Cash is headed for a whole new dimension. MasterCard has invested millions in the development of an E-cash system called Mondex. Smart Mondex cards have tiny embedded microchips that can store not only electronic dollars but also five other types of currency, an abbreviated medical history and even a personalized electronic "key" that can open everything from your apartment to your office. Says Henry Mundt, MasterCard executive vice president for global access: "The chip that we are putting on the card now will form the platform for the ultimate in remote access for consumers to their funds, anytime, anywhere. What we really see happening in the future is consumers being able to design their cards to meet their individual needs. We refer to that as moving more toward life-style cards." E-cash is already everywhere, from highway tolls to subways.
Technology and finance have become one and the same. As William Niskanen, chairman of the Washington-based CATO Institute, puts it, "The distinction between software and money is disappearing." And nowhere is that truer than in the world of cold, hard cash.
Paper money is, in its way, amazing stuff. It is, for instance, easily transferable and widely accepted. You can pay the baby sitter without even thinking about the complex financial dynamics underlying the transaction. Cash--especially U.S. dollars--is also portable, storable and exchangeable. (Just ask the thousands of Russian Mafiosi who pay for nearly everything with $100 bills.) But paper cash does have some awful drawbacks. Lose it and it's gone; sit on it and it may lose its value overnight: think about what just happened in Asia, or earlier in South America.
Enter electronic cash. The idea of digital money is simple enough: instead of storing value on paper, find a way to wrap it in a string of digits that's more portable and (most important) smarter than its paper counterpart. Smart money? Well, yes. Because digital cash is endlessly mutable, you can control it much more precisely than paper money. Think about the $2,000 check you send to your daughter at college for expenses. How is that money really spent? Books … or beer? Electronic cash takes that relatively simple transaction--passing an allowance--and makes it into a much more intelligent process. And one that hardly requires something as old-fashioned as a bank.
For starters, you can send the money over the Internet encoded in an E-mail instead of sending a check. Your daughter can store the money any way she wants--on her laptop, on a debit card, even (in the not too distant future) on a chip implanted under her skin. And, you can program the money to be spent only in specific ways. You might instruct some of the digits to go for books, some for food and some for movies. Unless you pass along a few digits that can be cashed at the local pub, she'll have to find someone else to buy the drinks.
Smart, digital cash may also address some of the other problems of paper money. If you lose your digital cash, for example, you will be able to replace it instantly by asking your computer to invalidate the disappeared digits and replace them with a fresh set. And unlike paper money--which stops earning interest as it shoots out of the ATM slot--smart money can keep earning interest until the moment you spend it.
This "cash-interest phenomenon" may sound trivial, but it's a link to a whole other revolution in finance: the dissolution of the government monopoly on money. After all, if some small bank in Luxembourg or Belize is willing to pay you more interest on your digital cash, who are you to argue? Government money will still exist, but so will dozens of other currencies, each tailored to a specific need and endlessly convertible and exchangeable. Says Howard Greenspan, president of Toronto-based Heraclitus Corp., a management consulting firm: "In the electronic city, the final step in the evolution of money is being taken. Money is being demonetized. Money is being eliminated."
Maybe. Digital cash, for all its charms, is still climbing a tough road to acceptance. "Between 40% and 50% of transactions today use cash and checks," says Steve Cone, an executive at Fidelity Investments. And there are plenty of folks who still like cold cash just fine. Says economist Bruce Skoorka: "Look, every day there's a guy who shows up at a bank in Bogota with a big box full of cash. You think he wants to travel with a traceable digital-cash card?"
In fact, in the eyes of some digital-cash Pollyannas, one of the great things about traceable, bit-based cash is that it will do away with whole categories of cash-based crime. "Paper money is, I hate to say it, the root of all evil," says DigiCash founder Chaum, who argues that the traceability of electronic cash will mean the end of some types of crime. "What kidnapper would take a ransom payment by check? Once you build the infrastructure for electronic cash, the incremental cost of replacing paper money is small. And the social benefits could be amazing."
But the China Syndrome aspect of all this interconnected finance is among its most worrisome features. What if the whole interconnected computer network crashes? (For that matter, what if just your part does?) What if a hacker breaks in at the wrong place? This new electronic world challenges everything we thought we knew about finance, but maybe not what we know about economics. Will a high-speed global economy put an end to the boom and bust of the business cycle, or will it create dangerous interlinkages across borders, where a bad year for the Mexican economy, say, might accidentally trigger a global depression?