Legal Seminar, Denver, CO

ARTICLE

IN PRESS

JID: CLSR

[m7;July 3, 2018;21:58]

computer law & security review 000 (2018) 1–8

because of advantages that payment technologies deliver to them. 3 Although many payment networks are decades old, their structure continues to provide an essential framework within the modern payments ecosystem. Indeed, the principal net- works developed and promoted by banks and payment card systems continue to be viewed as the “rails” on which the payments “train” regularly operates. 4 Those rails have ben- efitted from innovations and improvements from enhanced technology, as competition drives the payments marketplace toward making a good thing even better. However, these rails persist because of their ability to provide a reliable, safe, and reasonably efficient means to transmit value through estab- lished practices and participants. Innovators have chosen to cooperate and build on this technology, expanding pathways to mobile devices and embedded technologies in online envi- ronments to make payments more convenient. New technologies, including primarily cryptocurrencies based on distributed ledger technology protocols (also known as “blockchain”), lay claim to providing a path to disruption. Through eliminating the traditional intermediaries within payment networks, these technologies have the potential to disrupt not only the economics of traditional payments, but also the regulatory apparatus through which governments monitor activity and gather information to assist them in en- forcing their laws. Distributed ledger systems have yet to deliver a viable, cost-efficient alternative to the payment choices of most con- sumers. Nevertheless, their claims have generated attention from investors seeking to benefit from potential innovation, or at least the belief in future innovation that attends this marketplace. They have also generated attention from gov- ernments, who see threats from incursions into the efficacy of the current regulatory, tax, and criminal law enforcement environment. The discussion below is organized as follows. Section 2 pro- vides an overview of the benefits that the dominant electronic payment systems have delivered to consumers, merchants, and government actors, along with some new challenges pre- sented on privacy and security fronts. Section 3 presents an assessment of the disruptive potential of cryptocurrencies, including structural limitations, environmental impacts, and regulatory concerns. Section 4 provides some concluding ob- servations.

crease the time and cost associated with physical transmis- sion (particularly across distances), as well as the costs as- sociated with monitoring and securing those physical objects traditionally associated with payment. The conventional approach to these networks involves trusted intermediaries, who serve as gatekeepers, monitors, and guardians of the processes of accounting for and moving money. Parties who are relatively unknown to one another can complete a payment transaction through trusting an interme- diary effectively to vouch for another participant, allowing the payment process to be completed. For example, by presenting a credit card, a purchaser who may be completely unknown to a merchant can transmit a payment in exchange for goods and services. The merchant can rely on the card network to deliver the payment, thereby eliminating credit risk otherwise associated with the personal promise of the purchaser. In re- turn, the consumer purchasing that good or service has access to assurance that the good or service will be delivered, which might not occur if cash had been transmitted before delivery. 5 Unlike cash, electronic payments are transmitted to the merchant’s account without interference from untrustworthy clerks, violent robbers, or forces of nature like fire or wind that otherwise threaten the security of the store of value. There is no risk of counterfeits, which turn out to be valueless. They also transmit value free of pathogens and other contaminants that might otherwise be found on cash. 6 However, electronic payment networks present their own set of security issues. The identity of the payor is mostly irrel- evant for a cash-based transaction (at least from the perspec- tive of a payment risk). 7 However, electronic payments present risks of fraud or error emerging from unauthorized transac- tions. Securing the payment network through protecting the relationship between participants and their rights to access the network (often through tokens of ownership that they pos- sess), as well as from interference from those outside the net- work has presented challenges that are now becoming quite familiar. For the most part, the payments industry has over- come these challenges by mitigating security risks through private, collective actions. 8 When those risks could not be eliminated, the ability to spread the costs of fraud through- out the network environment has been highly successful in keeping those networks working. 9 Industry investments in new technologies are designed with the costs and benefits to participants in mind. For exam- ple, when U.S. card systems transitioned to EMV technology otherwise employed in Europe, merchants who adopted the new technology in their POS systems had to make significant new investments to handle the new chip-enabled cards. Those 5 See discussion beginning at note 14, infra. 6 See David Wolman, The End of Money 48 (2012) (“Kill cash, and you can have fewer cashiers, fewer security issues, no employees skimming off the top, and fewer germs to boot.”) 7 One exception might be a regulated industry or product, such as a sale of alcohol to a minor, which might create other risks for a noncompliant seller, even if payment risk is avoided.

2.

Promises and perils of electronic payment

networks

Electronic networks have changed the nature of payment transmission between market participants. Instead of mov- ing physical objects or tokens, such as paper money, checks, or notes, electronic payment networks allow the transmission of value by electronic means. As a result, they potentially de-

3 As will be discussed below, the economic incidence of these costs present additional complexities. 4 See Edward A. Morse, Introduction xv, in Electronic Payment Systems: Law and Emerging Technologies (Edward A. Morse, ed. 2018). 8 See generally Edward A. Morse & Vasant Raval, Private Order- ing in Light of the Law: Achieving Consumer Protection Through Payment Card Security Measures, 10 DePaul Bus. & Comm. L.J. 213 (2012). 9 See id. Please cite this article as: E.A. Morse, From Rai stones to Blockchains:The transformation of payments, Computer Law & Security Review: The International Journal of Technology Law and Practice (2018), https://doi.org/10.1016/j.clsr.2018.05.035