Understanding Networked Applications:
A First Course
Chapter 14 by
David G. Messerschmitt

Understanding Networked Applications:
A First Course
Electronic payments by
David G. Messerschmitt

Electronic payments: the players
Consumer
Merchant
Financial institutions
Understanding Networked Applications
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Physical tokens representing value
A First Course

Some forms of spending money
Credit
Debit
Loan
Withdrawal
Withdrawal Check
Cash
Demand deposit
Withdrawal
Cash reserves
Understanding Networked Applications
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A First Course

Questions about value tokens
• Who will back the value?
• How is fraud, counterfeiting, etc. prevented?
• Will value restored if lost or stolen?
• Is it subject to regulation?
• Who pays for the system?
• Is it traced?
Understanding Networked Applications
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A First Course

Policy dilemmas
• Multiplicity of incompatible payment systems?
• Tracing and auditing:
– Criminal prosecution
– Taxation vs
– Personal privacy
Understanding Networked Applications
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A First Course

Some privacy initiatives
• Open Profiling Standard
• TRUSTe
• Anonymous digital cash
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A First Course

Electronic credit and debit
• Standard authentication, confidentiality, and non-repudiation techniques can be used
– Asymmetric encryption and certificates
• Framework must take into account different institutions involved
• Example: Secure Electronic Transactions
(SET) of Visa/Mastercard
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A First Course

Participants
• Consumer (cardholder)
• Merchant
• Acquirer
: financial institution acting as transaction clearinghouse for merchant
• Issuer
: financial institution that issued consumer credit/debit card
• Association
: Visa or Mastercard
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A First Course

SET chain of trust
SET Root Association
Acquirer Merchant
(self-signed, included in all software)
Issuer
Understanding Networked Applications
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Cardholder
A First Course

SET order/payment protocol
Consumer Merchant Acquirer
Issuer initiate purchase authorize capture
Understanding Networked Applications
11 authorize capture
A First Course

Smartcard
Card that contains encapsulated electronics and can be used for various forms of electronic commerce (and other things)
Understanding Networked Applications
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A First Course

Prepaid smartcard options
• Memory card
– Memory plus password/PIN protection
• Shared-secret
– Mutual authentication of any terminal sharing the secret
• Signature-carrying
– Carries signatures created by institution
• Signature-creating
– Hardware to create signature based on secret key
Understanding Networked Applications
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A First Course

Smartcard merits
• Memory
– Closed system: single institution
– No authentication of terminal
• Shared-secret
– Requires encapsulated module in terminal, one to carry each card secret
– One secret per institution implies that all cards of that institution can be compromised
Understanding Networked Applications
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A First Course

Smartcard merits (con’t)
• Signature
– Terminals need only public keys
– Easy to handle multiple institutions
• All but signature-carrying have unique card identity, and hence institutions can invade privacy by linking transactions
Understanding Networked Applications
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A First Course

Hard vs. digital cash
Deposit
Withdraw
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A First Course

Digital cash
010110101101010111010110101
011010110101011010110101011
010101101010110111101011111
011010000000110101010110101
Since digital cash is represented by data, it is easily replicated. How do we prevent:
•Counterfeiting?
•Multiple spending?
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A First Course

What is a digital cash token?
Bit string
Unique identifier
Value attribute
Bank digital signature
Prevents spending more than once
Prevents counterfeiting
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A First Course

Financial institution perspective
Vault cash

Consumer’s demand deposit
Withdrawal
Branch ATM Digital branch
Digital cash liability

Currency in wallet
Payment
Merchant
Currency in smartcard
Deposit
Merchant’s demand deposit
May return as more digital cash
Understanding Networked Applications
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A First Course

Digital cash must be deposited
Hard currency Digital cash
Consumer wallet
Spend
Merchant
Deposit
Consumer smartcard
Merchant
Deposit
Withdraw as new digital cash
Understanding Networked Applications
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A First Course

Possible characteristics of digital cash
• Anonymity of consumer
– Merchant knows who paid, but that information is not inherent to the digital cash itself
– Financial institution knows what merchant deposited
• Attribution of cheating
– Double spending
• Authorized traces
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A First Course

Spending anonymity
Withdrawal
Payment
Deposit
Withdrawal and deposit are traceable, but can we break the chain somewhere?
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A First Course

Understanding Networked Applications:
A First Course
Supplements by
David G. Messerschmitt

Message digest
Message
MD algorithm
Message digest
• MD is a fixed length (128 or 160 bit) summary of message
• One way: message cannot be recovered from MD
• Collision-free: computationally infeasible to find a message corresponding to a given MD
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A First Course

Digital signature based on a message digest
Message MD
Encrypt secret key
Decrypt public key
Compare
Signature generation
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MD
Signature checking
A First Course

Consumer
Offer
Dual signature
Merchant
Merchant can verify binding of offer and authorization, does not see authorization
Acquirer
MD
MD
Dual signature
Payment authorization
Understanding Networked Applications
Acquirer can verify binding of offer and authorization, does not see offer
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A First Course

Spending anonymity
Create $$, including identifier
Repeat n times
Cut and choose one
Blind signature
If the consumer’s software creates the digital cash, and the bank signs it blindly, the bank will not see the identifier. The cut and choose protocol assures the bank the $$ is proper.
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A First Course

Blind signature analogy
Carbon
Token
Consumer gets bank to sign cash token without observing contents
$$
$$
Remove token from envelope
Put token and carbon in envelope
Present to bank for embossing
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A First Course

Cut and choose protocol
$$
Randomly choose one, check others
$$
Although the bank can’t see what it is signing, with the cut and choose the incentive for the consumer is to generate legitimate instances of digital cash.
Blind signature
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A First Course