Electronic money

 

University of international Business

Department __Finance and credit__

 

 

 

 

 

 

 

 

    

 

«Approved»

Head of department «Finance and credit»

Doctor of economic science,

Associate Professor Omarbakiev L.

________________________________

«______» __________________ 2011y.

 

 

Methodological Instructive Regulations for Execution of Course Work on Discipline “Money, Credit, Banking” for Students of “Finance and Credit” Department

 

 

 

 

 

 

Almaty, 2011

Table of contents

Introduction and executive summary                                                                   3

 

1 Target of Evaluation description                                                                          7

 

1. E-money system: model                                                                                      7

 

1. Main concepts of the model                                                                           7

 

2. Examples of e-money systems                                                                    9

 

3. History of electronic Money                                                                               10

 

4. Additional concepts: compensation, transactions,

           EV life cycle, roles, actors, and quasi-actors                                           13

 

1.1.5 Interoperability of two e-money systems                                                    19

1.2 Target of Evaluation                                                                             20

 

1.2.1 Elements that are part of the TOE                                                      20

 

1.2.2 Elements that are outside the TOE                                                   21

2 The electronic payment system in Kazakhstan                                21

2.1 The popularity of electronic money. prospects for development          21     

2.2 The role of the Processing Center and in the development of             23

      payment card systems of the Republic of Kazakhstan

List of sources used                                                                                  28

 

 

 

 

 

 

 

Introduction and executive summary

 

Electronic money (e-money) systems are gradually achieving some level of status as a means of payment in a number of countries.

In the light of the possible impact of the development of e-money, in 1998 the Euro system issued the “Report on Electronic Money”, addressing monetary policy effects, level playing field considerations and regulatory concerns, such as the smooth and efficient functioning of payment systems, confidence in payment instruments, protection of customers and merchants, stability of financial markets and protection

against criminal abuse. As part of their oversight responsibility for payment systems, central banks have to ensure that all relevant e-money systems comply with the requirements of the 1998 report.

Given the specific importance of IT security matters in relation to the conduct of an overall assessment of the reliability of e-money systems, on the issue of technical security on the 1998 report was further elaborated. The Euro system’s investigations resulted in the Electronic Money System

Security Objectives (EMSSO) report, which details the Euro system’s expectations in this field. The EMSSO report contains a comprehensive risk analysis for e-money systems and a list of security objectives that should be fulfilled in order to over these risks/threats in a given environment. In particular, the analysis provides an overall description of a typical e-money system and highlights the threats and organizational guidelines that arise on the basis of certain assumptions. The security objectives are defined broadly enough to cover both hardware and software-based e-money systems, including the newer server based initiatives. The EMSSO report benefited this final EMSSO report, which complements the 1998 report, will be used by the Euro system’s central banks to assess the overall reliability and technical security of e-money schemes in the euro area. The Euro system’s security objectives are also designed to level the regulatory playing field for the different schemes. Furthermore, the report could provide market participants with useful input for their own risk and security analyses and for the definition of their security policies.

The risk analysis and the definition presentation of the security objectives in the EMSSO report are based on the “Common Criteria for Information Technology Security Evaluation (CC)” methodology. This internationally agreed and standardized methodology was selected because it provides a coherent framework for describing e-money systems and related assumptions, threats and organizational aspects and for deriving a definition of security objectives from this description. According to the CC methodology, the drafting process should also cover other steps, such as the definition of security requirements, which would result in the drafting of a Protection Profile and in the definition of evaluation and assurance requirements. However, these additional steps are not addressed in this document.

In Chapter 1, the EMSSO report focuses on several basic concepts, such as the e-money system, electronic value and sub-systems. The e-money system is a mechanism that facilitates payments – generally of limited value – in which e-money can be considered as an electronic surrogate for coins and banknotes.

The e-money system is described on the basis of a model with a set of sub-systems through which electronic value (EV) is transferred, under the responsibility of a System Supervisor who monitors the security of EV creation, EV extinguishment and EV circulation within the system. In the context of this report, electronic value is defined as a from a market consultation in March 2002.

 

This final EMSSO report, which complements the 1998 report, will be used by the Euro system’s central banks to assess the overall reliability and technical security of e-money schemes in the euro area. The

Euro system’s security objectives are also designed to level the regulatory playing field for the different schemes. Furthermore, the report could provide market participants with useful input for their own risk and security analyses and for the definition of their security policies.

The risk analysis and the definition/ presentation of the security objectives in the EMSSO report are based on the “Common Criteria for Information Technology Security Evaluation (CC)” methodology. This internationally agreed and standardized methodology was selected because it provides a coherent framework for describing e-money systems and related assumptions, threats and organizational aspects and for deriving a definition of security objectives from this description. According to the CC methodology, the drafting process should also cover other steps, such as the definition of security requirements, which would result in the drafting of a Protection Profile and in the definition of evaluation and assurance requirements. However, these additional steps are not addressed in this document.

In Chapter 1, the EMSSO report focuses on several basic concepts, such as the e-money system, electronic value and sub-systems. The e-money system is a mechanism that facilitates payments – generally of limited value – in which e-money can be considered as an electronic surrogate for coins and banknotes. The e-money system is described on the basis of a model with a set of sub-systems through which electronic value (EV) is transferred, under the responsibility of a System Supervisor who monitors the security of EV creation, EV extinguishment and EV circulation within the system. In the context of this report, electronic value is defined as a monetary value represented by a claim on an EV Issuer, which is: stored on an electronic device; issued on receipt of funds for an amount not less in value than the monetary value issued; and accepted as a means of payment by undertakings other than the Issuer.

The notion of a sub-system is intentionally flexible, i.e. the model does not impose any restriction on the number of sub-systems that form an e-money system, and a sub-system is defined only by:

– Its capacity to send or receive EV amounts;

– The System Supervisor’s ability to monitor these amounts.

The sub-systems are capable of generating Reporting Data (RD) and of making this data available (either directly or indirectly via other sub-systems) to the System Supervisor on request, thereby allowing EV exchanges to be traced.

After describing the concepts, in Chapter 2 the EMSSO report defines the main threats related to the unsecured and entrusted environment in which an e-money system usually works and that this report is intended to cover. The operation of an e-money system requires an adequate handling of risks relating to counterfeits, damages and criminal events, which can be translated into main threats.

Such threats, if not properly managed, can put issuers, merchants and customers at risk.

The main threats against which protection is to be provided are:

– Creation of fake EV: Circumstances in which it might be possible for an attacker to use fake EV, i.e. EV that does not represent an EV Issuer debt.

– Illicit extinguishment of EV: Attacks or incidents that lead to an abnormal and irrevocable EV loss.

– Embezzlement of EV: Attacks in which one actor embezzles EV from its legitimate owner.

– EV theft: Opportunities for an attacker to steal EV.

 

– Abuse of the e-money system: Use of the e-money system to infringe regulations unrelated to the system.

– Interference with the operation of the e-money system: Accidental or intentional malfunction that may result in the system being totally or partially unavailable.

To counter the above threats, the following security objectives should be met by appropriate technical and organizational action. Further details on these objectives, which are listed below, can be found in

Chapter 3 of the report.

 

– Access control: Unauthorized access to all assets is prohibited, even in the case of a malfunction in monitoring or in secrets management. Each identified actor has a clear set of access rights.

– Assessment: Important players are subject to assessment.

– Atomicity: Transactions are either completed or undone.

– Authentication: EV transactions and monitoring data exchanges are authenticated.

– Availability: The system ensures service availability, even during maintenance of part of the system.

– Commitment and validation: Transactions are conducted and validated under the terms of a commitment between the parties.

– Competence and responsibility: People involved in the system know and follow their own contractual obligations, and have sufficient means, training and information to perform their role.

– Confidentiality: Those assets that must remain confidential are preserved accordingly.

– Cryptography and protocols: State-of-the art cryptography, protocols and security procedures are required.

– Detection: The system has the capability to:

– detect abnormal events, including actual or attempted modification of assets and counterfeiting of transaction attributes;

– communicate all relevant information which traces these abnormal events to the System Supervisor.

– Identification: An unambiguous identification is required for some components of the e-money system.

– Integrity: The integrity of the assets is preserved, in particular EV amounts.

– Life cycle: State-of-the-art security procedures are used during the life cycle of the EV and sub-systems.

– Limitations: EV amounts are limited during the EV life cycle.

– Non-evaporation: Only authorized subsystems can perform extinguishment transactions.

– Partition: When a sub-system uses applications other than the e-money application, separation is enforced between the applications.

– Qualification and tests: System components are tested before and/or during operation.

– Reaction: The system provides means to limit or undo the consequences of an abnormal or illicit action.

– Secret management: Correct generation, correct distribution, physical storage protection, limited life span and renewal all preserve the confidentiality and integrity of secrets.

– Security update: A periodic security update is required for all sensitive parts of the system.

– Traceability: The System Supervisor is able to trace and audit all strategic events (as defined in the report). Sub-systems record and keep the data required by the System Supervisor for as long as required. Trace data accurately reflect recorded events.

– Transaction order: Every transaction consists of a set of basic operations executed in a predefined order.

– Trusted location: A physically protected environment is required for sensitive security devices.

– Trusted path: Interaction with the system is achieved through protected communication means.

 

Additional information is provided in the annexes, such as the rationale for the model, a list of acronyms used in the document, a glossary, and a cross-reference table linking the security objectives with the relevant assumptions, threats and organizational issues.

 

1 Target of Evaluation description

 

The intention of this section is to define the Target of Evaluation (TOE), which is the part of the system that is to be evaluated (i.e. to which the security objectives are to be applied).

The TOE is defined in a rather generic manner, by using a high-level model for e-money systems, in order to cover as many e-money systems as possible and to be able to deal with interoperability situations, which are likely to arise in the euro area. Section 2.1 first introduces the model and the various concepts related to it. Section 2.2 then defines the TOE, which is a subset or part of this model, with clearly defined transactions and actors.

1. E-money system: model

 

This section defines the model and several concepts that will be relied upon in this report. The concepts are first defined formally, then illustrated by a practical example.

The three main elements which make up our e-money system model are EV, EV circulation between sub-systems and supervision. Put together, these elements constitute the core of the e-money system model. The notions of transactions, compensation, EV life cycle and actors then complete this model.

 

1.1.1 Main concepts of the model

The e-money system is modeled as a set of sub-systems through which the EV specific to the system is transferred, under the responsibility of a System Supervisor who monitors the security of EV creation, EV

Extinguishment and EV circulation within the system.

 

EV4 is a monetary value represented by a claim on an EV Issuer, which is:

– stored on an electronic device;

– issued on receipt of funds for an amount not less in value than the monetary value issued;

– accepted as a means of payment by undertakings other than the issuer.

The EV circulation starts with a first phase called EV creation, and ends with a final phase called EV extinguishment.

 

This model does not impose any restriction on the number of sub-systems that form an e-money system.

 

The sub-system notion is intentionally flexible.

A sub-system is generally defined by its capability to:

– send or receive EV amounts;

– generate Reporting Data (RD);

– make this data available (directly, or indirectly via other sub-systems) to the System Supervisor on request, thereby allowing EV exchanges to be traced.

Furthermore, the System Supervisor is responsible for monitoring the sub-systems. A sub-system may be able to aggregate EV received into a single amount, the value of which equals the sum of the amounts received. Conversely, the EV amount stored in a sub-system may be broken into smaller amounts, the sum of which equals the value of the EV amount stored.

 

Card-based system

 

In a card-based system, the sub-systems which participate in the EV flow generally consist of four entities or functions: a loading agent, a customer, a merchant and a collecting agent.

The loading and collecting agents are banks participating in the system and the customer uses a smart card to pay at the terminal of the merchant. The customer’s purse (the smart card) is a simple, stand-alone sub-system, while the point-of-sale (POS) terminals and the central information systems to which they are connected constitute a more complex sub-system.

In this example, there is a central entity which issues EV and operates as a bookkeeping entity to which the creation and extinguishment of EV is reported via Accounting Data (AD)

 

1.1.2 Examples of e-money systems

 

The general model is in principle applicable to any type of e-money system, whether card based or software-based (including server based/ network-based types). An example of both types is illustrated below.

 

 

 

 

Server-based system

In a server-based system, the customer and the merchant do not keep the EV in devices held in their possession. The EV is stored in customer and merchant accounts on servers accessed via the internet. The customer and merchant sub-systems are therefore software processes running on the central server.

The general model also covers these types of e-money systems, in view of the specificity of the use of centrally stored accounts.

 

 

 

1.1.3 History of Electronic Money

 

Electronic money is a fairly recent invention in the history of money and commerce, and typically means that currency with real value, and which can be exchanged for traditional cash, is instead entirely digital (or virtual). Electronic money only exists in digital format, and can be primarily based on the Internet or on smart cards that maintain a record of their stored value. Transactions carried out electronically are also known as electronic money. Other names for electronic money include e-money, digital cash, digital money, digital currency, or electronic cash.

The age of computer has made possible the creation of electronic money, and began back in the 1960s when IBM and American Airlines jointly created a system known as SABRE (Semi-Automatic Business Research Environment) which allowed offices of American Airlines to be fitted with terminals connected to telephone lines that would allow agencies to directly check flight times, seat availability, and then electronically make reservations that could be paid for using a system of credits.

By the 1970s banks in the US and Europe had started using mainframe computers to track transactions between branches and other banks, a system that proved particularly successful across international boundaries when currency exchange was needed. Initially, any transactions that had been initiated but not cleared were effectively in limbo, and as computer use spread within corporations, tracking funds that were processed electronically became an important financial consideration.

Consumer uptake of electronic money first started to be noticed in France with the introduction of the Minitel service in 1982 that operated in a similar way to pre-Internet bulletin boards. Countries like the UK and the US had developed basic tele-text services that allowed televisions to display text such as program guides, weather, game show results, or news directly onto the television screen, with users keying in page numbers on their TV remote control to access pages. The tele-text system was a simple one way service, and whilst it was useful, it didn’t allow users to query data.

The French Minitel service by contrast used a dumb terminal with built in modem and since the service operated over standard telephone lines and the terminals were equipped with full AZERTY keyboards, it was possible for subscribers to type messages, or search queries, a fundamental difference from tele-text services. The French Minitel terminals were given away free to over 9 million households encouraging French business entrepreneurs to offer Minitel shops such as travel agencies, flower delivery, As Seen on TV, music catalogs and more. Payment could be made using credit card or charged to the telephone account, marking the first use of electronic money in the consumer market.

A slightly similar service had been launched in the UK in 1979 named Prestel but supported equipment was expensive and a Prestel based retail service didn’t develop with the exception of package tour travel agencies who would provide quotes but still required customers to call and arrange payment over the phone. In 1983, a service known as Homelink started with the support of the Bank of Scotland and Nottingham Building Society where account holders could subscribe to a special Prestel service that allowed online banking, and marks the first recorded use of electronic money.

In the US, similar services to the French Minitel and the UK Prestel existed, but without dedicated hardware, users would own their own micro-computers and modems and pay to dial into a local bulletin board service such as Compuserve or TheSource, however transactions for products and services were not offered until 1989 when US grocery delivery company Peapod was founded in Evanston, Illinois and sold a dial-up disk with software allowing customers to order and pay for groceries that the company would later deliver.

1991 saw the introduction of the Internet in the consumer market with the disbanding of the Arpanet network, and the creation of the NSFNET backbone formed by IBM, MCI, and Merit. CERN also released Tim Berners-Lee’s HTML specification that allowed easier display of Internet data. It wasn’t long until America Online took advantage of the new Internet and then in 1992, started offering retail services directly to their subscribers who could pay using a credit card, and firmly ushering in the era of electronic money. 1-800-Flowers was one of the first AOL retail partners.

In 1994, and taking a lind leap of faith that the Internet would help their business, Pizza Hut adopted the same model used by Peapod, and thus allowing online pizza ordering, with a choice of payments, credit card vie he Internet, or in person on delivery. The same year J.C. Penney start their first website offering a department store on the Internet, sales are slow but company shareholders are happy to see the corporation taking the initiative.