A SMART WAY TO AVOID THE TAXMAN

Sounds like science fiction? Well, electronic money is on its way, and you can already buy a pint with it - if you live in Swindon
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The Independent Culture
Electronic or "e"-cash, is here. Almost. Rather than being based on tokens like coins and notes, its medium is a microprocessor loaded up with information and sunk into a plastic card. It is money that moves through a computer network rather than from your pocket to a till drawer and back again.

E-cash is a privately issued alternative to state money, and comes in different fiscal flavours: "stored-value cards", which are disposable in the manner of a phonecard; "electronic purses", which can be topped up from your current account when slotted into a hole- in-the-wall machine or a payphone; and "smartcards", which can also be recharged but are capable of carrying a range of other functions.

Like paper money, e-cash can be used to purchase goods or services from any trader who recognises its value. Likewise, it's gone forever if you lose it. But potentially, the e-cash smartcard could be endlessly versatile: rather than just paying for your bus ticket it could be your bus ticket. It could also store your right to services like pay-per-view television, and let you make purchases on the Internet or over the telephone without having to take the security risk of telling a stranger your credit-card details.

Marshall McLuhan suggested that humans have an instinct for physical exchange that has its origin in the satisfaction our simian ancestors felt when they swung from the branch of one tree and grabbed hold of the next. So could digital alternatives to cash really replace the jingling Yen or Euro in your pocket? To a large extent, it's already happened. Ten-pound notes are promises of intent, Valentine's cards swapped between banks, traders and consumers. Unless you're a particular fan of curlicues and watermarks, they are intrinsically worthless: pieces of paper occulted into significance by that intriguing little incantation, "I promise to pay the bearer on demand the sum of ... " It's not true, of course. Mr Kentfield (whose signature appears next to the Queen's head) won't give you your sliver of bullion, because since Britain's exit from the Gold Standard in 1931, there has been much more cash in circulation than gold reserve to back it up. Not only that, but the amount of money spent during an average day of British capitalism is some 10 times larger than the value of all the coins and notes stuffed under our mattresses, stashed in our vaults or bulging in our collective wallets.

So ask yourself a question - where is the money that you own? Where is your bank account? The short an-swer is that most of this money has been "dematerialised", reduced to a series of digital codes that zip between computers. When we pay with a debit card for our week's shopping, our bank doesn't courier a bunch of crisp tenners to Tesco's head office. There are no clinking coins, no bundles of notes in rubber bands, not even Mel Smith in a Lycra suit. Just an agreement to abide by an adjustment of digitised data.

Every day, more and more of our transactions make do without that physical element of trade that has been the linchpin of human commerce since our tribal forebears thrashed out the pig-goat exchange rate. Over the last 3,000 years, we've moved purposefully away from systems of barter - the exchange of what is genuinely valuable - and towards representative, tokenistic forms of payment. It's a three-millennia-long process whose history includes the Lydians' minting of the world's first coins from lumps of electrum (circa 687BC), merchant Nicholas Vanacker's signature on Britain's first cheque (1659), and the establishment of the First Bank of the Internet (1995). They were all matters of convenience (just try fitting a bunch of goats into a wallet), and they all pushed the concept of capital further towards intangibility.

The world's financial institutions and computer-hardware manufacturers are working to create a form of e-cash which will appeal to consumers. Pilot schemes are in place all over the world. VisaCash was launched at the 1996 Summer Olympic Games in Atlanta, where a consortium of banks distributed 1.5 million cards to visitors for use at participating fast-food stands, newsagents, ticket booths and fuel stations. These experimental e-cash systems require you to run your plastic through a "reader", like a credit card. However, there's no need to sign any paperwork, making it good for small payments (just try buying a newspaper with your credit card).

Elsewhere, the Singaporean Cash-card allows instant payment for parking, cinemas, public telephones, taxis, buses and road tolls; the Zambian Meridiencard stores credit in 10 different currencies; the Finnish Avantcard comes in a disposable and rechargeable form, and can be used in payphones, for buying goods from participating businesses, on public transport and in post offices. Brussels has the Proton, Copenhagen the Danmont card, and the Netherlands' national electronic purse is the Chip-Knip. Britain's contribution, Mondex, has been operating in Swindon since 1995. Piloted by NatWest, Midland and BT, Mondex keys can be loaded with credit at participating banks' cash dispensers and via telephone lines. Though considered by many to be a failure, Mondex has made Swindon one of the few places in Britain where you can buy lager with e-cash - and if you run out of credits, you can recharge your key at the pub payphone.

E-cash is proving particularly popular in less stable regions of the globe, where carrying pocketfuls of cash is a risk not worth taking. In the countries of the former Soviet Union, the chronic weakness of the rouble has given rise to numerous smartcard systems that allow holders to trade with merchants and buy goods from each other without the need to involve paper money. Banks and private companies alike are constructing their own systems.

Mondex spokesman Gerry Hopkinson envisions a near future in which one pre-paid plastic card could pay for a variety of services. Unlike today's magnetic cards, you wouldn't have to swipe this through a reader, but simply flash it past a sensor mounted - for example - at the entrance to a Tube station. "Multifunctional smartcards will have more of an impact in the short-term. They could be used on the bus and the train, they could be your passport or your museum pass or your football season ticket. They'll be charged up with services that you can download from the Internet via your PC at home." So, instead of waiting in the queue for a ticket, you could buy it in your living-room before you set out for the night. By feeding your smartcard into a reader on your PC, you could download the authorisation to travel on the Eurostar and attend tonight's performance of Turandot (from the Web Page of the relevant company). This isn't just a computer-assisted version of a normal credit-card payment. Using a PIN number, you would authorise the transfer of funds to Eurostar or the Paris Opera, but instead of the tickets simply being purchased and sitting there at the box office for you to collect, they would become resident on your card itself.

Whilst such changes might offer attractive increases in the velocity of routine transactions, it's not all just for your benefit. Cash costs a lot of money: most major British banks spend between pounds 200m and pounds 300m a year on handling, counting, storing and transporting piles of coins and notes, and the US banking system has running costs of pounds 90 billion. Not only would smartcards reduce these bills, but they would allow what Hopkinson calls "nano-direct debit". For instance, phone calls could be paid for by the second, the money bleeding directly from your bank account to BT's, freeing it from the expensive hassle of posting you a quarterly bill. Electricity and gas could be paid for in the same "real-time" way, relieving the utility companies of masses of paperwork, and allowing them to start earning interest on your money immediately. There are advantages for the consumer, who would always know if he or she had enough cash to pay for a service - they could use their PC to watch it tick away by the second. But such smartcard technologies also carry a potential civil-liberties risk: if every nano-direct-debit transaction is logged in a database somewhere, then the information would build up into a complete record of the user's movements. This is partially true today of credit-card payments, often used to track criminals, but with an all-purpose smartcard it would be possible for card issuers to track your use of public transport and your financial life down to the smallest purchase. Unlike the world of the prepaid card or the old-fashioned banknote, this is a fiscal future in which anonymity is dead.

Something else we may have to wave goodbye to is the bank as we know it, already on its way out and predicted to vanish in the next 30 years, replaced by an Internet service accessed through a domestic PC. The "branch" will disappear, and banks will share premises, so that there will be one building on the High Street to which you could go if you felt you needed a chat - probably over a video-line - to advisers from any financial service. This facelessness may generate a luxury market, with versions of Coutts springing up to cater for customers willing to pay a little extra for nostalgically personal service. Old-fashioned tellers will sit behind mahogany desks that provide discreet cover for the same computer technology that will form the operational infrastructure of every bank from Midland to Sainsbury's.

However, e-cash systems will mean that banks will no longer have a monopoly on the movements of money. Although most of these systems depend on back- up from conventional banks, the Internet has already allowed individuals to create their own payment services, which aim to act as secure electronic go-betweens for you and Internet service providers. For instance, open a CyberCash account at http://www.cybercash.com and you can use this virtual currency to purchase a limited selection of goods and services: a hand- carved CD rack from North Dakota; steak; golf clubs; medical advice.

Three years ago, your only option for Internet shopping was to surrender your credit-card number, e-mailing it to the service-provider on an insecure system. Unfortunately, there are thousands of people out there capable of snooping your details, who could then use them to go on a virtual shopping spree. Now, you can use conventional methods to buy CyberCash, DigiCash, or NetBux from the issuing company, and then spend its virtual currency on the Net. Each time you buy a service, your virtual bank debits your account, transfers credit to the service-provider, and takes a nice 5 per cent cut for itself. Because it seems foolhardy to risk e-mailing your credit-card details for small transactions, these virtual cur-rencies are proving popular for so-called "micropayments" - tiny charges of a few pence to enter a database, download a photograph or read a journal. At the moment, these systems are unattractively clunky, and remain tied to conventional cash. But they may represent the beginning of more dramatic changes.

In June 1994, Microsoft chairman Bill Gates whipped up controversy by declaring in a Newsweek interview that "Banks are dinosaurs ... we can bypass them." He offered his own company as the nexus of a "transformation of the world financial system", in which consumers would sidestep banks by constructing their own independent payment system for virtual services. In 1996, electronic commerce accounted for $245 billion (pounds 150 billion). By 2005, this is expected to top $3 trillion (pounds 1.8 trillion) of dematerialised money.

Commentators like Ian Angell, Pro-fessor of Information Studies at the LSE (and on whose speculations the preceding fiction is largely based), see this process as one of the most significant events of our lifetime, and the engine of radical social change. "E-cash is the ultimate in liquidity," he argues. "And it can't be monopolised by national governments. Technologies like this are changing the nature of power." For Angell, the end of hard cash will precipitate the end of the tax system, the collapse of the nation state, and the rise of an overclass of rich individuals sustained by untaxable off- planet bank accounts.

Angell argues that companies and individuals will use the Internet to dodge their civic responsibilities as they scramble after ever-higher profit margins. Technology will allow them to abdicate from all responsibility towards the communities in which they work. Organisations doing business on the Net, and therefore having "no physical centre of gravity", will be able officially to base themselves in economies that won't take a chunk of their profits.

And, it seems, government efforts to tax the flow of information are doomed. "There'll always be someone willing to open up a loophole," he says. If you transfer your bank account to an orbiting satellite, he suggests, and all your transactions are electronic, then your cash is untaxable, because it never touches the ground. And once governments see the futility of trying to get their cut from the information industry, a major source of revenue will vanish. Governments deprived of income will have to think the unthinkable and pursue drastic strategies to maintain their economic viability. Angell believes this will make the nation state unsustainable, and prompt the emergence of "islands of civilisation", small-scale tiger economies competing to host the commercial activities of the world's mobile - and job-generating - rich. Significantly, Bill Gates has recently made large personal investments in Teledesic Corp, a group building a network of satellites aimed at vastly increasing the speed at which data can be streamed around the globe.

However, even Angell's dystopian visions baulk at one future-of-money speculation; that instead of being housed in a plastic card, the smart financial microprocessor could be implanted under the account-holder's skin. All you'd have to do to buy a bus ticket would be to wave at the driver, and the technology is already here. Since 1984, US cattle ranchers have been tracking livestock with syringe- injectable microchips containing a unique ID code. And the somewhat secretive Interval Research in San Francisco has succeeded in implanting digital watches into experimental subjects' wrists: an LCD is sunk under the subcutaneous tissue, and the display is bright enough to be visible through the skin. But whilst this might be the ultimate in convenience, it also presents a few hazards - not least in the shape of those muggers waiting round the corner with a chisel and a scalpel ... "Oh no," says the Professor. "I don't think people would stand for it, do you?" !

MONEY TALK

c.3000BC First form of banking invented as Mesopotamian temples proved safe storage for valuable items.

c.2250BC Cappadocian rulers guarantee the value of silver ingots, creating an early standardised currency.

c.687BC According to Herodotus, the rulers of Lydia (now northern Turkey) have already minted the world's first coins: bean-shaped lumps of electrum (a natural mix of gold and silver) stamped with an official mark. The method soon spreads.

55BC Julius Caesar raids Britain and notes with disgust that the natives are still using sword blades as units of exchange.

c.60AD Nero invents inflation by debasing Roman coinage, a strategy followed by several of his successors.

c.765 King Heabert of Kent produces the first British silver penny.

c.806 A copper shortage results in the production of the first paper money in China.

1156 The first known foreign exchange contract is signed in Genoa, as two brothers borrow 115 Genoese pounds and promise to pay back their creditors in Constantinople bezants.

1403 A Florentine court judges that charging interest on loans is legal.

1659 The first British cheque is written by Nicholas Vanacker for pounds 400 (about pounds 29,300 in modern terms).

1668 Samuel Pepys sends a banknote for pounds 600 to his father.

1778 One of the earliest savings banks is established in Hamburg.

1792 The US adopts the dollar as its official currency under the Coinage Act.

1799 William Pitt introduces income tax.

1847 Britain's first permanent building society, the Woolwich, is founded.

1929 The Wall Street Crash wipes out millions of dollars in a day.

1931 Britain abandons the Gold Standard.

1967 Barclays bank opens the first cashpoint in Enfield, north London.

1971 Britain goes decimal.

1990 DigiCash founded in Holland, to develop an exchange system for the Internet.

1995 CyberCash announces the first "secure Internet transactions". NatWest, Midland and BT launch Mondex in Swindon.

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