored consequences for
>economic and political governance.
>
>The year is 2005. You have a number of brands of e-cash on your
>computer's hard drive: some withdrawn from a bank in Antigua, some
>borrowed from Microsoft, and some earned as payment for your services.
>You use the digital value units (DVUs) to purchase information from a
>Web site, pay bills, or send money to your daughter in graduate
>school. Peer-to-peer payments are easy: You can transfer DVUs to any
>computer anyplace in the world with a few keystrokes.
>
>Your e-cash is secure and can be authenticated easily. It is also
>anonymous; governments have not been able to mandate a technology that
>leaves a clear audit trail. Public-key encryption technology and
>digital signatures allow blind transactions; the receiving computer
>knows that the DVUs are authentic without knowing the identity of the
>payer. Your e-cash can be exchanged any number of times without
>leaving a trace of where it has been. It is virtually impossible to
>alter the value of your e-cash at either end of the transaction (by
>adding a few more zeros to it, for example).
>
>DVUs are almost infinitely divisible. Given the virtually negligible
>transaction cost, it is efficient for you to pay a dollar or two to
>see a financial report over the Internet or for your teenager to rent
>a popular song for the few minutes during which it is in vogue.
>Microtransactions have become the norm. E-cash is issued -- actually
>created -- by a large number of institutions, bank and nonbank.
>Electronic currencies (e-currencies) have begun to exist on their own;
>many are no longer backed by hard currency and have developed value
>separately from currencies issued by central banks. DVUs circulate for
>long periods of time without being redeemed or deposited. Consumer
>confidence in the issuer is crucial; as with electronic commerce
>(e-commerce) in general, brand names have become critical.
>
>The early 21st century is described as a world of competing
>e-currencies, a throwback to the 19th-century world of private
>currencies. The better known brands of e-cash are highly liquid and
>universally accepted. It is a relatively simple matter for you to set
>up filters in your electronic purse to screen out e-currencies that
>you do not want to accept.
>
>GOVERNANCE IN THE DIGITAL WORLD
>
>E-cash and the increasing importance of digital markets pose problems
>for central government control over the economy and the behavior of
>economic actors; they also render borders around national markets and
>nation-states increasingly permeable -- or, perhaps, increasingly
>irrelevant. In a world where true e-cash is an everyday reality, the
>basic role of government in a liberal market economy and the relevance
>of borders and geography will be drastically redefined.
>
>While at first glance this concern appears to reflect a traditional
>break between domestic and international economic issues, in fact the
>advent of e-cash raises serious questions about the very idea of
>"domestic" and "international" as meaningful and distinct concepts.
>The new digital world presents a number of governance issues,
>described below.
>
>-- Can central banks control the rate of growth and the size of the
>money supply? Private e-currencies will make it difficult for central
>bankers to control -- or even measure or define -- monetary
>aggregates. Several forms of money, issued by banks and nonbanks, will
>circulate. Many of these monies may be beyond the regulatory reach of
>the state. At the extreme, if, as some libertarians imagine, private
>currencies dominate, currencies issued by central banks may no longer
>matter.
>
>-- Will there still be official foreign exchange transactions? E-cash
>will markedly lower existing barriers to the transfer of funds across
>borders. Transactions that have been restricted to money-center banks
>will be available to anyone with a computer. Peer-to-peer transfers of
>DVUs across national borders do not amount to "official" foreign
>exchange transactions. If you have $200 worth of DVUs on your computer
>and buy a program from a German vendor, you will probably have to
>agree on a mark-to-dollar price. However, transferring the DVUs to
>Germany is not an "official" foreign exchange transaction; the DVUs
>are simply revalued as marks. In fact, national currencies may lose
>meaning with the development of DVUs that have a universally accepted
>denomination. Without severe restrictions on individual privacy --
>which are not out of the question -- governments will be hard-pressed
>to track, account for, and control the flows of money across borders.
>
>-- Who will regulate or control financial institutions? The U.S.
>Treasury is not sure whether existing regulations, which apply to both
>banks and institutions that act like banks (i.e., take deposits),
>would apply to all who issue (and create) e-cash. If nonfinancial
>institutions do not accept the extensive regulatory controls that
>banks take as the norm, can reserve or reporting requirements be
>enforced? What about consumer protection in the event of the
>insolvency of an issuer of e-cash, a system breakdown, or the loss of
>a smart card?
>
>-- Will national income data still be meaningful? It will be almost
>impossible to track transactions when e-cash becomes a widely used
>means of payment, online deals across borders become much easier, and
>many of the intermediaries that now serve as checkpoints for recording
>transactions are eliminated by direct, peer-to-peer payments. The
>widespread use of e-cash will render national economic data much less
>meaningful. Indeed, the advent of both e-cash and e-commerce raises
>fundamental questions about the national market as the basic unit of
>account in the international economic system.
>
>-- How will taxes be collected? Tax evasion will be a serious problem
>in an economy where e-cash transactions are the norm. It will be easy
>to transfer large sums of money across borders, and tax havens will be
>much easier to reach. Encrypted anonymous transactions will make
>audits increasingly problematic. Additionally, tax reporting and
>compliance relies on institutions and intermediaries. With e-cash and
>direct payments, all sorts of sales taxes, value-added taxes, and
>income taxes will be increasingly difficult to collect. More
>fundamentally, the question of jurisdiction -- who gets to tax what --
>will become increasingly problematic. Say you are in Philadelphia and
>you decide to download music from a computer located outside Dublin
>that is run by a firm in Frankfurt. You pay with e-cash deposited in a
>Cayman Islands account. In which jurisdiction does the transaction
>take place?
>
>-- Will e-cash and e-commerce widen the gap between the haves and the
>have-nots? Participation in the global electronic economy requires
>infrastructure and access to a computer. Will e-cash and e-commerce
>further marginalize poorer population groups and even entire poor
>countries? This widened gap between the haves and the have-nots --
>those with and without access to computers -- could become
>increasingly difficult to bridge.
>
>-- Will the loss of seigniorage be important as governments fight to
>balance budgets? Seigniorage originally referred to the revenue or
>profit generated due to the difference between the cost of making a
>coin and its face value; it also refers to the reduction in government
>interest payments when money circulates. The U.S. Treasury estimates
>that traditional seigniorage amounted to $773 million in 1994 and that
>the reduction in interest payments due to holdings of currency rather
>than debt could be as much as $3.5 billion per year. The Bank for
>International Settlements reports that the loss of seigniorage for its
>11 member states will be more than $17 billion if smart cards
>eliminate all bank notes under $25.
>
>-- Will fraud and criminal activity increase in an e-cash economy? At
>the extreme -- and the issue of privacy versus the needs of law
>enforcement is unresolved -- transfers of large sums of cash across
>borders would be untraceable. There would be no audit trail. Digital
>counterfeiters could work from anywhere in the world and spend
>currency in any and all places. New financial crimes and forms of
>fraud could arise that would be hard to detect, and it would be
>extremely difficult to locate the perpetrators. The task of financing
>illegal and criminal activity would be easier by orders of magnitude.
>E-cash will lower the barriers to entry and reduce the risks of
>criminal activity.
>
>Most of the issues raised in the recent National Research Council
>report on cryptography's role in the information society apply
>directly to electronic cash. Secure, easily authenticated, and
>anonymous e-cash requires strong encryption technology. Anonymous
>transactions, however, cannot be restricted to law-abiding citizens.
>Encryption makes it as difficult for enforcement authorities to track
>criminal activity as it does for criminals to penetrate legitimate
>transmissions. Should privacy be complete? Or should law enforcement
>authorities and national security agencies be provided access to
>e-cash transactions through escrowed encryption, for example? What
>about U.S. restrictions on the export of strong encryption technology?
>E-cash is global cash; how can governments limit its geographic
>spread? Can they even suggest that strong encryption algorithms be
>restricted territorially?
>
>GEOGRAPHIC SPACE VERSUS CYBERSPACE
>
>A recent U.S. Treasury paper dealing with the tax implications of
>electronic commerce argues that new communications technologies have
>"effectively eliminated national borders on the information highway."
>It is clear from the paper's subsequent discussion, however, that the
>more fundamental problem is that electronic commerce may "dissolve the
>link between an income-producing activity and a specific location."
>The source of taxable income, which plays a major role in determining
>liability, is defined geographically in terms of where the economic
>activity that produces the income is located. Therein lies the rub:
>"Electronic commerce doesn't seem to occur in any physical location
>but instead takes place in the nebulous world of 'cyberspace.'" In a
>digital economy it will be difficult, or even impossible, to link
>income streams with specific geographic locations.
>
>Digitalization is cutting money and finance loose from its geographic
>moorings. The framework of regulation that governs financial
>institutions assumes that customers and institutions are linked by
>geography -- that spatial proximity matters. E-cash and e-commerce
>snap that link. What remains are systems of economic and political
>governance that are rooted in geography and are trying nonetheless to
>deal with e-cash and markets that exist in cyberspace. The obvious
>disconnect here will only worsen over time.
>
>The geographical rooting of political and economic authority is
>relatively recent. Territorial sovereignty, borders, and a clear
>distinction between domestic and international spheres are modern
>concepts associated with the rise of the nation-state. Territorial
>sovereignty implies a world divided into clearly demarcated and
>mutually exclusive geographic jurisdictions. It implies a world where
>economic and political control arise from control over territory.
>The international financial system -- which consists of hundreds of
>thousands of computer screens around the globe -- is the first
>international electronic marketplace. It will not be the last. E-cash
>is one manifestation of a global economy that is constructed in
>cyberspace rather than geographic space. The fundamental problems that
>e-cash poses for governance result from this disconnect between
>electronic markets and political geography.
>
>The very idea of controlling the money supply, for example, assumes
>that geography provides a relevant means of defining the scope of the
>market. It assumes that economic borders are effective, that the flow
>of money across them can be monitored and controlled, and that the
>volume of money within a fixed geographic area is important. All of
>those assumptions are increasingly questionable in a digital world
>economy.
>
>Many of our basic tax principles assume that transactions and income
>streams can be located precisely within a given national market. That
>assumption is problematic when e-cash is spent on a computer network.
>It is problematic when many important economic transactions cannot be
>located, or may not even take place, in geographic space.
>
>The increasing irrelevance of geographic jurisdiction in a digital
>world economy markedly increases the risks of fraud, money-laundering,
>and other financial crimes. Asking where the fraud or money-laundering
>took place means asking "Whose jurisdiction applies?" and "Whose law
>applies?" We need to learn to deal with crimes that cannot be located
>in geographic space, where existing concepts of national jurisdiction
>are increasingly irrelevant.
>
>The term "disintermediation" was first used to describe the
>replacement of banks as financial intermediaries by direct lending in
>money markets when interest rates rose. It is often used in the world
>of e-commerce to describe the elimination of intermediaries by direct
>seller-to-buyer transactions over the Internet. Many observers argue
>that e-cash is likely to disintermediate banks. Of more fundamental
>importance is the possibility that e-cash and e-commerce will
>disintermediate the territorial state.
>
>To be clear, I argue that we face not the end of the state, but rather
>the diminished efficacy of political and economic governance that is
>rooted in geographic sovereignty and in mutually exclusive territorial
>jurisdiction. Questions such as: "Where did the transaction take
>place?" "Where did the income stream arise?" " Where is the financial
>institution located?" and "Whose law applies?" will lose meaning.
>E-cash and e-commerce are symptoms, albeit important ones, of an
>increasing asymmetry between economics and politics, between an
>electronically integrated world economy and territorial nation-states,
>and between cyberspace and geographic space. How this asymmetry will
>be resolved and how economic and political relations will be
>reconstructed are two of the critical questions of our time.
>
>WHAT IS TO BE DONE?
>
>The question asked here is not "What is feasible?" but "What are the
>limits of the possible?" Whether the picture presented here is correct
>in all -- or even some -- of its details is unimportant. A digital
>world economy is emerging. Imagining possible scenarios is necessary
>if we are to come to grips with the consequences of this revolution.
>The purpose here is to raise problems rather than to solve them and to
>imagine possible futures and think about their implications for
>economic and political governance. A digital world economy will demand
>increasing international cooperation, harmonizing national regulations
>and legislation, and strengthening the authority of international
>institutions.
>
>The harmonization of national regulations will help to prevent
>institutions, such as those issuing e-cash, from slipping between
>national jurisdictions or shopping for the nation with the least
>onerous regulations. However, it will not address the basic problem of
>the disconnect between geographic jurisdiction and an electronically
>integrated global economy.
>
>If it is impossible to locate transactions geographically -- if the
>flows of e-cash are outside of the jurisdictional reach of every
>country -- then the harmonization of national regulations will
>accomplish little. The basic problem is not one of overlapping or
>conflicting jurisdictions; it stems from the lack of meaning of the
>very concept of "jurisdiction" in a digitalized global economy.
>The erosion of the viability of territorial jurisdiction calls for
>strengthened international institutions. It calls for giving
>international institutions real authority to measure, to control, and,
>perhaps, to tax. The Basle Committee on Banking Supervision -- an
>international body of bank regulators who set global standards --
>could perhaps be given the authority to collect information from
>financial institutions wherever they are located and formulate and
>enforce regulations globally. Interpol, or its equivalent, may have to
>be given jurisdiction over financial crimes, regardless of where they
>are committed. That does not mean a world government; it does mean a
>markedly increased level of international cooperation.
>
>The questions we must face are whether territorial sovereignty will
>continue to be viable as the primary basis for economic and political
>governance as we enter the 21st century, and what the implications
>will be for the American economy -- and Americans in general -- if we
>refuse to cooperate internationally in the face of an increasingly
>integrated global economy.
>
>                         ---------------------
>
>ELECTRONIC CASH: A GLOSSARY
>
>DIGITAL DATA: Information coded into a series of zeros and ones that
>can be transmitted and processed electronically.
>
>DIGITAL SIGNATURE: A code that allows absolute authentication of the
>origin and integrity of a document, check, or electronic cash that has
>been sent over a computer network. A blind signature allows
>authentication without revealing the identity of the sender.
>
>DISINTERMEDIATION: The substitution of direct transactions for those
>that are mediated. The term originated when rising interest rates
>caused savings to be withdrawn from banks -- whose interest rates were
>capped -- and invested in money market instruments that were the
>direct debts of borrowers. Banks were disintermediated. In electronic
>commerce, the term refers to the rise of direct buyer-to-seller
>relationships over the Internet, disintermediating wholesalers and
>retail outlets.
>
>ELECTRONIC MONEY: Units or tokens of monetary value that take digital
>form and are transmitted over electronic networks. Digital Value Units
>are the basic units of denomination of electronic money; they may or
>may not correspond to units of national currency.
>
>ENCRYPTION: The coding of information for security purposes, such as
>credit card numbers or electronic cash used over the Internet.
>Public-key encryption uses a mathematical algorithm comprising a pair
>of strings of numbers to encrypt and decrypt the data. For example,
>the sender would encrypt the data with the receiver's public key and
>the receiver would decrypt with his or her private key.
>
>INTERNET: A global network of linked networks that allows
>communication and the sharing of information among many different
>types of computers. The World Wide Web is a graphical system on the
>Internet that allows rapid movement between documents and computers
>through the use of embedded (hypertext) links.
>
>SMART CARDS: A plastic card, similar to a credit card, containing a
>microchip that can be used to retrieve, store, process, and transmit
>digital data like electronic cash or medical information.
>                        -----------------------
>
>(Stephen J. Kobrin is the director of the Lauder Institute of
>Management and International Studies and the William Wurster professor
>of multinational management at the Wharton School of the University of
>Pennsylvania. This paper develops themes raised at a discussion of
>electronic money at the 1997 annual meeting of the World Economic
>Forum in Davos, Switzerland.)
     


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