A brief discussion of
the nature of money is helpful in understanding the issues presented by
alternative payment systems. Several
concepts are worthy of note:
(1)
Taken to its most abstract level, “money” is simply a
subpart of a general belief system, a piece of “consensual reality.” This concept is particularly important since
alternative payment systems, at their core, are founded on the principle that
the “e-money” they create and process is only what the participants in that
system agree that it shall be. While the
same is true of traditional systems, the underlying belief which support
traditional systems are so well accepted that their foundation in belief is no
longer noted, much less questioned.
(2)
Money was created to serve three functions: a medium of
exchange, a unit of account, and a store of value. Electronic money fulfills
these three functions.
(3)
One should bear in mind a distinction between (a) the
evidence of money as an object and (b) the delivery system for the money. For example, the coin, the bill, and the
digital file are forms of evidence of the money. The human hand, the electronic wallet, the
ATM machine, the credit or debit card and all the associated infrastructure are
delivery systems for the evidence of the money and thereby enable the functions
of the money to be fulfilled.
(4)
The “e-money” in the alternative systems is not “legal
tender,” as the concept underlying that term is employed generally in the
public finance laws of most jurisdictions.
The e-money becomes “legal tender” only at the point that it becomes
denominated in the form of the money that is employed within the traditional
payment system. In this sense, except
for the fact that it is in electronic form, “e-money” is for all practical
purposes not distinguishable from the “script” or “tokens” used elsewhere in
the pre-electronic world. At Disneyland,
one could purchase a book of tickets granting admission to the rides and to
exchange for other goods (e.g., food) or services. The paper script with Mickey
Mouse’s picture that can be used to buy cotton candy worked only because Disney
agreed to accept it as form of payment.
Indeed, the term “tokens” is sometimes used to refer to certain forms of
e-money.
The first form of evidence of money was some physical object, a commodity
such as cooper, silver, gold, or sea shells.
The form of evidence evolved to paper, which has the major advantage of
being a more efficient way of performing its three functions. The form of evidence has now evolved by the
further reduction in its physicality.
Money has become notational money, that is, money whose existence is
evidenced by notations in the records of various parties, principally financial
institutions. The advent of the computer
age pushed the evolution further by converting the pen and ink notations in
ledgers to the less tangible bits and bytes in electronic storage media. In all cases, however, regardless of whether
the evidence is in the form of basic physical objects or in the form of electronic
accounting entries, the money is what it is agreed to be.
One effect of the computer age is that this process can be greatly
accelerated and done entirely electronically.
Checks and other items that once took weeks to settle now routinely
settle in days and can, if handled electronically, settle within seconds. Notational money can be made vastly more
efficient by being directly transferred, without requiring written
instructions. Once the requirement for a
writing is eliminated, the “script” or “token” can take on an infinite variety
of forms. All that is required is general agreement as to form and an efficient
system for trading the tokens from one party to another.
Most new electronic payment systems
involve prepaid stored-value cards (card-based systems) and on-line payments
made on the Internet (software-based systems).
These new money systems have not yet gained wide acceptance in the
United States. They are used much more
widely in Europe and Asia. While a
variety of factors appear to be relevant in causing this difference in levels
of acceptance, two seem most relevant from the jurisdictional perspective:
differences in the quality and cost of means of communicating information and
differences in the structure of financial services providers. These are points that are further developed
below.
Any
description of alternative payments methods might mention some of the following
items: anonymity of cash purse-to-purse transfers; tax implications; privacy
concerns; law enforcement issues, such as tax avoidance; money laundering;
setting interoperability standards; multiple currencies; multiple function
cards (e.g., privacy concerns when personal and medical data are also stored on
smart cards); closed vs. open systems: and debit vs. credit cards. However, it is not exactly clear what the
jurisdictional implications are in the Internet context, from the point of view
of the customer, the financial institutions, the networks and the governments
and regulators, beyond the basic issue of what authorities have prescriptive
jurisdiction and why they have it.
Further, in the literature on banking and payment systems and cyberspace,
frequent mention is made of many of the following substantive issues. Again, the question is whether any of them
have jurisdictional implications, beyond the basic question of what authority(ies)
have prescriptive jurisdiction and why they have it. These substantive issues include access to
the payments system (can non-banks issue electronic money?); finality of
payment, security and privacy; enforceability of contractual obligations; fraud;
consumer protection generally; regulatory issues, such as whether the issuance
of electronic money is a permissible banking activity for specific types of
institutions; applicability of state money transmitter and travelers' check
statutes; whether e-money is a negotiable instrument; and who will regulate
e-money issuers for credit worthiness and solvency.
The ultimate substantive question may be who controls global e-money and,
in the end, money itself: the governments and central banks or the issuers? Is the issuance of money a function only of
governments? While this is clearly a
political and policy issue, there is no legal jurisdictional component to the
ultimate policy question in the area.
HYPOTHETICAL A1.
In January 1999 an American consumer (AC), who is domiciled in New York
State and whose business is in New York State, executes a two-year contract
with an English marketing firm (EM) to buy monthly updates to a large mailing
address database previously licensed by AC from the same marketing firm. EM’s headquarters are in London, but the
server on which the database and the updates are stored is located in Brussels. EM’s computer staff in Brussels transmits the
updates directly via the Internet to AC’s server, which is located in
Massachusetts.
AC makes payment for the updates using e-money issued by the First
Internet Bank of Canada (FIBC) which operates a software-based alternative
payments system. FIBC is used because EM has a cyber-account with FIBC in view
of EM’s on-going operations in Canada.
AC does not have an account with FIBC, but exchanges e-money issued by
The Cayman Islands Web Bank (CIWB), where AC has a cyber-account. AC pays for the e-money issued by CIWB by a
standard wire transfer from AC’s usual bank, the Bank of New York (BONY).
1.
After three months AC discovers what it believes to be
significant inaccuracies in the updates and wishes to take action to recover
payments previously made, to require correction of data previously supplied,
and to obtain redress for as yet unspecified consequential damages caused by
its reliance on the inaccuracies in the updates, as well as such fees and costs
and the court may deem just.
2.
After two more months AC discovers a highly damaging
virus in its system which it alleges was transmitted due to the negligence of
EM’s computer staff in Brussels.
(A suspicious reader might conclude that EM’s pattern of shipping product
from one country and receiving payment in another might not be entirely
unrelated to the likelihood that the Inland Revenue would be discommoded
thereby in any audit of EM. An equally
alert reader might harbor a similar suspicion as to AC’s behavior in relation
to the New York Department of Taxation, especially in view of the somewhat
circuitous route by which payment arrived in Canada. But, such suspicions may be put aside.)
*
AC brings an
action against EM in an English court.
*
AC brings an
action against EM in a New York court.
*
What result in
each case?
HYPOTHETICAL A2.
In January 1899 an American consumer (AC), who is domiciled in New York
State and whose business is in New York State, executes a two-year contract
with an English marketing firm (EM) to buy monthly updates to a large
compilation of mailing addresses previously licensed by AC from the same
marketing firm. EM’s headquarters are in
London, but the building in which the compilation and the updates are stored is
located in Brussels. EM’s clerical staff
in Brussels send the updates by ship mail directly to AC’s advertisement
mailing center, which is located in Massachusetts.
AC makes payment for the updates using a draft issued by the First
International Bank of Canada (FIBC).
FIBC is used because EM has an account with FBIC in view of EM’s
on-going operations in Canada. AC does
not have an account with FIBC, but makes payment to FIBC by means of a draft
issued by The Cayman Islands World Bank (CIWB), where AC has an account. AC funds the draft issued by CIWB by a draft
issued by AC’s usual bank, the Bank of New York (BONY).
1.
After three months AC discovers what it believes to be
significant inaccuracies in the updates and wishes to take action to recover
payments previously made, to require correction of data previously supplied,
and to obtain redress for as yet unspecified consequential damages caused by
its reliance on the inaccuracies in the updates, as well as such fees and costs
and the court may deem just.
2.
After two more months AC discovers a series of gross
errors in the updates which it asserts have corrupted the previously licensed
compilation passim and which it alleges were transmitted due to the
negligence of EM’s clerical staff in Brussels.
*
AC brings an
action against EM in an English court.
*
AC brings an
action against EM in a New York court.
*
What result in
each case?
It would appear that the answers
to the 1899 Hypothetical A2 would not be different in any substantial respect
from the answers given to the 1999 Hypothetical A1 as a banking and payments system matter. Indeed, it would appear that the very
speed with which the funds can now be spun through jurisdictions other than
those of the parties to the main contract emphasizes their lack of
jurisdictional significance. There may
be a jurisdictional issue as between Belgium and Massachusetts in the “virus”
cases from Hypothetical A1 because differences may exist as to the weight given
to where the harmful action was initiated and where the harm resulted. However, that issue would not be a
banking/payments system issue. Further,
banks generally are able to locate their back-office computer operations in
states or countries other than where they are licensed to do business, so long
as the back-office is not open to the public for the engaging of banking
business. This legal rationale seems
applicable to the Internet servers.
