A B A C U S    Issue 2.05 - May 1996

DIY Cash

By Dave Birch & Neil Mcevoy

For most businesses, "minting it" is just a figure of speech. But with the advent of electronic cash, it could soon become a real business strategy. By making it easy to swap from one currency to another, e-cash may well turn everybody into a currency trader. And, if it does, there's no reason why governments should have a monopoly in producing currencies. Frequent-flier points and supermarket loyalty points are already (more or less) tradeable certificates of value. Powerful economic forces are pushing them to become fully-fledged currencies. As they do so, it will transform both the way in which companies raise money and the way in which they maintain the loyalty of their customers.

Nobel-prize-winning economist F. A. Hayek argued that companies will inevitably compete with governments to issue money. His thesis was that governments have defrauded their citizens by forcing them to accept money depreciated via inflation. Moreover, misguided attempts at using monetary policy to manage the economy only made the fraud less predictable, and therefore more destructive. Hayek asserted that commercial organisations competing for profit could more successfully provide money that retains its value - because, at least in theory, competition would enable people to choose for themselves the most value-retentive currency.

The Internet in general, and e-cash in particular, overcome two of the key practical difficulties which Hayek reckoned might prevent people from switching to private currencies. First, Hayek observed that most people are used to dealing with only one currency, and so would find the concept of choice strange. But Hayek also noted that people living in border areas are usually happy to accept payment in the currency of a neighbouring country, provided that the currency is reasonably stable. On the Internet, everybody inhabits a border zone. From a Net-connected desk- top in London, it is as instant and as easy to do business in Brussels as it is in Birmingham, or in Beijing. The second obstacle on the path to private money that Hayek noted was a technical problem: how to keep track of all those different currencies? Hayek foresaw two possibilities. One was that a single currency would predominate in each trading region. So the Internet, for example, might turn out to be a dollar-denominated realm. But Hayek also speculated that electronics might make trading between currencies so easy that everyone would be able to do it as simply and naturally as they now make change. Electronic purses now being tested throughout Europe already offer many of these capabilities. The electronic purse stores cash not as notes or coins but digitally, as 0s and 1s in computer chips. In addition to offering the accounting flexibility necessary for Hayek's vision of widespread currency trading, the electronic purse has a more immediate economic advantage to recommend it: it's potentially the cheapest conceivable way of doing business.

Cash is awkward to carry, diffi-cult to count, easy to lose and easier to steal. In part thanks to its incon- venience, cash has declined to 4% of the UK money supply; more and more people do all their shopping with cheques and credit cards. But cheques are expensive for banks to process, and, although credit cards are electronically quick and easy, each credit card transaction involves at least three different players - the credit card company, the cardholder and the shop.

Paying with an electronic purse, by contrast, combines most of the advantages of cash and credit card. Connecting the credit-card-sized purse to the till will transfer money directly to a store, involving no bank, credit-card company or other third party. Better still, many electronic purses also work over networks.

Plugging the purse into a card reader on your PC enables easy, encrypted (and so secure) transfers of cash to anybody else with an electronic purse - be it to shop on the Internet or to repay your brother the fiver he lent you last week.

Dozens of electronic-purse trials and initiatives are now taking place around the world. Much of the action is in Europe, where smart-card technology has a much higher profile than it has in the US (see boxes). So far, most of these schemes have been limited in one crucial respect: the cards can accept and disburse payment only in a single currency. Many aim primarily to replace coins, and they justify themselves by the efficiency and convenience of doing away with those bits of metal that you never seem to have when you need them.

But Britain's Mondex is the first of a new generation of electronic purses that can hold multiple currencies, and transfer between them as easily as transferring from one purse to another. At a minimum, this extends the convenience of single-currency schemes to an electronic purse that can work across the whole of Europe. But in the near future, it could also open the door to revolutionary new possibilities for corporate marketing and finance.

So far, Mondex cards simply hold traditional currencies: pounds, dollars, francs, Deutschmarks and so on. But there is no reason why the convenience of the electronic purse should not extend to other tokens of value now in circulation - like British Airways Air Miles, Safeway ABC Points, manufacturer's discount coupons, or Luncheon Vouchers.

Once in the electronic realm, however, Air Miles and their ilk take on new abilities. Not only are Air Miles easier to keep track of electronically, they are also easier to trade - at least so long as British Airways permits them to be traded. And once Air Miles can be traded - be it for pounds, dollars, or cat-food coupons - then they start to become a sort of pseudo-currency. Already, small informal markets exist for frequent-flyer miles. With the Net to ease trading, such markets could grow rapidly. And the companies issuing pseudo-currency could themselves do much to encourage - or discourage - a broader market.

Ultimately, the value of a voucher lies in the goods or services for which you can redeem it. One reason that Air Miles, for example, are worth less than cash is that they can only be redeemed for air travel on British Airways - while cash can buy anything. To make their vouchers more like cash, though, companies can form currency keiretsu, in which each member of the group agrees to honour all of the others' vouch- ers. Already, hotels, car-rental companies and credit-card companies have formed alliances with airlines to participate in the airlines' frequent-flier schemes. The more different things a given voucher can be re-deemed for, the less risk its holder carries that the issuing company will go bust before he can redeem his claim - and the more likely the claim will represent something he's interested in having.

Add one more piece to the puzzle - a foreign-exchange operation that can convert vouchers into real cash - and there really is little difference between a company-issued voucher and a government-issued currency. Informal markets have already sprung up for frequent-flyer points and other company loyalty vouchers, although few have yet flowed over from the company cafeteria to the Internet. Meanwhile, e-cash "foreign-exchange markets" are springing up fast on the Net.

Digicash's e-cash as yet has no fixed value in conventional cur- rency. To create a trial of the technology underlying this electronic currency, Digicash offered anybody everybody on the Internet 100 cyberbucks, which they could exchange for bumper stickers, t-shirts, software documentation or other trinkets made available by traders who were willing to give stuff away to test the technology. But no sooner had cyberbucks hit the Net than a Web page sprang up to serve as a cyberexchange, promot- ing deals to swap cyberbucks for the real thing, or for cars or anything else tradeable. Once frequent-flier points and other corporate vouchers go electronic, similar markets should spring up like mushrooms. So here's how a quick business deal could work in the new world of electronic currencies: Alice asks Bob to report on the Manchester United vs. Tottenham Hotspur game for her magazine. They agree a fee of 100 minutes of BT Long Distance (100 Busbys), a standard unit of account among journalists (who are always on the telephone). Bob writes the article; Alice loves it. Payment proceeds in four steps. Alice's PC (Alice's Quicken controlling her electronic purse card) contacts Bob's PC (Bob's Microsoft Money controlling his electronic purse card) and says, "I owe you 100 Busbys; how would you like it?"

Bob has set the preferences on his Microsoft Money to go for Safeway ABC Points, so his PC asks for that.

Alice's PC contacts a Net-based foreign-exchange market (Thomas Cyber-Cook), trades 100 Busbys for 1000 ABC Points and sends them to Bob, with a digital receipt signed by Thomas Cyber-Cook that states the exchange rate.

Bob generates a digitally signed receipt for Alice, and her Quicken files this away for tax purposes.

Although the overall deal looks complicated and unfamiliar, none of the pieces require a great leap of faith or logic from today's business practice. Bob and Alice are willing to deal in Busbys because BT is determined to maintain the value of its "currency" rather than let down customers - just as Hayek predicted it would be. The complexity of the transaction is hidden from them by their computers. And electronic trading means that Thomas Cyber-Cook always provides the most up-to-date exchange rates, at low commission charges, so there is little penalty for the exchange.

An interesting question, though, is what value the Busbys have to BT (or the ABC points to Safeway, for that matter). In today's world, such vouchers serve to maintain customer loyalty. Because they can't be traded, they have to be redeemed for the goods or services of the company that issued them. But as they become tradeable, people can - and almost certainly will - hold them for their exchange value rather than just to redeem them.

Bob might want to transfer his Busbys into Safeway ABC points because he is going shopping for a dinner party. Or he may shop at Sainsbury - but simply wish to hold ABC points because he believes that they will hold their value better than other available currencies. The interesting twist for Sainsbury is that, the more it does to keep up the long-term value of ABC points, the less incentive those points provide for their holders to shop at Safeway.

Many Muscovites now do business entirely in US dollars because they think (quite rightly) that the dollar holds value better than the rouble. Holding dollars does not make the average Russian any more likely to pop over to New York for the weekend. But it does give the US government some advantages that Safeway might want to think about. The US government can raise dollars more cheaply than anybody else in the world - simply by printing them. And so long as people retain their faith in the dollar, and thus are eager to swap roubles (or whatever) for dollars, then the Americans can easily finance even its current ridiculously large budget deficit.

In a 1994 pamphlet for the Centre for the Study of Financial Innovation (a London think-tank sponsored by corporates like Abbey National, Bank of America and Sun Life), lateral thinker Edward de Bono argued that companies could raise money just as governments now do - by printing it. He put forward the idea of private currency as a claim on products or services produced by the issuer. So IBM might issue "IBM Dollars" - theoretically redeem- able for IBM equipment, but also practically tradeable for other vouchers or cash. To make such a scheme work, IBMwould have to learn to manage the supply of money to ensure that - with too many vouchers chasing too few goods - infla- tion does not destroy the value of their creations. But companies should be able to manage that trick at least as easily as governments do, particularly as they don't have voters to cope with.

Such schemes would have to evolve from relatively small beginnings; obviously IBM could not ann-ounce its entry into the currency world with the issue of a few billion dollars' worth of new vouchers. But they could start seeding markets by offering vouchers as, say, a bonus for high-performing employees. And as exchange markets grow up, Safeway's corporate treasury could eventually start selling directly into them.

So to prosper from electronic currency, companies will have to make a choice. Some companies will want simply to translate their marketing schemes into the electronic realm. By restricting the transfer of their coupons, or the length of time which they can be held, or both, they can continue to use vouchers to keep customers loyal. Other companies will want to take their customer loyalty schemes away from their marketing department and hand them over to finance. But, whether you market with it or you mint it, all of tomorrow's best brands should have electronic currency.


The world's first stored-value card provider, Danmont, was established in June 1991. It is owned 50/50 by TeleDenmark and Danish Payment Systems (on behalf of Denmark's banks). Its off-line, pre-paid card pilot went live in September 1992. Half a million cards are now used in 60 Danish cities. Transactions in 1995 were up 122% on 1994 at more than 2 million in total. Cards are accepted for mass transit, telephones, vending machines, postage-stamp dispensers, cafeterias and news-stands. Around 90% of transactions occur in a self-ser- vice environment; few retailers accept cards. Consumers buy cards prepaid at face values ranging from around $20 to around $100.


Banksys, the Belgian payments network, rolled out its smart card, Proton, in the towns of Wavre and Ghent last year. The card is mainly for small purchases, up to a maximum of BFr 5,000 (about £110). It loads itself from cash dispensers. In 1996, the pilot will expand to Brussels, Antwerp and Liége. There are now 32,000 Proton cards; 1,100 retailers, 200 vend ing machines and 50 telephones accept them.

Transactions totalled Bfr139 million to the end of 1995. Proton has been installed by Telekurs in Switzerland, ERG in Australia, Mitel Group in Brazil and ChipKnip in the Netherlands.


Britain's Mondex went live in July 1995 in Swindon. Mondex is the world's only general-purpose electronic purse. Payments can be made from a purse into an electronic till, and also from one purse to another. Developed jointly by NatWest Bank, Midland Bank and BT, Mondex can be recharged via ATMs or special telephones. Midland's parent, The Hong Kong and Shanghai Banking Corporation, will begin trials in Hong Kong in 1997. Royal Bank of Canada and Canadian Imperial Bank of Commerce will pilot Mondex in Guelph, Ontario later this year. Californian regional bank Wells Fargo started its own Mondex pilot last July.

Unlike purse- or card-based schemes, the Digicash system is aimed at the Internet. Its "tokens" take the form of digitally signed numbers that the user exchanges for money from his bank account. Each tokens can be spent only once. When the token is spent, it is immediately sent to the issuing bank for verification and logging (to ensure it is not spent again). Clever "blinding" techniques ensure that verification does not reveal the identity of the consumer. In October 1995, the Mark Twain Bank of St. Louis, Missouri, began to link a version of Digicash to deposit accounts.

Dave Birch is the founder of Hyperion, a technology consultancy. Neil McEvoy works there, helping to design tomorrow's e-cash systems.