© 1999 Kerry Lynn Macintosh.

Professor of Law, Santa Clara University School of Law. J.D., 1982, Stanford Law School. I thank Scott Pesetsky, Santa Clara University School of Law, Class of 1999, for his research assistance. I am also grateful to the editorial staff of the Berkeley Technology Law Journal for their helpful comments and edits.

1. WILLIAM J. CLINTON & ALBERT GORE, JR., A FRAMEWORK FOR GLOBAL ELECTRONIC COMMERCE 3 (1997) available at <http://www.iitf.nist.gov/eleccomm/ecomm.htm> (hereinafter FRAMEWORK).

2. See id. at Principles.

3. See id.

4. See id.

5. See id.

6. See id.

7. See FRAMEWORK, supra note 1, I.2.

8. See id.

9. See id.

10. See id.


12. See Peter Wayner, Electronic Cash for the Net Fails to Catch On, N.Y. TIMES ON THE WEB, Nov. 28, 1998 (visited April 17, 1999) <http://www.nytimes.com/library/tech/98/11/cyber/articles/28cash.html>.

13. See id.

14. See David Einstein, Day Early, Dollar Short-DigiCash Files Chapter 11, S.F. CHRON., Nov. 6, 1998, at B1-2. Under the DigiCash system, a customer uses her computer to generate a random serial number. The number serves as a digital "coin," and has a dollar value associated with it. The customer submits the coin to her bank, which adds its digital signature, and debits her account. The customer now holds an electronic bank obligation, which she can transmit anonymously as payment for online goods or services. The merchant who receives the coin contacts the issuing bank to verify that it has not been spent before. If the coin is still good, the merchant deposits it in his own bank. See Kerry Lynn Macintosh, How to Encourage Global Electronic Commerce: The Case for Private Currencies on the Internet, 11 HARV. J.L. & TECH. 733, 735 n.9 (1998).

15. See Einstein, supra note 14, at B1.

16. A smart card is a plastic card with an embedded computer chip. The chip is loaded with value. To purchase goods or services, a buyer takes the card to a store equipped with a card-reading terminal. After the sale is complete, the store submits the value to the card issuer for redemption. See CONGRESSIONAL BUDGET OFFICE, EMERGING ELECTRONIC METHODS FOR MAKING RETAIL PAYMENTS 9-11 (1996); Macintosh, supra note 14, at 734.

17. See Saul Hansell, Got a Dime? Citibank and Chase End Test of Electronic Cash, N. Y. TIMES, Nov. 4, 1998, at C1.

18. See Wayner, supra note 12.

19. Smart cards loaded with value, eCash, and similar products are not legal tender; rather, they represent claims against the issuer. See Task Force on Stored-Value Cards, A Commercial Lawyer's Take on the Electronic Purse: An Analysis of Commercial Law Issues Associated with Stored-Value Cards and Electronic Money, 52 Bus. Law. 653, 670 (1997). In effect, the temporal gap between creation of value and redemption of value involves an extension of credit by the issuer. See id. at 664.

20. For example, under federal law, the issuer of a bank credit card or convenience card (like American Express) is subject to claims and defenses arising out of a credit card transaction, if: (1) the cardholder makes a good faith effort to resolve her dispute with the merchant; (2) the amount of the transaction exceeds $50; and (3) the place where the transaction occurred is in the same state or within 100 miles from the cardholder's residence. See 15 U.S.C. 1666(i) (1998); 2 BARKLEY CLARK & BARBARA CLARK, THE LAW OF BANK DEPOSITS, COLLECTIONS, AND CREDIT CARDS 15.07[2] (rev. ed. 1999). Liability is limited to the amount of credit outstanding on the transaction when the cardholder first notifies the issuer of the claim or defense. See id. When the seller has issued the credit card, or is under the control of the issuer, or is a franchised dealer, the cardholder can assert her claims or defenses without regard to dollar amount or geographic location. See id.

21. See, e.g., Miller v. Race, 97 Eng. Rep. 398 (K.B. 1758) (money cannot be recovered once paid honestly upon a valuable consideration).

22. Issuing banks prefer to honor their cashier's checks in order to protect their own credit reputations. The Uniform Commercial Code reinforces this strong self-interest. Banks that wrongfully refuse to honor their own cashier's checks can be sued for expenses, loss of interest, and consequential damages. See U.C.C. 3-411(b) (1995).

23. For example, some lawyers believe courts would treat smart cards as cash, and refuse to permit stop payment. This is likely in systems where value cannot be linked to an individual after payment has been made. See Task Force on Stored-Value Cards, supra note 19, at 720. To avoid uncertainty, issuers may choose to address such legal problems through contracts or system rules. See id.

24. Banks that process credit card slips for sellers charge a percentage fee known as the "discount rate." The discount rate ranges from one-half to seven percent of the amount of the credit card slip. See 2 CLARK & CLARK, supra note 20, 15.02.

25. See supra note 20 and accompanying text.

26. The issuer may charge the amount of the purchase back to the seller's bank, which, in turn, may charge back against the seller pursuant to a recourse agreement. See 2 CLARK & CLARK, supra note 20, 15.02[4][b].

27. For an overview of terms included in bank-merchant agreements, see id.

28. This is not a technological pipe dream. Mondex Co. possesses technology that permits users to transmit stored value directly from smart card to smart card. Other companies have developed smart card readers for computers. With such readers in place, electronic money could move online. See generally Karen Kaplan, E-commerce may help Americans learn to love 'smart' cards, L.A. TIMES, Oct. 11, 1998, at C1.

29. See Macintosh, supra note 14, at 738-39.

30. See id. at 750.

31. See id.

32. See id. at 756-57.

33. See id. at 758. Some may question the utility of common units of account, arguing that computer software could be developed to translate any national unit of account into any other national unit of account. However, the transaction costs involved might be higher than expected; the software would have to be constantly updated as exchange rates for over two hundred national currencies fluctuated.

More importantly, practical experience teaches that common units of account provide informational benefits to users. Prior to introduction of the euro, the price charged for the same goods varied widely between European countries. See Faster Forward, THE ECONOMIST, Nov. 28, 1998, at 83. An investment bank studied fifty-three homogeneous goods across Europe and found that on average, prices differed from the mean by twenty-four percent-a variation twice as large as in the United States. See id. This variation was due in part to price opacity. Even when exchange rates were steady, comparing prices stated in differing national currencies was not easy for consumers. See id.

On January 1, 1999, Europe entered a new era. Two hundred and ninety million people in eleven countries adopted a common currency, known as the euro. See Anu Mahmud, Birth of Euro: Impact on Economy, HONG KONG STANDARD, Jan. 27, 1999. The new unit of account introduced price transparency, allowing buyers to comparison-shop freely across Europe. As experts had predicted, see Faster Forward, supra, the introduction of the euro revealed that some prices were out of line, and brought prices down. See Charles Fleming, The Euro's Arrival Leads One Firm to Cut its Prices, WALL ST. J. EUR., Jan. 28, 1999, at 13.

34. See Macintosh, supra note 14, at 762.

35. See id. at 763-64.

36. See Joshua B. Konvisser, Note, Coins, Notes, and Bits: The Case for Legal Tender on the Internet, 10 HARV. J.L. & TECH. 321 (1997).

37. Apparently, the Fed fears that direct competition between the government and private sector could stifle the current environment of experimentation and innovation. See Hearing Before the House Comm. on the Judiciary, 105th Cong. 619 (June 3, 1998) (statement of Laurence H. Meyer, Member, Board of Governors of the Federal Reserve System).

38. National governments can print large amounts of money to cover deficits, reduce unemployment, or to redistribute income and wealth between creditors and debtors. See Lewis D. Solomon, Local Currency: A Legal & Policy Analysis, 5 KAN. J.L. & PUB. POL'Y 59, 66 (1996). Of course, such action results in inflation. See id.

39. See Macintosh, supra note 14, at 761-64.

40. See supra note 11.

41. See FRAMEWORK, supra note 1, at Part I.2.

42. The Electronic Fund Transfer Act, 15 U.S.C. 1693-1693r (1998), regulates electronic fund transfers involving consumers. Regulation E implements the Act. See 12 C.F.R. 205 (1999).

43. See BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, REPORT TO THE CONGRESS ON THE APPLICATION OF THE ELECTRONIC FUND TRANSFER ACT TO ELECTRONIC STORED-VALUE PRODUCTS (1997), available at <http://www.bog.frb.fed.us/boarddocs/RptCongress/efta_rpt.pdf>. This report does not recommend any specific course of action. However, it concedes that benefits to consumers might not outweigh the costs of applying Regulation E to electronic stored value products. See id. at 75.

44. See CONSUMER ELECTRONIC PAYMENTS TASK FORCE, REPORT OF THE CONSUMER ELECTRONIC PAYMENTS TASK FORCE 59 (April 1998). In reaching this conclusion, the Task Force voiced its concern that comprehensive new regulation of electronic money could quash competition and innovation, retard the development of a promising new industry, and increase the cost of new products unnecessarily. See id. at 59.

45. See id. at 59-60.

46. See 31 U.S.C. 5330(a)(1) (1998); Lee S. Adams & David J. Martz, Survey: Developments in Stored-Value Cards and Cyberbanking, 53 BUS. LAW. 1085, 1091 (1998).

47. See Proposed Amendment to the Bank Secrecy Act Regulations, Definition and Registration of Money Services Businesses, 62 Fed. Reg. 27,890 (1997) (to be codified at 31 C.F.R. 103).

48. See id. at 27,897 (to be codified at 31 C.F.R. 103.11(n)(3)).

49. "Stored value" would include funds or monetary value represented in digital electronics format and stored or capable of storage on electronic media in such a way as to be retrievable and transferable electronically. See id. at 27,898 (to be codified at 31 C.F.R. 103.11(vv)). FinCEN intends this broad term to encompass not only stored value cards, but "other advanced payment system products." See id. at 27,893; Linda Noonan, Many New Businesses May Become Subject to the BSE, 7 NO. 11 MONEY LAUNDERING L. REP. 1 (1997).

50. See Proposed Amendment to the Bank Secrecy Act Regulations, Definition and Registration of Money Services Businesses, supra note 47, at 27,897-98 (to be codified at 31 C.F.R. 103.11(uu)(3)-(5)).

51. See id. at 27,893.

52. See Adams & Martz, supra note 46, at 1091. For example, financial institutions subject to the BSA must report currency transactions over $10,000 and keep records on funds transfers over $3,000. See id.

53. See id. at 1092; Uniform Non-Depository Providers of Financial Services Act: Hearing Before the National Conference of Commissioners on Uniform State Laws Drafting Committee (Oct. 24, 1997) (testimony of Mark E. Plotkin, Partner, Covington & Burling, on Behalf of Mondex USA), available at <http://www.law.upenn.edu/library/ulc/ndpfsa/plotkin.htm> [hereinafter Plotkin Testimony].

54. On May 21, 1997, FinCEN published its Proposed Amendment to the Bank Secrecy Act Regulations, Requirement of Money Transmitters and Money Order and Traveler's Check Issuers, Sellers, and Redeemers to Report Suspicious Transactions, 62 Fed. Reg. 27,900 (to be codified at 31 C.F.R. 103). These proposed amendments would extend to "money services businesses" a suspicious transaction reporting regime that is similar to the one imposed on banks, thrifts, and credit institutions. See id. at 27,900-01. However, the amendments would exempt transactions that involve only the issuance or facilitation of transfer of stored value, or the issuance, sale, or redemption of stored value. See id. at 27,908 (to be codified at 31 C.F.R. 103.20(a)(4)).

55. See id. at 27,904.

56. See, e.g., Plotkin Testimony, supra note 53.

57. See id.

58. See id. Years later, no case of "cyberlaundering" has been detected. See FINANCIAL ACTION TASK FORCE ON MONEY LAUNDERING, 1997-1998 REPORT ON MONEY LAUNDERING TYPOLOGIES, pt. II(ii), New Payment Technologies, at 7 (Feb. 12, 1998), available at <http://www.ustreas.gov/fincen/typo97en.html>.

59. See 61 Fed. Reg. 19,696 (May 2, 1996).

60. See Economic Growth and Regulatory Paperwork Reduction Act of 1996, Pub. L. No. 104-208, 2601, 110 Stat. at 3009-469.

61. See Noonan, supra note 49, at 4-5.

62. See Economic Growth and Regulatory Paperwork Reduction Act of 1996, supra note 60. For example, Mondex USA has pledged to impose low limits on the amount of value that may be stored on consumer smart cards. Merchant smart cards will be rendered incapable of transmitting value to anyone other than as a legitimate consumer refund or as a deposit in a bank. Moreover, Mondex will monitor transaction activity in its system, searching for abnormal patterns of behavior. See Plotkin Testimony, supra note 53.

63. See generally FRAMEWORK, supra note 1, at Part I.2.

64. National Conference of Commissioners on Uniform State Laws, Uniform Money Services Business Act (March 1999), available at <http://www.law.upenn.edu/library/ulc/moneysrv/msb399.htm>. In prior drafts, the UMSBA was known as the Uniform Nondepository Providers of Financial Services Act. The name change was adopted on the ground that "money services business" better described the entities regulated under the Act, and was consistent with FinCEN terminology. See id. 101, Reporter's Note.

65. See id. 102(17).

66. See id. 102(20). The current draft includes the following definition of stored value instrument:

[A] card or other tangible object for the transmission or payment of money which contains a microprocessor chip, magnetic stripe, or other means for the storage of information, which is prefunded, and for which the value is decremented upon each use, but does not include a card or other tangible object that is redeemable only by the issuer in the issuer's goods and services.

See id. 102(26).

67. See id. 102(17).

68. See id. 102(20), Reporter's Note.

69. See id. 102(18), Reporter's Note.

70. See Plotkin Testimony, supra note 53.

71. See id.

72. FRAMEWORK, supra note 1, at Principles (emphasis added).

73. For example, New York prohibits any corporation other than a national bank, unless expressly authorized by the laws of New York, from issuing notes or other evidences of debt to be loaned or put into circulation as money. See N.Y. Banking Law 131 (McKinney 1998); see generally Anita Boomstein, Business or Banking?, CREDIT CARD MANAGEMENT, Sept. 1998.

74. See id.

75. For example, American Express or some other money services business that enjoys widespread market recognition and trust might issue electronic money. The money could be denominated in dollars, or independently. Either way, it would represent a claim against a private company. See supra note 19.

76. See Thomas P. Vartanian et al., Echoes of the Past with Implications for the Future: The Stamp Payments Act of 1862 and Electronic Commerce, 67 BNA'S BANKING REPORT 464 (1996).

77. 18 U.S.C. 336 (1998) (emphasis added).

78. An argument can be made that "obligation" was never intended to include electronic money, and thus, the statute should not apply. After all, Civil War era lawmakers could not have had electronic payment products in mind when they passed the Stamp Payments Act. However, Congress did amend the Act as recently as 1994. See Vartanian, supra note 76. Unfortunately, this legislative activity could be taken as a sign that Congress intended to breathe new life into the Act, reaffirming and extending its prohibition to all twentieth century obligations-including electronic ones. See id. Because the Stamp Payments Act imposes criminal penalties for violations, uncertainty as to the meaning of the word "obligation" could chill innovation. The Working Group should urge Congress to repeal this provision.

79. Cal. Penal Code 648 (West 1999).

80. See id.