Digicash and currency markets - Economist

[rishab@dxm.ernet.in]

Alex Strasheim <alex@omaha.com>: (?)
> Yes, it is granted that Digicash is in beta, and not polished.  But
> beta testing usually happens after all significant functionality is
> present.  The Digicash beta isn't moving real money, and that's a
> significant functional deficit.

So far I haven't seen much discussion on the monetary effect of e-cash.
The best (and only) analysis I've seen was in last week's Economist (no, I
don't work there, I'm only a fan) of which John Young (jya@pipeline.com) was
kind enough to offer e-mail copies. I excerpt:

   The Economist
   November 26, 1994, pp. 21-23

[NO INTEREST ON E-CASH:]
         The more disputed aspects of electronic money's future
   are those that relate mainly to money's other role, as a
   store of value. ... If, to command confidence, electronic money had to be
   convertible into legal tender on demand, then for every unit of 
   electronic money there would have to be a unit of cash 
   reserved in the real economy
   ^^^^^^^^^^^^^^^^^^^^^^^^^^^^
   ...which is pretty much how the fledgling
   CyberCash, for example, plans to operate, requiring banks
   working with it to hold money converted into e-cash in an
   escrow account. It follows that, in an efficient system,
   if each e-cash unit represents an immobilised unit of real
   cash, then positive balances of e-cash will earn no interest, 
             ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
   because the interest they might earn would be
   offset by the interest foregone on the real cash that is
   backing them. It also follows that, in such a system, there
   would be no purely virtual lending: for this would increase
   the stock of digital money without a corresponding increase
   in the stock of real money, and so undermine
   convertibility. The virtual economy in this phase of its
   development would be free from usury.

[BYPASSING REGULATED CURRENCY MARKETS:]
 If you pay yen for electronic dollars in Tokyo and buy something from a 
 merchant based in Paris who cashes them for francs, 
 a currency conversion has taken place. 
 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
 That, however, is an activity towards which
   most governments feel highly defensive; and if e-cash
   started to bypass regulated foreign-exchange markets by
   developing its own grey market for settlement, then
   governments might be provoked into trying to clamp down on
   it. Probably, therefore, e-cash will, at least in its early
   forms, be denominated in single conventional currencies and
   exchanged at conventional market rates.

[Which wouldn't be much fun. For example, in India it's not easy for _me_ to
 convert rupees into dollars; 75% of dollars I earn must be converted into 
 rupees. Assuming DigiCash takes off; I sell copies of Electric Dreams and 
 become an e-cash millionaire. I can then buy stuff in dollars, which
 according to regulations I am not supposed to have. Similar problems arise
 in even less tightly regulated countries.

[ON A TOTALLY DIGITAL CURRENCY WITHOUT PAPER BACKING:]
         It is possible to imagine the development of e-cash
   reaching this point, and no further. But it is also
   possible to imagine that the temptation to move away from
   a fully-backed digital money would prove irresistible.
   Instinct argues that people will want virtual credit, and
   that it must therefore find a price. ...there will come
   a ... stage towards a single overarching monetary system in 
   which convertibility into Legal tender ceases to be a condition 
   for electronic money; and electronic money will thereby become 
   indistinguishable from -- because it will be the same as -- other, more
   traditional sorts of money. Money will be money whether it
   is constituted as a string of digits or a piece of paper or
   an entry in a ledger. Some electronic money might be backed
   by governments, some by private issuers....

   Ideally, the ultimate e-cash will be a currency without
   a country (or a currency of all countries), infinitely
   exchangeable without the expense and inconvenience of
   conversion between local denominations. It may constitute
   itself as a wholly new currency with its own denomination
   -- the "cyber-dollar", perhaps.....
   Either way, it is hard to imagine that the
   existence of an international, easy-to-use,
   cheap-to-process, hard-to-tax electronic money will not
   then force freer convertibility on traditional currencies.


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