What does the Reserve Bank say about e-cash?

A Reserve Bank paper delivered last May says is it vital that members of the public 'fully appreciate' the distinctions 'between currency and privately-issued 'money' and suggests that banks launching e-cash systems 'need to be careful to represent their products as akin to a 'deposit' rather than 'cash''. Issuers of electronic money are, says the Bank, in a 'risky business' and should make that risk clear to customers.

The Reserve bank's e-cash specialist, Peter Ledingham, was out of the country when Computerworld called, but his paper, The Policy Implications of Electronic Payments, delivered just before the banks bought the Mondex franchise last year, makes interesting reading.

In particular, Ledingham says it is important that members of the public "fully appreciate" the distinctions "between currency and privately-issued 'money' ... If they are told that something is an "alternative to cash" they may believe this, and fail to realise that the monetary amount stored on a card or on a network is only as good as the bank or other organisation which has the ultimate liability to pay on that obligation. Issuers will therefore need to be careful to represent their products as akin to a 'deposit' rather than 'cash'."

This would not appear to tally very well with the banks' consistent description of Mondex value as "cash" - and especially not with Mondex CEO Michael Keegan's heavily emphasised statement at Westpac Trust's Mondex trial launch (in the presence of the Reserve Bank governor) that "Mondex is cash."

Ledingham says caution is required because it "seems possible that issuers of electronic 'money' could be in a risky business, because of the potential for counterfeiting. ... with some technologies, it might be difficult or impossible for the recipient of an electronic payment, or even for an issuer, to detect an electronic counterfeit. By contrast, counterfeit currency can often be detected by a recipient, and is always detected by the Reserve Bank - which never pays out on it.

"Sophisticated security features will mean that the risk of successful electronic counterfeiting is likely to be very low. However, given that the perceived returns could be quite high, the possibility cannot be ignored. The costs if successful counterfeiting occurred - for the issuer, and perhaps for some of its customers - could be devastating.

"It is clear that issuers will need to take great care to ensure that the danger of counterfeiting is minimised, and that they are vigilant in monitoring their systems and operations so that it is quickly detected when it occurs."

Ledingham also proposes that "substantial electronic issuers ... should be subject to a disclosure regime, so that holders of their obligations can be made more aware of the financial condition of the issuers, and the potential risks they may face."

In this case, if the franchising banks or Mondex itself have received reports on the likely time and expense involved in cracking a card, this information - which has a very clear bearing on potential risk - should be made public.

Ledingham regards the recognition of Mondex value as legal tender as unlikely, and a Reserve Bank spokesman told Computerworld this was not being considered.

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