Is there a future for electronic currency on the world wide web?

Winter 1999 in E*Journal

A couple of years ago, there was a serious expectation that purchases and sales on the World Wide Web would create a demand for privately issued money to be used in those transactions. As one example, the Cato Institute sponsored a conference in May 1996 on “The Future of Money in the Information Age,” a conference at which some participants discussed possible currency used in online transactions and the implications for the economy. Such privately issued money would be represented by bytes on a users' hard disk and would be transferable from one person to another at low transactions cost in low denominations. The resulting currency would make online small-value transactions attractive that otherwise would be infeasible.

It is fair to say that the expectation of privately issued currency used in significant amounts has not been fulfilled to date. There is almost no evidence of transactions on the Internet using electronic money. One issuer of electronic money, Digicash, is reorganizing under Chapter 11, and many sites on the Internet in 1996 relating to electronic money are not there in 1999.

Credit Cards on the Web

Electronic commerce on the Web has grown rapidly without the use of digital cash. In fact, for high-valued payments, many users are better off using credit cards. With a credit card, it is possible to stop payment if the seller fails to execute his side of the transaction. The credit card company bears a substantial portion of the risk due to sellers who might be tempted to take the money and run. Because of these characteristics of credit cards, there is some certification of sellers who can get a merchant credit-card account. While some reputable sellers probably cannot get a merchant credit-card account, this difficulty by necessity primarily limits sellers who would sell infrequently or do not have an established reputation. Individually at least, these types of sellers are not likely to generate large volumes.

That said, transactions between households, what often are called peer-to-peer transactions, almost surely are constrained by the lack of a medium of exchange that can guarantee payment by the buyer. The basic problem is that transactions on the Web seldom have simultaneous payment for the good and receipt of the good. As a result, the potential for default is greater when buying on-line than when buying in a grocery store.

Consider an example of such transactions: a sale of a Beanie Baby doll on-line. The buyer mails a personal check for the agreed amount. Suppose that the seller sends the doll on receipt of the check. It is possible for the buyer to either stop payment on the check or to not have sufficient funds in the account to cover the check, in which case the check will be returned unpaid. The seller can avoid this problem by waiting for a period after taking the check to the bank to be sure that it clears, but this delays the completion of the transaction. The buyer bears the risk that the seller will not send the doll, and indeed may never have had one. Recovery requires legal expenses that are not worth the cost. Electronic payments can short-circuit mailing a physical check and simplify this transaction.

Electronic payments, of course, cannot guarantee delivery of the doll after payment is made. The main solution for this problem, as on America On Line and ebay, are references by prior purchasers. This at least eliminates the possibility of repeated exploitation of buyers over time.

The Opportunity

In addition to peer-to-peer transactions, though, the delivery of many possible types of goods and services becomes possible when there is verifiable payment with low transactions costs for small payments. It is informative to examine a market in which it seems likely that digital cash for small value payments would be very useful: electronic greetings cards.

Electronic greetings cards are available at many sites on the Web. These sites offer electronic cards such as birthday cards that can be e-mailed to the recipient. Such cards are an obvious application for digital cash. The marginal cost of sending such a card is quite low, far less than for paper cards. The cost of processing credit card transactions, however, is large relative to the marginal cost of sending such cards.

The strategies pursued by three producers of such cards is informative.

Initially, e-greetings, at, charged for their electronic cards by having buyers carry balances on e-greetings' books. The buyer would permit e-greetings to charge a credit card account for an amount such as $5. This is a relatively small amount for a credit-card charge but still was substantially more than the charge for an individual electronic greeting card. The buyer then would use up this balance when sending cards. When the balance was depleted, the buyer could replenish the balance and continue sending cards.

There are obvious problems with this payment scheme. Perhaps the most glaring is the requirement that customers effectively provide trade credit to e-greetings and become unsecured creditors.

In the event, this payment scheme did not persist. E-greetings now has advertisers who pay for the service. I do not know whether the advertising is sufficient to cover e-greetings' cost. Hence, it is not obvious whether this “payment by advertising” will persist. (Note added later: It did not.) Viewing advertising is the Web's current mode of payment, which is ironic for a setting where any commercial activity was anathema just a few years ago.

American Greetings, at, has attempted to solve the problem a different way. American Greetings sells cards for a fixed price per card. In addition, they sell memberships for six months, during which time the customer can send an apparently unlimited number of cards for no additional charge. Such a membership has a big advantage over a fixed price per card: the cards are close to zero marginal cost to send and the buyer is charged nothing for sending an additional card. A member also gets a discount on personalized non-electronic cards.

Hallmark Cards, at, has few free electronic greetings cards. Hallmark sells animated greetings cards for a charge and provides a few free electronic greetings cards. In short, Hallmark has not pursued this market.

Instantly verifiable electronic payment with low transactions costs for small amounts are an obvious solution to expand opportunities in this market. With low transactions costs, it would not be surprising to see electronic greetings cards become an important substitute for paper cards with their substantial costs of purchase and shipping.

The Future

Is there a future for electronic currency on the Web? It is hard to see why not. The example of electronic greetings cards may seem frivolous in some ways: such cards generally are personal, not professional, and they are entertaining. Nonetheless, sending appropriate cards to friends and relatives at the right times is helpful for maintaining personal relations; the greetings card industry is not a negligible one; and online greetings cards merely are an example of the type of product that is most likely to benefit from electronic currency on the Web. Any product that is low value, probably less than $5 or $10, and can be delivered on the Web is a prime candidate for sale using electronic currency.

There is a major hurdle that must be overcome before electronic currency can be successful, and this hurdle has contributed to its slow adoption. Buyers will not acquire electronic currency if few sellers accept it and sellers will not accept that currency if few buyers hold it. If few sellers accept electronic currency, there is little reason for buyers to tie up part of their assets in the currency. On the flip side, if few buyers hold electronic currency, there is little reason for sellers to bear the costs of accepting the currency. This need not be the result though. If many sellers started to accept electronic currency, it would be attractive for buyers to acquire that currency; and if many buyers hold electronic currency, it is attractive to add the capability of accepting that currency to a Web site. A successful electronic currency on the Web will require an introduction that manages to overcome what otherwise is a catch-22.