Typical stored-value card.
(National Currency Collection)
In recent decades, electronic payment methods have become part of the fabric of modern commerce, displacing cheques, bank notes, and coin in many transactions. Ninety-nine per cent of adult Canadians have a bank account1 and hence access to a debit card, while 92 per cent of Canadian households have at least one credit card.2 Canadians routinely pay household utility bills and other charges by direct debit from their bank accounts instead of using cash or cheque as they did in the past. Similarly, employers deposit wages and salaries directly into their employees’ accounts. The rapidly growing popularity of e-commerce has also prompted the development of new electronic payments systems, such as PayPal, which are being readily adopted by the young and technically savvy. In many countries, payments are now routinely made using mobile telephones.
A survey conducted by the Bank of Canada in 2009 found that the use of cash accounted for only 25 per cent of transactions by value in Canada, although it still represented close to 54 per cent of transactions by volume.3 From 2002 to 2011, both the total number of approved debit transactions with merchants and the value of those transactions rose by almost 75 per cent. Total debit transactions in 2011 amounted to almost $183 billion, with the average transaction of $44.4 On a per capita basis, Canadians used their debit cards an average of 116 times per year.5 Credit cards have been even more popular. Over the decade, the value of retail Visa and MasterCard transactions in Canada rose by almost 150 per cent to reach $302 billion in 2011, with the value of an average transaction climbing from $99 to $107.6
What do these developments portend for the use of currency and counterfeiting? Are we witnessing the final stages of the complete dematerialization of money—the end of an evolution that has taken us from commodity money, such as gold, to representational money, such as paper notes, and finally to digital bytes that reside only virtually on a microprocessor or a remote computer server? Will a “cashless” society that consigns bank notes and coins to the dustbin of history also mean the end of counterfeiting?
To paraphrase Mark Twain, reports of the death of currency are exaggerated. Although the transfer of electronic funds accounts for the lion’s share of transactions by value, if not by volume, futurists’ predictions of the imminent demise of cash have so far not been realized. In fact, the amount of bank notes in circulation as a proportion of Canadian GDP has risen slightly, from about 3 per cent in 1990 to roughly 3.3 per cent in 2012. Although holders of cash assume the risk of loss or theft, currency remains the most accepted form of payment among Canadians, especially for small-value transactions.7 It is portable, convenient, widely accepted, and private. Moreover, cash provides immediate payment finality: merchants don’t have to wait to receive funds. They also don’t have to pay fees to financial institutions, fees that, in the case of credit cards, can amount to a significant percentage of the value of the merchandise sold. Confidence in currency is buttressed by the security measures taken by the Bank of Canada against the threat of counterfeiting, as well as by its commitment to maintain low and stable inflation, which protects the purchasing power of bank notes and coin. With more than $61 billion in bank notes in circulation in Canada in 2012, equivalent to roughly $1,800 per person, currency shows few signs of going out of fashion and will, unfortunately, remain a target for counterfeiters for the foreseeable future.
Electronic money, or e-money, in the form of prepaid or stored-value cards is a plausible challenger to currency. The cards are designed to replace currency in small transactions, such as buying a coffee, a newspaper, or using the bus, although they can conceivably be used for large-value transactions as well. Sometimes called an electronic purse or wallet, these cards can offer the convenience and anonymity of cash.8 Value is stored on an electronic microprocessor on a so-called smart card, or on a computer server. Funds can then be transferred from the holder of the stored-value card to a merchant or to another cardholder using a card reader. The cards can be recharged from holders’ bank accounts at special ATMs, or via the telephone or Internet. Unlike debit or credit cards, the value stored on smart cards does not represent a claim on a bank account or the payer but resembles actual cash “in hand.”9
Stored-value cards are particularly competitive with coins and bank notes for use in vending machines, public telephones, or parking meters, where there is no human contact. Consumers no longer require the exact change, while companies and kiosk owners avoid the expense of counting, verifying, and securing piles of small-denomination coins. Stored-value cards require merchants to purchase expensive equipment, however. More importantly, the integrity of stored-value cards could be compromised, leading to fraud, i.e., the risk that fraudsters could illegally recharge cards—in effect counterfeiting e-money by tampering with the microprocessors used on the smart cards or by breaking the encryption used on software-based systems.10
During the 1990s, there were a number of pilot projects in Europe and North America to assess the attractiveness of electronic wallets. The experiments were not very successful. In Canada, a consortium of ten banks under the auspices of Mondex Canada launched a test project in Guelph, Ontario, in February 1997, only to cancel it eighteen months later. Despite millions spent by the scheme’s sponsors on advertising and computer support, few of Guelph’s 100,000 residents used Mondex’s smart cards.11 It seemed that the attractions of the smart card could not compete with the convenience of cash.
Typical stored-value card.
(National Currency Collection)
Although electronic wallets have so far not found favour among Canadian consumers, prepaid gift cards have found a niche. Used to buy goods and services at a specific store, these rechargeable cards have become popular in recent years. General-purpose, prepaid, rechargeable “credit” cards are also available. These cards look like regular credit cards and can be used anywhere that accepts credit cards but, being preloaded with money, don’t provide credit. They are particularly useful for individuals with poor credit records but who still need to use a “credit” card for certain transactions, such as booking a hotel room. Such cards typically charge an initial sign-up fee and a monthly maintenance fee.
“Electronic wallet” used in the Guelph pilot project.
(National Currency Collection)
In recent years, there have been renewed efforts to encourage the use of electronic money. In 2009, the Singapore government launched CEPAS (contactless, e-purse application).12 CEPAS is a pillar in Singapore’s national ePayment infrastructure, which aims to have the world’s first “nationwide interoperable micro-payment platform that bridges multiple sectors—in particular the transit and retail e-payment space.”13 If successful, CEPAS will eliminate the need for consumers to hold multiple payment cards, permitting them to undertake small transactions “seamlessly and safely” for a wide range of activities. By providing a common infrastructure for merchants, Singapore’s authorities expect that CEPAS will reduce costs and permit a wider range of participants in the “micro-payment space.”
In April 2012, as part of its ongoing research into developing more efficient currency, the Royal Canadian Mint announced the creation of a new digital currency technology called MintChip(TM) and asked North American software programmers “to test and challenge” the technology and “determine its applicability to the current marketplace.”14 MintChip(TM) “uses a secure chip to hold electronic value and a secure protocol to transfer electronic value from one chip to another.” The Mint envisions MintChip(TM) being used for online purchases and for small-value transactions, such as “micro transactions” of under $10 and “nano transactions” of under $1.00.15
In early 2009, a new form of electronic currency emerged called Bitcoin. The supply of Bitcoin is limited by the design of the system and will never total more than 21 million.16 Unlike national currencies, there is no central administrator or issuer.17 Bitcoins are created by a process called “mining,” through which individuals are rewarded in Bitcoins for solving complicated and time-consuming mathematical routines. Bitcoins can be used to make irreversible payments anywhere in the world between parties through the Bitcoin network and can be converted into other currencies. The currency is accepted, however, by only a very tiny, although rapidly growing, number of retailers. The Economist news magazine reported that the number of retailers accepting Bitcoins increased from about 100 in March 2012 to 1,100 by September that year.18 In March 2013, a Canadian man made digital history when he listed his Alberta house for sale in both Canadian dollars and Bitcoins.19
To avoid “double spending” (in effect, counterfeiting), the system uses a “peer-to-peer distributed time-stamp server to generate computational proof of the chronological order of transactions.”20 It is theoretically possible to double-spend Bitcoins, although it would apparently take an extraordinary amount of computer power, which would make the effort impractical. It might also be possible to break the system’s encryption. Other weaknesses include forgetting the address of your virtual Bitcoin “wallet” or its theft from your personal computer by hackers. There have also been reports of thieves hijacking personal computers with viruses that they then use to “mine” Bitcoins. These viruses often contain other malware that can seriously affect the hijacked computers.21 A recent incident highlights some of Bitcoin’s security weaknesses. In September 2012, 24,000 Bitcoins worth about US$250,000 were stolen from one of the biggest online Bitcoin currency exchanges. The exchange was subsequently closed.22 The impact of theft was short lived, however. The growing acceptability of the currency, combined with design constraints that limit the creation of new Bitcoins, at a time when major central banks have rapidly increased the money supply to support global economic activity, has led to a rapid appreciation of the Bitcoin against traditional currencies. From a value of a few pennies at its launch in 2009, it rose to a high of about US$260 in early April 2013. However, highlighting the thinness and fragility of the Bitcoin market, panic selling later in the month led to a 50 per cent decline in Bitcoin’s value over a six-hour period.23
Since electronic wallets are still not widely used, and stored-value gift cards are limited in the range of goods and services they can buy or where they can be used, they have not become major targets for counterfeiters. A far more serious and current threat to electronic commerce is identity theft—i.e., “counterfeit” users. Credit and debit cards can be stolen, copied, and fraudulently used. Personal information, including highly confidential personal identification numbers (PINs), can be obtained through a variety of nefarious means. One crude method is looking over a user’s shoulder as the person inputs his or her PIN when making a purchase or using an automatic teller machine (ATM). More sophisticated criminals have illegally attached scanning devices to ATMs or to point-of-sale machines in stores. These record the unwitting users’ credit or debit information, which is then used to fabricate counterfeit cards. Cameras have also been employed to spy on ATM users and record PIN numbers. Confidential data loaded on the new contactless payments cards can reportedly be read and duplicated by thieves at a distance if carried unshielded in a wallet or purse. You are not safe at home or at work either. Hackers infiltrate home and corporate security systems or remotely take control of victims’ computers in order to steal valuable personal financial information. “Spam” specialists also infect computers with “malware,” which tracks users’ actions on their computers, should the unwary open innocuous-appearing email attachments.
In 2011, there were more than 624,000 cases of credit card fraud in Canada, with a value of $539 million (up more than 19 per cent from 2010), of which $190 million represented counterfeit cards, with $296 million coming from fraudulent e-commerce, telephone, and mail purchases. During the same year, losses from counterfeit debit cards declined by 40 per cent to a still considerable $70 million in over 159,000 cases.24 Worldwide losses from cybercrime in 2010 are estimated to have reached a colossal $114 billion.25 These losses far outstrip those associated with the traditional counterfeiting of bank notes. In response, most major police forces, including the RCMP, are devoting more and more resources to fighting cybercrime. The Bank of Canada has also widened its efforts in the fight against financial fraud. In 2008, it commissioned the production of four short videos called Fighting Fraud on the Front Lines, aimed at educating individuals and retailers about payment-card fraud, cheque fraud, and identity theft, as well as traditional counterfeiting.26
Fortunately for the holders of credit and debit cards in Canada, Canadian financial institutions compensate victims of identity fraud in most circumstances. Nevertheless, the inconvenience of blocked accounts as financial institutions make their inquiries, as well as the feeling of personal violation can be considerable. Moreover, although individual victims may not suffer direct financial loss from fraud, financial institutions pass on the cost of these losses, as well as their security expenses, to the consumers of financial services. Consequently, we all lose from financial fraud.
A fascinating new twist to financial fraud comes from online video gaming. In recent years, the distance between virtual worlds and the real world has thinned, providing fraudsters with opportunities to engage in virtual criminal activities with very real-world consequences. In 2009, the chief executive officer of a virtual bank in the online world EVE embezzled “200 billion interstellar kredits” and sold them to another gamer for more than $5,000 in real-world currency. The thief was expelled from the game but avoided other real-world consequences because of jurisdictional problems.27 The theft underscored the importance of cyber-security when dealing with virtual currencies, even in fantasy situations.
The war on counterfeiting is far from over. Bank notes and coins will likely remain an important part of our payments system for the foreseeable future and will therefore remain a target of counterfeiters. The issuance of the Bank of Canada’s new Polymer series of bank notes beginning in 2011 represents a new campaign in a war that started in Canada in 1685 when counterfeiters first duplicated the card money issued by Intendant de Meulles in Quebec City. The security features of the new polymer notes represent formidable protection against counterfeiting. Nevertheless, it would be premature for the Bank to claim victory in its war with counterfeiters. If the past holds any lessons, we can expect them to rise to the challenge. The Bank of Canada and law enforcement agencies must consequently remain vigilant to stay at least one step ahead. Moreover, until all denominations of the new Polymer note series are in wide circulation, counterfeiters have a window in which to duplicate older, less secure notes. In December 2011, the RCMP seized $1.5 million in bogus $100 bills of the previous Canadian Journey series in Richmond, British Columbia, whose makers were rushing to get them onto the streets. Fortunately, none of the fake bills made it into circulation.28
Stacks of $100 bills and other materials seized by the RCMP in Richmond, B.C. in 2011.
(Courtesy RCMP)
In addition to the cache of phony bills seized in Richmond, police found blank credit cards. These blank cards represent the new front of the counterfeiting war. Already dwarfing the counterfeiting of currency, identity theft and the illegal duplication of alternative payment instruments will likely continue to grow as bank notes become more difficult and expensive to duplicate, and as electronic commerce continues to diminish the face-to-face contact between vendors and customers.
Slightly more than a year later, in March 2013, police on the other side of the country in St. John’s, Newfoundland, cracked a large gift-card ring, seizing more than 300 bogus prepaid and credit cards in a raid on a hotel room. The cards from retailers, such as Esso and Walmart, were found after police received a tip about suspicious activity. Three men and two women face charges of fraud, conspiracy to commit fraud, and possession of instruments for copying credit-card data. Like the case in British Columbia, the Newfoundland seizure of blank credit and other cards represents the new front of the counterfeiting war.29
ENDNOTES FOR CHAPTER 12
1Canadian Bankers Association, “Competition in the Financial Services Sector,” 2011, http://www.cba.ca/en/media-room/50-backgrounders-on-banking-issues/121-competition-in-the-financial-services-sector.
2Canadian Bankers Association, “Fast Facts 2009,” http://www.cba.ca/contents/files/statistics/stat_faststat_2009_en.pdf.
3C. Arango, D. Hogg and A. Lee, “Why Is Cash (Still) So Entrenched? Insights from the Bank of Canada’s 2009 Method-of-Payment Survey,” Bank of Canada Discussion Paper no. 2012-2, February 2012.
4Interac, “Research & Statistics,” 2012, http://www.interac.ca/en/transactions-merchants-terminals-dollar-value-users.
5Interac, “Research & Statistics,” 2012, http://www.interac.ca/en/no-of-debit-transactions-by-country.
6Canadian Bankers Association, “Credit Card Statistics—Visa and MasterCard,” 2012, http://www.cba.ca/contents/files/statistics/stat_cc_db038_en.pdf.
7C. Arango and V. Taylor, “The Role of Convenience and Risk in Consumers’ Means of Payment,” Bank of Canada Discussion Paper no. 2009-8, 2009, 6.
8For an early review of electronic purses and their prospects, see G. Stuber, “The Electronic Purse: An Overview of Recent Developments and Policy Issues,” Bank of Canada Technical Report no. 74, 1996.
9M. Krueger and H. Godschalk, “Why E-Money Still Fails: Chances of E-money within a Competitive Payment Instrument Market.” Paper prepared for the Third Internet Economic Workshop, Berlin, 26–27 May 2000, http://paysys.de/download/Berlin5.pdf.
10Krueger and Godschalk, “Why E-Money Still Fails.” See also M. Al-Laham, H. Al-Tarawneh, and N. Abdallat, “Development of Electronic Money and Its Impact on the Central Bank Role and Monetary Policy,” Issues in Informing Science and Information Technology 6 (2009): 339–49, http://www.iisit.org/Vol6/IISITv6p339-349Al-Laham589.pdf.
11J. Gatehouse and D. Akin, “Old-Fashioned Cash Outsmarts Smart Card: Mondex Test Ended,” National Post, 1 November 1998, http://seclists.org/interesting-people/1998/Nov/2.
12Quid, E-Money News, “Cashless Society Developing in Singapore,” 1 December 2009, http://www.squidcard.com/corporate/emoneynews/transit/cashless-society-developing-in-singapore245.html.
13IDA Singapore, “Specification for Contactless E-Purse Applications (CEPAS),” updated 6 July 2010, http://www.ida.gov.sg/Infocomm-Landscape/ICT-Standards-and-Framework/Specification-for-Contactless-ePurse-Application.
14Royal Canadian Mint, “Royal Canadian Mint Launches MintChip(TM) Developer Challenge,” Press Release, 4 April 2012, http://www.mint.ca/store/news/royal-canadian-mint-launches-mintchiptm-developer-challenge-14900005?cat=News.+releases&nId=700002&parentnId=600004&nodeGroup=About+the+Mint.
15Royal Canadian Mint, MintChip Developer Resources, 2012, http://developer.mintchipchallenge.com/devguide/index.php.
16BitcoinMe, 2011, http://www.bitcoinme.com/.
17Bitcoin Basics, “What Are Bitcoins?” 2011, http://www.bitcoinbasics.com/.
18“Bitcoin: Monetarists Anonymous,” The Economist, 29 September 2012.
19Mike Falcy, “ Canadian Man Tries to Sell His Home for Bitcoins,” Digital Trends, 22 March 2013.
20S. Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System,” 2011, http://www.bitcoin.org/bitcoin.pdf.
21BBC News, 28 March 2013, http://www.bbc.co.uk/news/technology-21964881.
22BBC News, “Bitcoin Theft Causes Bitfloor Exchange to Go Offline,” 5 September 2012, http://www.bbc.com/news/technology-19486695.
23BBC News, “Bitcoins Take a Bashing,” 12 April 2013, http://www.bbc.co.uk/news/entertainment-arts-22121985.
24Canadian Bankers Association, “Credit Card Fraud Statistics—Amex, MasterCard and Visa Statistics,” 2011, http://www.cba.ca/contents/files/statistics/stat_creditcardfraud_en.pdf.
25Symantec, “Norton Study Calculates Cost of Global Cybercrime,” 2011, http://www.symantec.com/about/news/release/article.jsp?prid=20110907_02
26See the Bank of Canada website, http://www.bankofcanada.ca/banknotes/bank-note-videos/.
27Business Insider, “Theft Highlights Downside of Virtual Currencies,” 2009, http://www.businessinsider.com/first-virtual-bank-fraud-ceo-steals-virtual-deposits-trades-for-real-cash-2009-7.
28CBC News, “B.C. Mounties Uncover Large Counterfeit Operation,” 19 December 2011, http://www.cbc.ca/news/canada/british-columbia/story/2011/12/19/bc-fake-cash.html.
29Maclean’s, “Noted in the Crime Blotter: Murder Mansion, the Torch Gang, and a Gift-Card Crime Ring,” 25 March 2013, 23.