Regulating Electronic Currency

Congress, the Treasury Department and the Office of Management and Budget are struggling with how to regulate digital cash. Who will come up with the answers?

The government is jumping in on all sides to figure out how to regulate the movement of electronic currency, primarily over the Internet and through smart cards. While law enforcement is worried that financial criminals will flock to the anonymity of high-tech transactions, banks, technology companies and privacy proponents are not pleased that a regulatory solution is likely.

Late last month, Treasury Secretary Robert Rubin held the first meeting of a task force he has formed to study government's role in the future of the financial markets. The Advisory Commission on Financial Services is expected to come up with recommendations by the end of December.

At the first meeting, Rubin said technology is driving the need for change. While policy is usually made in response to a specific crisis, he said, the legislation and regulation of electronic currency will instead be a reaction to new technologies.

"No one anticipated the advent of credit cards, debit cards or smart cards, not to mention cellular telephones, computer modems and fax machines," Rubin said.

Treasury officials have said that they are afraid such unregulated technologies will encourage cyberlaundering and other financial crimes. "Will financial service activities tend to gravitate to areas of less regulation?" Rubin asked.

Rubin's effort is the latest in a succession of studies and meetings to address the issue. Congress just held the first of a series of hearings covering electronic currency, at which industry representatives David Chaum, chairman of DigiCash and William Melton, chief executive of CyberCash, said premature regulation could kill technologies such as smart cards. The Treasury Department's anti-money laundering arm, the Financial Crimes Enforcement Network (Fincen), plans to hold a colloquium this fall to discuss law enforcement's role. And the Office of Management and Budget is now receiving comments on how to regulate the movement of digital cash "to protect consumers from counterfeiting and fraud."

This influx of government attention comes at a time when banks are starting to offer more services over the Internet and are forming more partnerships with technology companies to offer home banking. In fact, Rubin said his study would address the consequences of a merger of a financial services company and a software giant. And while smart cards are now widely used around the world, these investigations come just as the U.S. is poised to finally jump on the bandwagon. Next summer, Visa, in conjunction with First Union bank and NationsBank will launch the biggest U.S. smart card pilot at the Atlanta Olympics. The companies will sell 750,000 disposable microchip-embedded cards, and 250,000 that can be reloaded. "The Olympics will bring this technology to the forefront in the U.S." said Thomas J. Firnhaber, policy advisor at Fincen.

Both Rubin's study and the OMB's multifaceted report titled "National Information Infrastructure Security: The Federal Role," are now being commented on by other governments and industry. So far, the most outspoken opponents are those who think the government is heading toward a big brother approach in regulation of electronic currency

John Gilmore, a San Francisco-based computer security proponent who calls himself a "cypherpunk" blasted the OMB's proposal. "To the government, 'protect consumers from... fraud' really means, 'be able to watch every transaction and every person involved,'" he said in a comment letter. "Let me guess -- Fincen will be charged with... this examination."n

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