Consumer choice, not regulation, is the best way to balance security and privacy as electronic commerce develops, three European executives told lawmakers Tuesday.
The executives, all from electronic payment system developers, made their comments during the House Banking Committee's domestic and international monetary policy subcommittee's fourth and final hearing exploring "The Future of Money." Also appearing before the subcommittee were U.S. business and academic specialists in electronic commerce.
In Europe, where smart and stored-value cards are commonplace, customers have learned there is a tradeoff between security and privacy, said Henning Jensen, chief executive officer of Danmont A/S, a Danish stored-value card issuer.
Europeans joining Mr. Jensen on the panel were Tim Jones, chief executive of Mondex, the United Kingdom electronic payment systems developer, and Marc Lassus, chairman of Gemplus Card Inc., the world's largest manufacturer of smart cards.
"To be secure, a system must be auditable and traceable," Mr. Jensen said.
Although smart card transactions can be traced to individual memory chips, there's no way of identifying the owner unless additional information - such as fingerprints or photographs - has been added to the card.
"If you did that you would lose on the privacy front, and consumers don't want that," Mr. Jensen said.
The solution may be to let consumers decide whether to sacrifice some privacy in return for security, said Mr. Jones of Mondex.
"We're trying to provide choices within the system's architecture," Mr. Jones said.
Smart cards can be encoded with electronic "locks" that block transactions after an incorrect identification code is entered, he said. Only the issuer can open the lock. However, unless the consumer is willing to add personal information to the memory chip, there's no way of returning a lost card.
Although providers are still experimenting with security systems, French and German consumers have taken readily to electronic cash, said Marc Lassus of Gemplus. "In France and Germany, where almost everybody uses smart cards, few use cash anymore" for vending machines and pay telephones, he said.
Europeans are not worried that the cards are not insured like bank deposits, the executives said.
"Our basic approach is that the consumer is responsible," Mr. Jones said.
At the same time, central bankers are staying on the sidelines as the market develops, he said. "On the regulatory side, flexibility has been given to the private sector so far," Mr. Lassus said.
Rep. Michael Castle, R-Del., the subcommittee's chairman, said U.S. industry should learn from Europe's rapidly developing electronic commerce and make sure it is compatible.
"Nations will be challenged by the need to either develop a consistent approach to both virtual and real electronic payment systems or risk being left by the side of the information superhighway," he said.
Denis A. Calvert, vice president of VeriFone Inc.'s U.S. financial retail division, said lawmakers could encourage the industry's growth by recognizing encrypted codes as "digital signatures" for electronic contracts and payment systems.
