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Alternative Payment Systems

            One area of payment systems is developing within electronic commerce that does present some challenging jurisdictional issues.  The Internet does pose the possibility that alternatives to the existing global payment system may arise.  Indeed, electronic bartering and various forms of “e-currency” and “e-payments” are currently in use in some Internet transactions. These alternatives raise a number of issues with jurisdictional consequences because of their essentially closed nature.

            Within these company towns, using these tokens as an alternative currency had its advantages.  In a practical sense, there was no need to issue “real” money since these isolated communities were wholly self-sufficient.  The company that owned the enterprise providing employment, which generated wages to the workers in exchange for their labor, also owned or controlled all of the reasonable outlets for those wages.  This closed economic system allowed for the development of a closed currency.  To the company’s advantage, so long as its workers
            Currently, alternative payment systems are essentially retail systems rather than wholesale systems.  To the extent that they arise at all, jurisdiction issues arise almost exclusively on the retail level.  Wholesale systems are still the province of the traditional players, and as a practical matter, the alternative payment systems are just short-cuts to the larger players.  Fundamentally, at some point the alternative payment system must “convert” its accumulated value to something “real” by transferring to a recognized and accepted form of currency outside of the closed environment.  This is a necessary and sufficient consequence, since no economic system is capable of isolated self-sustenance in the modern world, especially no system built on the world-wide platform of the Internet.
In the Internet environment, those cash and checks can be replaced by any token of value that the other participants in that system agree to accept.  But unless and until those alternative systems become sufficiently pervasive and diverse enough for the participants to be self-sufficient in their economy (if, indeed, attaining such a goal is possible in the context of our current global economy), they must at some point rely on the traditional payment systems and the agreements and structures that underpin it. 

            The whole notion of “electronic commerce” presupposes that payments must and will be exchanged between the parties.  After all, what’s commerce without money?  Currently, payments are made to both traditional and Internet providers of goods and services through three principal means: credit cards, debit instruments, and “Digital Currency.”  The first two options are currently components of the traditional payment systems and, as explained above, disputes regarding their processing that have jurisdictional significance are rare.  Credit card and debit card transactions work somewhat differently in the physical world than in the Internet world.  However, the differences are without jurisdictional significance.

            Any merchant who accepts credit card payments must sign an agreement either with the card system operator (e.g., Visa, MasterCard, American Express, etc.) or the merchant’s financial institution (which will process payments to the card system on behalf of the merchant and signs a separate agreement with the card system operator).  The agreement will specify how all disputes between the various parties (merchant and customer, system operator and merchant, financial institution and customer, etc.) will be resolved and what individual rights each has within the system.  Accepting these dispute resolution processes is one “price” the merchant pays for the right to use the credit card system as a mode of receiving payment.

            It is important to distinguish between credit card transaction disputes generally and credit card transaction disputes with jurisdictional significance.  Disputes involving credit card transactions are relatively common, usually involving unauthorized transactions (e.g. stolen cards), account statement errors, and dissatisfaction regarding goods and services.  These disputes are dealt with in the context of the system operator agreements.  The merchant’s bank, the card-issuing bank, the system operator, the merchant and the cardholder are all parties to various agreements with specific applicable laws and regulations, such as (in the United States) the Electronic Funds Transfer Act and Truth-in-Lending Act.  Normally, these disputes are resolved by a “charge-back” against the merchant by the merchant’s bank.

            Disputes regarding debit instruments are similarly resolved.  These items usually constitute an order from the customer to their financial institution to pay an amount certain to the merchant.  Conceptually, this process operates the same as the paper-based check.  Instead of a piece of paper that contains these instructions changing hands from customer to merchant to the paying bank, the transaction is handled wholly by electronic messages.  As a practical matter, even paper-based checks are usually truncated quickly into electronic information to speed the flow of funds and significantly reduce processing costs.  As the debit instrument mirrors, in all practical respects, the traditional check, again all the parties’ rights and obligations have long been established through the traditional payment system.
Digital currency represents the newest wrinkle within Internet payment systems.  At its base, digital currency represents a mutual agreement among that system’s participants to attribute a defined value to the modes of exchange designated by that system.  Perhaps the concept is best illustrated by looking at its historical precedents.

            Throughout the history of payment systems, alternative methods have developed to transfer value among that systems’ participants.  One appropriate analogy to today’s emerging markets in digital currency is to review the use of alternative currencies in what were referred to in American history as “Company Towns.”  As remote areas of the United States were industrialized, the advancement of commerce and trade could not be held back by the relatively slow expansion of the availability of financial services and the relative immaturity of the official currency system financial services.  An alternative financial services system was needed.  Local, isolated communities were often structured around a single employer, such as a coal mine or lumber camp.  Workers for that employer were not paid in traditional, commonly recognized currencies, but instead were issued tokens or other forms of tangible representations of value.  These tokens were often referred to as “script.”  Those tokens were then used as the medium of exchange within that community.  They could be used to purchase goods at the company-owned store or other services within the company’s town.

accumulated value only in a form recognized solely within that community, its workers were tied to that area and that enterprise interminably.  The company set the wages and concomitantly the prices for the goods and services purchased with those wages.  All profits at every level of commerce within that closed system inured to the benefit of that company.

            The alternative systems being developed to facilitate electronic commerce share many of the characteristics with these company towns and their tokens.  The “currency” issued within these systems may be exchanged only among participants within that system.  It has value only to the other participants and has no recognized value outside of the system.  For all practical purposes, any value built through the accumulation or exchange of this alternative currency can be used only within the context of that system.

            Consequently, these alternative payment systems may be thought of as being, in varying degrees, independent of the traditional system and but still connected to it at some point.  Alternatives are being used or under development because some of the inherent limitations within the traditional system constrict or inhibit facets of electronic commerce.  Credit card payments take several weeks to process before the merchant receives credit.  Each participant on that payment chain shaves some percentage off the transfer, leaving the merchant to actually receive less than the full value originally exchanged.  Both debit instruments and credit card payments bring exhaustive consumer protections that ultimately work against the interest of the merchant and its correspondent bank.  Security concerns make some consumers reluctant to provide the information necessary to effect either type of transaction.  Unless these limitations can be overcome, alternative payment systems may evolve into the development of an entirely new construct that is a “super-set” of the traditional system and the emerging alternative systems.


The US data is instructive in this regard.  Nearly all wholesale payments in the United States are conducted electronically via governmental and non-governmental payment system networks.  Measured in terms of dollar value, approximately 90 percent of all non-cash payments in the United States are made by electronic transfer.  Currently, retail transactions conducted electronically through the Internet are only a small fraction of the whole.  Further, in the US, cash and checks are used for payment in more than 80 percent of the number of retail transactions and about 30 percent of the dollar value of such transactions. 

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