Tatsuo Tanaka <email@example.com>
Center for Global Communications
International University of Japan
6-15-21, Roppongi, Minato-ku, Tokyo 160, Japan
Tel.: +81 3 5411 6677
Fax: +81 5412 7111
Center on Japanese Economy and Business
521 Uris Hall
New York, NY 10027, USA
Tel: +1 212 854 3976
Fax: +1 212 678 6958
In this paper, the possible consequences of digital cash from the viewpoint of economics are discussed and a possible scenario for the future is forecast.
Digital cash will bring us benefits as well as problems. One major benefit of digital cash is its increased efficiency, which will open new business opportunities, especially for small businesses. On the other hand, it will bring us four problems: taxation and money laundering, instability of the foreign exchange rate, disturbance of money supply, and the possibility of financial crisis.
There is one important attribute of digital cash, however, that overshadows these benefits and problems. It is the transnationality of digital cash--the ability of digital cash to flow freely across national borders. Every bank can issue it, and everybody all over the world can use it. This transnationality is a cause for both benefits and problems and could have significant repercussions internationally. From the economic standpoint, the most important characteristic of digital cash is its transnationality. If digital cash circulated only within a traditional national border and was controlled under a central monetary authority, there would be no economic implications that would be worth analyzing. In this case, digital cash would be nothing more than a convenient transaction method such as a credit card.
However, digital cash is more than that. Its transnationality has the potential to cause conflict between cyberspace and nation-states. If digital cash spreads successfully in the 21st century, its history may be written as a record of its battle with nation-states.
What are the economic consequences of digital cash? What are its implications from the viewpoint of economics? In recent years, several proposals for electronic cash have appeared in cyberspace, and some of them have begun their services already. But the economic consequences of these endeavors have not yet been examined.
Some people stress that an important economic consequence of electronic cash is the free issue of private currency by commercial banks or other nonfirms, as Hayek said in his celebrated book Denationalization of Money (Hayek, 1978; Mantonis, 1995; Wall Street Journal, 23 November 1995). However, if we look at the history of money, we realize that it is not an easy task to make privately issued currency credible in the eyes of the public. As far as there exists a competition among banks, private banks will often end in bankruptcy, and the credibility of the privately issued currency will suffer as a result.
In this paper, I discuss another consequence of digital cash. My main conclusions are as follows. The most important characteristic of digital cash is its transnationality; digital cash has no national borders--that is, it is not controlled by any central bank of any nation-state. If digital cash circulated only within a traditional national border and was controlled under a central money authority, there would be no economic implications because, in that case, digital cash would be nothing more than a convenient transaction method such as a credit card or prepaid card. But in reality, digital cash has no national borders--a fact that will bring both new benefits and new problems to the economy as a whole. The main benefit will be an unprecedented efficiency of international payments. The problem will be that digital cash's transnationality will tend to increase the instability of the monetary system. This problem has the potential to cause conflict between digital cash providers/users and the central banks of nation-states. If digital cash spreads successfully in the 21st century, its history may be written as a record of its battle with nation-states.
In section 2, I provide a brief overview of the electronic payment system. In section 3, I discuss consequences of digital cash from the viewpoint of monetary economics. In section 4, I discuss the transnationality of digital cash and present a possible future scenario for an illustrative purpose, and in section 5, I state my conclusions.
There are over a dozen proposals for electronic payment systems on the Internet. To briefly overview these proposals, let us begin with the problems we encounter when we pay a bill by sending our credit card number through the Internet. We can point out the following four problems with respect to a credit card payment through the Internet when compared to a cash payment in the real world:
Proposed electronic payment systems try, more or less, to cope with these problems. According to the extent to which these systems cope with these problems, I divide them into three categories: credit-card-based, check-type, and cash-type systems.
To avoid the risk of tapping, First Virtual Holding began a payment system in which users send only their passwords instead of their credit card numbers when purchasing an item (Figure 1(i)). In this system, a user registers in advance with First Virtual Holding a password and a credit card number. In purchasing goods or services at the shop on the Internet, the user sends only the password to the shop. After purchasing, the user receives a confirmation e-mail asking whether the purchase is valid. When the user replies yes to this mail, the bill is deducted from the credit card account. Because this system is simple and easy to understand, especially for people who are not computer experts, it has been diffused already to some extent. Besides First Virtual, Visa and MasterCard are also planning a similar credit-card-based payment system using encryption technology in place of passwords.
But these credit-card-based systems solve only the security problem. As Figure 1(i) shows, these systems handle only the communication between the user and the shop in cyberspace. The transaction of money remains to be done by the conventional credit card transaction system. Thus, a fee is also necessary, and a peer-to-peer transaction is impossible. Untraceability is not guaranteed.
The conventional check system is closer to cash than a credit card payment is, because with checking, the fees are almost zero except for the cost of a stamp, and peer-to-peer transactions are possible. As a result, several proposals have emerged to invent checks on the Internet that would be transferable between individuals (Cybercash, NetCheck, etc.). As Figure 1(ii) shows, in that system, a user opens an account in the bank on the Internet and issues an electronic check for the bill. The receiver of this check sends it to the bank to confirm and cash it. Security is guaranteed by both the encryption technology and the bank's confirmation process with the issuer of the check.
This system makes possible peer-to-peer payments and may reduce fees to some extent. But untraceability is still not realized because the bank can learn what the user buys and where.
The last and probably most difficult problem is untraceability. Untraceability is a prominent characteristic of cash. Untraceability keeps the transaction anonymous and prevents the dominance of Big Brother (Chaum, 1987). To achieve untraceability on the Internet, encryption technology has to be fully employed because the untraceable money could be easily copied and spent twice (double spending). David Chaum (1989, 1992) and Okamoto and Ohta (1991) proposed an untraceable electronic payment system using advanced encryption technology.
The mechanism in this system is similar to the electronic check, but it prevents banks from knowing who bought what (Figure 1(iii)). First, a user opens an account at the bank on the Internet. Then the user asks the bank to issue a certain amount of digital cash. The bank issues that amount of digital cash using encryption technology and deducts that amount of money from the user's account.
The content of digital cash is a combination of two huge integers that have a special mathematical relation. No other person but the bank can produce the data with the same relation, because the calculation for it will take an almost infinite amount time if one does not know the secret key, which only the bank knows. Issuing digital cash means that the bank calculates these two huge integers and sends them to the user.
To pay a bill with digital cash, the user sends this data to a receiver. The receiver sends this data to the bank to confirm it. If the bank confirms it, the bank credits the receiver's bank account by that amount, or issues the receiver another digital cash in the same amount. Note that the bank can confirm only that this data (digital cash) is surely issued by the bank and that this data is not double-spent. The bank cannot know who used the digital cash, as long as users do not use it twice.
This payment system deserves the name of "cash on the Internet" because it is almost equal to a cash payment in terms of security, fee, peer-to-peer payment, and untraceability. So I will focus on this cash-type "digital cash" hereafter. That is the reason I use the term "digital cash" in this paper and not a broader term such as "electronic money."
What are the consequences of digital cash? The main benefit of digital cash is that it make transactions more efficient, which will in turn enlarge business opportunities and eventually pass more benefits on to the users.
The consequence of these three effects is an enlargement of new business opportunities and an expansion of economic activities on the Internet. Even small businesses can trade with customers all over the world. Multinational small businesses will become a new trend of business . There may appear high school students who sell their own software to world computer users through the Internet and gain lots of money. Large firms will also utilize this more efficient transaction tool, especially for international payment. The increased efficiency and enlarged business opportunity will lead to less expensive and more sophisticated services for users.
The problems of digital cash are fourfold: taxation and money laundering, instability of the exchange rate, disturbance of the money supply, and the possibility of a Black Monday in cyberspace.
Because digital cash enables seamless transactions across national borders, taxation and money laundering become potential problems. Should we impose sales tax on transactions over the Internet? Let us imagine that a Chinese person puts some software on a server in the United States and sells it to a Japanese buyer. Which country's sales tax rate should be applied, and to whom? Which country should benefit from that tax? Such conflicts of international taxation, which have appeared occasionally already, could intensify. To handle this problem, international taxation rules have to be adjusted. To make matters more difficult, the transfer of digital cash does not leave any record like a bank accounting record that the tax authority can trace, because digital cash is exactly like cash, not like a transfer through the conventional banking system. Owing to this untraceability, taxation will not be an easy task, even if the international taxation rule is adjusted.
This untraceability will enable criminal usage of digital cash. Money laundering will be an easy task because if you send money as digital cash, you can send it anywhere in the world without any evidence. If investigators dare to obtain evidence, they have to check all packets around the world and crack all cryptography. It is almost impossible. Because underground people are always smart to use new technology, initially digital cash may be used for transactions of illegal goods and services such as pornography or drugs.
The other three problems associated with digital cash are concerned with the effects of digital cash on macroeconomic stability. Before analyzing these effects, we should decide whether digital cash is a proxy of real currency or a privately issued new currency.
I will assume that digital cash will be issued as a proxy for currency in the real world, at least for a while. In other words, digital cash will be issued on the same terms as existing hard currency (digital dollars, digital yen, etc.) and can be exchanged to that hard currency at any time. Some people assume that digital cash will be issued by private firms: "MS-cash" is issued by the Microsoft Corporation just as dollar bills are issued by the U.S. Federtal Reserve. If so, digital cash does have a monetary freedom as Hayek insisted. But this development is not likely, because it is difficult to get people to trust a privately issued currency that is not controlled by the government.
The difficulty is that conditions making government-issued money credible do not hold true for privately issued currency. First, in the case of government-issued currency, most people cannot escape from their country and have to use their country's currency even if its value is depreciated. Second, people can control the government through voting. The former condition forces people to keep using that currency even under inflationary conditions, and the latter condition enables people to try to stabilize the value of currency through the political process. These conditions, however, do not hold true for privately issued currency. If the value of a firm's privately issued currency begins to depreciate, everybody will quickly start selling off that firm's currency to avoid a loss, which will accelerate the depreciation of that currency and will eventually lead to the bankruptcy of that firm. Because such instability is easily anticipated, people won't use the privately issued currency.
Thus, I will assume hereafter that digital cash will be issued as a proxy for real currency such as the dollar or yen, at least for a while--that is, the value of digital cash is exactly equal to that of real currency, and digital cash is exchangeable for real currency at any time. Even under this rather conservative assumption, I can consider the remaining three monetary problems identified above.
Digital cash will increase the instability of exchange rates. Since digital cash is a proxy for real currency, there has to be an exchange rate applied to it, or there must be a foreign exchange market in cyberspace (see Figure 2). For example, dollar-term digital cash can be exchanged for yen-term digital cash using the same exchange rate as in the real world. The exchange rates in cyberspace and in the real world should be equal; otherwise, arbitrage transactions immediately equalize the two exchange rates. So the two worlds link through the exchange rate.
Figure 2. In the real world, only selected people such as professional dealers, bankers, and trading firms participate in foreign exchange markets. By contrast, in cyberspace, general public will join the exchange market because the exchange fee is much lower and people are not confined to national borders. This massive participation may cause exchange instability.
But there will be two differences between the foreign exchange market in cyberspace and that in the real world. First, the fee for exchanging one currency's digital cash for another currency's digital cash will be much lower than the fee for exchanging real cash because the exchanging of digital cash only involves a rewrite of data on the computer. In the real world, the difference between the selling rate and the buying rate is now about 2 percent for general customers, a rate that reflects the costs of storing bills in various currencies, managing branches, and hiring workers. But these costs will be eliminated if digital cash is adopted. Thus, the exchange fee for digital cash will become very small. This fee reduction will make it possible not only for specialists, but also for the average person to take part in the foreign exchange market.
Second, holders of digital cash will not stick to one country when they purchase something, because the Internet has no national borders. On the Internet, we can easily move from the home page of an American boutique to that of an French boutique. So we can easily change the currency to use for payment. On the contrary, in the real world, almost all people have to stay and continue to purchase goods in their home country, no matter how the foreign exchange rates change. In cyberspace, however, people can purchase from all over the world. So if the dollar is depreciating, people surely will want to exchange dollar-term digital cash for another currency's digital cash. In other words, there is an incentive for speculation even for the general person in cyberspace.
Accordingly, we can expect that a large number of people in cyberspace will participate in the foreign exchange market of digital cash. This massive participation could possibly lead to the destabilization of the foreign exchange rate. For example, if the dollar begins to depreciate, a very large number of people could start selling the dollar's digital cash and buying another currency's digital cash to avoid loss or to gain profit. This speculative behavior could accelerate the initial depreciation of the dollar and amplify the fluctuation, and a so-called bubble effect could occur.
Logically speaking, of course, an increase in the number of participants may stabilize the market if the participants' expectations are independent of each other. But if participants' expectations are dependent on each other, a bubble is likely to occur (Rapport and White, 1994). What actually happens depends on how independent people's expectations are. Historical experience shows, unfortunately, that bubbles occur when the general public joins in speculative transactions (Allen, 1931; Galbraith, 1954) . This fact suggests that massive participation by the general public may cause a bubble and destabilize the foreign exchange rate. Because the exchange rate of digital cash is linked to the real world's exchange rate, this destabilization could, in turn, affect the real world.
Disturbance of money supply is another of the problems identified above. Digital cash will affect the money supply in the real world. As described before, at least initially, people who want to use digital cash deposit real cash in the bank and ask the bank to issue digital cash. If the bank issuing digital cash does not offer a loan as digital cash (so-called 100% reserve system), the amount of digital cash will be fixed to the amount of real cash deposited to the bank. In this case, no new money will be created in cyberspace. However, if the economy of the Internet expands, the banks will start lending customers money as a form of digital cash. Then new money will be created in cyberspace. In other words, the total amount of digital cash will exceed the amount of deposited real cash (see Figure 3). So there should be a money multiplier of digital cash. "Money multiplier" here is defined as the ratio of issued digital cash to deposited real cash (i.e., reserve) in cyberspace economy. If cyberspace is an economy similar to a national economy, this is a natural development process of finance.
Figure 3. When banks in cyberspace begin loans in digital cash, digital cash will exceed reserved real cash (money creation). Reflecting the fluctuation of money demand in cyberspace, cyberspace will absorb or give out real cash. This will affect the money supply in the real world. (Problem 3)
This money creation could lead to the possibility of bankruptcy. But since there is no central bank in cyberspace, the bankruptcy of banks would tend to cause chained-bankruptcy, that is, financial crisis. (Problem 4)
But this development means that money in cyberspace fluctuates reflecting economic activity there, which eventually affects the real world's money supply. For example, let us assume that cyberspace's economy expands or the money multiplier falls for some reason. This will cause a shortage of digital cash. Then people will try to bring real cash from the real world to the bank in cyberspace requesting the issuance of more digital cash. In other words, to meet the demand for digital cash, cyberspace will absorb real cash. As a result, the money in the real world will shrink. Therefore, the money supply in the real world will be affected by cyberspace's economic activity.
This mechanism of interaction is not new to economics. In the real world also, one country's economic expansion increases its interest rate, which causes capital inflow from other countries, eventually resulting in a shortage of other countries' money supplies. But there are new factors in the case of cyberspace. First, since digital cash is a proxy for real cash--having the same unit and exchangeability to real cash--the interaction will be more direct and rapid. In the real world, national borders and the risk of fluctuating exchange rates dampen the speed and amount of capital flow to some extent. By contrast, there are no such barriers between dollar digital cash and real dollar bills. Therefore, monetary interaction between cyberspace and a national economy will be more direct and rapid than that between two national economies. Second, since cyberspace has no national borders and no central monetary authority, dollar-term digital cash can be issued by non-U.S. banks anywhere in the world. So even if the Fed tries to manage the amount of dollar digital cash, it cannot do it. These two factors will make the monetary control of the central banks more difficult than now.
The possibility of financial crisis is another problem identified above. If banks begin to create new money as a form of digital cash, there arises a possibility of chained bankruptcy, which may easily cause financial crisis in cyberspace.
If a bank issues digital cash within limits of the real cash that customers have deposited and the bank does not lend it as digital cash again (i.e., 100% reserve system), a bank can respond to refunding demand from customers even when all customers want to convert all the digital cash to real cash. In this case, bankruptcy would be unlikely, and the chain effect is limited. But as I said before, the natural development of finance and competition among banks will lead to the loan of digital cash beyond the amount of deposited real cash. Then a bankruptcy of one bank can cause a chain effect and lead to another bank's default, which may result in financial crisis.
In the real world, this risk is minimized by the so-called safety net offered by the central bank or other institutional devices such as the Federal Deposit Insurance Corporation. But in cyberspace, there is no central authority to offer the safety net, at least not now and probably not for a while. Thus, the default of only one bank can easily cause a chain effect. Many customers may rush to the banks to ask for a conversion of their digital cash to real cash, which is of course impossible. The possibility of financial crisis is expected to be higher in cyberspace than in the real world owing to the absence of a central bank.
In sum, I listed one benefit--increased efficiency of transaction--and four problems--taxation and money laundering, increased instability of exchange rate, disturbance of money supply, and possibility of financial crisis. Then what is the critical characteristic of digital cash? Is there a common factor in any of these benefits or problems? If these consequences really take place in future, what kind of scenario could happen? I consider these questions next.
The most important characteristic of digital cash is transnationality, which plays an important role in each of the benefits and problems associated with digital cash.
Digital cash is transnational in that it is not constrained by national borders. First, people using digital cash are transnational because they can purchase services and goods from every site on the Internet. Second, banks issuing digital cash are transnational because not only U.S. banks, but also all other banks can issue dollar-term digital cash. To put this another way, as far as digital cash is concerned, both the demand side and the supply side have no national borders.
This transnationality is an important characteristic of digital cash that greatly affects the benefits and problems discussed above. The benefit of increased efficiency is most striking in the case of international transactions. For example, in Japan, the bank commission of an international money transfer is about $20 or $30, whereas it is $2 or $3 for a domestic transfer. So the cost-reduction effect is more dramatic for international payments.
The problems are also deeply rooted in this transnationality. The taxation and money laundering problems are caused directly by this transnationality. Instability of the exchange rate is also a result of the transnationality of people living in cyberspace; instability may be caused by mass participation in speculative transactions, and, likewise, mass transactions may be result of the fact that people can purchase goods and services directly from anywhere in the world by using digital cash in any currency. Disturbance of the money supply may become serious as a consequence of digital cash's transnationality, because one currency's digital cash may be issued by not only that country's bank, but also by all other banks outside that country, which are beyond the control of that country's central bank. The financial crisis may be intensified by the transnationality of digital cash, because this transnationality makes it difficult for conventional central banks to deal with chained bankruptcy in cyberspace.
To understand the importance of transnationality, let us assume that digital cash is completely domestic, not transnational. That is, only a home country's banks can issue digital cash in that home country's currency, and only a home country's people can use it only at sites located in the home country. Then, the benefit of digital cash will be reduced to the level of just a new payment system, something like a credit card or prepaid card. Multinational small businesses will, of course, be impossible. Potential customers in cyberspace, which are now worldwide, may be reduced to those in one nation-state. But, regardless of this loss, the problems caused by digital cash will become far less serious. Domestic taxation rules can be applied to transactions on the Internet. Money laundering is still possible, but it will be more easily detected by investigators because digital cash will stay in the home country. The instability of the exchange rate will not be a serious issue; the people of a home country have to keep using that home country's digital cash, so they will have less incentive to participate in exchange rate speculation. Disturbance of the money supply will be minimized because the central bank can control not only real cash, but also digital cash by the conventional means, such as control of money by bank rate control or open market operation. Chained bankruptcy may also be controlled by the conventional techniques of the central bank. Therefore, both the benefits and the problems disappear or are reduced much as if the digital cash is completely domestic. This thought experiment indicates that transnationality is critically important for digital cash.
In other words, if digital cash had no transnationality, it would be considered as nothing more than an efficient payment system like a credit card system, and would have no significant economic implications. Credit card systems increased the efficiency of payment, probably changed the velocity of money and raised the money multiplier. But that is all they did. They did not bring about consequences like those discussed above. They did not cause a taxation or money laundering problem and did not affect the stability of the foreign exchange rate or money supply. If digital cash had no transnationality, its consequences would be very limited like those of credit card systems, and there would be no economic consequences to analyze.
This argument leads to a necessity to distinguish between the digital cash discussed here and so-called electronic cash because, in general, the latter does not have sufficient transnationality. For example, a smart card system like Mondex is sometimes treated in the same way as digital cash. But since the smart card system usually requires a specialized reading and writing device, it cannot easily spread all over the world. Thus, the transnationality of the smart card is limited compared with that of Chaum's Digicash. As this example shows, not all electronic cash has transnationality. This is the reason I use the term "digital cash" in this paper instead of the broader term "electronic cash." Digital cash, like Chaum's Digicash, being different from other electronic cash, has an unprecedented transnationality that may cause significant benefits and problems.
But will these consequences really occur? It all depends on how much digital cash will actually be used on the Internet. Not just a few people are anxious about the security of digital cash. If the concerns and problems outweigh the benefits, digital cash will not spread, and the consequences discussed above will not be realized. However, it is difficult to predict which way the trend will turn in the future. The only thing we can do now is to consider several possible scenarios, from the most conservative ones to the most radical ones.
For illustrative purposes, I will consider one of the most radical scenarios--a scenario in which digital cash becomes prevalent on the Internet, turning cyberspace into a large-scale economy. This is not a prediction, only a possible scenario. The aim of presenting this radical case is to better understand digital cash. To understand the implications of digital cash and to make preparations for the future, it is better to take an extreme case as a thought experiment.
Let us assume that the benefits of digital cash are plentiful enough to overcome the security concerns, and people will increasingly use digital cash. Under this assumption, what will happen? I will consider three stages of development (see Figure 4).
Digital cash spreads on the Internet. Increased efficiency brings unprecedented benefits to producers and consumers. Multinational small businesses gain momentum, and new business organizations appear such as virtual corporations. Consumers enjoy purchasing goods and services from all over the world. Some banks sticking to traditional transaction systems may lose their competitive edge. The size of the cyberspace economy, measured by the total sales on the Internet or something like the gross national product (GNP), grows more rapidly than the economy of the real world.
As long as the size of the cyberspace economy is far smaller than the real world's economy, the effect on exchange rates or money supply is limited. So the main problem in this stage is the taxation problem and money laundering. These two problems demand an international accommodation of rules, such as an international standard taxation rule on transactions through the Internet, or an international agreement on criminal investigations on the Internet. The process of making such rules may warrant a harsh negotiation round among nation-states. But in any case, these new rules will be nothing but patchwork regulation, which will not change the character of digital cash. So the expansion of digital cash will continue in spite of such weak regulations.
The expansion of digital cash will eventually raise the size of the cyberspace economy enough to influence the real world's international economy. For example, imagine the amount of transactions in cyberspace reaching to 5 percent of the total of world transactions. Then the destabilizing effect on the exchange rate and the disturbance effect on the money supply will become reality. Many people will begin to be concerned about the possibility of financial crisis. Cyberspace will be under fire as a cancer to the world economy. Experts and scholars may propose various reform plans to solve these problems.
But it might be difficult to enact the reforms before the financial crisis really happens, because the reform means, more or less, the introduction of worldwide regulation into cyberspace, and people living in cyberspace tend to dislike any kind of regulation. People living there love the freedom of cyberspace and tend to be proud of being part of anarchy. On top of this, since this regulation would include all the banks in cyberspace, it would require a time-consuming worldwide negotiation process. If people's resistance is strong enough and negotiation wastes too much time, financial crisis could occur before any reforms are enacted. Once a financial crisis occurs, everybody will try to withdraw their money from cyberspace and move it to the real world, and the digital cash may rapidly shrink and economic activity in cyberspace become paralyzed.
If the financial crisis actually occurs, the necessity of reform becomes evident to everyone. What kind of reform could happen then? Two typical reform plans can be imagined: territorial segmentation by nation-states or establishment of monetary authority in the cyberspace.
In territorial segmentation by nation-states, the nation-states manage their banks. In other words, every bank on the Internet would have to belong to a nation-state and be controlled by the central bank of that state. The central bank would be responsible for the problems discussed here and would control the issue and circulation of digital cash. Thus, digital cash will lose its transnationality. As shown before, digital cash without transnationality would only be a new means of payment like a credit card and would be controllable by the central government. To put this another way, the problems would be minimized at the cost of the loss of the benefit of transnationality. This reform would symbolize, in a sense, the "colonization of cyberspace" by nation-states. Cyberspace would surrender to the nation-states.
The above segmentation reform plan would not be a satisfactory solution for people living in cyberspace ("Netizens") . They will try to seek another solution. Another possible reform would be to establish a monetary authority in cyberspace just like a central bank in the real world. The organization of this monetary authority may be a union of the banks on the Internet, a committee of experts and bankers, or an organization of representatives elected from regular people in cyberspace. At any rate, this monetary authority would be responsible for the financial problems that could arise such as chained bankruptcy or an instability of the money supply and exchange rate. To perform this purpose, all banks issuing digital cash would have to accept regulation by this monetary authority.
However, if digital cash remains a proxy of real cash, the monetary authority in cyberspace will not be able to perform its responsibility, because the authority cannot issue real cash. In the real world, monetary authority can issue real cash (for example, dollar bills or yen bills) to any extent, so it can be a last resort of credit. If digital cash remains a proxy of real cash, the monetary authority in cyberspace would not be able to be a last resort of credit.
One of the strongest solutions to this incompetence would be that the authority in cyberspace create a completely new currency for digital cash. I will tentatively call this new currency's unit "netty." Netty would be a new currency similar to the dollar or yen. Only the monetary authority could issue netty-term digital cash, and other banks on the Internet use this cash as a base money and issue their bank's digital cash. Consequently, cyberspace could obtain sovereignty as far as currency is concerned. Cyberspace could obtain monetary independence with respect to money .
To some readers, this scenario may sound like science fiction. I would like to stress again that this is not a prediction, but a possible and probably a most radical scenario, rooted in the basic characteristic of digital cash. The above thought experiment suggests that the scenario will, more or less, be a story of conflict between cyberspace and nation-states . Of course we cannot yet be sure if digital cash will really spread or not. But if it spreads, the historian in the 21st century may write the history of digital cash as a story of the battle between cyberspace and nation-states.
Digital cash will bring us benefits as well as problems. One major benefit of digital cash is its increased efficiency, which will open new business opportunities, especially for small businesses. On the other hand, it will bring us four problems: taxation and money laundering, instability of the foreign exchange rate, disturbance of money supply, and the possibility of financial crisis. There is one important attribute of digital cash, however, that overshadows these benefits and problems. It is the transnationality of digital cash--its ability to flow freely across national borders. Every bank can issue it and everybody all over the world can use it. This transnationality--a cause for both benefits and problems--could have significant repercussions internationally. From the economic standpoint, the most important characteristic of digital cash is its transnationality. If digital cash circulated only within a traditional national border and was controlled under a central monetary authority, there would be no economic implications that would be worth analyzing. In this case, digital cash would be nothing more than a convenient transaction method such as a credit card. However, digital cash is more than that. Its transnationality has the potential to cause conflict between cyberspace and nation-states. If digital cash spreads successfully in the 21st century, its history may be written as a record of its battle with nation-states.
 Camp (1995) is a brief survey of electronic payment systems. For an overview available on the Internet, see: http://www.ex.ac.uk/~RDavies/arian/emoneyfaq.html (Griffith, Cashless Society or Digital Cash?), http://www.sfasu.edu/fincash.htm (E-money mini-FAQ), http://ganges.cs.tcd.ie/mepeirce/project.html (Network Payment Mechanisms and Digital Cash), and http://www.sims.berkeley.edu/resources/infoecon/ (H. Varian's site).
 If the cost of connecting the Internet and personal computers is taken into account, the cost of e-cash payment is high, of course. But note that the explosion of the Internet is taking place already owing to other attractive services such as e-mail, WWW, databases, public relations, etc. Accordingly, for most users and e-cash providers, the cost of e-cash transfer will be recognized as negligibly small.
 Super-distribution has been developed by a team led by Mori. See: http://www.virtualschool.edu/mon/ElectronicProperty/MoriSuperdist.html and http://www.hotwired.com/wired/2.09/departments/idees.fortes/superdis.html
 See: http://www.digicash.com/~nick/multi.small.html
 Japan's land bubble in the 1980s also occurred with a speculative transaction of lots of firms other than real estate firms. Exchange rate volatility is said to have increased after the liberalization of international capital markets (Corsetti et al., 1990).
 Regarding the concept of Netizen, see Hauben (1995).
 Creating new money in cyberspace may sound strange. But we had a similar experience already: ECU (European Currency) of Europe and SDR (Special Drawing Right) of IMF. These two currencies are a newly created international currency based on the agreement of the people concerned.
 John Barlow, one of the founders of the Electric Frontier Foundation, circulated a declaration of the independence of cyberspace just after the U.S. Telecommunication Act 1996 was approved by Congress. Though his major concern is with freedom from government censorship, this declaration can be interpreted as an early indication of this independence scenario (John Perry Barlow, 8 February 1996, "A Declaration of the Independence of Cyberspace").
Allen, Frederick L. 1931. Only Yesterday: An Informal History of the Nineteen-Twenties. New York.
Barlow, John Perry. 1996. "A Declaration of the Independence of Cyberspace," February 8, document circulated on the Internet.
Business Week. 1995. "The Future of Money: E-cash Could Transform the Worlds' Financial Life," June 12, pp. 36-46.
Camp, L. Jean. 1995. "Opportunities, Options, and Obstacles in Electronic Commerce," paper presented at Columbia Institute for Tele-Information Conference on the Future of Electronic Banking, October 1995.
Chaum, David. 1987. "Security Without Identification: Card Computers to Make Big Brother Obsolete," http://www.digicash.com/publish/bigbro.html. Original version: "Security Without Identification: Transaction Systems to Make Big Brother Obsolete," Communications of the ACM, vol. 28, no. 10, October 1985.
Chaum, David. 1992. "Achieving Electronic Privacy," Scientific American, August 1992, pp. 96-101. http://www.digicash.com/publish/sciam.html.
Chaum, David, 1989. "Online Cash Checks," Advances in Cryptology: EUROCRYPT '89, pp. 288-293. http://www.digicash.com/publish/online.html.
Corsetti, Giancarlo, Vittorio Grilli, and Nouriel Roubini. 1990. "Exchange Rate Volatility in Integrating Capital Markets," NBER Working Paper Series No. 3570.
Crocker, S., B. Boesch, A. Hart, and J. Lum, 1995, "CyberCash: Payment for the Internet," Proceedings of INET'95, 27-30 June 1995, in Hawaii, http://info.isoc.org/HMP/PAPER/181/abst.html.
Economist. 1994. "Electronic Money: So Much for the Cashless Society," 24 November, pp. 23-27.
Galbraith, John K. 1954. The Great Crash, 1929. Boston.
Hayek, Friedrich A. 1978. Denationalisation of Money: The Argument Refined. Institute of Economic Affairs.
Hauben, Michael. 1995. "Netizens: On the History and Impact of Usenet and the Internet," http://www.columbia.edu/~hauben/project_book.html.
Levy, Stevin. 1995. "E-Money (That's What I Want)," Wired, December 1994, p. 174. http://www.hotwired.com/wired/2.12/features/emoney.html.
Matonis, Jon. 1995. "Digital Cash & Monetary Freedom," Proceedings of INET'95, 27-30 June 1995, in Hawaii, http://info.isoc.org/HMP/PAPER/136/html/paper.html.
Okamoto, Tatsuaki, and Kazuo Ohta. 1991. "Universal Electronic Cash," Advances in Cryptography: Crypto91, Lecture Notes in Computer Science 576, pp. 324-337, Springer-Verlag, Berlin.
Rappoport, Peter, and Eugene N. White. 1994. "The New York Stock Market in the 1920s and 1930s: Did Stock Prices Move Together Too Much?" NBER Working Paper Series No. 4627.