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Berentsen and Schär
Figure 1
Cash Transaction
Goods
Buyer
Seller
Cash transaction
Figure 2
Electronic Payment
Goods
Buyer
Seller
Electronic payment
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of value circulating in the economy are always clearly established, without a central authority
needing to keep accounts. Furthermore, any agent can participate in a cash payment system;
nobody can be excluded. There is a permissionless access to it. Cash, however, also has disad-
vantages. Buyers and sellers have to be physically present at the same location in order to
trade, which in many situations makes its use impracticable.
1.2 Digital Cash
An ideal payment system would be one in which monetary value could be transferred
electronically via cash data files (Figure 2). Such cash data files retain the advantages of physical
cash but would be able to circulate freely on electronic networks. 1 A data file of this type could
be sent via email or social media channels.
A specific feature of electronic data is that it can be copied any number of times at negli-
gible cost. This feature is highly undesirable for money. If cash data files can be copied and
the duplicates used as currency, they cannot serve as a payment instrument. This problem is
termed the “double spending problem.”
1.3 Electronic Payment Systems
To counteract the problem of double spending, classical electronic payment systems are
based on a central authority that verifies the legitimacy of the payments and keeps track of
the current state of ownership. In such systems, a central authority (usually a bank) manages
the accounts of buyers and sellers. The buyer initiates a payment by submitting an order. The
2
First Quarter 2018
Federal Reserve Bank of St. Louis REVIEW