Law Institute Journal (Victoria)
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by PROFESSOR GREG TUCKER
Digital currency and other electronic payment systems have emerged alongside traditional means of payment. hese developments are inextricably connected with new and more effic ient means of carrying on business. The use of electronic means to conduct transactions, or electronic commerce, is well established. Electronic payment sys¬tems will play a pivotal role in this en¬vironment, in accord with financial instit¬utions' objectives to reduce the cost of transactional banking. The purpose of this article is to raise some of the legal im¬plications of a number of these systems.
The three types of electronic payment schemes I have considered are:
electronic fund transfers (including EFTPOS and ATM transactions); smart card systems; andE- network (including Internet) banking.
Consideration of these systems here is confined to use in the context of retail trans-actions and the corresponding financial institution/card issuer/merchant involve¬ment to support these transactions. It should be noted that organisations other than traditional financial institutions, including retailers and service providers, may participate in the provision of these financial services.
Common to each of these systems is the replacement of traditional payment systems (e.g. cash or cheque) with electronic com¬munications underpinned by appropriate contractual agreements. The participants in each of these systems vary, as does the nature of the agreements between them. At present in Australia electronic funds transfer is the only system fully operative. Various forms of smart cards are being tested, and network banking has been used in some form - for instance telephone banking - however banking using digital cash is still being developed.
Although EFT systems vary around the world, the frameworks supporting point of sale retail transactions, for instance, share common characteristics:
For example, the customer offers the EFTPOS card to the merchant as a means of payment. The merchant accepts this. The customer enters the PIN and the network electronically verifies the customer's account and its status. If there is a positive response, the customer's account is debit¬ed with the amount of the transaction and the merchant's details are provided in order for the appropriate account to be credited at its financial institution. Settle¬ment between these institutions is not immediate.
Thus EFTPOS is not the equivalent of a cash transaction, rather it is the culm¬ination of a number of agreements to accept electronic communications as a means of facilitating payment. The trans¬fer of value is not instantaneous. More-over, there is no value contained on the cards themselves, rather the cards are the threshold device which gives rise to all the other agreements in the chain. The risk is governed by contractual agreements between the parties.
EFTPOS is regulated by a voluntary code of practice first implemented in 1989. Essentially, the code has a consumer pro¬tection orientation and deals with the relationship of customers to their financial institutions. Its terms are incorporated by the financial institutions into the individ¬ual contracts with each customer. The implementation of the code is overseen by the Australian Payments System Council. It has recently been reviewed jointly by Treasury and the Australian Competition and Consumer Commission. The recom¬mendations of the review are yet to be implemented.'
As it is likely that credit, debit and smart cards will merge into the one card for all purposes, it would make good sense to apply the EFTPOS model to smart cards and to extend it as necessary to meet the additional requirements. Prior to looking at the other payment systems, it is appropriate to first consider the impli¬cations of the use of forms of electronic cash. There are various expressions used: ecash, net cash, digital cash, cybercash and cyberbucks. This description is applied to a range of payment systems which in reality only approximate a cash system. For this reason I shall call them quasi cash or q-cash.
Specific issues arise in relation to the use of q-cash, whether on a smart card or over a network. Quasi-cash is really an electronic communication, or bit stream, and is not a chattel or a document in any traditional sense. However, it may effect the same transaction as, say, cash or cheques.' Reliance on electronic commun¬ications as a medium for financial transfer and payment is not new; it has been happening in wholesale banking for many years, for example, the SWIFT system used by banks worldwide. The following are several important issues relating to the use of q-cash.
The constitutional position for the reg¬ulation of q-cash is interesting as it is unclear under which head of power any federal laws or regulations relating to it may fall. Is it currency, coinage, legal tender, a bill of exchange or a promissory note, or will it fall within the general banking or telecommunications powers?3 This will be a question of characterisation of each q-cash system.
This new digital medium of exchange is not a note, like a $5 or $10 note, as defined under the Reserve Bank Act 1959 (Cth) and is not regarded as legal tender.' Fur¬thermore, it is not a negotiable instrument as it appears to fall outside the definitions of bills of exchange, cheques and prom¬issory notes and has not yet been recog¬nised as forming a new category of negotiable instruments.' Accordingly, q-cash would not enjoy the special status of negotiable instruments and the nemo dat rule would apply to the transferee. Thus a transferee of q-cash for value in good faith, and without notice of defects in title, is not a holder in due course and therefore takes subject to any defects in title to it. This is important where it is lost or stolen.
Neither the Reserve Bank nor the Treas¬ury may be responsible for, or oversee the issue of, q-cash. In this sense the use of the word "cash" to describe digital money is misleading as the Reserve Bank together with the Treasury has control over the issue of cash in Australia. Visa, Mastercard and Mondex (UK) are examples of non-bank issuers of q-cash. When q-cash is issued there is no seigniorage (the profit made by the government in note and coin issue). Accordingly, a source of govern¬ment revenue will be lost, as will direct control over a substitute for cash.
An associated issue is when is value passed and when is payment irrevocable? The transfer of the electronic commun¬ication, i.e. the q-cash, between card holder and merchant, for instance, may not discharge the debt immediately, rather the discharge is conditional on the issuer of the q-cash making payment. This will depend on the intention of the parties.
This issue will become more acute where the q-cash is transferred between a number of parties before it finds its way back to the relevant issuing institution. Who bears this risk? The answer appears to lie in what is regarded as the relevant banking practice in these cases or, alter-natively, in the specific terms of the agree¬ment which is entered into between the parties.' There are several possible out-comes: where electronic tokens are used as a cash substitute, receipt of the token is likely to be interpreted as final payment; under an EFT style system it will not, rather payment will be the responsibility of a third party under an existing arrange¬ment.
at is the position where q-cash is "forged" and transferred for value? Assum¬ing a security breach occurred, what would be the legal position as between the parties to the transaction as well as the liability of the issuer of the q-cash whose system was penetrated?
Forgery seems to be an inappropriate term to use as it will not be the forgery of a cheque itself or a signature on it, for example, instead it will require access to an appropriate form of message and the underlying algorithm making up the q-cash communication. It is this inform¬ation that will permit fraudulent q-cash to be created and to appear as authorised q-cash. At a forensic level, the fraudulent q-cash will be indistinguishable from the validly issued q-cash as all the digits would be in the same place.` The incidence of the loss would, in the usual case, be between the merchant and the issuer of the q-cash. Typically, if the issuer confirms on-line that it is authentic q-cash when the trans-action takes place and the merchant relies on this and concludes the transaction, the issuer would appear to be estopped from denying its authenticity.
Conflicts of laws issues may arise where the q-cash crosses national, state or ter¬ritory boundaries and becomes subject to different legal regimes. These issues would normally be dealt with by the terms of any contract or the relevant conflict of laws rules.
It is to be hoped that many of these issues, and the more general concerns which follow, are determined before systems are implemented. However, there are no signs of this at present. Without this, reliance will be placed on the terms of the relevant contracts and the common law which will emerge - as it did, for example, in Re Charge Card Services Ltd.'
In general, smart cards add intelligence to plastic cards by having the ability to either store or process information, or do both. The capacity and range of functions of smart cards vary according to the mem¬ory capacity and power of the microchip embedded in the card. Smart cards may be a substitute for cash and be either dis¬posable or rechargeable (typically via the cardholder's account). The non-recharge¬able varieties, called stored value cards, may be used for a range of small consumer purchases or a single application, for example, telephone calls.
The alternative is a rechargeable card which permits the cardholder to add fur¬ther value to the card, up to its limit, and to continue using it. These cards are able to process data.'
The Federal Bureau of Consumer Affairs recognised several advantages of these cards over magnetic stripe cards in that they:
The simple form of smart card (non-rechargeable) represents a certain mon¬etary value which is purchased by the consumer and may be spent on specified goods or services.
With a more sophisticated variety, con¬sumers can add value to the card so that there is an apparent transfer from the account at the financial institution to the card itself. The recognition of the value of the card relies on agreements between the merchants and financial institutions participating in the relevant scheme. The parties acknowledge that the electronic data on the card represent value so that when the card is used as a payment mech¬anism with a merchant, payment is made by the transfer of the data from the card to the merchant. Once payment is accepted a corresponding debit entry is recorded on the card so that its reserves are decreased by the amount of the transaction.
Arguably, once the smart card is pur¬chased, or value loaded onto an existing card, then these become the consumer's funds, not those of the card issuer, and the question of payment of interest on funds by the card issuer does not arise." This would be so in a traditional cash with¬drawal. However, in procedural and tech¬nical terms, when the q-cash is transferred the money is taken from the card holder's account and placed into a suspense account (or sent to a clearing house) by the fin¬ancial institution pending the eventual return of the spent q-cash. This is similar to the manner in which bank cheques, for instance, are provided by banks to account holders. There would be a contingent liability created over these funds.
Clarification of the position is needed, including who will own the property in the card itself. The use of terms like electronic purse or wallet suggests that it will be the property of the card holder. However, the history of credit and debit card agreements suggests that the relevant contracts will provide that it is the property of the card issuer.
Smart card systems, like Visa, are more like an EFT system than a cash trans-action. They provide an off-line recon¬ciliation and accountability between the credit value loaded onto the smart card and the debit entry in the suspense account or clearing house.
Although smart card systems vary significantly, there have been a number of general issues raised in relation to the introduction of smart cards as distinct from q-cash itself.
The way in which these issues are handled by the card issuers and associated parties will, in large part, determine the success of smart cards. Consumers may not embrace this new payment medium if they lack confidence in it. There are a number of studies into the implications of the use of smart cards."
It is difficult to know what form con¬sumer network payment systems will ultimately take. At present there are two principal means of payment for goods and services on the Internet - credit card and q-cash. The first is well known and established and the main concern with this form of payment is the security of the system to support the input of card holders' details. Consumers are usually warned that they do so at their own risk. Cybercash (http://www.cybercash.com) has a system which uses a credit card authorisation mechanism to provide pay¬ments on behalf of consumers. Cybercash pre-records the credit card details of the consumer. When the consumer uses cybercash as payment, the information is passed electronically to the merchant which adds its own details and passes it to Cybercash which verifies the messages and, as appropriate, authorises the trans-action by providing an electronic receipt to the merchant. Settlement takes place later. It is a sophisticated use of the present credit card system. Cheque auth¬orisation systems also exist: for example, NetCheque permits registered users to make payments through the use of elec¬tronic cheques. NetCheque authorises payment of the proceeds of the e-cheques from the "drawer" to the "payee".
The second form of payment is in embryonic form, with only a few banks and merchants undertaking it. However, this is expected to grow. The best known of the financial institutions is Mark Twain Bank (http://www.marktwain.com). Advance Bank (http://www.advance.com.au) has also developed a form of Internet banking but no payment system as yet. No card medium is required. Transactions may be paid for by downloading money from your account and turning it into electronic cash, or q-cash. Once authenticated by the bank, the q-cash may be used to purchase goods or services available through merchants linked to this payment mech¬anism. Unspent money may be returned to the account at the bank. The relationship is governed by an extensive contract which indicates the laws of Missouri, USA, apply.
Through the use of an encryption mechanism which uses a technique known as a blind digital signature, this payment system claims to provide anonymity yet to be able to provide unconditional verif¬ication of q-cash by the financial instit¬ution or clearing house which, in turn, authorises the transaction. The q-cash is sent by the consumer to the bank for it to be digitally stamped with its identification marks and face value. This stamp permits the q-cash to be spent and to be identified by the bank when it is presented for pay¬ment. Of the q-cash systems, this best approximates a cash payment system.
One of the main impediments to the implementation of these systems more generally is user confidence in the exist¬ence of an appropriate security platform on which payments may be made with minimal risk of loss to the parties.
These systems are not fully operative in Australia. It is recommended that any regulatory developments for electronic commerce should also consider the appli¬cation of these to network banking sys¬tems. Many of the issues outlined in the previous section arise, as q-cash is used in both instances.
The intention of this article is not to be Luddite and strike fear into the hearts of those people who still cannot pre-program their video recorders. Rather it is to point out some of the issues which should be addressed in an orderly transition into apparently simple, yet legally complex, payment systems. Some of the issues raised here already exist as part of present payment schemes, but the advent of these new retail payments systems may add a further dimension. An approach similar to that which gave rise to the Electronic Funds Transfer Code of Practice may be appropriate, and the process towards developing such a document should begin forthwith.
Notes
1. See also Sneddon, "A review of the Electronic Funds Transfer Code of Conduct" (1995) JBFLP 29. 2. The legal characterisation of the precise communication may vary between payment systems, for example, between the Visa smart card and the Digicash systems. 3. Section 51 of federal Constitution, see placita (xii), (xvi), (xiii) and (v) respectively. 4. See PartV - among other things the q-cash is not issued in accordance with the definition in s32; s36(1). 5. See generally, Tyree, Banking Law in Australia, 2nd ed, Butterworths, 1995 pp253-4. 6. See Momm v Barclays Bank International Ltd [1977] QB 790 and Delbrueck & Co v Manufacturers Hanover Trust Co 609 F 2d (1979). 7. In relation to the criminal law, the laws of counterfeiting do not apply: see s6 Crimes (Currency) Act 1981 (CO); however forging q-cash may constitute a computer crime under the Crimes Act 1914 (Cth) s76D and the relevant computer crime legislation in the states and territories. 8. [1987) Ch 150. 9. Other functions, including the storage and processing of medical and customs information, may be added to the card. This will add a layer of complexity to the security system on the card. 10. A Cashless Society? Electronic banking and the consumer, AGPS, July 1995. 11. This will depend on the intention of the parties. Even where interest may be payable this would be problematic where the q-cash has been transferred to another party so that the payer has already received value for it. 12. See: Privacy Committee of NSW, Smart Cards: Big Brother's little helpers, August 1995; Privacy Commissioner, Smart Cards: Implications for privacy, December 1995; and the Commission for the Future is presently undertaking a study entitled Social Issues Related to the Introduction of Smart Card Technologies in the Retail Financial Sector in Australia (1996); see also Tyree, "Banking law" (1995) JBFLP 297.
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URL: http://www.austlii.edu.au/au/journals/LawIJV/1997/13.html