12-29-96. Computerworld: Cybercash at risk/Money laws lacking Cruising the Internet with a hard drive full of electronic cash is like walking the mall with a pocketful of bills. If you get ripped off, that money is gone. Don't expect a refund from the financial firm that gave you the cash. But a lot of people don't understand that. The laws that govern digital money are unclear, partly because federal and state governments have failed to revise finance rules to include the online realm explicitly. Electronic payment is potentially an enormous market. Internet commerce is expected to ring in $6 billion by 2000, according to International Data Corp. in Framingham, Mass. But digital cash can take various forms. Those include electronic chits to be exchanged for hard cash, smart cards with a preprogrammed value and the digital equivalent of cash in the mode of specially coded ones and zeros. These days, everyone from financial start-ups such as 2-year-old CyberCash, Inc. in Reston, Va., to banking veterans Wells Fargo Bank and The Chase Manhattan Bank Corp. is turning out products. But because the payment methods are so new, even enthusiastic online merchants worry about the legalities. "I can't afford to have a major blow. You have to know there's something to fall back on," said Leo Travenshek, owner of Leo's Live Seafood in Lummi Island, Wash. And that something is the law, Travenshek and other electronic merchants hope. Yet the federal government so far has stayed away from writing rules specifically to govern electronic money. Tracing the Deals Audit trails is one area that the federal government is clear about wanting to regulate, however. No matter what the method of digital payment,the feds want to be able to trace funds in some way in order to guard against online money laundering. Overall, Uncle Sam's hands-off stance isn't necessarily bad news for an emerging technology, experts said. But the situation has left people wondering what laws and banking regulations apply to electronic cash. Furthermore, companies looking to sell products and services on the World Wide Web often don't know the risks they bear when they sign contracts with suppliers of digital money, according to several online merchants, lawyers and analysts. "Checks, credit cards, etc. they're regulated. But beyond that, it's something of a free-for-all," said Tom Smedinghoff, a lawyer at McBride Baker & Coles in Chicago. For example, anyone can invent his own online currency, which people can decide to use or not use. But for risk-takers who adopt it, it isn't clear what legal recourse there will be should Bob's BigBucks go under, Smedinghoff said. Regulations Vary In general, online money suppliers have to comply with banking laws at the point where their services deal with banks. For example, if a shopper starts a CyberCash CyberCoin account at a bank, his money is insured when it sits inside the bank, just as other funds are protected by the Federal Deposit Insurance Corp. But there are no widely accepted regulations for, say, the maximum fees companies such as CyberCash can charge or what information consumers or merchants must reveal to open accounts. Many merchants, meanwhile, are small-business owners with little technology know-how. They often put their faith in software products, rather than the law, to protect them. Sandra Bauer, a marketing assistant at Dreisbach's Steaks, Inc. in Grand Island, Neb., said she initially had concerns about the safety of CyberCash. "But when they called on me, they also came with our banker from Norwest [Corp.], who was very enthusiastic about it," Bauer said. "This set any fears we had to rest." Karen Epper, an analyst at Forrester Research, Inc. in Cambridge, Mass., said electronic commerce companies should do more legal research than that. "Joe Programmer could create a new currency system," Epper said. "But if it's not supported by regulators, what do you have?" Indeed, Amsterdam-based Digicash B.V. is in just such a precarious position, Epper said. So far, only one bank offers Digicash's Ecash: Mark Twain Bank in St. Louis. Daniel M. Eldridge, vice president of Ecash business development at Digicash's New York office, acknowledged that there could be a problem. "If Mark Twain goes out of business, the Ecash could be worthless if no other bank is there to accept it or wants to accept it," Eldridge said. But Digicash is working to sign up other banks, including Germany's Deutchebank, he said. The safest bet is to look for electronic payment firms backed by veteran banks, analysts said. Smart card vendor Mondex USA, for example, is no sure thing. But it is run by seven of the largest banks and credit-card companies in the U.S., Epper said. "These financial institutes will watch their Ps and Qs," he said. Although the federal government hasn't rushed to regulate electronic money, the Federal Reserve Board is deciding whether to apply its complex Regulation E to at least some online payments, starting with smart cards. Regulation E oversees the electronic movement of money. Automated teller machine transactions fall under Regulation E, for example. Some states, such as Illinois and New Hampshire, are devising policies on their own. Yet when regulations aren't spelled out, matters often get decided in court a slow, piecemeal process, Smedinghoff said. That's what is now happening with trademark disputes over Web domain names. Although no one wants stifling interference from the government, some clear statements from lawmakers might help spur electronic commerce, said Stan Wilson, general manager of Iconomics, Inc., a graphic design company in Fort Collins, Colo. "It would make some people feel better about trusting these new ways to pay," Wilson said. Payment options proliferate Electronic payment methods are proliferating on the Web a trend that is likely to accelerate in 1997. What follows is a sampling of companies growing the first crop of digital dollars: Digicash created Ecash, a digital form of dollars and cents that consumers can use to pay merchants directly online (www.digicash.com). CyberCash offers CyberCoins, which are essentially electronic promissory notes that can be redeemed at certain banks. No banks offer CyberCoins yet, but several are expected to launch programs early next year, including First Union Corp. in Charlotte, N.C., and U.S. Bank in Portland, Ore. CyberCash also offers an encryption service to guard credit-card numbers transmitted online (www.cybercash.com). Mondex is a joint venture of The Chase Manhattan Bank, AT&T Corp., Wells Fargo Bank and four other big banks and credit-card companies to push smart cards. People who use the cards, which hold a preprogrammed amount of value, can pay for items online by sending encoded numbers or, in the real world, by swiping them through card readers. First Virtual Holdings, Inc. in San Diego uses electronic mail and secret personal identification numbers to transmit payments online (www.fv.com). ---------- 12-27-96. Nikkei English News: Asahi, Sakura to join Visa's e-money trial Asahi Bank and Sakura Bank decided Thursday to participate in an electronic- money experiment arranged by Visa International Inc., to be conducted in Tokyo's Shibuya district by a consortium of major Japanese finance companies. Participants in the project include most of Japan's major banks and finance firms, such as leading credit card issuers Nippon Shinpan Co., DC Card Co. and UC Card Co. Daiwa Bank and regional Bank of Yokohama also decided the same day to join the consortium, which includes as start-up members Bank of Tokyo-Mitsubishi and Dai-Ichi Kangyo Bank. Among the few major players not taking part are Sanwa Bank, Hokkaido Takushoku Bank and JCB Co. ---------- 12-29-6. Communications Daily: Bureau of Export Administration issued regulation implementing Administration's new data encryption policy. Bureau of Export Administration issued regulation implementing Administration's new data encryption policy (CD Oct 2 p2). New rules establish procedures companies must follow to export encryption products. William Reinsch, Undersecy. of Commerce for Export Administration, said new rules "will promote the robust growth of international electronic commerce and secure global communications while balancing our nation's economic and national security needs." ---------- 12-28-96. Computer Shopper: SPA Sets Guidelines for Net Distribution The Software Publishing Association (SPA) recently released guidelines for the electronic sale and distribution of software. The proposal includes procedures for the protections of intellectual property and customer privacy and provides a system for tracking sales. The SPA proposes a new entity called a clearinghouse, which will handle the locking and unlocking of software--in the form of digital codes that will render programs inoperable until paid for--as well as keep records of all transactions. Copies of the SPA's report are available from the association's Web site (http://www.spa.org). ---------