Evolution of Payment Systems and the Rise of Digital Currency

1. Introduction • History: • Exchange of goods/services conducted face to face between 2 parties dates back to before the beginning of recorded history. • As trade became more complicated, abstracted representation of values were devised: • Cash • Checks • Money orders • Credit cards • Online use of credit cards • Smart card • Electronic Money

2. Problems • Traditional means of payments • Counterfeit • Forged signature • Bounced checks • … • Electronic money has same problems • Easy to copy • Digital signature can be reproduced by anybody who knows the secret cryptographic signing key. • The buyer’s name is associated with payment – lack of anonymity.

3. Credit Card • Advantages • Allows credit • People can buy more than they can afford • Widespread but lack: • Anonymity • Security • Inability to reach everyone • In the United States, about 40% of the population does not have a credit card.

4. Payment Size: • Macro payments involve large payments from about 10 USD onwards. • Small payments are from 0.1 USD or higher. • Micro payments can involve fractions of Cents. • Credit cards too expensive for small/micro payments • Fixed charge of 2-4.5% (higher on internet) • The most expensive e-Payment mechanism • MasterCard: $0.29 + 2% of transaction value • A $100 charge costs the merchant $2.29 • This cost reflects the security problems

5. Security Problems • Security problems: • All info is exposed to the merchant • There is a greater threat over the Internet where merchants can be located anywhere • All purchases are traceable

6. ePayment - Problems • Problem: • Banks not set up for instantaneous transactions • Security • System design problems • Keep transaction costs low • Scale to huge number of transactions (100 billion per day) • Bank systems (SWIFT, FedWire) do not talk to the Internet

7. Requirements • Money atomicity: no money is lost or created in a transfer • Goods atomicity: money and goods are exchanged atomically(both or none) • Non-repudiation: No party can deny its role in the transaction; Digital signatures • Desirable Properties • Universally accepted • Transferable electronically • Divisible into change (pay for $10 item with $100 bill) • Forge-proof, Theft-proof • Private (no one except parties know the amount) • Anonymous (no one can identify the payor) • Work off-line (no need for on-line verification)

8. Payer makes the payment. (customer or buyer). Payee receives the payment. (merchant or seller). Issuer is the third party of the payer, (bank or service-provider of the payer). Acquirer is the third party of the payee, (bank/service-provider of the payee). Broker is both issuer and acquirer (when a protocol requires a single third party to be shared by payer and payee). Observer is usually an uninvolved third party used in the privacy analysis of a payment system. Observer has information about the transaction. The Participants

9. Certification • A registration and certification authority for the management of authentication and symmetric keys like Kerberos or public keys certification • Arbiter • To resolves disputes. • Trusted Third Parties • Notaries • To enforce payment receipt notifications, clearings or witnessing of transactions.

10. Electronic Payment Systems Notational Fund Transfer Digital Currency

11. Notational Fund Transfer • In credit card or check transactions, sensitive information is being exchanged. • For example, you give your credit card to a merchant, who sends the card number through phone line and receives confirmation. • Banks meanwhile receive the same information and adjust buyer's and merchant's accounts accordingly. • The information being transmitted online in this case is encrypted for security. • The primary example is the use of digital credit cards (e.g. CyberCash (www.cybercash.com) and VISA/MasterCard's SET-based transactions).

12. The Internet may be more secure than phone lines for this same old payment methods. (Can you encrypt your voice when you give your credit card number over the phone? Can you be sure who the other person is?)

13. Secure Credit Card • Most important point in using a credit card for payments through the Internet is the secure transmission of the credit card data. • Payer transmits the credit card data or their equivalent to the payee who submits them in turn to the acquirer for online validation. • Acquirer resolves the actual payment via the established financial networks. • The drawback : Unsuitability for micro payments.

14. What is ECash • ECash is the digital analogue to physical coins. It has the same properties as does the legal tender to which you're used: you can't spend one coin twice, the coin has no memory of who owned it or what it was used to purchase, and it's difficult to forge.

15. Digital money is created against existing money. In the long run, digital money may be created on its own if users accept it on its face value, which will be determined by how dependable its issuers are. All monies are only as good as their issuers. • Very flexible: Can be made to behave like e-checks or anonymous cash as situation warrants.

16. Ecoin • It is the unit of payment and represents a fixed amount of money. It is a combination of random elements chosen by the payer and digital signatures of the bank.

17. Models of e-cash • On-line payment means that Bob calls the Bank and verifies the validity of Alice's token before accepting her payment and delivering his merchandise. (This resembles many of today's credit card transactions.) • Off-line payment means that Bob submits Alice's electronic coin for verification and deposit sometime after the payment transaction is completed. (This method resembles how we make small purchases today by personal check.)

18. Smart Card • An electronic device about the size of a credit card that contains an embedded integrated circuit (program and memory) • Uses: • Storing digital cash • Storing information; giving hospitals or doctors personal data without filling out a form • Generating network IDs by storing X.509 certificates, private keys and RSA crypto-engines;  establishing your identity when logging on to an Internet access provider or to an online bank • Specialized Applications such as SIM (Subscriber Information Modules) in GSM wireless telephones -- a SIM contains all the generic information required to access the telephone network 

19. Smart cards can be typically classified into broad categories based on how they communicate with another device: • Contact - Direct Communication - the card must be inserted into a smart card reader which connects to a conductive module on the card • Connectionless - antenna or other electromagnetic interface is imbedded in the card • Hybrid cards are dual chip cards with each chip containing its respective contact or connectionless interface; the chips are not connected to each other in the card • Combo cards have a single ship with both contact and connectionless interfaces. • Power for the smart card may be supplied either by an embedded battery or by a microwave frequency -- the card needs to be within 2 to 3 inches of the card reader.

20. Smart Card Applications • Applications • Ticketless travel: Seoul bus system: 4M cards, 1B transactions since 1996 • Authentication, ID • Medical records • Ecash • Store loyalty programs • Personal profiles • Government: Licenses • Mall parking . . .

21. May emerge as the ultimate interface device for the mobile digital economy. • It will hold your cash, ID information, house and office keys, subway tokens, all types of preference files (for house temperature setting, driver seat setting, etc.) and other information. • You will exchange these information and digital products with other people, transact business, present to police officers, check into a hotel or a sports arena, and all other things yet to be imagined.

22. Over a billion smart cards are in use, primarily in Europe.  Because the current infrastructure in the US is designed for credit cards with magnetic strips, there has been a slower rate of adoption of smart cards in the US.  The use of Smart Cards in Europe received its initial boost from the French government in 1985 when it purchased 16 million cards for use by its then state-owned bank. 

23. Smart Card Standards • OpenCard Framework is supported by Sun Microsystems, IBM, Oracle, Netscape. It is a standard for NCs, emphasizes portability and personalization, and adopts Java. • Personal Computer Smart Card (PCSC) Workgroup Standard is proposed by Microsoft and supported by Schlumberger Electronic Technologies. • Sun’s Java Card API, endorsed by Citibank, Visa, First Union National Bank, VeriFone. • Motorola formed a Smart Card Systems Business unit for contactless cards using radio.

24. Generic Transaction • Alice chooses a random x and r and supplies the bank with B = r3f(x)mod n. • The bank returns the third root of B modulo n: r.f(x)1/3 mod n • Alice gives Bob (x, f(x)1/3 mod n) • Bob calls the bank immediately to verify that the coin has not been spent.

25. Double Spending • Bit Sequences can be copied exactly any number of times. • Alice can copy a Ecoin many times and spend it repeatedly.

26. Exposing Double Spenders To get a coin • Choose ai, ci, di and ri, 1≤i ≤k • Send bank Bi = r3.f(xi,yi) mod n, 1≤i ≤k • xi=g(ai,ci) yi=g(XOR(ai,(u||v+i)),di). • Bank chooses k/2 random Bi and sends them. • For the others, the blinding function must be revealed. • Bank checks that the values u and v are correct. • The coin C is extracted

27. Exposing Double Spenders To Pay • Alice sends C to Bob • Bob chooses a random binary string z1,z2,…,zk/2 • Alice responds as follows for all 1 ≤ i ≤ k • If zi=1 then Alice sends Bob ai, ci and yi • If zi=0 then Alice sends Bob xi, XOR(ai,(u||v+i)) and di

28. Exposing Double Spenders • Bob verifies that C is of proper form and Alice’s responses fit. • C and Alice’s responses are sent to the bank which verifies it and stores ai (for zi=1) and XOR(ai,ui||vi) (for zi=0)

29. Exposing Double Spenders • If C is used twice, there is a high probability that for at least one i, ai and XOR(ai, ui||vi) is available.

30. Digicash Concept Merchant 1. Consumer buys Digicash from Bank 2. Bank sends Digicash bits to consumer 3. Consumer sends Digicash to merchant 4. Merchant checks with Bank that Digicash is valid (not already spent) 5. Bank verifies that Digicash is valid 6. Parties complete transaction Consumer still has (invalid) Digicash Anonymous Complex transaction (checking with Bank) Atomicity a problem 5 4 Bank 3 2 1 Consumer

31. ALICE SEND UNSIGNED BLINDED COINS TO THE BANK Withdrawal (Minting): WALLET SOFTWARE ALICE BUYS DIGITAL COINS FROM A BANK BANK SIGNS COINS, SENDS THEM BACK. ALICE UNBLINDS THEM BOB VERIFIES COINS NOT SPENT ALICE PAYS BOB Spending: BOB DEPOSITS CINDY VERIFIES COINS NOT SPENT ALICE TRANSFERS COINS TO CINDY PersonalTransfer: CINDY GETS COINS BACK

32. Micro payment If transaction costs can be made low enough to handle even sub-dollar payments, why should digital product sellers be limited to accepting credit card payments and other large-scale payment methods?

33. Aggregation • Used when individual transactions are too small for credit card (e.g. $2.00) • Consumer and Merchant sign up with Aggregator • Consumer makes purchase. Merchant notifies Aggregator. • Aggregator keeps Consumer’s account. When amount owed is large enough (or every month), charges to Consumer’s credit card • Aggregator sends money (less fees) to Merchant • QPASS, CyberCash, GlobeID