HISTORY OF BANKING

· Barter

· Precious metals (gold, silver)

· Symbols

· Coins

· Merchant receipts (leave coins)

· Banks

· First printed banknotes - 1661 (Sweden)

· Forgery leads to government intervention

· Development of checks

· Debit and credit cards

· Smart cards

· Electronic cash

ISSUANCE OF CURRENCY

· Long tradition of privately issued currency

· Based on trust:

* What is it backed up with?

* How liquid is it?

* What can it be converted to?

· Private banks and currency lawful in U.S. until 1913

· Provided competition to the “dollar”

· A market in currencies

· Ultimately, currency is just a symbol of value, of little or no intrinsic value itself

· Confidence in currency is very important

· Modern role of Central Bank - to control the currency

· Each country values and protects its own currency

THE BUSINESS OF BANKING

· The business of banks is buying and selling money:

* They “buy” money (deposits) with interest rates

* They sell money (loans) for a fee (interest)

* The difference between what they pay for money and what they get for it is called the “float” - the source of the banks revenues and profits

· This provides an efficient allocation of scarce resources

· It also means that banks do not just hold and protect your money – they give it to someone else: consequently, they actually have available only a small percentage of the money that has been deposited

GOVERNMENT ROLE IN BANKING

· Internal to banking system

* Require minimum reserves

* Standardize rules and regulations

* Insure deposits (FDIC)

* Set interest rates

* Manage entry and competition

· Management of economy

* Print money (control money supply)

* Track money supply (aggregates and velocity)

* Protect value of currency

* Use various tools (spending, taxation, printing money, controlling interest rates, etc.) to manage overall economy

· External to banking system

* Counterfeiting

* Fraud

* Tax evasion

* Money laundering

* Cross-border transfers

· Control of the currency and banking system have become central elements of a modern government and nation-state

· (In this regard, note continuing dismay over events around the 1998 Asian financial/currency crisis and the external attacks on national currencies)

“ELECTRONIC MONEY”

· Are we headed for the “cashless society”?

· From credit cards to “smart cards”

· Credit and debit (prepaid)

· Identified and anonymous (issues)

· Role of traditional banks and credit card companies

· New online cash issuers (Mondex, Digicash, NetCard, etc.)

· New online banks - First Virtual, Security First, Wingspan

· New kinds of value symbols (Beenz, iPoints, Flooz) - currency useable only online

· Return of private banking? The Microsoft “Bill”? The American Express “Amex”? Can they extend credit?

· Return to barter?

ISSUES RAISED BY ELECTRONIC MONEY

· Loss of control of banking system

* No reserves = bankruptcies?

* No insurance = consumer losses?

* No quality control = fraud?

· Loss of control of currency - will bits replace currency? Will we have competing currencies?

· Loss of control of money flows (domestic and international) (foreign exchange rates)

· Counterfeiting (electronic duplication)

· Invasions of privacy (should anonymous e-cash be allowed?)

· Money laundering and criminal activity

· Tax evasion/reporting

· Will corporations adopt?

DIGITAL CASH AND PAYMENT SYSTEMS – CONSUMER ISSUES

- FRAUD AND UNFAIR PRACTICES

- SECURITY (ENCRYPTION AND TECHNICAL STANDARDS)

- PROTECTION OF INTERNET BANK ACCOUNTS (REGULATIONS, INSURANCE)

- PRIVACY (RELIES ON ENCRYPTION)

- ANONYMITY (RISK OF LOSS, ILLEGAL USES)

DIGITAL CASH AND PAYMENT SYSTEMS – GOVERNMENT ISSUES

- LIMIT RISKS THAT THREATEN STABILITY OF FINANCIAL MARKETS OR UNDERMINE CONFIDENCE IN PAYMENT SYSTEM

- PROTECT CONSUMERS FROM FRAUD, LOSS, INTRUSIONS ON PRIVACY

- ENCOURAGE DEVELOPMENT OF EFFECTIVE, LOW-RISK, LOW-COST AND CONVENIENNT PAYMENT AND FINANCIAL SERVICES

- ENSURE THE CENTRAL BANKS ABILITY TO CONDUCT MONETARY POLICY (CONTROL MONEY SUPPLY)

- PRESERVE ABILITY OF LAW ENFORCEMENT AUTHORITIES REGARDING FUNDS IN CRIMINAL ACTIVITIES

DIGITAL CASH AND PAYMENT SYSTEMS – FINANCIAL ISSUES

- END OF TREASURY MONOPOLY ON CURRENCY?

- CURRENCY SAFEGUARDS – CURRENCY RELIABLE AND VERIFIABLE

- AUTHENTICATION – SOME WAY TO IDENTIFY PARTIES

- MONITORING – TRANSFERS AND MISAPPROPRIATION

- RECORD KEEPING VS. ANONYMITY

- CONSISTENCY AND STANDARDIZATION

DIGITAL CASH AND PAYMENT SYSTEMS – BUSINESS ISSUES

- WHAT EFFECT ON CONSUMER CONFIDENCE?

- UNIVERSAL ACCEPTANCE, AUTHENTICATION

- ANONYMITY (PAYER AND PAYEE)

- COST AND EASE OF USE

- REPLACEMENT

- RISK OF FRAUD

DIGITAL PAYMENT SYSTEMS

- INTRINSIC VALUE (CASH) VS. REPRESENTATIONS (CHECKS)

- TRUE “DIGITAL CASH” – CONVERTS MONEY TO ELECTRONIC EQUIVALENT ON CARD OR PC. USUALLY ANONYMOUS FOR PAYER, THOUGH NOT FOR PAYEE (COLLECTS AT BANK). CONCERNS ABOUT DUPLICATION, MONEY LAUNDERING, THEFT AND LOSS

- PAYMENT SYSTEMS:

o CREDIT CARDS

o DIGITAL CHECKING

o DIGITAL MONEY

§ SMART CARDS

§ STORED-VALUE CARDS

§ ELECTRONIC WALLETS AND MULTIPLE PAYMENT PRODUCTS (MSFT PASSPORT)

SELECTED REFERENCES

FOR E-MONEY

Electronic Money, or E-Money, and Digital Cash – Roy Davies

http://www.ex.ac.uk/~RDavies/arian/emoney.html/

John Marshall Law School – Electronic Commerce Page

http://www.jmls.edu/cyber/index/commerce.html/

Alan Greenspan on Electronic Money and Banking

http://www.federalreserve.gov/boarddocs/speeches/1996/19960919.htm

Remarks by Governor Laurence H. Meyer At the Distinguished Lecture Program, Swarthmore College, Swarthmore, Pennsylvania, December 5, 2001

http://www.federalreserve.gov/boarddocs/speeches/2001/20011205/default.htm