Federal Reserve Boosts E-Cash Viability

A new regulation limiting electronic cash companies' liability could help the industry go mainstream

The Federal Reserve may soon relax consumer protection laws to give the emerging electronic cash business a lift.


The Federal Reserve's move is needed because "if they impose too much regulation, there will be no [e-cash] product," said Nessa Feddis, a senior counsel at the Washington-based American Banking Association.

The new Regulation E would allow companies and banks to sell e-cash cards containing less than $100 without having to replace the money if a consumer claims the card is lost or stolen. However, companies offering e-cash will have to warn customers of their liability should they lose the card.

Electronic cash is based on credit card-like devices that either store electronic replications of dollar bills, or contain information allowing the immediate transfer of money from a card owner's bank account to another account.

E-cash technology includes phone cards sold by phone companies, magnetic-stripe tickets sold by subway services, and AT&T Corp.'s Universal Card, which is intended for on-line commerce. E-cash proponents hope consumers will use the technology for routine purchases, as well as on-line commerce.

The Federal Reserve's position on e-cash is contained in a proposed rewrite of Regulation E of the 1978 Electronic Funds Transfer Act governing the transfer of money among banks. The regulation includes consumer protection rules that require banks, not consumers, to pay bills charged on stolen credit cards. The new Regulation E loosens that liability for e-cash, but adds consumer risk.

"If you lose your stored-value card... it is like losing a $100 bill," said Russell Stevenson, general counsel at CyberCash Inc., Reston, Va. "Without the exemption, stored-value cards will not work," he said. CyberCash offers a computer-based version of e-cash for on-line commerce. Company officials may try to include their e-cash technology under the new Regulation E, he said.

However, some say the offer to amend Regulation E is a two-edged sword for the e-cash industry. Although the new Regulation E gives government backing for e-cash, it marks the first extension of government regulation to the new technology, said Richard Field, a lawyer specializing in e-cash in Cliffside Park, N.J.

"This proposal represents our first cut at designing regulation" for the emerging e-cash technology, said Edward Kelley, governor of the Federal Reserve Board. Kelley spoke at a Washington conference organized by the Washington-based law firm of Steptoe & Johnson and the Software Publishers Association.

The board will not try to heavily regulate the new technology, Kelley said. "Continued observation seems to be the best course.... [A development of a government e-cash] product could very well stifle the current climate of rapid innovation," he said.

This wait-and-see policy was echoed by Eugene Ludwig, the Comptroller of Currency at Treasury Department. Government officials use regulation to protect consumers, avert financial crimes and keep the nation's financial system stable, he said. So he is "looking, thinking, reflecting," before proposing any e-cash regulations, he said. "We can deal with these problems with a scalpel, not a meat ax," he said.

However, Kelley warned industry officials that e-cash may not win widespread acceptance from consumers or businesses unless it includes good security technology to avert crime, and is built on a solid legal framework. "It is not always clear [what] the [legal] rights and obligations of the contracting parties are.... [Good laws] will help avoid risks and costly lawsuits" when using e-cash, he said.


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