Hot Money

By Kurtzman, Joel | Chief Executive (U.S.), June 1995 | Go to article overview

Hot Money


Kurtzman, Joel, Chief Executive (U.S.)


While the electronic economy hums along in the fiber-optic trenches--helping businesses to run better and faster with technologies including electronic funds transfer, imaging, electronic data interchange, and sophisticated point-of-sale systems--a phenomenon has been putting butterflies in the bellies of even the toughest CEOs and CFOs. That phenomenon is "hot money." Hot money refers to the trillions of dollars that race from one investment instrument to another, seeking superior returns and churning already volatile markets. But it also defines the transactions and maneuvers of the underground economy: money laundering by international drug cartels, for example, or capitalist profits in developing nations seeking asylum in overseas banks.

Herein lies the predicament: The same digital technology that greases the electronic pipeline threatens to make safeguards against shady transactions ineffectual and to create for crooks a near impregnable payment infrastructure. The danger comes from a wrinkle in the world of ones and zeros developed by a Netherlands-based start-up company, Digicash.

Despite predictions a generation ago auguring the emergence of a paperless society, global business remains a mixture of hard copy and electronics. The Federal Reserve daily charters a fleet of more than 200 planes to move the nation's 2 billion checks, and postal workers spend much of their time pushing around the tons of paper associated with financial transactions. One upshot is that hot money leaves a paper trail. Though almost all canceled checks do nothing more than verify that an electronic transfer has taken place, they enable the government to "follow the money," as Deep Throat once said, deterring money launderers and inside traders.

All that may change, thanks to Digicash, founded by entrepreneur David Chaum to transfer cash on the Internet in complete privacy. Bearded, ponytailed, and Santa Claus-plump, Chaum holds a Ph.D. in computer science from the University of California at Berkeley and is well-versed in encryption technology. "Most encryption systems are lock and key varieties, with the lock residing in one location and the key in another," Chaum says. "That's the old paradigm. I divide up the lock and divide up the key." Those divided locks and keys are made of complex, patentable mathematical formulas called algorithms, which Digicash stores in computers in various locations.

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