The Law and Application of Electronic Commerce in Relation to Banking and Finance

1. The Law and Application of Electronic Commerce in Relation to Banking and Finance • Alan Davidson • University of Queensland - • TC Beirne School of Law • Solicitor and Barrister Alan Davidson

2. Introduction • The management of international business is nothing more or less than the management of international risk Alan Davidson

3. Payments System • Cash • Non Cash • Payments Clearing • Role of the Central Bank Alan Davidson

4. Money and the 21st Century • Trade involves permutations of time mode place and currency of payment • Relative certainty and security - risk • To minimise the risk - international trade merchants typically use financial institutions as intermediaries Alan Davidson

5. Payment Systems • 1. 'objects-as-money' group • first generation • (trade by barter) • second generation • (trade with valuable objects) Alan Davidson

6. Payment Systems • 2. 'currency-as-money' group • third generation • (coins) and • fourth generation • (paper notes) Alan Davidson

7. Payment Systems • 3. 'claims-as-money' group • fifth generation • (deposit accounts) • sixth generation • (plastic money) • seventh generation • (electronic payments (EPs) and electronic fund transfers (EFTs)) Alan Davidson

8. Payment Systems • 4. 'electronic-impulses-as-money' group • eighth generation • (smart cards) • ninth generation • (digital coins) Alan Davidson

9. Electronic Transactions • Completion of electronic transactions may involve purely electronic record keeping • May be no paper record or follow up. • Veracity of transactions typically involves digital signatures • Time - reduced to seconds rather than hours or even days Alan Davidson

10. Electronic Transactions • Flexibility of instruments or devices- less constrained • Purpose and use often overlapproviding customer service and satisfaction Alan Davidson

11. Pay Pal • eBay company • 50 million acounts • Regulation? Alan Davidson

12. Smart Cards • Secure storage of copious amounts of digital data • May be utilised as a debit card or credit card in account transfer systems- replacing magnetically stripped technology • Secure counter of value Alan Davidson

13. SVC • Where smart card stores electronic prepaid value- it functions as a stored value card (SVC) Alan Davidson

14. Electronic Purse System • Electronic purse systems are hardware related, while digital cash systems tend to be software based Alan Davidson

15. Electronic Purse Systems • System incorporates previously agreed arrangements between the card issuer and participating retailers • Reimbursement generally involves the retailer downloading or resubmitting to the card issuer the value data received from the card holder Alan Davidson

16. The transaction will create a debt that is owed by the card issuer to the merchant because the merchant in effect grants credit to cardholder based as previously arranged with the card issuer • The balance may be accessed, on-line or off-line • Closed system • Open systems • Mondex and Digicash Alan Davidson

17. Digital Cash • Electronic money - digital currency - cybermoney • Payment methods in which electronic impulses are dealt with as money Alan Davidson

18. Digital Cash • More than: • instructions for subsequent debiting/crediting of an account • evidence bringing pre-agreed credit agreements into operation • Exchange of electric impulses as the end - not merely the means of a transaction • Digital data may be treated as value rather than instructions about value Alan Davidson

19. Digital Cash • Protocols incorporating multiple use tokens permits peer-to-peer transactions • Freely circulating value • Risk of double spending Alan Davidson

20. Digital Cash - Risk of Double Spending • Single use tokens and on-line verification • Anonymous or pseudonymous by the use of “blinding” technology Alan Davidson

21. Digital Cash • 1. Withdrawal request forwarded to the customer's financial institution • 2. Financial institution validates by affixing its digital signature to the coin • 3. The coin is returned to the customer - may be stored in a purse program • 4. To spend - the coin is transmitted to a merchant Alan Davidson

22. 5. Merchant verifies the digital signature of the bank • 6. Merchant checks coin not already spent referring - on-line register • 7. Merchant delivers the commodity • 8. (a) Single use token system • merchant returns the coin to the financial institution in exchange for a new coin or credit • (b) Multiple use system • merchant may store the coin until required Alan Davidson

23. Digital Cash • Credit worthiness • Compare to the letter of credit • Cryptography (digital signature technology) plays a crucial role Alan Davidson

24. Features of Money and Money and Money Substitutes • means of exchange • physical possession • physical transfer • negotiability • intrinsic value • excellent store of value • unit of account • extinguishes obligation • standard of deferred payment Alan Davidson

25. Negotiable Instruments and Plastic Money • means of exchange • physical possession • physical /abstract transfer of instructions • instructions evidence of rights to value • (limited) negotiability (plastic money) • face value/variable value • indivisible • deferred payment • extinguished debt on settlement • conditional/final payment Alan Davidson

26. EFTs, SVCs and Digital Coins • means of exchange • limited de facto negotiability(SVCs and digital coins only) • instructions evidence of rights to value • abstract instructions for transfer = value • variable/restricted value • limited fungibility (digital coins only) • final payment Alan Davidson

27. Cheques • Written instruction to a financial institution by a customer to pay a third party • Electronic Cheques • Compare to digital cash and other electronic instruments Alan Davidson

28. Direct Entry (DE) • For businesses/organisations for making payments to or receiving payments from employees/clients • Pre-authorised payments arrangements Alan Davidson

29. For example • employees' accounts • payment of interest and dividends, rent and commissions • insurance premiums, utility bills, repayments of debt • Credits to accounts are irrevocable in nature and cannot be reversed. Debits, on the other hand, are provisional and can be dishonoured in somewhat similar fashion to cheques. Alan Davidson

30. Electronic Data Interchange (EDI) • Computer-to-computer transfer of business information (messages) between trading partners • Established standards are ANSI X12 and EDIFACT • The UN standard is progressively being accepted as the worldwide standard Alan Davidson

31. Financial EDI • Contains both the remittance advice relating to a purchase of goods or services and the corresponding payment message. • No common industry standard • The predominant use of cheques in settling business transactions points towards the potential for financial EDI in the future Alan Davidson

32. Automated Teller Machines (ATMs) Alan Davidson

33. Credit/Debit Cards • Financial institutions issue such cards • Charge cards (American Express and Diners' Club) are issued directly by the card companies - closed system - no cross-financial institution clearing obligations • Some recorded on paper - but most are processed electronically from Alan Davidson

34. Electronic Funds at Point of Sale (EFTPOS) • On-line debit of the customer's savings or cheque account - with credit to the merchant's account • Substitute for cash and cheque payments • Cash services Alan Davidson

35. Stored Value Cards • Rechargeable" value (and other information) in a computer chip - "rechargeable stored value", "smart cards" or "electronic purses" • Non-rechargeable" stored value cards built around magnetic stripe technology Alan Davidson

36. Recommendations • Functional equivalence • paper based commerce and electronic commerce should be treated equally • Technology neutrality • the law should not discriminate between forms of technology. Alan Davidson

37. Approaches • Encourage parties to resolve the issues by contract • Take no action at this stage and leave it up to the courts to determine how existing law will apply to new technologies • Enact legislation to update the law Alan Davidson

38. The Law and Application of Electronic Commerce in Relation to Banking and Finance • Alan Davidson • University of Queensland - • TC Beirne School of Law • Solicitor and Barrister Alan Davidson