D. Electronic Money

• Author: M.H. Ogilvie
• Profession: LSM, B.A., LL.B., M.A., D.Phil., D.D., F.R.S.C. Of the Bars of Ontario and Nova Scotia Chancellor's Professor and Professor of Law, Carleton University
• Pages: 356-361

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Electronic money (emoney) is transferrable economic value which is stored in a microprocessor (microchip) embedded in a smart or digital card, or in a digital format in a computer file.²⁷ When stored in a smart card, emoney is distinguishable from a credit card in that it carries no line of credit and from a debit card in that it is not an access device to a payment system but another means of payment in itself. The EC Directive 2000/46, recital 3, describes emoney as an electronic surrogate for cash stored in a card or computer memory to provide an alternative means of payment to cash.²⁸ Payment is made by transferring digital information from the payer to the payee, so that value is immediately transferred on delivery of the information.

Commonly accepted definitions of emoney distinguish the two variations stated above of value stored either in a plastic card or in a computer file, which can be transferred over the Internet.²⁹ The plastic smart card was marketed earlier than the computer-file variation, al-

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though in North America, it has not been implemented to date and may well be overtaken by third party payment systems over the Internet.³⁰

A smart card³¹is a plastic card containing a microchip, rather than a magnetic stripe, that is capable of storing words or information, or a digital snapshot of a fingerprint, palm print, or retinal scan. The monetary value stored in the chip is the "electronic purse" or "wallet," and the customer fills or loads the purse with "electronic cash" at a bank, at an ABM, or via a computer link with their bank, including by cell phone. The card may be used to make a purchase by inserting it into a terminal at a POS or some other device such as a vending machine or parking meter, and the terminal reads the information stored on the chip to ensure that the card is genuine and then deducts the amount of the transaction from the value stored in the card. Security is ensured by cryptographic algorithms, which perform various security functions, and the private part of the digital signature key does not leave the card, while the public part of the digital signature key is used to authenticate and use the card. This is done on the card itself and is not seen by the host reader’s memory, so it is secure and it is also impossible to tamper with the card or destroy the chip. It is also possible to detect attempts at physical or electronic tampering. The merchant transmits a full record of the daily transactions to the bank electronically or on tapes; the account is credited and the information passed on by the bank into the clearing and settlement system.

The attractions of the smart card are its security insofar as there are no communication links in its use once it is loaded with value; the availability to anyone who can purchase the stored value by cash or cleared funds in a bank account so that no creditworthiness issues arise; the absence of requirements to remember and manually enter passwords; the anonymity at POS for the cardholder; and the convenience of conducting countless small or large transactions with one simple plastic card. On the other hand, theft or loss of the card will deprive the card-holder of the stored value, which may be spent before the cardholder becomes aware of the theft or loss.

Internationally, there are two major smart card systems in operation, Visa Cash and Mondex, and numerous others which operate on

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a national basis.³²

Visa Cash operates as an "open" electronic money system, which means that there are multiple card issuers, acquirers, and retailers, and funds clearing and settlement is required. By contrast, a closed system is one in which cards can only be used to buy goods and services offered by the card issuer and there is no transfer of funds between financial institutions. Good examples of closed systems are those operating within enclosed communities such as universities, where a community...