What's The Color Of Cybermoney?

Doing business in cyberspace sounds like a great deal--low overhead, no real estate, no traffic. But how are you going to get paid? Or pay for what you buy?

Electronic payment systems are among the most challenging issues facing programmers. It's relatively simple to create digital equivalents of checking and credit-card accounts--and to protect them with encryption--but that's only part of the answer. Electronic replicas of those account systems won't be well suited to making "micropayments" for snippets of information that will be bought and sold on the Internet.

And there's another issue. When consumers start doing business across the untamed Internet, they will vastly increase the chances that confidential data about them can be compiled. Those risks exist now, but on the Net, every transaction leaves a trail--that a hacker, an aggressive marketer, or the government could pick up. And it's more than Internet purchases: Credit-card issuers are planning "smart" cards for use with everything from pay phones to public transit. "The potential for invasion of privacy becomes severe," says Don Tapscott, director of the Alliance for Converging Technologies, a private research outfit.

One answer is to create the electronic equivalent of cash--digital money that can be loaded onto your hard drive or a wallet card and used as freely--and anonymously--as cash. That's the idea behind First Virtual Holdings, which runs a kind of private currency system on the Net, and DigiCash, a Dutch software startup.

DigiCash's "ecash," now being tested on the Internet, is the brainchild of company founder David Chaum, a former computer-science professor at the University of California at Berkeley. Like other electronic payment systems, ecash is protected with encryption technology. With a credit-card or electronic checking, encryption stops snoops from stealing your account numbers from the Net. But merchants and card issuers still get purchasing information.

With ecash, the encryption not only protects the money from snoops and thieves but also obscures the identity of the owner. Here's how: When you want cash, you make an electronic withdrawal from your bank account. The bank issues electronic currency--a series of encrypted serial numbers representing dollar bills and coins. Once the encrypted money leaves your account, it can no longer be traced back to you--not even by the issuing bank. When you spend it, your digital coins get deposited directly to the merchant's ecash account.

NERVOUS BANKERS. While ecash can't guarantee your privacy--merchants can still keep track of where they send their wares--it does play an important role in making the I-way a better place to do business. With a digital cash system in place, anyone with a computer and a modem could peddle their ideas or wares on the Net--whether a short story, a work of digital art, or investment advice.

Not everyone is cheering. Banks, credit-card issuers, and the Internal Revenue Service are less than eager to see untraceable digital money catch on. "We are the antithesis of anonymous cash," says Richard M. Lonergan, senior vice-president for point of transaction at Visa International. The credit-card giant is working with Microsoft Corp. on a secure electronic credit-card setup for the Net.

Banks could be the biggest losers. In the ecash pilot, DigiCash acts as its own bank--but it is just playing with digital Monopoly money for now. Even though Chaum hopes to work with leading banks, there's really no need to. And that has some bankers alarmed. "We have to ensure that we own a piece of every transaction, whether it's a movement of funds or information," says Charles H.S. Mallis, global marketing executive for global payments and treasury services for Chase Manhattan.

In the end, there will likely be multiple payment methods in cyberspace, just as in the real world. Microsoft, for example, has a credit-card venture with Visa but is quietly looking into electronic money, too. And Wells Fargo & Co. is looking into electronic cash. "It's fairly clear that there has to be action on the part of banks," says Maria Mandler, senior product director at Citibank global cash-management services, "or I'm sure other organizations will fill the gap." With digital cash, perhaps.

Companies on the Trail of Electronic Money

CYBERCASH Working with Wells Fargo on a system to encrypt credit-card data

DIGICASH Wants to create the digital equivalent of cash-totally anonymous and universally accepted

FIRST VIRTUAL HOLDINGS Has launched an E-mail system for small transactions

MICROSOFT Developing a specification for credit-card transactions with Visa

MONDEX This British banking venture

is developing a smart card system for electronic cash

NETSCAPE Building encryption and validation into its Web software with partners MasterCard, Bank of America, MCI