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Essential Economics
Ganesh Narvane
Contents
Articles
Banking Ombudsman Scheme 1
Bharat Nirman 2
Cheque 6
Negotiable instrument 23
Letter of credit 28
Commercial paper 35
Traveler's cheque 39
Bitcoin 43
Promissory note 60
Debt 63
References
Article Sources and Contributors 71
Image Sources, Licenses and Contributors 73
Article Licenses
License 74
Banking Ombudsman Scheme
1
Banking Ombudsman Scheme
Banking Ombudsman
[1]
is a quasi judicial authority functioning under Indias Banking Ombudsman Scheme 2006,
and the authority was created pursuant to the a decision by the Government of India to enable resolution of
complaints of customers of banks relating to certain services rendered by the banks. The Banking Ombudsman
Scheme was first introduced in India in 1995, and was revised in 2002. The current scheme became operative from 1
January 2006, and replaced and superseded the banking Ombudsman Scheme 2002. From 2002 until 2006, around
36,000 complaints have been dealt by the Banking Ombudsmen.
Type of complaints
The type and scope of the complaints which may be considered by a Banking Ombudsman is very
comprehensive, and it has been empowered to receive and consider complaints pertaining to the following:
Non-payment or inordinate delay in the payment or collection of cheques, drafts, bills, etc.;
Non-acceptance, without sufficient cause, of small denomination notes tendered for any purpose, and for charging
of commission for this service;
Non-acceptance, without sufficient cause, of coins tendered and for charging of commission for this service;
Non-payment or delay in payment of inward remittances ;
Failure to issue or delay in issue, of drafts, pay orders or bankers cheques;
Non-adherence to prescribed working hours;
Failure to honour guarantee or letter of credit commitments;
Failure to provide or delay in providing a banking facility (other than loans and advances) promised in writing by
a bank or its direct selling agents;
Delays, non-credit of proceeds to parties' accounts, non-payment of deposit or non-observance of the Reserve
Bank directives, if any, applicable to rate of interest on deposits in any savings, current or other account
maintained with a bank ;
Delays in receipt of export proceeds, handling of export bills, collection of bills etc., for exporters provided the
said complaints pertain to the bank's operations in India;
Refusal to open deposit accounts without any valid reason for refusal;
Levying of charges without adequate prior notice to the customer;
Non-adherence by the bank or its subsidiaries to the instructions of Reserve Bank on ATM/debit card operations
or credit card operations;
Non-disbursement or delay in disbursement of pension to the extent the grievance can be attributed to the action
on the part of the bank concerned, (but not with regard to its employees);
Refusal to accept or delay in accepting payment towards taxes, as required by Reserve Bank/Government;
Refusal to issue or delay in issuing, or failure to service or delay in servicing or redemption of Government
securities;
Forced closure of deposit accounts without due notice or without sufficient reason;
Closure of account without customer concern.
Refusal to close or delay in closing the accounts;
Non-adherence to the fair practices code as adopted by the bank; and
Financial lose incurred to customer due to wrong information given by bank official.
Banking Ombudsman Scheme
2
Any other matter relating to the violation of the directives issued by the Reserve Bank in relation to banking or
other services.
complaints from Non-Resident Indians having accounts in India in relation to their remittances from abroad,
deposits and other bank-related matters;
[2]
Vide their Circular No.CSD.BOS.4638/13.01.01/2006-07 dated May 24, 2007, the Reserve Bank of India has
amended their Banking Ombudsman Scheme, 2006 and the scheme shall be operative with amended effect.
References
[1] http:/ / bankingombudsman.rbi. org.in/
[2] http:/ / www. rbi. org. in/ Scripts/ FAQView. aspx?Id=24
Bharat Nirman
Bharat Nirman is an Indian business plan for creating and augmenting basic rural infrastructure.
[1]
It comprises
projects on irrigation, roads (Pradhan Mantri Gram Sadak Yojana), housing (Indira Awaas Yojana), water supply
(National Rural Drinking Water Programme), electrification (Rajiv Gandhi Grameen Vidyutikaran Yojana) and
telecommunication connectivity.
Objectives
Bharat Nirman is a business plan for rural infrastructure which was implemented by the Government of India in
order to provide some basic amenities to the rural India. The objectives of the plan are as followings.
It aims at providing safe drinking water to all the under developed areas in India by 2012.
It also aims to develop housing facilities for the poor. Initially the scheme targeted 60 lakh additional houses to be
constructed for the poor within the year 2009, but now the plan has been extended to 2014 and the targeted house
to be constructed has been increased to 1.2 crore.
The plan also includes to cover 40% of the rural area with telecommunication facilities by the year 2014 and
provide broadband coverage to all the 2.5 lakh Panchayats by the year 2012.
The plans suggests to construct all weather roads by the year 2012 in order to connect all the villages of India
having a minimum population of 500 ( 250 in case of hilly or tribal areas).
The plan aims to provide electricity to every village by the year 2012.
The plan aims to provide an additional one crore hectare of irrigational land by the year 2012.
Sub Divisions of Bharat Nirman
Bharat Nirman have been sub-divided into six parts. The Government of India will try to improve the infrastructural
facilities of these six sections individually which will result in the overall development of the infrastructural facilities
of the country.
Waters
Roads
Housing
Telephone
Electricity
Irrigation
Bharat Nirman
3
Water Supply
Bharat Nirman was launched by the Government of India in 2005. Providing rural areas with safe drinking water
facilities was one of the key objectives of the plan. It got implemented during 2005-06 to 2008-09. The plan aimed to
cover 55,067 un-covered and 3.31 lakh under developed areas with safe drinking water facilities. It also aimed to
improve the quality standard of drinking water of 2.17 lakh areas which had poor quality water supplies.
Bharat Nirman - Rural Drinking Water, Target and Achievement
During(2005-06 TO 2008-09)
Sl. No. State/UT TARGET ( BALANCE AS ON 1.4.2005) COVERAGE
Uncovered Slipped
Back
Quality affected
Habs
Total Uncovered Slipped
Back
Quality affected
Habs
Total
1 ANDHRA PR. 0 29744 4050 33794 0 28598 2611 31209
2 ARUNACHAL PR. 668 2752 0 3420 668 870 401 1939
3 ASSAM 7375 10636 8119 26130 7375 8829 2478 18682
4 BIHAR 0 47597 776 48373 0 42705 6306 49011
5 CHHATTISGARH 0 19007 5021 24028 0 29547 1042 20589
6 GOA 6 0 0 6 6 1 0 7
7 GUJARAT 36 4389 8717 13142 36 6046 3551 9633
8 HARYANA 0 2506 361 2867 0 2860 205 3065
9 HIMACHAL PR. 6891 9308 0 16199 6891 9653 0 16544
10 J & K 3211 3138 49 6398 3211 782 0 3993
11 JHARKHAND 0 17225 168 17393 0 17005 457 17462
12 KARNATAKA 5618 809 21008 27435 5618 8578 3238 17434
13 KERALA 7573 421 867 8861 7573 3946 691 12210
14 M.P. 0 37269 5381 42650 0 38512 559 39071
15 MAHARASHTRA 17738 11579 3787 33104 17738 13987 3622 35347
16 MANIPUR 0 80 37 117 0 517 0 517
17 MEGHALAYA 251 4341 160 4752 251 3562 98 3911
18 MIZORAM 112 271 26 409 112 363 26 501
19 NAGALAND 731 202 157 1090 731 614 46 1391
20 ORISSA 0 14900 32254 47154 0 39902 5124 45026
21 PUNJAB 1931 5247 2093 9271 1786 2198 703 4687
22 RAJASTHAN 2300 33680 41072 77052 1871 26897 5355 34123
23 SIKKIM 74 783 0 857 74 510 0 584
24 TAMIL NADU 0 44080 5574 49654 0 33123 1300 34423
25 TRIPURA 0 651 7031 7682 0 825 683 1508
26 UTTAR
PRADESH
0 19886 5062 24948 0 24629 3853 28482
27 UTTRANCHAL 272 7562 0 7839 237 5611 0 5848
28 WEST BENGAL 0 3536 65156 68692 0 7625 7728 15363
Bharat Nirman
4
29 A & N ISLANDS 102 0 26 128 94 0 0 94
30 D & N HAVELI 60 0 0 60 60 0 0 60
31 DAMAN & DIU 0 0 0 0 0 0 0 0
32 DELHI 0 0 0 0 0 0 0 0
33 LAKSHADWEEP 10 0 0 10 0 0 0 0
34 PONDICHERRY 108 0 16 124 108 57 91 256
35 0 0 0 0 0 0 0 0 0
Example TOTAL 55067 331604 216968 603639 54440 358362 50168 462970
Actually covered habitation. in earlier report coverage includes habitations of ongoing schemes making total of
310698 habitations.
Pradhan Mantri Gram Sadak Yojana marker in a
village in Punjab
Roads
The Government of India has several plans policies in order to improve
the infrastructural facilities of rural roads.
Pradhan Mantri Gram Sadak Yojana
The Pradhan Mantri Gram Sadak Yojana (PMGSY) was launched on
December 25, 2000. The primary objective of PMGSY is to provide
good quality all-weather roads in all the rural areas where urban-rural
road connectivity is found to be very weak.
[2]
All unconnected
habitations with a population of more than 500 persons has been
provided connectivity by 2007.
[3]
Housing
The main objective is to provide housing facilities to the rural areas of India. According to the plan the government
of India will construct 60 lac houses for the rural areas by 2009. The scheme under this is named as Indira Awaas
Yojana and is governed by the Ministry of Rural Development. It is mainly sponsored by the central government.
The ratio of the sponsorship between the center and the state is 75:25.
Telephone
This plan aims to supply telecommunication facilities to remote areas of rural areas. It aims in increasing the rural
telecommunication facilities by 40%. It also aims to supply broadband and Bharat Nirman Seva Kendras in 2.5 lac
Panchayats. According to this plan the government of India will connect each and every village by
telecommunication facilities. The plan is taken care of by the Department of Telecom which fall under the Ministry
of Communication and Information Technology. There are 66,822 villages which are still left to be covered.
Rural Teledensity (for the month of February 2011)
Bharat Nirman
5
SL.No. Circle/State Percentage of Rural Teledensity as
on March 31, 2009
Percentage of Rural Teledensity as on
February 28, 2011
1 ANDAMAN & NICOBAR 16.57 31.75%
2 ANDHRA PRADESH 15.22 33.19%
3 ASSAM 9.36 23.36%
4 BIHAR 9.17 26.41%
5 CHHATTISGARH 1.81 2.77%
6 GUJARAT 25.21 45.81%
7 HARYANA 28.10 51.36%
8 HIMACHAL PRADESH 40.47 68.68%
9 JAMMU & KASHMIR 16.72 29.13%
10 JHARKHAND 1.44 2.35%
11 KARNATAKA 14.36 34.26%
12 KERALA 35.43 52.65%
13 MADHYA PRADESH 11.07 28.95%
14 MAHARASHTRA (including Goa) 21.70 45.25%
15 NORTH-EAST- I (comprising Meghalaya, Mizoram
& Tripura)
14.67 50.34%
16 NORTH-EAST- II (comprising Arunachal Pradesh,
Manipur & Nagaland)
3.69 7.78%
17 ORISSA 12.55 28.07%
18 PUNJAB 33.11 55.45%
19 RAJASTHAN 16.71 38.14%
20 TAMIL NADU 25.62 47.53%
21 UTTARAKHAND 6.04 9.46%
22 UTTAR PRADESH 10.24 26.47%
23 WEST BENGAL (including Sikkim) 13.50 35.22%
24 KOLKATA - -
25 CHENNAI - -
26 DELHI - -
27 MUMBAI - -
ALL- INDIA 15.11 32.99%
Bharat Nirman
6
References
[1] Official Website of Bharat Nirman (http:/ / www.bharatnirman. gov. in/ )
[2] Pradhan Mantri Gram Sadak Yojna http:/ / www.india. gov. in/ sectors/ rural/ pradhan_manthri. php
[3] http:/ / rural. nic.in/ annual0203/ chap-3. pdf
official website of Bharat Nirman (http:/ / www. bharatnirman. gov. in)
Cheque
A cheque with Thomas Jefferson as payee and
payor from 1809
A cheque from 1905
A cheque from 1933
A cheque sample from Canada 2006
A cheque (or check in American English) is a document
[1]
that orders a payment of money from a bank account. The
person writing the cheque, the drawer, has a transaction
banking account (often called a current, cheque, chequing or
checking account) where their money is held. The drawer
writes the various details including the monetary amount,
date, and a payee on the cheque, and signs it, ordering their
bank, known as the drawee, to pay that person or company
the amount of money stated.
Cheques are a type of bill of exchange and were developed as
a way to make payments without the need to carry large
amounts of money. While paper money evolved from
promissory notes, another form of negotiable instrument,
similar to cheques in that they were originally a written order
to pay the given amount to whoever had it in their possession
(the "bearer").
Technically, a cheque is a negotiable instrument
[2]
instructing
a financial institution to pay a specific amount of a specific
currency from a specified transactional account held in the
drawer's name with that institution. Both the drawer and
payee may be natural persons or legal entities. Specifically,
cheques are order instruments, and are not in general payable
simply to the bearer (as bearer instruments are) but must be
paid to the payee. In some countries, such as the US, the
payee may endorse the cheque, allowing them to specify a
third party to whom it should be paid.
Although forms of cheques have been in use since ancient
times and at least since the 9th century, it was during the 20th
century that cheques became a highly popular non-cash
method for making payments and the usage of cheques
peaked. By the second half of the 20th century, as cheque
processing became automated, billions of cheques were
issued annually; these volumes peaked in or around the early
1990s. Since then cheque usage has fallen, being partly replaced by electronic payment systems. In an increasing
number of countries cheques have either become a marginal payment system or have been completely phased out.
Cheque
7
Numismatics
Currency
Coins
Banknotes
Forgery
List
ISO
Circulating currencies
Africa
The Americas
Europe
Asia
Oceania
Local currencies
Company scrip
Coal scrip
LETS
Time dollars
Fictional currencies
History
Historical currencies
Greek
Roman
China
India
Byzantine
Medieval currencies
Production
Mint
Designers
Coining
Milling
Hammering
Cast
Exonumia
Credit cards
Medals
Tokens
Cheques
Notaphily
Banknotes
Scripophily
Cheque
8
Stocks
Bonds
Terminology
Numismatics
portal
v
t
e
[3]
Spelling and etymology
The spellings check, checque, and cheque were used interchangeably from the 17th century until the 20th century.
However, since the 19th century, the spelling cheque (from the French word chque) has become standard for the
financial instrument in the Commonwealth and Ireland, while check is used only for other meanings, thus
distinguishing the two definitions in writing.
[4]
</ref>
In American English, the usual spelling for both is check.
[5]
Etymological dictionaries attribute the financial meaning to come from "a check against forgery," with the use of
"check" to mean "control" stemming from a check in chess, a term which came into English through French, Latin,
Arabic and ultimately from the Persian word "shah" or "king."
History
See also: History of banking
The cheque had its origins in the ancient banking system, in which bankers would issue orders at the request of their
customers, to pay money to identified payees. Such an order was referred to as a bill of exchange. The use of bills of
exchange facilitated trade by eliminating the need for merchants to carry large quantities of currency (for example,
gold) to purchase goods and services.
Early years
In India, during the Mauryan period (from 321 to 185 BC), a commercial instrument called adesha was in use, which
was an order on a banker desiring him to pay the money of the note to a third person, which corresponds to the
definition of a bill of exchange as we understand it today. During the Buddhist period, there was considerable use of
these instruments. Merchants in large towns gave letters of credit to one another. There are also numerous references
to promissory notes.
The ancient Romans are believed to have used an early form of cheque known as praescriptiones in the 1st century
BC.
Muslim traders are known to have used the cheque or akk system since the time of Harun al-Rashid (9th century) of
the Abbasid Caliphate. Transporting a paper saqq was more secure than transporting money. In the 9th century, a
merchant in country A could cash a saqq drawn on his bank in country B.
[6]
In the 13th century in Venice the bill of exchange was developed as a legal device to allow international trade
without the need to carry large amounts of gold and silver. Their use subsequently spread to other European
countries.
In the early 1500s in the Dutch Republic, to protect large accumulations of cash, people began depositing their
money with "cashiers". These cashiers held the money for a fee. Competition drove cashiers to offer additional
services including paying money to any person bearing a written order from a depositor to do so. They kept the note
as proof of payment. This concept went on to spread to England and elsewhere.
Cheque
9
Modern era
By the 17th century, bills of exchange were being used for domestic payments in England. Cheques, a type of bill of
exchange, then began to evolve. Initially they were called drawn notes, because they enabled a customer to draw on
the funds that he or she had in the account with a bank and required immediate payment. These were handwritten,
and one of the earliest known still to be in existence was drawn on Messrs Morris and Clayton, scriveners and
bankers based in the City of London, and dated 16 February 1659.
In 1717, the Bank of England pioneered the first use of a pre-printed form. These forms were printed on "cheque
paper" to prevent fraud, and customers had to attend in person and obtain a numbered form from the cashier. Once
written, the cheque was brought back to the bank for settlement. The suppression of banknotes in eighteenth-century
England further promoted the use of cheques.
[7]
Until about 1770, an informal exchange of cheques took place between London banks. Clerks of each bank visited
all the other banks to exchange cheques, whilst keeping a tally of balances between them until they settled with each
other. Daily cheque clearing began around 1770 when the bank clerks met at the Five Bells, a tavern in Lombard
Street in the City of London, to exchange all their cheques in one place and settle the balances in cash. See bankers'
clearing house for further historical developments.
In 1811, the Commercial Bank of Scotland, it is thought, was the first bank to personalise its customers' cheques, by
printing the name of the account holder vertically along the left-hand edge. In 1830 the Bank of England introduced
books of 50, 100, and 200 forms and counterparts, bound or stitched. These cheque books became a common format
for the distribution of cheques to bank customers.
In the late 19th century, several countries formalised laws regarding cheques. The UK passed the Bills of Exchange
Act in 1882, and India passed the Negotiable Instruments Act (NI Act) 1881; which both covered cheques.
An English cheque from 1956 having a bank clerk's red mark
verifying the signature, a two-pence stamp duty, and holes punched
by hand to cancel it. This is a "crossed cheque" disallowing transfer
of payment to another account.
In 1931 an attempt was made to simplify the
international use of cheques by the Geneva Convention
on the Unification of the Law Relating to Cheques.
[8]
Many European and South American states as well as
Japan joined the convention. However, countries
including the U.S. and members of the British
Commonwealth, did not participate and so it remained
very difficult for cheques to be used across country
borders.
In 1959 a standard for machine-readable characters
(MICR) was agreed and patented in the U.S. for use
with cheques. This opened the way for the first
automated reader/sorting machines for clearing cheques. As automation increased, the following years saw a
dramatic change in the way in which cheques were handled and processed. Cheque volumes continued to grow; in
the late 20th century, cheques were the most popular non-cash method for making payments, with billions of them
processed each year. Most countries saw cheque volumes peak in the late 1980s or early 1990s, after which
electronic payment methods became more popular and the use of cheques declined.
In 1969 cheque guarantee cards were introduced in several countries, allowing a retailer to confirm that a cheque
would be honoured when used at a point of sale. The drawer would sign the cheque in front of the retailer, who
would compare the signature to the signature on the card and then write the cheque-guarantee-card number on the
back of the cheque. Such cards were generally phased out and replaced by debit cards, starting in the mid-1990s.
From the mid-1990s, many countries enacted laws to allow for cheque truncation, in which a physical cheque is
converted into electronic form for transmission to the paying bank or clearing-house. This eliminates the
cumbersome physical presentation and saves time and processing costs.
Cheque
10
In 2002, the Eurocheque system was phased out and replaced with domestic checking systems. Old eurocheques
could still be used, however they were now processed by national checking systems. At that time, a number of
countries such as Germany took the opportunity to phase out the use of cheques altogether. As of 2010, many
countries have either phased out the use of cheques altogether or signaled that they would do so in the future.
Parts of a cheque
Parts of a cheque based on a UK example drawee, the financial institution where the
cheque can be presented for paymentpayeedate of issueamount of currencydrawer, the
person or entity making the chequesignature of drawerMachine readable routing and
account information
The four main items on a cheque are
Drawer, the person or entity who
makes the cheque
Payee, the recipient of the money
Drawee, the bank or other financial
institution where the cheque can be
presented for payment
Amount, the currency amount
As cheque usage increased during the
19th and 20th centuries additional
items were added to increase security
or to make processing easier for the
bank or financial institution. A
signature of the drawer was required to
authorise the cheque and this is the main way to authenticate the cheque. Second it became customary to write the
amount in words as well as in numbers to avoid mistakes and make it harder to fraudulently alter the amount after
the cheque had been written. It is not a legal requirement to write down the amount in words, although some banks
will refuse to accept cheques that do not have the amount in both numbers and words.
An issue date was added, and cheques may not be valid a certain amount of time after issue. In the US and Canada a
cheque is typically valid for six months after the date of issue, after which it is a stale-dated cheque, but this depends
on where the cheque is drawn; in Australia this is typically fifteen months. A cheque that has an issue date in the
future, a post-dated cheque, may not be able to be presented until that date has passed, writing a post dated cheque
may simply be ignored or is illegal in some countries. Conversely, an antedated cheque has an issue date in the past.
A cheque number was added and cheque books were issued so that cheque numbers were sequential. This allowed
for some basic fraud detection by banks and made sure one cheque was not presented twice.
In some countries such as the US, cheques contain a memo line where the purpose of the cheque can be indicated as
a convenience without affecting the official parts of the cheque. In the United Kingdom this is not available and such
notes are sometimes written on the reverse side of the cheque.
In the US, at the top (when cheque oriented vertically) of the reverse side of the cheque, there are usually one or
more blank lines labelled something like "Endorse here".
Starting in the 1960s machine readable routing and account information was added to the bottom of cheques in
MICR format. This allowed automated sorting and routing of cheques between banks and led to automated central
clearing facilities. The information provided at the bottom of the cheque is country specific and is driven by each
country's cheque clearing system. This meant that the payee no longer had to go to the bank that issued the cheque,
instead they could deposit it at their own bank or any other banks and the cheque would be routed back to the
originating bank and funds transferred to their own bank account.
For additional protection, a cheque can be crossed so that funds must be paid into a bank account in the name of the
payee. The format and wording varies from country to country, but generally two parallel lines and/or the words
'Account Payee' or similar may be placed either vertically across the cheque or in the top left hand corner. In addition
Cheque
11
the words 'or bearer' must be not be used or crossed out on the payee line.
Attached documents
Stubs may be retained as a record of the cheque
being written.
Cheques sometimes include additional documents. A page in a
chequebook may consist of both the cheque itself and a stub or
counterfoil when the cheque is written, only the cheque itself is
detached, and the stub is retained in the chequebook as a record of the
cheque. Alternatively, cheques may be recorded in a separate ledger,
such as at the back of a chequebook.
When a cheque is mailed, a separate letter or "remittance advice" may
be attached to inform the recipient of the purpose of the cheque
formally, which account receivable to credit the funds to. This is
frequently done formally using a provided slip when paying a bill, or
informally via a letter when sending an ad hoc cheque.
Usage
Parties to regular cheques generally include a drawer, the depositor writing a cheque; a drawee, the financial
institution where the cheque can be presented for payment; and a payee, the entity to whom the drawer issues the
cheque. The drawer drafts or draws a cheque, which is also called cutting a cheque, especially in the US. There may
also be a beneficiaryfor example, in depositing a cheque with a custodian of a brokerage account, the payee will
be the custodian, but the cheque may be marked "F/B/O" ("for the benefit of") the beneficiary.
Ultimately, there is also at least one endorsee which would typically be the financial institution servicing the payee's
account, or in some circumstances may be a third party to whom the payee owes or wishes to give money.
Cheques may be valid regardless of denomination and are used
within numerous scenarios in place of cash.
A payee that accepts a cheque will typically deposit it
in an account at the payee's bank, and have the bank
process the cheque. In some cases, the payee will take
the cheque to a branch of the drawee bank, and cash the
cheque there. If a cheque is refused at the drawee bank
(or the drawee bank returns the cheque to the bank that
it was deposited at) because there are insufficient funds
for the cheque to clear, it is said that the cheque has
bounced. Once a cheque is approved and all appropriate
accounts involved have been credited, the cheque is
stamped with some kind of cancellation mark, such as a
"paid" stamp. The cheque is now a cancelled cheque.
Cancelled cheques are placed in the account holder's
file. The account holder can request a copy of a
cancelled cheque as proof of a payment. This is known as the cheque clearing cycle.
Cheques can be lost or go astray within the cycle, or be delayed if further verification is needed in the case of
suspected fraud. A cheque may thus bounce some time after it has been deposited.
Following concerns about the amount of time it took banks to clear cheques, the United Kingdom Office of Fair
Trading set up a working group in 2006 to look at the cheque clearing cycle. Their report acknowledged that clearing
times could be improved, but that the costs associated with speeding up the cheque clearing cycle could not be
justified considering the use of cheques was declining. However, they concluded the biggest problem was the
Cheque
12
unlimited time a bank could take to dishonor a cheque. To address this, changes were implemented so that the
maximum time after a cheque was deposited that it could be dishonoured was six days, what was known as the
"certainty of fate" principle; see Cheque and Credit Clearing Company and "2-4-6".
An advantage to the drawer of using cheques instead of debit card transactions, is that they know the drawer's bank
will not release the money until several days later. Paying with a cheque and making a deposit before it clears the
drawer's bank is called "kiting" or "floating" and is generally illegal in the US, but rarely enforced unless the drawer
uses multiple chequing accounts with multiple institutions to increase the delay or to steal the funds.
Declining use
Cheques have been in decline for some years, both for point of sale transactions (for which credit cards and debit
cards are increasingly preferred) and for third party payments (for example, bill payments), where the decline has
been accelerated by the emergence of telephone banking and online banking. Being paper-based, cheques are costly
for banks to process in comparison to electronic payments, so banks in many countries now discourage the use of
cheques, either by charging for cheques or by making the alternatives more attractive to customers. Cheques are also
more costly for the issuer and receiver of a cheque.Wikipedia:Citation needed In particular the handling of money
transfer requires more effort and is time consuming. The cheque has to be handed over on a personal meeting or has
to be sent by mail. The rise of automated teller machines (ATMs) means that small amounts of cash are often easily
accessible, so that it is sometimes unnecessary to write a cheque for such amounts instead.
Alternatives to cheques
In addition to cash there are number of other payment systems that have emerged to compete against cheques;
1. Debit card payments
2. 2. Credit card payments
3. Direct debit (initiated by payee)
4. Direct credit (initiated by payer), ACH in US, giro in Europe, Direct Entry in Australia
5. Wire transfer (local and international)
6. Electronic bill payments using Internet banking
7. Online payment services (for example PayPal and WorldPay)
8. Cryptocurrency (for example Bitcoin and Litecoin)
Europe
In most European countries, cheques are now rarely used, even for third party payments. In these countries, it is
standard practice for businesses to publish their bank details on invoices, to facilitate the receipt of payments by giro.
Even before the introduction of online banking, it has been possible in some countries to make payments to third
parties using ATMs, which may accurately and rapidly capture invoice amounts, due dates, and payee bank details
via a bar code reader to reduce keying. In some countries, entering the bank account number results in the bank
revealing the name of the payee as an added safeguard against fraud. In using a cheque, the onus is on the payee to
initiate the payment, whereas with a giro transfer, the onus is on the payer to effect the payment (The writer of a
paper cheque is pushing on a rope: he cannot force money out of his own account and into the destination's account.
By writing the paper cheque, he is handing the far end of the rope to the payee, who will pull in his own good time.
In contrast, giro is more akin to wire transfer, in that the payer pushes his money away towards the payee). The
process is also procedurally more simple, as no cheques are ever posted, can claim to have been posted, or need
banking or clearance.
In Germany, Austria, the Netherlands, Belgium, and Scandinavia, cheques have almost completely vanished in
favour of direct bank transfers and electronic payments. Direct bank transfers, using so-called giro transfers, have
been standard procedure since the 1950s to send and receive regular payments like rent and wages and even
Cheque
13
mail-order invoices. In the Netherlands, Austria, and Germany, all kinds of invoices are commonly accompanied by
so-called acceptgiro's (Netherlands) or berweisungen (German), which are essentially standardised bank transfer
order forms preprinted with the payee's account details and the amount payable. The payer fills in his account details
and hands the form to a clerk at his bank, which will then transfer the money. It is also very common to allow the
payee to automatically withdraw the requested amount from the payer's account (Lastschrifteinzug (German) or
Incasso (machtiging) (Netherlands)). Though similar to paying by cheque, the payee only needs the payer's bank and
account number. Since the early 1990s, this method of payment has also been available to merchants. Due to this,
credit cards are rather uncommon in Germany, Austria and the Netherlands, and are mostly used to give access to
credit rather than as a payment mechanism. However, debit cards are widespread in these countries, since virtually
all Austrian, German and Dutch banks issue debit cards instead of simple ATM cards for use on current accounts.
Acceptance of cheques has been further diminished since the late 1990s, because of the abolition of the Eurocheque.
Cashing a foreign bank cheque is possible, but usually very expensive.
In Finland, banks stopped issuing personal cheques in about 1993 in favour of giro systems, which are now almost
exclusively electronically initiated either via internet banking or payment machines located at banks and shopping
malls. All Nordic countries have used an interconnected international giro system since the 1950s, and in Sweden,
cheques are now almost totally abandoned. Electronic payments across the European Union are now fast and
inexpensiveusually free for consumers.
In Poland cheques were withdrawn from use in 2006, mainly because of lack of popularity due to the widespread
adoption of credit and debit cards.
In the United Kingdom, Ireland, and France, some people still use cheques, partly because cheques remain free of
charge to personal customers; however, bank-to-bank transfers are increasing in popularity. Since 2001, businesses
in the United Kingdom have made more electronic payments than cheque payments. Most utilities in the United
Kingdom charge lower prices to customers who pay by direct debit than for other payment methods, including
electronic methods. The vast majority of retailers in the United Kingdom and many in France no longer accept
cheques as a means of payment. For example Shell announced in September 2005 that it would no longer accept
cheques in its UK petrol stations. More recently, this has been followed by other major fuel retailers, such as Texaco,
BP, and Total. Asda announced in April 2006 that it would stop accepting cheques, initially as a trial in the London
area, and Boots announced in September 2006 that it would stop accepting cheques, initially as a trial in Sussex and
Surrey. Currys (and other stores in the DSGi group) and WH Smith also no longer accept cheques. Cheques are now
widely predicted to become a thing of the past, or at most, a niche product used to pay private individuals or for the
very large number of small service providers who are not used to providing their bank details to customers to allow
electronic payments to be made to them, and/or do not wish to be burdened with checking their bank account
frequently and reconciling their contents with amounts due (for example, music teachers, driving instructors,
children's sports lessons, small shops, schools). The UK Payments Council announced in December 2009 that
cheques would be phased out by October 2018, but only if adequate alternatives are developed. They intended to
perform annual checks on the progress of other payments systems and a final review of the decision would have been
held in 2016. Concerns were expressed, however, by charities and older people, who are still heavy users of cheques,
and replacement plans have been criticised as open to fraud. However it was announced by the UK Payment's
Council in July 2011 that the cheque will not be eliminated as a paper-initiated payment.
In June 2014, following a successful trial in the UK by Barclays, the British government gave the go-ahead for a
cheque photo plan allowing people to pay in a cheque by simply taking a photo of a it, rather than physically
depositing the paper cheque at a bank.
Cheque
14
North America
The US still relies heavily on cheques, due to the convenience it affords payers, and due to the absence of a high
volume system for low value electronic payments. About 70 billion cheques were written annually in the US by
2001, though around 17 million adult Americans do not have bank accounts at all. When sending a payment by
online banking in the US at some banks, the sending bank mails a cheque to the payee's bank or to the payee rather
than sending the funds electronically.Wikipedia:Citation needed Certain companies whom a person pays with a
cheque will turn it into an Automated Clearing House (ACH) or electronic transaction. Banks try to save time
processing cheques by sending them electronically between banks. Cheque clearing is usually done through an
electronic cheque broker, such as The Clearing House, Viewpointe LLC or the Federal Reserve Banks. Copies of the
cheques are stored at a bank or the broker, for periods up to 99 years, and this is why some cheque archives have
grown to 20 petabytes. The access to these archives is now world wide, as most bank programming is now done
offshore. Many utilities and most credit cards will also allow customers to pay by providing bank information and
having the payee draw payment from the customer's account (direct debit). Many people in the US still use paper
money orders to pay bills or transfer money which is a unique type of cheque. They have security advantages over
mailing cash, and do not require access to a bank account.
Canada's usage of cheques is less than that of the US and is declining rapidly. The Canadian Payments Association
reported that in 2012, cheque use in Canada accounted for only 40% of total financial transactions. The Interac
system, which allows instant fund transfers via chip or magnetic strip and PIN, is widely used by merchants to the
point that few brick and mortar merchants accept cheques. Many merchants accept Interac debit payments but not
credit card payments, even though most Interac terminals can support credit card payments. Financial institutions
also facilitate transfers between accounts within different institutions with the Email Money Transfer (EMT) service.
Cheques are still widely used for government cheques, payroll, rent, and utility bill payments, though direct deposits
and online/telephone bill payments are also widely and increasingly used.
The Canadian government has said it will be phasing out all government cheques by April 2016.
[9]
Asia
In many Asian countries cheques were never widely used and generally only used by the wealthy, with cash being
used for the majority of payments. Where cheques were used they have been declining rapidly, by 2009 there was
negligible consumer cheque usage in Japan, South Korea and Taiwan. This declining trend was accelerated by these
developed markets advanced financial services infrastructure. Many of the developing countries in Asia have seen an
increasing use of electronic payment systems, 'leap-frogging' the less efficient chequeing system altogether.
India is one of the few countries in Asia that did have significant cheque usage. It had a long tradition of using
cheques and passed laws to formalise cheque usage as early as 1881. As of 2009 there was still wide usage of
cheques as payment method in trade, and also by individuals when paying other individuals or for paying utility
bills. One of the reasons was that banks usually provided cheques for free to their individual account holders.
However cheques are now rarely accepted at point of sale in retail stores where cash and cards are payment methods
of choice. Electronic payment transfer continued to gain popularity in India and like other countries this has caused a
subsequent reduction in volumes of cheques issued each year. In 2009 the Reserve Bank of India reported there had
been five percent decline in cheque usage compared to the previous year.
Cheque
15
Oceania
In Australia, following global trends, the use of cheques continues to decline. In 1994 the value of daily cheque
transactions was A$25billion; by 2004 this had dropped to only A$5billion, almost all of this for B2B transactions.
Personal cheque use is practically non-existent thanks to the longstanding use of the EFTPOS system, BPAY,
Electronic transfers and debit cards.
In New Zealand, payments by cheque have declined since the mid-1990s in favour of electronic payment methods.
In 1993, cheques accounted for over half of transactions through the national banking system, with an annual
average of 130 cheques per capita. By 2006 cheques lagged well behind EFTPOS (debit card) transaction and
electronic credits, making up only nine percent of transactions, with an annual average of 41 cheque transaction per
capita. Most retail stores no longer accept cheques, and those that do often require government-issued identification
or a store-issued "cheque identification card" before they can be accepted as payment.
Variations on regular cheques
In addition to regular cheques, a number of variations were developed to address specific needs or to address issues
when using a regular cheque.
Cashiers cheques and bank drafts
Main article: Cashier's check
Cashier's cheques and banker's drafts also known as a bank cheque, treasurer's cheque or banker's cheque, are
cheques issued against the funds of a financial institution rather than an individual account holder. Typically, the
term cashier's cheques are used in the US and banker's drafts are used in the UK and most of the Commonwealth.
The mechanism differs slightly from country to country but in general the bank issuing the cashiers cheque or
bankers draft will allocate the funds at the point the cheque is drawn. This provides a guarantee, save for a failure of
the bank, that it will be honoured. Cashier's cheques are perceived to be as good as cash but they are still a cheque, a
misconception sometimes exploited by scam artists. A lost or stolen cheque can still be stopped like any other
cheque, so payment is not completely guaranteed.
Certified cheque
Main article: Certified cheque
When a certified cheque is drawn, the bank operating the account verifies there are currently sufficient funds in the
drawer's account to honour the cheque. Those funds are then set aside in the bank's internal account until the cheque
is cashed or returned by the payee. Thus, a certified cheque cannot "bounce", and its liquidity is similar to cash,
absent failure of the bank. The bank indicates this fact by making a notation on the face of the cheque (technically
called an acceptance).
Payroll cheque
Main article: Paycheck
A cheque used to pay wages may be referred to as a payroll cheque. Even when the use of cheques for paying wages
and salaries became rare, the vocabulary "pay cheque" still remained commonly used to describe the payment of
wages and salaries. Payroll cheques issued by the military to soldiers, or by some other government entities to their
employees, beneficiants, and creditors, are referred to as warrants.
Cheque
16
Warrants
Main article: Warrant of payment
Warrants look like cheques and clear through the banking system like cheques, but are not drawn against cleared
funds in a deposit account. A cheque differs from a warrant in that the warrant is not necessarily payable on demand
and may not be negotiable. They are often issued by government entities such as the military to pay wages or
suppliers. In this case they are an instruction to the entity's treasurer department to pay the warrant holder on demand
or after a specified maturity date.
Travellers cheque
Main article: Traveller's cheque
A traveller's cheque is designed to allow the person signing it to make an unconditional payment to someone else as
a result of paying the account holder for that privilege. Traveller's cheques can usually be replaced if lost or stolen,
and people often used to use them on vacation instead of cash as many businesses used to accept traveller's cheques
as currency. The use of credit or debit cards has begun to replace the traveller's cheque as the standard for vacation
money due to their convenience and additional security for the retailer. This has resulted in many businesses no
longer accepting traveller's cheques.
Money or postal order
Main articles: Money order and Postal order
A cheque sold by a post office, bank or merchant such as a grocery store for payment by a third party for a customer
is referred to as a money order or postal order. These are paid for in advance when the order is drawn and are
guaranteed by the institution that issues them and can only be paid to the named third party. This was a common way
to send low value payments to third parties, avoiding the risks associated with sending cash via the mail, prior to the
advent of electronic payment methods.
Oversized cheques
Presentation of the Ansari X Prize $10 million
award
Oversized cheques are often used in public events such as donating
money to charity or giving out prizes such as Publishers Clearing
House. The cheques are commonly 18 by 36 inches (46cm 91cm) in
size, however, according to the Guinness Book of World Records, the
largest ever is 12 by 25 metres (39ft 82ft). Regardless of the size,
such cheques can still be redeemed for their cash value as long as they
have the same parts as a normal cheque, although usually the oversized
cheque is kept as a souvenir and a normal cheque is provided. A bank
may levy additional charges for clearing an oversized cheque.
Cheque
17
Payment vouchers
In the US some public assistance programs such as the Special Supplemental Nutrition Program for Women, Infants
and Children, or Aid to Families with Dependent Children make vouchers available to their beneficiaries, which are
good up to a certain monetary amount for purchase of grocery items deemed eligible under the particular
programme. The voucher can be deposited like any other cheque by a participating supermarket or other approved
business.
Cheques around the world
Australia
The Cheques Act 1986 is the body of law governing the issuance of cheques and payment orders in Australia.
Procedural and practical issues governing the clearance of cheques and payment orders are handled by Australian
Payments Clearing Association (APCA).
In 1999, banks adopted a system to allow faster clearance of cheques by electronically transmitting information
about cheques, this brought clearance times down from five to three days. Prior to that cheques had to be physically
transported to the paying bank before processing began. If it was dishonoured, it was physically returned.
All licensed banks in Australia may issue cheques in their own name. Non-banks are not permitted to issue cheques
in their own name but may issue, and have drawn on them, payment orders (which functionally are no different from
cheques).
Canada
In Canada, cheque sizes and types
[10]
as well as endorsements requirements and MICR tolerances
[11]
are overseen
by the Canadian Payments Association (CPA)
It is possible to write cheques in currencies (using the standardised ISO currency names) that are not in Canadian
Dollars.
Canadian cheques can legally be written in English, French or Inuit.
Personal cheques in Canada are sold directly from financial institutions through commercial suppliers.
Business cheques in Canada are also sold directly through financial institutions at the branch or online through
commercial suppliers.
A tele-cheque is a paper payment item that resembles a cheque except that it is neither created nor signed by the
payerinstead it is created (and may be signed) by a third party on behalf of the payer. Under CPA Rules these
are prohibited in the clearing system effective 27 January 2004.
India
The Cheque was introduced in India by the Bank of Hindustan, the first joint stock bank established in 1770. In
1881, the Negotiable Instruments Act (NI Act) was enacted in India, formalising the usage and characteristics of
instruments like the cheque, the bill of exchange and promissory note. The NI Act provided a legal framework for
non-cash paper payment instruments in India. In 1938, the Calcutta Clearing Banks' Association, which was the
largest bankers' association at that time, adopted clearing house.
Until 1 April 2012, cheques in India were valid for a period of six months from the date of their issue, before the
Reserve Bank of India issued a notification reducing their validity to three months from the date of issue.
Cheque
18
Japan
In Japan, cheques are called Kogitte ( Help:Installing Japanese character sets), and are governed by Kogitte
Law.
Bounced cheques are called Fuwatari Kogitte ( Help:Installing Japanese character sets). If an
account owner bounces two cheques in six months, the bank will suspend the account for two years. If the account
belongs to a public company, their stock will also be suspended from trading on the stock exchange, which can lead
to bankruptcy.
New Zealand
Instrument-specific legislation includes the Cheques Act 1960, part of the Bills of Exchange Act 1908, which
codifies aspects related to the cheque payment instrument, notably the procedures for the endorsement, presentment
and payment of cheques. A 1995 amendment provided for the electronic presentment of cheques and removed the
previous requirement to deliver cheques physically to the paying bank, opening the way for cheque truncation and
imaging. Truncation allows for the transmission of an electronic image of all or part of the cheque to the paying
banks branch, instead of the cumbersome physical presentment. This reduced the total cheque clearance time, as
well as eliminating the costs of physically moving the cheque.
The registered banks under supervision of Reserve Bank of New Zealand provide the cheque payment services. Once
banked, cheques are processed electronically together with other retail payment instruments. Homeguard v Kiwi
Packaging is often cited case law regarding the banking of cheques tendered as full settlement of disputed
accounts.
[12]
United Kingdom
In the UK all cheques must now conform to "Cheque and Credit Clearing Company (C&CCC) Standard 3", the
industry standard detailing layout and font, be printed on a specific weight of paper (CBS1), and contain explicitly
defined security features.
Since 1995, all cheque printers must be members of the Cheque Printer Accreditation Scheme (CPAS). The scheme
is managed by the Cheque and Credit Clearing Company and requires that all cheques for use in the British clearing
process are produced by accredited printers who have adopted stringent security standards.
The rules concerning crossed cheques are set out in Section 1 of the Cheques Act 1992 and prevent cheques being
cashed by or paid into the accounts of third parties. On a crossed cheque the words account payee only (or similar)
are printed between two parallel vertical lines in the centre of the cheque. This makes the cheque non-transferable
and is to avoid cheques being endorsed and paid into an account other than that of the named payee. Crossing
cheques basically ensures that the money is paid into an account of the intended beneficiary of the cheque.
Following concerns about the amount of time it took banks to clear cheques, the United Kingdom Office of Fair
Trading set up a working group in 2006 to look at the cheque clearing cycle. They produced a report recommending
maximum times for the cheque clearing which were introduced in UK from November 2007. In the report the date
the credit appeared on the recipient's account (usually the day of deposit) was designated "T". At "T + 2" (two
business days afterwards) the value would count for calculation of credit interest or overdraft interest on the
recipient's account. At "T + 4" clients would be able to withdraw funds on current accounts or at "T + 6" on savings
accounts (though this will often happen earlier, at the bank's discretion). "T + 6" is the last day that a cheque can
bounce without the recipient's permissionthis is known as "certainty of fate". Before the introduction of this
standard (also known as 2-4-6 for current accounts and 2-6-6 for savings accounts), the only way to know the "fate"
of a cheque has been "Special Presentation", which would normally involve a fee, where the drawee bank contacts
the payee bank to see if the payee has that money at that time. "Special Presentation" needed to be stated at the time
of depositing in the cheque.
Cheque
19
Cheque volumes peaked in 1990 when four billion cheque payments were made. Of these, 2.5billion were cleared
through the inter-bank clearing managed by the C&CCC, the remaining 1.5billion being in-house cheques which
were either paid into the branch on which they were drawn or processed intra-bank without going through the
clearings. As volumes started to fall, the challenges faced by the clearing banks were then of a different nature: how
to benefit from technology improvements in a declining business environment.
Although the UK did not adopt the euro as its national currency when other European countries did in 1999, many
banks began offering euro denominated accounts with chequebooks, principally to business customers. The cheques
can be used to pay for certain goods and services in the UK. The same year, the C&CCC set up the euro cheque
clearing system to process euro denominated cheques separately from sterling cheques in Great Britain.
The UK Payments Council from 30 June 2011 withdrew the existing Cheque Guarantee Card Scheme in the UK.
This service allowed cheques to be guaranteed at point of sales up to a certain value, normally 50 or 100, when
signed in front of the retailer with the additional cheque guarantee card. This was after a long period of decline in
their use in favour of debit cards.
The Payments Council proposed to close the centralised cheque clearing altogether in the UK and had set a target
date for this of 31 October 2018. However, on 12 July 2011, the Payments Council announced that after opposition
from MPs, charity groups and public opinion, the cheque will remain in use and there would no longer be a reason to
seek an alternative paper-initiated payment.
United States
In the United States, cheques are referred to as checks and are governed by Article 3 of the Uniform Commercial
Code, under the rubric of negotiable instruments.
[13]
An order check the most common form in the US is payable only to the named payee or his or her
endorsee, as it usually contains the language "Pay to the order of (name)."
A bearer check is payable to anyone who is in possession of the document: this would be the case if the cheque
does not state a payee, or is payable to "bearer" or to "cash" or "to the order of cash", or if the cheque is payable
to someone who is not a person or legal entity, for example if the payee line is marked "Happy Birthday".
A counter check is a bank cheque given to customers who have run out of cheques or whose cheques are not yet
available. It is often left blank hence sometimes called a "blank check", though this term has other uses and
is used for purposes of withdrawal.
In the US, the terminology for a cheque historically varied with the type of financial institution on which it is drawn.
In the case of a savings and loan association it was a negotiable order of withdrawal (compare Negotiable Order of
Withdrawal account); if a credit union it was a share draft. Checks were associated with chartered commercial
banks. However, common usage has increasingly conformed to more recent versions of Article 3, where check
means any or all of these negotiable instruments. Certain types of cheques drawn on a government agency, especially
payroll cheques, may be called a payroll warrant.
At the bottom of each cheque there is the routing / account number in MICR format. The routing transit number is a
nine-digit number in which the first four digits identifies the US Federal Reserve Bank's cheque-processing center.
This is followed by digits 5 through 8, identifying the specific bank served by that cheque-processing center. Digit 9
is a verification check digit, computed using a complex algorithm of the previous eight digits.
Typically the routing number is followed by a group of eight or nine MICR digits that indicates the particular
account number at that bank. The account number is assigned independently by the various banks.
Typically the account number is followed by a group of three or four MICR digits that indicates a particular
cheque number from that account.
fractional routing number (U.S. only)also known as the transit number, consists of a denominator mirroring the
first four digits of the routing number. And a hyphenated numerator, also known as the ABA number, in which
the first part is a city code (149), if the account is in one of 49 specific cities, or a state code (5099) if it is not
Cheque
20
in one of those specific cities; the second part of the hyphenated numerator mirrors the 5th through 8th digits of
the routing number with leading zeros removed.
A draft is a bill of exchange which is not payable on demand of the payee. (However, draft in the US Uniform
Commercial Code today means any bill of exchange, whether payable on demand or at a later date; if payable on
demand it is a "demand draft", or if drawn on a financial institution, a cheque.)
The electronic check or substitute check was formally adopted in the US in 2004 with the passing of the "Check
Clearing for the 21st Century Act" (or Check 21 Act). This allowed the creation of electronic checks and translation
(truncation) of paper checks into electronic replacements, reducing cost and processing time.
Turkey
In Turkey, cheques are usually used for commercial transactions only, and using post-dated cheques is legally
possible.
Cheque fraud
Main article: Cheque fraud
Cheques have been a tempting target for criminals to steal money or goods from the drawer, payee or the banks. A
number of measures have been introduced to combat fraud over the years. These range from things like writing a
cheque so it is difficult to alter after it is drawn, to mechanisms like crossing a cheque so that it can only be paid into
another bank's account providing some traceability. However, the inherent security weaknesses of cheques as a
payment method, such as having only the signature as the main authentication method and not knowing if funds will
be received until the clearing cycle to complete, have made them vulnerable to a number of different types of fraud;
Embezzlement
Taking advantage of the float period (cheque kiting) to delay the notice of non-existent funds. This often involves
trying to convince a merchant or other recipient, hoping the recipient will not suspect that the cheque will not clear,
giving time for the fraudster to disappear.
Forgery
Sometimes, forgery is the method of choice in defrauding a bank. One form of forgery involves the use of a victim's
legitimate cheques, that have either been stolen and then cashed, or altering a cheque that has been legitimately
written to the perpetrator, by adding words and/or digits to inflate the amount.
Identity theft
Since cheques include significant personal information (name, account number, signature and in some countries
driver's license number, the address and/or phone number of the account holder), they can be used for fraud,
specifically identity theft. In the US until recent years the social security number was sometimes included on
cheques. The practice was discontinued as identity theft became widespread.
Dishonoured cheques
A dishonoured cheque cannot be redeemed for its value and is worthless; they are also known as an RDI (returned
deposit item), or NSF (non-sufficient funds) cheque. Cheques are usually dishonoured because the drawer's account
has been frozen or limited, or because there are insufficient funds in the drawer's account when the cheque was
redeemed. A cheque drawn on an account with insufficient funds is said to have bounced and may be called a rubber
cheque. Banks will typically charge customers for issuing a dishonoured cheque, and in some jurisdictions such an
act is a criminal action. A drawer may also issue a stop on a cheque, instructing the financial institution not to honour
Cheque
21
a particular cheque.
In England and Wales, they are typically returned marked "Refer to Drawer"an instruction to contact the person
issuing the cheque for an explanation as to why the cheque was not honoured. This wording was brought in after a
bank was successfully sued for libel after returning a cheque with the phrase "Insufficient Funds" after making an
errorthe court ruled that as there were sufficient funds the statement was demonstrably false and damaging to the
reputation of the person issuing the cheque. Despite the use of this revised phrase, successful libel lawsuits brought
against banks by individuals remained for similar errors.
In Scotland, a cheque acts as an assignment of the amount of money to the payee. As such, if a cheque is
dishonoured in Scotland, what funds are present in the bank account are "attached" and frozen, until either sufficient
funds are credited to the account to pay the cheque, the drawer recovers the cheque and hands it into the bank, or the
drawer obtains a letter from the payee stating that they have no further interest in the cheque.
A cheque may also be dishonored because it is stale or not cashed within a "void after date". Many cheques have an
explicit notice printed on the cheque that it is void after some period of days. In the US, banks are not required by the
Uniform Commercial Code to honour a stale-dated cheque, which is a cheque presented six months after it is dated.
Consumer reporting
In the United States some consumer reporting agencies such as ChexSystems, Early Warning Services, and
TeleCheck have been providing check verification services that track how people manage their checking accounts.
Banks use the agencies to screen checking account applicants. Those with low debit scores are denied checking
accounts because a bank can not afford an account to be overdrawn.
[14][15][16]
In the United Kingdom, in common with other items such as Direct Debits or standing orders, dishonoured cheques
can be reported on a customer's credit file, although not individually and this does not happen universally amongst
all banks. Dishonoured payments from current accounts can be marked in the same manner as missed payments on
the customer's credit report.
Lock box
Main article: Lock box
Typically when customers pay bills with cheques (like gas or water bills), the mail will go to a "lock box" at the post
office. There a bank will pick up all the mail, sort it, open it, take the cheques and remittance advice out, process it
all through electronic machinery, and post the funds to the proper accounts. In modern systems, taking advantage of
the Check 21 Act, as in the US, many cheques are transformed into electronic objects and the paper is destroyed.
Notes
Footnotes
[1] See the negotiable cowitself a fictional storyfor discussions of cheques written on unusual surfaces.
[2] [2] Although cheques are regulated in most countries as negotiable instruments, in many countries they are not actually negotiable, viz., the
payee cannot endorse the cheque in favour of a third party. Payers could usually designate a cheque as being payable to a named payee only
by "crossing" the cheque, thereby designating it as account payee only, but in an effort to combat financial crime, many countries have
provided by a combination of law and regulation that all cheques should be treated as crossed, or account payee only, and are not negotiable.
[3] http:/ / en. wikipedia. org/ w/ index. php?title=Template:Numismatics& action=edit
[4] James William Gilbart in 1828 explains in a footnote 'Most writers spell it check. I have adopted the above form because it is free from
ambiguity and is analogous to the ex-chequer, the royal treasury. It is also used by the Bank of England "Cheque Office"'.<ref
name="Gilbart">
[5] Cheque - Merriam-Webster's Online Dictionary (http:/ / www. merriam-webster. com/ dictionary/ cheque)
[6] Islamic inventions (17) (http:/ / www. independent.co.uk/ news/ science/ how-islamic-inventors-changed-the-world-469452. html)
[7] Federal Reserve Bank of Atlanta, The Evolution of the Check as a Means of Payment: A Historical Survey, 2008 (http:/ / www. frbatlanta.
org/ filelegacydocs/ er08no4_QuinnRoberds. pdf)
Cheque
22
[8] Lex Mercatoria, Law Faculty of the University of Troms, Norway (http:/ / www. jus. uio. no/ lm/ un. sg. report. itl. development. 1966/ 1.
html)
[9] http:/ / www. servicecanada. gc.ca/ eng/ sc/ direct-deposit/
[10] http:/ / www.cdnpay. ca/ imis15/ eng/ FAQs/ Cheque_Specifications/ eng/ faq/ Cheque_Specifications. aspx
[11] http:/ / www.cdnpay. ca/ imis15/ pdf/ pdfs_rules/ standard_006. pdf
[12] [1981] 2 NZLR 322
[13] U.C.C. - ARTICLE 3 - NEGOTIABLE INSTRUMENTS (http:/ / www. law. cornell. edu/ ucc/ 3/ article3. htm)
[14] New York Times (http:/ / query. nytimes.com/ gst/ fullpage. html?res=9B02EEDD1630F937A15755C0A9609C8B63& pagewanted=all)
[15] Bank Account History, cnn.com (http:/ / money. cnn. com/ 2012/ 08/ 16/ pf/ bank-account-history/ index. html?iid=EL)
[16] CFPB Credit Reporting (http:/ / money.cnn.com/ 2012/ 07/ 16/ pf/ CFPB-credit-reporting/ index. htm?iid=EL)
Citations
External links
Wikimedia Commons has media related to cheques.
Cheques found in the Cairo Geniza from the 12th century (http:/ / www. lib. cam. ac. uk/ cgi-bin/ GOLD/
thumbs?class_mark=T-S_Ar. 30. 184)
Information on cheques in the UK (http:/ / www. chequeandcredit. co. uk/ ) from UK Payments Administration
Malaysia Introduces New Cheque Clearing System (http:/ / english. cri. cn/ 3130/ 2008/ 04/ 09/ 195@343610.
htm)
Bills of Exchange Act 1882 (http:/ / www. legislation. gov. uk/ id/ ukpga/ Vict/ 45-46/ 61)
Cheques Act 1957 (http:/ / www. legislation. gov. uk/ id/ ukpga/ Eliz2/ 5-6/ 36)
Cheques Act 1992 (http:/ / www. legislation. gov. uk/ id/ ukpga/ 1992/ 32)
Negotiable instrument
23
Negotiable instrument
A 1939 bill of exchange, Rangoon, Burma.
A negotiable instrument is a document guaranteeing the payment of a
specific amount of money, either on demand, or at a set time, with the
payer named on the document. More specifically, it is a document
contemplated by or consisting of a contract, which promises the
payment of money without condition, which may be paid either on
demand or at a future date. The term can have different meanings,
depending on what law is being applied and what country it is used in
and what context it is used in.
Examples of negotiable instruments include promissory notes, bills of
exchange, banknotes, and cheques.
Because money is promised to be paid, the instrument itself can be
used by the holder in due course as a store of value. The instrument may be transferred to a third party; it is the
holder of the instrument who will ultimately get paid by the payer on the instrument. Transfers can happen at less
than the face value of the instrument and this is known as discounting; this may happen for example if there is doubt
about the payer's ability to pay.
Due to the nature of the negotiable instrument as a store of value, most countries passed laws specifically related to
negotiable instruments.
History
Common prototypes of bills of exchanges and promissory notes originated in China. There, in the 8th century during
the reign of the Tang Dynasty they used special instruments called feitsyan for the safe transfer of money over long
distances.
Later such document for money transfer used by Arab merchants, who had used the prototypes of bills of exchange
suftadja and hawala in 1013th centuries, then such prototypes had been used by Italian merchants in the 12th
century. In Italy in the 1315th centuries, bills of exchange and promissory notes obtain their main features, while
further phases of their development have been associated with France (1618th centuries, where the endorsement
had appeared) and Germany (19th century, formalization of Exchange Law). In England (and later in the U.S.),
exchange law was different from continental Europe because of different legal systems.
[1]
The modern emphasis on negotiability may also be traced to Lord Mansfield. Germanic Lombards documents may
also have some elements of negotiability.
[2]
Negotiable instruments distinguished from other types of contracts
An 1870 Bill of Exchange payable in London
with British Foreign Bill revenue stamps
attached.
A negotiable instrument can serve to convey value constituting at least
part of the performance of a contract, albeit perhaps not obvious in
contract formation, in terms inherent in and arising from the requisite
offer and acceptance and conveyance of consideration. The underlying
contract contemplates the right to hold the instrument as, and to
negotiate the instrument to, a holder in due course, the payment on
which is at least part of the performance of the contract to which the
negotiable instrument is linked. The instrument, memorializing: (1) the
Negotiable instrument
24
power to demand payment; and, (2) the right to be paid, can move, for example, in the instance of a 'bearer
instrument', wherein the possession of the document itself attributes and ascribes the right to payment. Certain
exceptions exist, such as instances of loss or theft of the instrument, wherein the possessor of the note may be a
holder, but not necessarily a holder in due course. Negotiation requires a valid endorsement of the negotiable
instrument. The consideration constituted by a negotiable instrument is cognizable as the value given up to acquire it
(benefit) and the consequent loss of value (detriment) to the prior holder; thus, no separate consideration is required
to support an accompanying contract assignment. The instrument itself is understood as memorializing the right for,
and power to demand, payment, and an obligation for payment evidenced by the instrument itself with possession as
a holder in due course being the touchstone for the right to, and power to demand, payment. In some instances, the
negotiable instrument can serve as the writing memorializing a contract, thus satisfying any applicable Statute of
Frauds as to that contract.
The holder in due course
The rights of a holder in due course of a negotiable instrument are qualitatively, as matters of law, superior to those
provided by ordinary species of contracts:
The rights to payment are not subject to set-off, and do not rely on the validity of the underlying contract giving
rise to the debt (for example if a cheque was drawn for payment for goods delivered but defective, the drawer is
still liable on the cheque)
No notice need be given to any party liable on the instrument for transfer of the rights under the instrument by
negotiation. However, payment by the party liable to the person previously entitled to enforce the instrument
"counts" as payment on the note until adequate notice has been received by the liable party that a different party is
to receive payments from then on. [U.C.C. 3-602(b)]
Transfer free of equitiesthe holder in due course can hold better title than the party he obtains it from (as in the
instance of negotiation of the instrument from a mere holder to a holder in due course)
Negotiation often enables the transferee to become the party to the contract through a contract assignment (provided
for explicitly or by operation of law) and to enforce the contract in the transferee-assignees own name. Negotiation
can be effected by endorsement and delivery (order instruments), or by delivery alone (bearer instruments).
Classes
Promissory notes and bills of exchange are two primary types of negotiable instruments.
Promissory note
Although possibly non-negotiable, a promissory note may be a negotiable instrument if it is an unconditional
promise in writing made by one person to another, signed by the maker, engaging to pay on demand to the payee, or
at fixed or determinable future time, certain in money, to order or to bearer. (see Sec. 194)
[3]
The law applicable to
the specific instrument will determine whether it is a negotiable instrument or a non-negotiable instrument. Bank
note is frequently referred to as a promissory note, a promissory note made by a bank and payable to bearer on
demand.
Introduction of bill of exchange
A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to the payee. A common
type of bill of exchange is the cheque (check in American English), defined as a bill of exchange drawn on a banker
and payable on demand. Bills of exchange are used primarily in international trade, and are written orders by one
person to his bank to pay the bearer a specific sum on a specific date. Prior to the advent of paper currency, bills of
exchange were a common means of exchange. They are not used as often today.
Negotiable instrument
25
Bill of exchange, 1933
A bill of exchange is essentially an order made by
one person to another to pay money to a third person.
A bill of exchange requires in its inception three
partiesthe drawer, the drawee, and the payee. The
person who draws the bill is called the drawer. He
gives the order to pay money to the third party. The
party upon whom the bill is drawn is called the
drawee. He is the person to whom the bill is
addressed and who is ordered to pay. He becomes an
acceptor when he indicates his willingness to pay the
bill. The party in whose favor the bill is drawn or is payable is called the payee. The parties need not all be distinct
persons. Thus, the drawer may draw on himself payable to his own order. A bill of exchange may be endorsed by the
payee in favour of a third party, who may in turn endorse it to a fourth, and so on indefinitely. The "holder in due
course" may claim the amount of the bill against the drawee and all previous endorsers, regardless of any
counterclaims that may have disabled the previous payee or endorser from doing so. This is what is meant by saying
that a bill is negotiable. In some cases a bill is marked "not negotiable" see crossing of cheques. In that case it can
still be transferred to a third party, but the third party can have no better right than the transferor.
Definition
In the Commonwealth of Nations almost all jurisdictions have codified the law relating to negotiable instruments in a
Bills of Exchange Act, e.g. Bills of Exchange Act 1882 in the UK, Bills of Exchange Act 1908 in New Zealand, The
Negotiable Instruments Act, 1881 in India and The Bills of Exchange Act 1914 in Mauritius. The Bills of Exchange
Act:
1. 1. defines a bill of exchange as: 'an unconditional order in writing, addressed by one person to another, signed by
the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable
future time, a sum certain in money to or to the order of a specified person, or to bearer.
2. 2. defines a cheque as: 'a bill of exchange drawn on a banker payable on demand'
3. 3. defines a promissory note as: 'an unconditional promise in writing made by one person to another, signed by the
maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the
order of a specified person or to bearer.'
Additionally most commonwealth jurisdictions have separate Cheques Acts providing for additional protections for
bankers collecting unendorsed or irregularly endorsed cheques, providing that cheques that are crossed and marked
'not negotiable' or similar are not transferable, and providing for electronic presentation of cheques in inter-bank
cheque clearing systems. The 1911 Encyclopdia Britannica Eleventh Edition has a comprehensive article on the
Bill of Exchange, detailing its history and operation, as understood at the time of its publication.
Negotiable instrument
26
In the United States
In the United States, Article 3 and Article 4 of the Uniform Commercial Code (UCC) govern the issuance and
transfer of negotiable instruments, unless the instruments are governed by Article 8 of the UCC. The various State
law enactments of Uniform Commercial Code 3104(a) through (d) set forth the legal definition of what is and
what is not a negotiable instrument:

3104. NEGOTIABLE INSTRUMENT. (a) Except as provided in subsections (c) and (d), "negotiable instrument" means an
unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or
order, if it: (1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder; (2) is payable on
demand or at a definite time; and (3) does not state any other undertaking or instruction by the person promising or ordering
payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give,
maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or
dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor. (b) "Instrument"
means a negotiable instrument. (c) An order that meets all of the requirements of subsection (a), except paragraph (1), and otherwise
falls within the definition of "check" in subsection (f) is a negotiable instrument and a check.
(d) A promise or order other than a check is not an instrument if, at the time it is issued or first comes into possession of a holder, it
contains a conspicuous statement, however expressed, to the effect that the promise or order is not negotiable or is not an instrument
governed by this Article.
Thus, for a writing to be a negotiable instrument under Article 3, the following requirements must be met:
1. 1. The promise or order to pay must be unconditional;
2. The payment must be a specific sum of money, although interest may be added to the sum;
3. 3. The payment must be made on demand or at a definite time;
4. 4. The instrument must not require the person promising payment to perform any act other than paying the money
specified;
5. 5. The instrument must be payable to bearer or to order.
The latter requirement is referred to as the "words of negotiability": a writing which does not contain the words "to
the order of" (within the four corners of the instrument or in endorsement on the note or in allonge) or indicate that it
is payable to the individual holding the contract document (analogous to the holder in due course) is not a negotiable
instrument and is not governed by Article 3, even if it appears to have all of the other features of negotiability. The
only exception is that if an instrument meets the definition of a cheque (a bill of exchange payable on demand and
drawn on a bank) and is not payable to order (i.e. if it just reads "pay John Doe") then it is treated as a negotiable
instrument.
UCC Article 3 does not apply to money, to payment orders governed by Article 4A, or to securities governed by
Article 8.
Negotiation and endorsement
Persons other than the original obligor and obligee can become parties to a negotiable instrument. The most common
manner in which this is done is by placing one's signature on the instrument (endorsement): if the person who signs
does so with the intention of obtaining payment of the instrument or acquiring or transferring rights to the
instrument, the signature is called an endorsement. There are five types of endorsements contemplated by the Code,
covered in UCC Article 3, Sections 204206
[4]
:
An endorsement which purports to transfer the instrument to a specified person is a special endorsement for
example, "Pay to the order of Amy";
An endorsement by the payee or holder which does not contain any additional notation (thus purporting to make
the instrument payable to bearer) is an endorsement in blank or blank endorsement;
An endorsement which purports to require that the funds be applied in a certain manner (e.g. "for deposit only",
"for collection") is a restrictive endorsement; and,
Negotiable instrument
27
An endorsement purporting to disclaim retroactive liability is called a qualified endorsement (through the
inscription of the words "without recourse" as part of the endorsement on the instrument or in allonge to the
instrument).
An endorsement purporting to add terms and conditions is called a conditional endorsement for example, "Pay
to the order of Amy, if she rakes my lawn next Thursday November 11th, 2007". The UCC states that these
conditions may be disregarded.
If a note or draft is negotiated to a person who acquires the instrument
1. in good faith;
2. for value;
3. without notice of any defenses to payment,
the transferee is a holder in due course and can enforce the instrument without being subject to defenses which the
maker of the instrument would be able to assert against the original payee, except for certain real defenses. These
real defenses include (1) forgery of the instrument; (2) fraud as to the nature of the instrument being signed; (3)
alteration of the instrument; (4) incapacity of the signer to contract; (5) infancy of the signer; (6) duress; (7)
discharge in bankruptcy; and, (8) the running of a statute of limitations as to the validity of the instrument. The
holder-in-due-course rule is a rebuttable presumption that makes the free transfer of negotiable instruments feasible
in the modern economy. A person or entity purchasing an instrument in the ordinary course of business can
reasonably expect that it will be paid when presented to, and not subject to dishonor by, the maker, without involving
itself in a dispute between the maker and the person to whom the instrument was first issued (this can be contrasted
to the lesser rights and obligations accruing to mere holders). Article 3 of the Uniform Commercial Code as enacted
in a particular State's law contemplate real defenses available to purported holders in due course. The foregoing is
the theory and application presuming compliance with the relevant law. Practically, the obligor-payor on an
instrument who feels he has been defrauded or otherwise unfairly dealt with by the payee may nonetheless refuse to
pay even a holder in due course, requiring the latter to resort to litigation to recover on the instrument.
Usage
While bearer instruments are rarely created as such, a holder of commercial paper with the holder designated as
payee can change the instrument to a bearer instrument by an endorsement. The proper holder simply signs the back
of the instrument and the instrument becomes bearer paper, although in recent years, third party checks are not being
honored by most banks unless the original payee has signed a notarized document stating such. Alternatively, an
individual or company may write a check payable to "Cash" or "Bearer" and create a bearer instrument. Great care
should be taken with the security of the instrument, as it is legally almost as good as cash.
Exceptions
Under the Code, the following are not negotiable instruments, although the law governing obligations with respect to
such items may be similar to or derived from the law applicable to negotiable instruments:
Bills of lading and other documents of title, which are governed by Article 7 of the Code. However, under
admiralty law, a bill of lading may either be a negotiable or 'order' bill of lading or a nonnegotiable or 'straight'
bill of lading.
Deeds and other documents conveying interests in real estate, although a mortgage may secure a promissory note
which is governed by Article 3
IOUs
Letters of credit, which are governed by Article 5 of the Code
Negotiable instrument
28
Modern relevance
Although often considered foundational in business law, the modern relevance of negotiability has been
questioned.
[5]
Negotiability can be traced back to the 1700s and Lord Mansfield, when money and liquidity was
relatively scarce. The holder in due course rule has been limited by various statutes. Concerns have also been raised
that the holder in due course rule does not align the incentives of the mortgage originators and the assignees
efficiently.
[]
References
[1] [1] Chisholm 1911.
[2] Rabinowitz JJ. (1956). The Origin of the Negotiable Promissory Note (http:/ / www. jstor. org/ stable/ 3310431). University of Pennsylvania
Law Review.
[3] [3] CONFUSING
[4] http:/ / www. law.cornell. edu/ ucc/ 3/ article3.htm#s3-204
[5] Mann RJ (1996). Searching for Negotiability in Payment and Credit Systems (http:/ / www. columbia. edu/ ~mr2651/ Data/
SearchforNegotiability.pdf). UCLA Law Review.
External links
Wikimedia Commons has media related to Bills of Exchange.
Bill of Exchange FAQ on TheBenche.com (https:/ / www. thebenche. com/ faq. php?faq=exchang1#faq_bill1)
Letter of credit
After a contract is concluded between a buyer and
a seller, the buyer's bank supplies a letter of credit
to the seller.
A letter of credit is a document issued by a financial institution, or a
similar party, assuring payment to a seller of goods or services
provided certain documents have been presented to the bank.
[1]
"Letters of Credit" are documents that prove the seller has performed
the duties specified by an underlying contract (e.g., the sale of goods
contract) and the goods/services have been supplied as agreed. In
return for these documents, the beneficiary receives payment from the
financial institution that issued the letter. The letter of credit serves as a
guarantee to the seller that it will be paid regardless of whether the
buyer ultimately fails to pay. In this way, the risk that the buyer will
fail to pay is transferred from the seller to the letter's issuer. The letter
can also be used to ensure that all agreed standards are met by the
supplier, provided that these requirements are reflected in the
documents described in the letter of credit.
Letters of credit are used primarily in international trade for transactions between a supplier in one country and a
purchaser in another. Most letters of credit are governed by rules promulgated by the International Chamber of
Commerce known as Uniform Customs and Practice for Documentary Credits (latest version: UCP 600). They
Letter of credit
29
Seller consigns the goods to a carrier in exchange
for a bill of lading.
Seller provides bill of lading to bank in exchange
for payment. Seller's bank exchanges bill of
lading for payment from buyer's bank. Buyer's
bank exchanges bill of lading for payment from
the buyer.
Buyer provides bill of lading to carrier and takes
delivery of goods.
are also used in land development to ensure that approved public
facilities (streets, sidewalks, storm water ponds, etc.) will be built. The
parties to a letter of credit are the supplier, usually called the
"beneficiary", "the issuing bank", of whom the buyer is a client, and
sometimes an advising bank, of whom the beneficiary is a client.
Almost all letters of credit are irrevocable, i.e., cannot be amended or
canceled without mutual consent of all parties. In executing a
transaction, letters of credit incorporate functions common to giros and
travelers' cheques.
Terminology
Origin
The name "letter of credit" derives from the French word
"accrditation", a power to do something, which derives from the Latin
"accreditivus", meaning trust. Wikipedia:Citation needed
Related terms
A Sight LC cause payment to be made immediately to the
beneficiary/seller/exporter upon presentation of the correct
documents. A time or date LC specifies when payment is to be
made at a future date and upon presentation of the required
documents.Wikipedia:Citation needed
Negotiation means the giving of value for draft(s) or document(s)
by the bank authorized to negotiate, with the nominated bank. Mere
examination of the documents and forwarding the same to the LC
issuing bank for reimbursement, without giving of value / agreed to
give, does not constitute a negotiation.Wikipedia:Please clarify
Advising Bankadvises the Beneficiary at the request of the
Issuing Bank.
Applicantthe party on whose request the issuing bank issues a
credit .
Banking dayThe day on which a bank is regularly open at the
place at which an act to be performed.
Beneficiarythe party who is to receive the benefit (payment) of
the LC. The consignee of an LC and the beneficiary may not be the
same. The credit is issued in the Beneficiary's favor.
Presentationeither delivery of documents against an LC or the
document itself.
Complying presentation when the presentation of documents is in
accordance with:
the terms and conditions of the credit
the applicable provisions of UCP
Letter of credit
30
international standard banking practice
Confirmationa definite undertaking from the confirming bank to honor or negotiate a complying presentation in
addition to that of the issuing bank.
Confirming bankadds confirmation to an LC. It does so at the request of the issuing bank and taking
authorization from the issuing bank.
Letter of Credit/Creditan irrevocable commitment of the issuing bank to honor a complying presentation.
Honourto act according to commitment of the LC. Presentations are honored in different ways depending on
the type of credit:
Making payment at sight for sight LC
Incurring a deferred payment undertaking and paying at maturity deferred payment LC.
Accepting a Draft drawn by the beneficiary and paying at maturity for Deferred Acceptance LC.
Issuing bankissues the LC.
Nominated Bankthe bank with which credit is available. If no bank is mentioned in the credit as nominated
bank, all banks are "nominated".
NegotiationA Nominated Bank is said to negotiate a document if it purchases a draft or documents under a
complying presentation either by making an advance or agreeing to advance funds to the Beneficiary on or before
the date on which reimbursement is due to the nominated bank . A draft drawn on a nominated bank cannot be
purchased separately.
Documents that can be presented for payment
To receive payment, an exporter or shipper must present the documents required by the LC. Typically, the payee
presents a document proving the goods were sent instead of showing the actual goods. The Original bill of lading
(BOL) is normally the document accepted by banks as proof that goods have been shipped. However, the list and
form of documents is open to negotiation and might contain requirements to present documents issued by a neutral
third party evidencing the quality of the goods shipped, or their place of origin or place. Typical types of documents
in such contracts include:Wikipedia:Citation needed
Financial DocumentsBill of Exchange, Co-accepted Draft
Commercial DocumentsInvoice, Packing list
Shipping DocumentsTransport Document, Insurance Certificate, Commercial, Official or Legal Documents
Official DocumentsLicense, Embassy legalization, Origin Certificate, Inspection Certificate, Phytosanitary
certificate
Transport DocumentsBill of lading (ocean or multi-modal or Charter party), Airway bill, Lorry/truck receipt,
railway receipt, CMC Other than Mate Receipt, Forwarder Cargo Receipt, Deliver Challan...etc.
Insurance documentsInsurance policy, or Certificate but not a cover note.
Legal principles governing documentary credits
One of the primary peculiarities of the documentary credit is that the payment obligation is independent from the
underlying contract of sale or any other contract in the transaction. Thus the banks obligation is defined by the terms
of the LC alone, and the sale contract is irrelevant. The defenses available to the buyer arising out of the sale contract
do not concern the bank and in no way affect its liability.
[2]
Article 4(a) of the UCP states this principle clearly.
Article 5 of the UCP further states that banks deal with documents only, they are not concerned with the goods
(facts). Accordingly, if the documents tendered by the beneficiary, or his or her agent, are in order, then in general
the bank is obliged to pay without further qualifications.
Letter of credit
31
The policies behind adopting the abstraction principle are purely commercial and reflect a partys expectations: first,
if the responsibility for the validity of documents was thrown onto banks, they would be burdened with investigating
the underlying facts of each transaction, and less inclined to issue documentary credits because of the risk and
inconvenience. Second, documents required under the LC could in certain circumstances be different from those
required under the sale transaction. This would place banks in a dilemma in deciding which terms to follow if
required to look behind the credit agreement. Third, the fact that the basic function of the credit is to provide a seller
with the certainty of payment for documentary duties suggests that banks should honor their obligation
notwithstanding allegations of buyer misfeasance.
[3]
Courts have emphasized that buyers always have a remedy for
an action upon the contract of sale and that it would be a calamity for the business world if a bank had to investigate
every breach of contract.
The principle of strict compliance also aims to make the banks duty of effecting payment against documents easy,
efficient and quick. Hence, if the documents tendered under the credit deviate from the language of the credit the
bank is entitled to withhold payment, even if the deviation is purely terminological.
[4]
The general legal maxim de
minimis non curat lex has no place in the field.
Types
Import/exportThe same credit can be termed an import or export LC depending on whose perspective is
considered. For the importer it is termed an Import LC and for the Exporter of goods, an Export LC.
RevocableThe buyer and the bank that established the LC are able to manipulate the LC or make corrections
without informing or getting permissions from the seller. According to UCP 600, all LCs are Irrevocable, hence
this type of LC is obsolete.
IrrevocableAny changes (amendment) or cancellation of the LC (except it is expired) is done by the Applicant
through the issuing Bank. It must be authenticated and approved by the Beneficiary.
ConfirmedAn LC is said to be confirmed when a second bank adds its confirmation (or guarantee) to honor a
complying presentation at the request or authorization of the issuing bank.
UnconfirmedThis type does not acquire the other bank's confirmation.
TransferrableThe exporter has the right to make the credit available to one or more subsequent beneficiaries.
Credits are made transferable when the original beneficiary is a middleman and does not supply the merchandise,
but procures goods from suppliers and arranges them to be sent to the buyer and does not want the buyer and
supplier know each other.
The middleman is entitled to substitute his own invoice for the supplier's and acquire the difference as profit.
A letter of credit can be transferred to the second beneficiary at the request of the first beneficiary only if it
expressly states that the letter of credit is "transferable". A bank is not obligated to transfer a credit.
A transferable letter of credit can be transferred to more than one alternate beneficiary as long as it allows
partial shipments.
The terms and conditions of the original credit must be replicated exactly in the transferred credit. However, to
keep the workability of the transferable letter of credit, some figures can be reduced or curtailed.
Amount
Unit price of the merchandise (if stated)
Expiry date
Presentation period
Latest shipment date or given period for shipment.
The first beneficiary may demand from the transferring bank to substitute for the applicant. However, if a
document other than the invoice must be issued in a way to show the applicant's name, in such a case that
Letter of credit
32
requirement must indicate that in the transferred credit it will be free.
Transferred credit cannot be transferred again to a third beneficiary at the request of the second beneficiary.
UntransferableA credit that seller cannot assign all or part of to another party. In international commerce, all
credits are untransferable.
Deferred / UsanceA credit that is not paid/assigned immediately after presentation, but after an indicated period
that is accepted by both buyer and seller. Typically, seller allows buyer to pay the required money after taking the
related goods and selling them.
At SightA credit that the announcer bank immediately pays after inspecting the carriage documents from the
seller.
Red ClauseBefore sending the products, seller can take the pre-paid part of the money from the bank. The first
part of the credit is to attract the attention of the accepting bank. The first time the credit is established by the
assigner bank, is to gain the attention of the offered bank. The terms and conditions were typically written in red
ink, thus the name.
Back to BackA pair of LCs in which one is to the benefit of a seller who is not able to provide the
corresponding goods for unspecified reasons. In that event, a second credit is opened for another seller to provide
the desired goods. Back-to-back is issued to facilitate intermediary trade. Intermediate companies such as trading
houses are sometimes required to open LCs for a supplier and receive Export LCs from buyer.
Pricing
Issuance charges, covering negotiation, reimbursements and other charges are paid by the applicant or as per the
terms and conditions of the LC. If the LC does not specify charges, they are paid by the Applicant. Charge-related
terms are indicated in field 71B.Wikipedia:Citation needed
Legal basis
Legal writers have failed to satisfactorily reconcile the banks undertaking with any contractual
analysis.Wikipedia:Please clarify The theories include: the implied promise, assignment theory, the novation theory,
reliance theory, agency theories, estoppels and trust theories, anticipatory theory and the guarantee theory.
Although documentary credits are enforceable once communicated to the beneficiary, it is difficult to show any
consideration given by the beneficiary to the banker prior to the tender of documents. In such transactions the
undertaking by the beneficiary to deliver the goods to the applicant is not sufficient consideration for the banks
promise because the contract of sale is made before the issuance of the credit, thus consideration in these
circumstances is past. However, the performance of an existing duty under a contract may be a valid consideration
for a new promise made by the bank, provided that there is some practical benefit to the bank
[5]
A promise to
perform owed to a third party may also constitute a valid consideration.
[6]
Another theory asserts that it is feasible to typify letter of credit as a Collateral Contract for a Third-Party
Beneficiary because three different entities participate in the transaction: the seller, the buyer, and the banker.
Because letters of credit are prompted by the buyers necessity and in application of the theory of Jean Domat the
cause of a LC is to release the buyer of his obligation to pay directly to the seller. Therefore, a LC theoretically fits
as a collateral contract accepted by conduct or in other words, an Implied-in-fact contract under the framework for
third party beneficiary where the buyer participates as the third party beneficiary with the bank acting as the
stipulator and the seller as the promisor. The term Beneficiary is not used properly in the scheme of an LC because a
Beneficiary (also, in trust law, cestui que use) in the broadest sense is a natural person or other legal entity who
receives money or other benefits from a benefactor. Note that under the scheme of letters of credit, banks are neither
benefactors of sellers nor benefactors of buyers and the seller receives no money in gratuity mode. Thus is possible
that a letter of credit was one of those contracts that needed to be masked to disguise the consideration or Privity
Letter of credit
33
requirement. As a result this kind of arrangement, would make letter of credit to be enforceable under the action
assumpsit because of its promissory connotation.
A few countries, including the United States (Article 5 of the Uniform Commercial Code) have created statutes in
relation to letters of credit. These statutes are designed to work with the rules of practice including UCP and ISP98.
These rules of practice are incorporated into the transaction by agreement of the parties. The latest version of the
UCP is the UCP600 effective July 1, 2007.
[7]
Since the UCP are not laws, parties have to include them into their
arrangements as normal contractual provisions. .
International Trade Payment methods
International Trade Payment method can be done in the following ways.
Advance payment (most secure for seller)The buyer parts with money first and waits for the seller to forward
the goods.
Documentary Credit (more secure for seller as well as buyer)Subject to ICC's UCP 600, the bank gives an
undertaking (on behalf of buyer and at the request of applicant) to pay the Beneficiary the value of the goods
shipped if acceptable documents are submitted and if the stipulated terms and conditions are strictly complied
with. The buyer can be confident that the goods he is expecting only will be received since it will be evidenced in
the form of certain documents called for meeting the specified terms and conditions while the supplier can be
confident that if he meets the stipulations his payment for the shipment is guaranteed by bank, who is independent
of the parties to the contract.
Documentary collection (more secure for buyer and to a certain extent to seller)Also called "Cash Against
Documents". Subject to ICC's URC 525, sight and usance, for delivery of shipping documents against payment or
acceptances of draft, where shipment happens first, then the title documents are sent to the buyer's bank by seller's
bank, for delivering documents against collection of payment/acceptance
Direct payment (most secure for buyer)The supplier ships the goods and waits for the buyer to remit the bill, on
open account terms.
Risk situations
Fraud Risks
The payment will be obtained for nonexistent or worthless merchandise against presentation by the beneficiary of
forged or falsified documents.
Credit itself may be funded.
Sovereign and Regulatory Risks
Performance of the Documentary Credit may be prevented by government action outside the control of the
parties.
Legal Risks
Possibility that performance of a Documentary Credit may be disturbed by legal action relating directly to the
parties and their rights and obligations under the Documentary Credit
Force Majeure and Frustration of Contract
Performance of a contract including an obligation under a Documentary Credit relationship is prevented by
external factors such as natural disasters or armed conflicts
Applicant
Non-delivery of Goods
Short shipment
Letter of credit
34
Inferior Quality
Early /Late Shipment
Damaged in transit
Foreign exchange
Failure of Bank viz Issuing bank / Collecting Bank
Issuing Bank
Insolvency of the Applicant
Fraud Risk, Sovereign and Regulatory Risk and Legal Risks
Reimbursing Bank
no obligation to reimburse the Claiming Bank unless it has issued a reimbursement undertaking.
Beneficiary
Failure to Comply with Credit Conditions
Failure of, or Delays in Payment from, the Issuing Bank
References
[1] Letter of Credit explained What is a letter of credit? (http:/ / www. loanuniverse. com/ letters. html)
[2] Ficom S.A. v. Socialized Cadex [1980] 2 Lloyds Rep. 118.
[3] [3] United City Merchants (Investments) Ltd v Royal Bank of Canada (The American Accord) [1983] 1.A.C.168 at 183
[4] J. H. Rayner & Co., Ltd., and the Oil seeds Trading Company, Ltd. v.Ham bros Bank Limited [1942] 73 Ll. L. Rep. 32
[5] William v Roffey Brothers & Nicholls (contractors) Ltd
[6] [6] Scotson v Pegg
[7] Dominique Doise, The 2007 Revision of the Uniform Customs and Practice for Documentary Credits (UCP 600) (http:/ / www.
alerionavocats. com/ fr/ expertise/ publications/
la-revision-2007-des-regles-et-usances-uniformes-relatives-aux-credits-documentaires-ruu-600/ )
External links
Letter of Credit Information, Procedure and Videos. (http:/ / www. bwtradefinance. com/ letter-of-credit-lc/ )
Anatomy of a Letter of Credit, showing an actual negotiated letter of credit (http:/ / www. vulcanhammer. info/
china/ letter-of-credit. php)
Letters of Credit and How They Work (http:/ / www. lancasterpollard. com/ newsdetail/
tci-fall-2007-fe-letters-of-credit)
(in Persian) (http:/ / banki. ir/ danestaniha/ 214-general/ 2468-lc)
Letter of Credit, its Relation with Stipulation for the Benefit of a Third Party (http:/ / papers. ssrn. com/ sol3/
papers. cfm?abstract_id=2019474)
Commercial paper
35
Commercial paper
Financial markets
Public market
Exchange
Securities
Bond market
Bond valuation
Corporate bond
Fixed income
Government bond
High-yield debt
Municipal bond
Securitization
Stock market
Common stock
Preferred stock
Registered share
Stock
Stock certificate
Stock exchange
Voting share
Derivatives market
Credit derivative
Futures exchange
Hybrid security
Over-the-counter
Forwards
Options
Spot market
Swaps
Foreign exchange
Currency
Exchange rate
Other markets
Commodity market
Money market
Reinsurance market
Real estate market
Practical trading
Commercial paper
36
Clearing house
Financial market participants
Financial regulation
Finance series
Banks and banking
Corporate finance
Personal finance
Public finance
v
t
e
[1]
Commercial paper, in the global financial market, is an unsecured promissory note with a fixed maturity of no
more than 270 days.
Commercial paper is a money-market security issued (sold) by large corporations to obtain funds to meet short-term
debt obligations (for example, payroll), and is backed only by an issuing bank or corporation's promise to pay the
face amount on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent
credit ratings from a recognized credit rating agency will be able to sell their commercial paper at a reasonable price.
Commercial paper is usually sold at a discount from face value, and carries higher interest repayment rates than
bonds. Typically, the longer the maturity on a note, the higher the interest rate the issuing institution pays. Interest
rates fluctuate with market conditions, but are typically lower than banks' rates.
Commercial paper though a short-term obligation is issued as part of a continuous rolling program, which is
either a number of years long (as in Europe), or open-ended (as in the U.S.).
Overview
The use of commercial paper has been adopted by every state in the United States except Louisiana.
[2]
At the end of 2009, more than 1,700 companies in the United States issued commercial paper. As of October 31,
2008, the U.S. Federal Reserve reported seasonally adjusted figures for the end of 2007: there was $1.7807 trillion
(short-scale, or 1,780,700,000,000) in total outstanding commercial paper; $801.3 billion was "asset backed" and
$979.4 billion was not; $162.7 billion of the latter was issued by non-financial corporations, and $816.7 billion was
issued by financial corporations.
Outside of the United States the international Euro-Commercial Paper Market has over $500 billion in outstandings,
made up of instruments denominated predominately in euros, dollars and sterling.
[3]
Commercial paper
37
History
Commercial credit, in the form of promissory notes issued by corporations, has existed since at least the 19th
century. For instance, Marcus Goldman, founder of Goldman Sachs got his start trading commercial paper in New
York in 1869.
[4]
Issuance
U.S. Commercial Paper types outstanding at end
of each year 2001 to 2007
Total U.S. CP outstanding e
Commercial paper though a short-term obligation is issued as part
of a continuous significantly longer rolling program, which is either a
number of years long (as in Europe), or open-ended (as in the U.S.).
Because the continuous commercial paper program is much longer
than the individual commercial paper in the program (which cannot be
longer than 270 days), as commercial paper matures and is paid down
the proceeds from the pay-down are used to buy new commercial paper
in the same program the process is referred to as "rolling" the
commercial paper. Because the program is a continuous rolling one
that runs for many years, it can be viewed as a source for long-term
funds for issuers, even though composed of shorter-term obligations.
By having the constituent parts of the Program be no longer than 270
days, the issuer avoids the cost, delays, and complications of being
required to file a registrations statement.
There are two methods of issuing credit. The issuer can market the
securities directly to a buy and hold investor such as most money
market funds. Alternatively, it can sell the paper to a dealer, who then
sells the paper in the market. The dealer market for commercial paper
involves large securities firms and subsidiaries of bank holding
companies. Most of these firms also are dealers in US Treasury
securities. Direct issuers of commercial paper usually are financial
companies that have frequent and sizable borrowing needs and find it
more economical to sell paper without the use of an intermediary. In the United States, direct issuers save a dealer
fee of approximately 5 basis points, or 0.05% annualized, which translates to $50,000 on every $100 million
outstanding. This saving compensates for the cost of maintaining a permanent sales staff to market the paper. Dealer
fees tend to be lower outside the United States.
Line of credit
Commercial paper is a lower-cost alternative to a line of credit with a bank. Once a business becomes established,
and builds a high credit rating, it is often cheaper to draw on a commercial paper than on a bank line of credit.
Nevertheless, many companies still maintain bank lines of credit as a "backup". Banks often charge fees for the
amount of the line of the credit that does not have a balance. While these fees may seem like pure profit for banks, in
some cases companies in serious trouble may not be able to repay the loan resulting in a loss for the banks.
Advantage of commercial paper:
High credit ratings fetch a lower cost of capital.
Wide range of maturity provide more flexibility.
It does not create any lien on asset of the company.
Tradability of Commercial Paper provides investors with exit options.
Commercial paper
38
Disadvantages of commercial paper:
Its usage is limited to only blue chip companies.
Issuances of commercial paper bring down the bank credit limits.
A high degree of control is exercised on issue of Commercial Paper.
Stand-by credit may become necessary
Commercial paper yields
Like treasury bills, yields on commercial paper are quoted on a discount basisthe discount return to commercial
paper holders is the annualized percentage difference between the price paid for the paper and the par value using a
360-day year. Specifically:
i
cp
(dy) = [
P
f
P
0
P
f]
360

h
and when converted to a bond equivalent yield:
i
cp
(bey) = [
P
f
P
0
P
0]
365

h
Defaults
Defaults on high quality commercial paper are rare, and cause concern when they occur. Notable examples include:
On June 21, 1970, Penn Central filed for bankruptcy under Chapter 77 of the U.S. Bankruptcy Code and defaulted
on approximately $77.1 million of commercial paper. This sparked a runoff in the commercial paper market of
approximately $3 billion, causing the Federal Reserve to intervene by permitting commercial banks to borrow at
the discount window.
[5]
This placed a substantial burden on clients of the issuing dealer for Penn Centrals
commercial paper, Goldman Sachs.
[6]
On January 31, 1997, Mercury Finance, a major automotive lender, defaulted on a debt of $17 million, rising to
$315 million. Effects were small, partly because default occurred during a robust economy.
On September 15, 2008, Lehman Brothers caused two money funds to break the buck, and led to Fed intervention
in money market funds.
References
[1] http:/ / en. wikipedia. org/ w/ index. php?title=Template:Financial_markets& action=edit
[2] Ontario Securities Commission National Instrument 45106 (http:/ / www. osc. gov. on. ca/ Regulation/ Rulemaking/ Current/ Part4/
rule_20050708_45-106_ni-registration-exempt. pdf) (Section 2.35) Accessed January 30, 2007
[3] http:/ / www. cmdportal. com/ Public/ Data. aspx
[4] Uhtermyer Urges Money Bill Changes; Approves Measure, but Wants Commercial Paper Defined in Its Strict Meaning (http:/ / query.
nytimes.com/ gst/ abstract. html?res=9F07EFD7123FE633A25750C2A96F9C946296D6CF) in The New York Times of September 23, 1913
Commercial Paper Should Be Changed; Gardin Thinks Three Years Sufficient for Transition to European Practice (http:/ / query. nytimes.
com/ gst/ abstract. html?res=9B01E0DC1E39E633A25752C0A9659C946596D6CF) in The New York Times of March 1, 1914
[5] [5] U.S. Securities and Exchange Commission, The Financial Collapse of the Penn Central Company, Staff Report of the Securities and
Exchange Commission to the Special Subcommittee on Investigations, U.S. Government Printing Office Washington DC 1972, page 272.
[6] [6] Ellis, Charles D. The Partnership: The Making of Goldman Sachs. Rev. ed. London: Penguin, 2009. 98. Print.
Commercial paper
39
External links
Look up commercial paper in Wiktionary, the free dictionary.
Federal Reserve System release on commercial papers (http:/ / www. federalreserve. gov/ Releases/ cp/ about.
htm)
An article from The Times on commercial paper and credit market vernacular (http:/ / business. timesonline. co.
uk/ tol/ business/ industry_sectors/ banking_and_finance/ article2302997. ece)
Fed Bank of Richmond, VA (http:/ / www. richmondfed. org/ publications/ economic_research/
instruments_of_the_money_market/ ch09. cfm) History of origin, and special regulations governing issue of
commercial paper. Thomas K Hahn, Federal Reserve Bank of Richmond
The Week America's Economy Almost Died (http:/ / www. npr. org/ templates/ story/ story.
php?storyId=95099470) National Public Radio broadcast September 26, 2008.
Traveler's cheque
A US$100 travelers cheque issued by American
Express
Obverse and reverse side of traveler's cheque of
National Bank of Poland (nomnal value: 1000
Polish zoty); sold in April 1989 in Budapest
(Hungary), for use during travel to Poland only,
never used.
A traveler's cheque (also traveller's cheque, travellers cheque,
traveller's check or traveler's check) is a preprinted, fixed-amount
cheque designed to allow the person signing it to make an
unconditional payment to someone else as a result of having paid the
issuer for that privilege.
They were generally used by people on vacation instead of cash, as
many businesses used to accept traveler's cheques as currency.
Merchants and other parties would accept them as if they were
currency because, as long as the original signature (which the buyer is
supposed to place on the check in ink as soon he or she receives the
cheque) and the signature made at the time the check is used is the
same, the traveler's check issuer will unconditionally guarantee
payment of the face amount even if the check is fraudulently issued,
was stolen or lost. In short, a traveler's check can never 'bounce' unless
the issuer goes bankrupt and out of business. If a traveler's cheque were
lost or stolen, it could be replaced by the issuing financial institution.
Their use has been in decline since the 1990s as alternatives, such as
credit cards, debit cards, and automated teller machines became more
widely available and were easier and more convenient for travelers.
Travelers cheques are no longer widely accepted and cannot easily be
cashed, even at the banks that issue the cheques.
Terminology
Legal terms for the parties to a traveler's cheque are the obligor or
issuer, the organization that produces it; the agent, the bank or other place that sells it; the purchaser, the natural
person who buys it, and the payee, the entity to whom the purchaser writes the cheque for goods and/or services. For
purposes of clearance, the obligor is both maker and drawee.
Traveler's cheque
40
History
Traveler's cheques were first issued on 1 January 1772 by the London Credit Exchange Company for use in ninety
European cities,
[1]
and in 1874, Thomas Cook was issuing 'circular notes' that operated in the manner of traveler's
cheques.
American Express was the first company to develop a large-scale traveller's cheque system in 1891,
[2]
and is still the
largest issuer of traveler's cheques today by volume. American Express's introduction of traveler's cheques is
traditionally attributed to employee Marcellus Flemming Berry, after company president J.C. Fargo had problems in
smaller European cities obtaining funds with a letter of credit.
Between the 1950s and the 1990s, travelers cheques became one of the main ways that people took money on
vacation for use in foreign countries without the risks associated with carrying large amounts of cash.
Several brands of travelers cheques have been marketed; the most familiar of those were Thomas Cook Group, Bank
of America and American Express.
Declining use
The wider acceptance and better security of the alternatives such as credit and debit cards has meant a significant
decline in the use of travelers cheques since the 1990s. In addition, the security issues for retailers accepting travelers
cheques has meant that many businesses no longer accept them, making them less attractive to travelers. This has led
to complaints about the difficulty that holders have in using them. In much of Europe and Asia, the cheques are no
longer widely accepted and can not easily be cashed, even at the banks that issue the cheques.
Usage
Purchasing cheques for later use
Travelers cheques are sold by banks and financial specialist to customers for use at a later time. Upon obtaining
custody of a purchased supply of traveler's cheques, the purchaser should immediately write his or her signature once
upon each cheque, usually on the cheque's upper portion. This helps protect them if they are stolen. The purchaser
will also have received a receipt and some other documentation that should be kept in a safe place other than where
he or she carries the cheques. Traveler's cheques can usually be replaced if lost or stolen (if the owner still has the
receipt issued with the purchase of the cheques showing the serial numbers allocated).
Cashing cheques
When wanting to cash a traveler's cheque while making a purchase, the purchaser should, in the presence of the
payee, date and countersign the cheque in the indicated space, usually on the cheque's lower portion (if at a
restaurant, it may be helpful to ask the waiter to watch and wait for this to be done).
Denomination and change
Applicable change for a purchase transaction should be given in local currency as if the cheque were banknotes.
Traveler's cheques are available in several currencies such as U.S. dollars, Canadian dollars, Pounds sterling,
Japanese yen, Chinese Yuan and Euro; denominations usually being 20, 50, or 100 (x100 for Yen) of whatever
currency, and are usually sold in pads of five or ten cheques, e.g., 5 x 20 for 100. Traveler's cheques do not
expire, so unused cheques can be kept by the purchaser to spend at any time in the future. The purchaser of a supply
of traveler's cheques effectively gives an interest-free loan to the issuer, which is why it is common for banks to sell
them "commission free" to their customers. The commission, where it is charged, is usually 1-2% of the total face
value sold.
Traveler's cheque
41
Deposit and settlement
A payee receiving a traveler's cheque should follow its normal procedures for depositing cheques into its bank
account: usually, endorsement by stamp or signature and listing of the cheque and its amount on the deposit slip. The
bank account will be credited with the amount of the cheque as with any other negotiable item submitted for
clearance.
In the United States, if the payee is equipped to process cheques electronically at point of sale (see: Check 21 Act),
he or she should still take custody of the cheque and submit it to a financial institution, particularly to avoid any
confusion on the part of the purchaser.
Security issues
One of the main advantages travellers cheques provide is the replacement if lost or stolen.
However, this feature has also created a black market where fraudsters buy travellers cheques, sell them at 50% of
their value to other people (such as travellers) and falsely report their travellers cheque stolen with the company from
which the cheque was obtained. As such, they get back the value of the travellers cheque and make 50% of the value
as profit.
[3]
The widespread problem of counterfeit travellers cheques has caused a number of businesses to no longer accept
them or to impose stringent checks when they are used. It is a reasonable security procedure for the payee to ask to
inspect the purchaser's picture ID; a driver's license or passport should suffice, and doing so would most usefully be
towards the end of comparing the purchaser's signature on the ID with those on the cheque. The best first step,
however, that can be taken by any payee who has concerns about the validity of any traveler's cheque, is to contact
the issuer directly; a negative finding by a third-party cheque verification service based on an ID check may merely
indicate that the service has no record about the purchaser (to be expected, practically by definition, of many
travelers), or at worst that he or she has been deemed incompetent to manage a personal chequing account (which
would have no bearing on the validity of a traveller's cheque).
Some purchasers have found the process of filing a claim for lost or stolen cheques is cumbersome, and have been
left without recourse after their cheques were lost or stolen.
Alternatives
The widespread acceptance of credit cards and debit cards around the world starting in the 1980s and 1990s
significantly replaced the use of travelers cheques for paying for things on vacation.
In 2005, American Express released the American Express Travelers Cheque Card, a stored-value card that serves
the same purposes as a traveler's cheque, but can be used in stores like a credit card. It discontinued the card in
October 2007. A number of other financial companies went on to issue stored-value or pre-paid debit cards
containing several currencies that could be used like credit or debit cards at shops and at ATMs, mimicking the
traveler's cheque in electronic form. One of the major examples is the Visa TravelMoney card.
Traveler's cheque
42
References
[1] On this day - January 3 (http:/ / archive.thisislancashire. co. uk/ 2005/ 1/ 3/ 452155. html)
[2] Host With The Most (http:/ / www. time. com/ time/ magazine/ article/ 0,9171,866900-7,00. html), Time Magazine, 9 April 1956 issue
[3] [3] Handboek voor de Wereldreiziger by Frans Timmerhuis
External links
American Express Traveler's Cheques merchant site (http:/ / www10. americanexpress. com/ sif/ cda/ page/
0,1641,18540,00. asp?)
Visa Travelers Cheques (http:/ / usa. visa. com/ personal/ using_visa/ visa_travelers_cheques. html)
Visa Interpayment Travellers Cheques (http:/ / www. travelex. co. uk/ uk/ personal/ TC_visamcard. aspx)
Thomas Cook Mastercard Travellers Cheques (http:/ / www. travelex. co. uk/ uk/ personal/ TC_visamcard. aspx)
Travelex Travellers Cheques (http:/ / www. travelex. co. uk/ uk/ personal/ TC_visamcard. aspx)
Bitcoin
43
Bitcoin
Bitcoin
A common logo from the bitcoin reference client
Date of introduction 3January 2009
User(s) Worldwide
Production 25 bitcoins per block (approximately every ten minutes) until mid 2016, and then afterwards 12.5 bitcoins per block for 4
years until next halving. This halving continues until 2110-2140 when 21 million bitcoins have been issued.
Source
Number of bitcoins in circulation
[1]
Method Increase in the supply
Subunit
10
8 satoshi
10
6 bit or BTC
10
3 mBTC
Symbol BTC, XBT,
Bitcoin is a software-based online payment system described by Satoshi Nakamoto
[2]
in 2008 and introduced as
open-source software in 2009. Payments are recorded in a public ledger using its own unit of account, which is also
called bitcoin.
[3]
The WSJ and The Chronicle of Higher Education advocate use of lowercase bitcoin in all cases,
however.
[4]
This article follows the latter convention.</ref> Payments work peer-to-peer without a central repository
or single administrator, which has led the US Treasury to call bitcoin a decentralized virtual currency. Although its
status as a currency is disputed, media reports often refer to bitcoin as a cryptocurrency or digital currency.
Bitcoins are created as a virtual product in reward for payment processing work, in which users offer their computing
power to verify and record payments into a public ledger. Called mining, individuals or companies engage in this
activity in exchange for transaction fees and newly created bitcoins. Besides mining, bitcoins can be obtained in
exchange for fiat money, products, and services. Users can send and receive bitcoins electronically for an optional
transaction fee using wallet software on a personal computer, mobile device, or a web application.
Bitcoin as a form of payment for products and services has seen growth, and merchants have an incentive to accept
the digital currency because fees are lower than the 23% typically imposed by credit card processors. The European
Banking Authority has warned that bitcoin lacks consumer protections. Unlike credit cards, any fees are paid by the
purchaser not the vendor. Bitcoins can be stolen and chargebacks are impossible.
[5]
Commercial use of bitcoin is
currently small compared to its use by speculators, which has fueled price volatility.
Bitcoin has been a subject of scrutiny amid concerns that it can be used for illegal activities. In October 2013 the US
FBI shut down the Silk Road online black market and seized 144,000 bitcoins worth US$28.5 million at the time.
The US is considered bitcoin-friendly compared to other governments. In China, buying bitcoins with yuan is subject
to restrictions, and bitcoin exchanges are not allowed to hold bank accounts.
Bitcoin
44
Overview
The most important part of the bitcoin system is a public ledger that records financial transactions in bitcoins. This is
accomplished without the intermediation of any single, central authority, as long as mining is decentralized. Instead,
multiple intermediaries exist in the form of computer servers running bitcoin software. By connecting over the
Internet, these servers form a network that anyone can join. Transactions of the form payer X wants to send Y
bitcoins to payee Z are broadcast to this network using readily available software applications. Bitcoin servers can
validate these transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other
servers.
The block chain ledger
All bitcoin transfers are recorded in a computer file that acts as a public ledger called the block chain, which
everyone can examine. Where a conventional ledger records the transfer of actual bills or promissory notes that exist
apart from it, bitcoins are simply entries in the block chain and do not exist outside of it.
Mining
Obsolete bitcoin mining hardware common in
mid and late 2013. Called USB Block Erupter,
each can calculate ~333 megahashes per second.
Maintaining the block chain is called mining, and those who do are
rewarded with newly created bitcoins and transaction fees. Miners may
be located anywhere in the world; they process payments by verifying
each transaction as valid and adding it to the block chain. As of
2014[6], payment processing is rewarded with 25 newly created
bitcoins per block added to the block chain. To claim the reward, a
special transaction called a coinbase is included with the processed
payments. All bitcoins in circulation can be traced back to such
coinbase transactions. The bitcoin protocol specifies that the reward for
adding a block will be halved approximately every four years.
Eventually, the reward will be removed entirely when an arbitrary limit
of 21 million bitcoins is reached c. 2140, and transaction processing
will then be rewarded by transaction fees solely. Paying a transaction fee is optional, but may speed up confirmation
of the transaction. Payers have an incentive to include such fees because doing so means their transaction will likely
be added to the block chain sooner; miners can choose which transactions to process and prefer to include those that
pay fees.
As of 2013[6] mining had become quite competitive, has been compared to an arms race and ever more specialized
technology is utilized. The most efficient mining hardware makes use of custom designed application-specific
integrated circuits, which outperform general purpose CPUs and use less power as well. Without access to these
purpose built machines, a bitcoin miner is unlikely to earn enough to even cover the cost of the electricity used in his
or her efforts.
Mining pools
The individual odds of winning the reward for adding a block to the block chain decrease with an increasing number
of miners. Since the reward for each block can only go to a single bitcoin address, As of 2014[6], it has become
common for miners to join organized mining pools, which split work and reward among all participants and make
mining a less risky endeavor. Even for those who join pools, the cost of the electricity necessary to mine may
outweigh the bitcoin rewards from doing so.
Bitcoin
45
Anonymity
The public nature of bitcoin means that, while those who use it are not identified by name, transactions can be linked
to individuals and companies. All transactions are recorded into a public ledger, the block chain, and are viewable by
everyone. Additionally, many jurisdictions require exchanges, where people can buy and sell bitcoins for cash, to
collect personal information. The privacy concerns of some who use bitcoins are sufficient to cause them to take
additional steps to cover their tracks. In order to obfuscate the link between individual and transaction, a different
bitcoin address for each transaction can be used, and others rely on so-called mixing services that allow users to
trade bitcoins whose transaction history implicates them for coins with different transaction histories.
[7]
It has been suggested that bitcoin payments should not be considered more anonymous than credit card payments.
Buying and selling
Bitcoins can be bought and sold with many different currencies from individuals and companies. Bitcoins may be
purchased in person or at a bitcoin ATM in exchange for cash currency.
[8]
Participants in online exchanges offer
bitcoin buy and sell bids. Using an online exchange to obtain bitcoins entails some risk, and according to one study,
45% of exchanges fail and take client bitcoins with them. Since bitcoin transactions are irreversible, sellers of
bitcoins must take extra measures to ensure they have received traditional funds from the buyer.
Wallets
See also: Digital wallet and Online wallet
Example of Casascius physical bitcoins
A paper wallet with QR codes
While wallets are often described as being a place to hold or store bitcoins,
[9]
due to the nature of the system,
bitcoins are inseparable from the block chain transaction ledger. Perhaps a better way to define a wallet is something
"that stores the digital credentials for your bitcoin holdings" and allows you to access (and spend) them. Bitcoin uses
public-key cryptography, in which two cryptographic keys, one public and one private, are generated. The public key
can be thought of as an account number or name and the private key, ownership credentials. At its most basic, a
wallet is a collection of these keys. Most bitcoin software also includes the ability to make transactions, however.
Perhaps better termed physical wallets, physical bitcoins are ubiquitous in media coverage and combine a novelty
coin with a private key printed on paper, metal, wood, or plastic. Physical bitcoins aren't widely seen outside of
pictures in news articleWikipedia:Citation needed, but for those serious about security, storing private keys on paper
printouts or in offline data storage devices is the best option.
Software
Main article: Bitcoin network
Bitcoin
46
Electrum sample bitcoin client
Bitcoin client software called a bitcoin wallet allows a user to transact
bitcoins. A wallet program generates and stores private keys, and
communicates with peers on the bitcoin network. The first wallet
program called Bitcoin-Qt was released in 2009 by Satoshi Nakamoto
as open source code. It can be used as a desktop wallet for payments or
as a server utility for merchants and other payment services.
Bitcoin-Qt, also called Satoshi client, is sometimes referred to as the
reference client because it serves to define the bitcoin protocol and acts
as a standard for other implementations. As of version 0.9, Bitcoin-Qt
has been renamed Bitcoin Core to more accurately describe its role in the network.
[10]
When making a purchase with
a mobile device, QR codes are used ubiquitously to simplify transactions. Several server software implementations
of the bitcoin protocol exist. So-called full nodes on the network validate transactions and blocks they receive, and
relay them to connected peers.
Ownership
The ownership of bitcoins associated with a certain bitcoin address can be demonstrated with knowledge of the
private key belonging to the address. For the owner, it is important to protect the private key from loss or theft. If a
private key is lost, the user cannot prove ownership by other means. The coins are then lost and cannot be recovered.
Because anyone with knowledge of the private key can take ownership of any associated bitcoins, theft can occur
when a private key is revealed or stolen.
Security, theft, and loss
Integral to bitcoin security is the prevention of unauthorized transactions from an individual's wallet. A bitcoin
transaction permanently transfers ownership to a new address, a string having the form of random letters and
numbers derived from public keys by application of a hash function and encoding scheme. The corresponding
private keys act as a safeguard for the owner; a valid payment message from an address must contain the associated
public key and a digital signature proving possession of the associated private key. Because anyone with a private
key can spend all of the bitcoins associated with the corresponding address, protection of private keys is quite
important. Loss of a private key may result in theft, which has occurred on numerous occasions. The practical
day-to-day security of bitcoin wallets is an ongoing concern. Risk of theft can be reduced by generating keys offline
on an uncompromised computer and saving them on external storage or paper printouts.
Bitcoins can be lost. In 2013 one user said he lost 7,500 bitcoins, worth $7.5m at the time, when he discarded a hard
drive containing his private key. Bitcoins can also be found. In March 2014, former bitcoin exchange Mt. Gox
reported it found an "old wallet, which was used before June 2011 [that] held about 200,000 bitcoins".
History
Main article: History of Bitcoin
Bitcoin was first mentioned in a 2008 research paper published under the name Satoshi Nakamoto. It is unknown
who Satoshi Nakamoto is. In 2009, an exploit in an early bitcoin client was found that allowed large numbers of
bitcoins to be created.
In March 2013, a technical glitch caused a fork in the block chain, with one half of the network adding blocks to one
version of the chain and the other half adding to another. For six hours two bitcoin networks operated at the same
time, each with its own version of the transaction history. The core developers called for a temporary halt to
transactions, sparking a sharp sell-off. Normal operation was restored when the majority of the network downgraded
to version 0.7 of the bitcoin software.
Some mainstream websites began accepting bitcoins c. 2013. WordPress started in November 2012 followed by
OKCupid in April 2013, Atomic Mall in November 2013, TigerDirect and Overstock.com in January 2014, Expedia
Bitcoin
47
in June 2014, and Newegg in July 2014. Certain non-profit or advocacy groups such as the Electronic Frontier
Foundation allow bitcoin donations. (Although this organization stopped accepting bitcoins in 2011 and began again
in 2013.
[11]
)
The first law enforcement events occurred in May 2013. Assets belonging to the Mt. Gox exchange were seized by
Department of Homeland Security, and the Silk Road drug market website was shut down by the FBI.
In October 2013, Chinese internet giant Baidu had allowed clients of website security services to pay with bitcoins.
During November 2013, the China-based bitcoin exchange BTC China overtook the Japan-based Mt. Gox and the
Europe-based Bitstamp to become the largest bitcoin trading exchange by trade volume. On 19 November 2013, the
value of a bitcoin on the Mt. Gox exchange soared to a peak of US$900 after a United States Senate committee
hearing was told that virtual currencies were a legitimate financial service. On the same day, one bitcoin traded for
over RMB6780 (US$1100) in China. On 5 December 2013, the People's Bank of China prohibited Chinese
financial institutions from using bitcoins. After the announcement, the value of bitcoins dropped and Baidu no longer
accepted bitcoins for certain services. Buying real-world goods with any virtual currency had been illegal in China
since at least 2009.
The first bitcoin ATM was installed in October 2013 in Vancouver, British Columbia, Canada.
With roughly 12 million existing bitcoins As of November 2013[6], the new price increased the market cap for
bitcoin to at least US$7.2 billion. By 23 November 2013, the total market capitalization of bitcoin exceeded US$10
billion for the first time.
In the US two men were arrested in January 2014 on charges of money-laundering using bitcoins including Charlie
Shrem, the head of defunct bitcoin exchange BitInstant and a vice chairman of the Bitcoin Foundation. Shrem
allegedly allowed the other arrested party to purchase large quantities of bitcoins for use on black-market websites.
In early February 2014, one of the largest bitcoin exchanges, Mt. Gox, suspended withdrawals citing technical
issues.
[12]
By the end of the month, Mt. Gox had filed for bankruptcy protection in Japan amid reports that 744,000
bitcoins had been stolen. Originally a site for trading Magic: The Gathering cards, Mt. Gox once was the dominant
bitcoin exchange although prior to the collapse its popularity had waned.
[13]
Economics
Classification
Bitcoin is commonly referred to as digital currency, digital cash, virtual currency, electronic currency, or
cryptocurrency. Some media outlets do make a distinction between "real" money and bitcoins, however. According
to the director of the Institute for Money, Technology and Financial Inclusion at the University of California-Irvine
there is "an unsettled debate about whether bitcoin is a currency or payment protocol".
Economists defining money as a store of value, a medium of exchange, and a unit of account agree that bitcoin has
some way to go to meet all these criteria. It does best as a medium of exchange. (About 1,000 bricks and mortar
businesses were willing to accept payment in bitcoins as of November 2013 in addition to more than 35,000 online
merchants.
[14]
) The bitcoin market currently suffers from volatility, limiting the ability of bitcoins to act as a stable
store of value, and, although bitcoin is the unit of account for the block chain, bitcoin does not see use as a unit of
account outside of it. Where people are allowed to buy with bitcoins, prices are not denominated in bitcoins.
The People's Bank of China has stated that bitcoin "is fundamentally not a currency".
Bitcoin
48
Price and volatility
To improve access to price information and increase transparency, on 30 April 2014 Bloomberg LP announced plans
to list prices from bitcoin companies Kraken and Coinbase on its 320.000 subscription financial data terminals.
According to Mark T. Williams of Boston University, the volatility of bitcoin is over seven times that of gold and
over eight times that of the S&P 500. The Bitcoin Foundation contends that high volatility is due to insufficient
liquidity while a Forbes journalist claims that it is related to the uncertainty of its long-term value. As of 2014,
pro-bitcoin venture capitalists argue the greatly increased trading volume that planned high-frequency trading
exchanges are hoped to bring will decrease price volatility. Volatility has little effect on the utility of bitcoin as a
payment processing system.
The price of bitcoins has gone through various cycles of appreciation and depreciation referred to by some as
bubbles and busts. In 2011, the value of one bitcoin rapidly rose from about US$0.30 to US$32 before returning to
US$2. In the latter half of 2012 and during the 2012-2013 Cypriot Financial Crisis, the bitcoin price began to rise,
reaching a peak of US$266 on 10 April 2013, before crashing to around US$50. At the end of 2013, the cost of one
bitcoin rose to the all-round peak of US$1135, but fell to the price of US$693 three days later.WP:NOTRS In 2014
the price fell sharply, and in April remained depressed at little more than half that of 2013.
Alternative to national currencies
Bitcoins are accepted in this caf in the Netherlands as
of 2013
Bitcoins are used by some Argentinians as an alternative to the
official currency,
[15]
which is stymied by inflation and strict
capital controls, to protect their savings against inflation or the
possibility that governments could confiscate savings accounts. It's
been suggested that during the 20122013 Cypriot financial crisis
bitcoin purchases rose due to fears that savings accounts would be
confiscated or taxed.
Speculative bubble
Bitcoin has been labelled a speculative bubble by many including
Former Federal Reserve Chairman Alan Greenspan and economist
John Quiggin. Two lead software developers of bitcoin, Gavin
Andresen and Mike Hearn, have warned that bubbles may occur.
[16]
Nobel Laureate Robert Shiller said that bitcoin
"exhibited many of the characteristics of a speculative bubble." Others reject the label and see bitcoin's quick rise in
price as nothing more than normal economic forces at work.
As investment
One way of investing in bitcoins is to buy and hold them as a long-term, high-risk investment. FINRA, a United
States self-regulatory organization, warns that investing in bitcoins carries significant risks. The European Banking
Authority warns that the risks of investment go beyond a potential fall in the value of bitcoins. Bitcoins may be of
limited value to unsophisticated investors. Risk hasn't deterred some such as the Winklevoss twins, who made a
US$1.5 million personal investment and attempted to launch a bitcoin ETF. The first regulated bitcoin fund was
established in Jersey in July 2014, with the approval of the Jersey Financial Services Commission. Other investors,
like Peter Thiel's Founders Fund, which invested US$3 million, don't purchase bitcoins themselves instead funding
bitcoin infrastructure like companies that provide payment systems to merchants, exchanges, and wallet services, etc.
Investors also invest in bitcoin mining.
Bitcoin
49
Supply
Growth of the bitcoin supply is predefined by the bitcoin protocol. Currently there are over twelve million bitcoins in
circulation with an approximate creation rate of 25 every ten minutes. The total supply is capped at an arbitrary limit
of 21 million, and every four years the creation rate is halved. This means new bitcoins will continue to be released
for more than a hundred years.
Value forecasts
Financial journalists and analysts, economists, and investors have attempted to predict the possible future value of
bitcoin. Economist John Quiggin stated, "bitcoins will attain their true value of zero sooner or later, but it is
impossible to say when." In 2013, Bank of America FX and Rate Strategist David Woo forecast a maximum fair
value per bitcoin of $1,300. Bitcoin investor Cameron Winklevoss stated in 2013 that the "[s]mall bull case scenario
for bitcoin is... 40,000 USD a coin". In late 2013, finance professor Mark Williams forecast a bitcoin would be worth
less than ten US dollars by July 2014. Since then bitcoin have exchanged as low as $344 (April 2014) and during
July 2014 the bitcoin low has been $609.
On its political economy
The Nation suggested in May 2014, that it was "difficult to see what problem Bitcoin solves for people with
left-wing politics.".
Vasilis Kostakis and Michel Bauwens claim that bitcoin is a currency that reflects a new type of capitalism, named
distributed capitalism. and that this new capitalism conforms to characteristics of the network era and utilizes the
peer-to-peer infrastructures to achieve capital accumulation. According to Vasilis Kostakis it might appear as though
it exists outside the financial system, but by promoting scarcity and competition this project aggravates the
over-accumulation of capital and exacerbates the social inequalities that it is supposed to combatWikipedia:Disputed
statement According to Vasilis Kostakis bitcoin should be viewed like a new technology, not just a currency: It has
paved the way for new types of currencies that utilize new technological infrastructures and whose dynamics should
not be ignored.
Reception
Some economists have responded positively to bitcoin, including Franois R. Velde, Senior Economist at the
Chicago Fed, who described it as "an elegant solution to the problem of creating a digital currency." Paul Krugman
and Brad DeLong have found fault with bitcoin questioning why it should act as a reasonably stable store of value or
whether there is a floor on their value. Economist John Quiggin has criticized bitcoin as "the final refutation of the
efficient-market hypothesis".
David Andolfatto, a Vice President at the Federal Reserve Bank of St. Louis, stated that bitcoin is a threat to the
establishment, which he argues is a good thing for the Federal Reserve System and other central banks because it
prompts these institutions to operate sound policies.
Free software movement activist Richard Stallman has criticized the lack of anonymity and called for reformed
development. PayPal President David A. Marcus calls bitcoin a "great place to put assets" but claims it will not be a
currency until price volatility is reduced. As bitcoins proved popular, they have been increasingly covered by comics
around the world.
Bitcoin
50
Acceptance by merchants
Established firms that accept bitcoins include Atomic Mall, Clearly Canadian, Dish Network, Overstock.com, the
Sacramento Kings, TigerDirect, Virgin Galactic, Zynga,Newegg., Expedia, and Dell.
In late 2013 the University of Nicosia became the first university in the world to accept it.
Financial institutions
As of 2014, bitcoin companies have had difficulty opening traditional bank accounts because lenders have been leery
of bitcoin's links to illicit activity. According to a co-founder of one such company, BitPay, "banks are scared to deal
with bitcoin companies, even if they really want to". Yet, some financial institutions have been bullish on bitcoin. In
a 2013 report, Bank of America Merrill Lynch stated that "we believe bitcoin can become a major means of payment
for e-commerce and may emerge as a serious competitor to traditional money-transfer providers. As a medium of
exchange, bitcoin has clear potential for growth and that in a long-term fair-value analysis maximum market
capitalization for bitcoins could be $15 billion." In June 2014, the first bank that converts deposits in currencies
instantly to bitcoin without any fees, for further transactions, was opened in Boston.
Concurrent with Bloomberg LP, 33% owned by Merrill Lynch launching pricing information is the development of
high-frequency trading firms by Atlas ATS in New York and Hong Kong and one from London-based Coinfloor,
claiming to be the first auditable bitcoin exchange, and a SecondMarket project of an exchange for institutional
investors.
A US government auction of almost 30,000 bitcoins seized in October 2013 from the Silk Road on 30 June 2014 by
the US Marshals Service was said to increase legitimacy of the currency. The 45 registered bidders, each of whom
put down a deposit of $200,000 made 63 bids.
[17]
Legal and journalistic opinions
Bitcoins have been evaluated and treated in various ways around the world. Magistrate Judge Amos Maazant of a
Texas court classified bitcoins as currency. A German court found bitcoin to be a unit of account. The Finnish
Government judged it to be a commodity. The People's Bank of China has stated that bitcoin "is fundamentally not a
currency".
A WSJ journalist declared bitcoins a commodity in December 2013. A Forbes journalist referred to bitcoins as
digital collectible. Two University of Amsterdam computer scientists proposed the term 'money-like informational
commodity' in order "to allow for a systematic discussion of its development through all stages including an initial
stage and a possible demise without being constrained by the implications of it being a money or a near-money".
Wired magazine summarized the reception of bitcoin, saying "many leading economists [believe] bitcoin is a fatally
flawed idea shaped by people who dont really understand how money works".
Legal status and regulation
Main article: Legal status of Bitcoin
Few governments have moved to regulate bitcoin and similar private currencies. According to the European Central
Bank, traditional financial sector regulation is not applicable because bitcoin does not involve traditional financial
actors. On the other hand, the Bitcoin Foundation Canadas report: Bitcoin and the law: An analytical report on
Bitcoins legal and regulatory framework in Canada dispels the myth that Bitcoin is not regulated in Canada.
[18]
Under other regimes, existing rules have been extended to include bitcoin and bitcoin companies. Steven Strauss, a
Harvard public policy professor, suggested in April 2013 governments could outlaw bitcoin, a possibility that was
mentioned in a 2013 SEC filing made by a bitcoin investment vehicle. A detailed survey of forty foreign
jurisdictions and the European Union is maintained by the US Library of Congress.
Bitcoin
51
Bolivia
Bitcoin is banned by the Bolivian central bank.
[19]
Canada
The Canadian government announced in February 2014 that it was going to regulate bitcoin under existing
anti-money laundering and counter-terrorist financing legislation.
[20]
In Quebec, The Financial Markets Authority
stated in regards to bitcoin ATMs, that it would prosecute any violation of the Securities Act, the Derivatives Act, or
the Money Services Business Act.
[21]
China
China restricted bitcoin exchange for local currency in December 2013. On 10 April 2014 the Peoples Bank of
China ordered banks and all third-party payment services to stop dealing with anyone in the bitcoin business. The
ruling de-funds all Chinese bitcoin trading websites, as they will no longer have bank accounts in China.
Cyprus
The use of bitcoins is not regulated in Cyprus. On 11 December 2013, the Central Bank of Cyprus issued a statement
on bitcoins, stating that "it considers the use of any kind of virtual money as particularly dangerous, given that it is
not under any regulatory system and its operation is unchecked."
Ecuador
On the 24th of July 2014, Ecuador effectively banned bitcoin, along with all other decentralized digital currencies,
approving a monetary reform allowing the government to create its own centralized digital currency. This new
reform comes as a severe blow to the bitcoin industry in Ecuador, since it demands that they shut down their
operations immediately. Those who defy the ban will face prosecution, and all bitcoins circulated and assets in
bitcoin trades face confiscation.
Europe
In July 2014 the European Banking Authority advised European banks not to deal in virtual currencies such as
bitcoin until a regulatory regime was in place.
Hong Kong
Pre-existing Hong Kong law covers acts of fraud and money laundering involving virtual commodities.
India
Digital or virtual currencies such as bitcoin have gained widespread acceptance in India despite a natural skepticism
to assets not backed by tangible entities such as land. After the RBI warning in December 2013, a number of bitcoin
operators shut shop.Wikipedia:Citation needed The actions of the ED (enforcement directorate) and the I-T
(income-tax) department have sent tremors throughout the mainstream bitcoin community in India, if only for the
reason that there is still no official regulation on how companies involved in dealing with digital currencies should
comply with anti-money laundering and financial transaction laws.
Indonesia
A spokesman for Bank Indonesia reportedly issued a statement on bitcoin in December 2013, saying that "bitcoin is
a potential payment method, but its different than ordinary currency... It is not regulated by the central bank so there
are risks... At the moment, were studying bitcoin and we have no plan to issue a regulation on it."
Japan
No laws in Japan regulate the use of bitcoins. Haruhiko Kuroda, governor of the Bank of Japan (BOJ), stated in
December, 2013, that BOJ was "researching issues of bitcoins, but I have nothing to say regarding bitcoins at the
moment."
[22]
As of July 2014, Japans new Bitcoin business advocacy group, The Japan Authority of Digital Asset,
has launched with the governments explicit support, aiming to help establish standards and codes of conduct for its
member organizations.
[23]
Bitcoin
52
Jersey
The first regulated bitcoin fund was established in Jersey in July 2014, with the approval of the Jersey Financial
Services Commission, after island leaders expressed a desire for Jersey to become a global center for digital
currencies. At the time of the establishment of the fund, bitcoin was already being accepted by some local
businesses.
Russian Federation
On 27 January 2014, the Central Bank of the Russian Federation issued a statement entitled "On Using Virtual
Currencies, Specifically Bitcoin, in Transactions." According to the statement, the Central Bank views the services
of Russian legal entities aimed at assisting in the exchange of bitcoins for goods, services, or currencies as a
"dubious activity" associated with money laundering and terrorism financing, and recommends that Russian
individuals and legal entities refrain from transactions involving bitcoins.
Singapore
The Monetary Authority of Singapore may require bitcoin intermediaries to collect personal details of their
customers and report suspicious activity similar to what it requires from money changers.
USA
In the US the first step of regulation occurred in July 2011, when the US Department of Treasury's Financial Crimes
Enforcement Network added "other value that substitutes for currency" to its definition of Money services
businesses. In 2013 the Treasury issued new rules regarding virtual currencies, whereby exchanges (but not users)
are considered money transmitters and must comply with rules to prevent money laundering and terrorist financing.
Besides obtaining personal details of clients, bitcoin exchanges must verify that their customers are not on the Office
of Foreign Asset Controls Specially Designated Nationals list. In April 2014, the Treasury confirmed that bitcoin
cloud mining and escrow services are not classified as money transmitters.
The US Government Accountability Office reviewed virtual currencies upon the request of the Senate Finance
Committee and in May 2013 recommended that the IRS formulate tax guidance for bitcoin businesses. On 25 March
2014, in time for 2013 tax filing, the IRS issued a guidance that virtual currency is treated as property for US federal
tax purposes and that "an individual who 'mines' virtual currency as a trade or business [is] subject to
self-employment tax."
The US Commodity Futures Trading Commission stated in March 2014 it was considering regulation of digital
currencies.
In January 2014, the US Securities and Exchange Commission (SEC) was very focused on whether
bitcoin-denominated stock exchanges were illegal, per its enforcement administrator, and inquired into the gambling
site SatoshiDice listing shares on bitcoin exchange MPEx. In May it warned investors that "both fraudsters and
promoters of high-risk investment schemes may target Bitcoin users." The SEC charged and settled with the former
owner of SatoshiDice in June 2014 for selling securities without registering with the SEC.
The IRS classified bitcoins as a capital asset end of March 2014 and subject to taxes on capital gains.
On 8 May 2014, the US Federal Election Commission issued draft guidance to US politicians who want to receive
bitcoin donations. The Commission declined to declare bitcoins currency, opting to deem them items "of value."
In May 2014, Brett Stapper, co-founder of Falcon Global Capital, registered to lobby members of Congress and
federal agencies on issues related to bitcoin.
As of July 2014[6], there are no rules at the US state level yet; In March, the New York State Department of
Financial Services had officially invited bitcoin exchanges to apply with them. On 17 July it published draft
regulations for businesses that receive, exchange, transmit or store virtual currency. Businesses would have to
provide transaction receipts, disclosures about risks, policies to handle customer complaints, maintain a
cybersecurity program, hire a compliance officer and verify details about their customers to follow
Bitcoin
53
anti-money-laundering rules, per FinCEN.
California Assemblyman Roger Dickinson (D-Sacramento) drafted legislation (Assembly Bill 129)drafted legislation
(Assembly Bill 129)
[24]
to legalize bitcoin and all other alternative and digital currency, such as Litecoin, Dogecoin,
Starbucks Stars, and Amazon Coins. However, Dickinson "thinks the federal government should regulate the
cryptocurrency" and said "I saw this legislation as a ways of cleaning up the code in California to conform to
reality".
International guidance
The 2013 G7's Financial Action Task Force published guidance for Internet-based payment services that defines
"exchangers buying or selling digital currency for cash (or other digital currencies) [...] as a virtual bureau de
change" and warns that "Internet-based payment services that allow third party funding from anonymous sources
may face an increased risk of [money laundering/terrorist financing]" concluding that this may "pose challenges to
countries in [anti-money laundering/counter terrorist financing] regulation and supervision."
Criminal activity
Bitcoins have been associated with online criminal behavior and so-called cybercriminals. Used to obfuscate online
transactions, bitcoins are seized when deep web black markets are shut by authorities.
[25]
Criminal activities have
stigmatized the currency and attracted the attention of financial regulators, legislative bodies, and law
enforcement.
[26]
CNN has referred to bitcoin as a "shady online currency [that is] starting to gain legitimacy in
certain parts of the world," and The Washington Post calls it "the currency of choice for seedy online activities." The
FBI stated in a 2012 report that "bitcoin will likely continue to attract cyber-criminals who view it as a means to
move or steal funds." Criminal activity involving bitcoin has largely centered around theft, money laundering, the
use of botnets for mining, and the use of bitcoins in exchange for illegal items or services. "Like cash, it can be used
for ill as well as for good." Certain nation states may feel that its use in circumventing capital controls is also
undesirable. Despite claims made by non-profit Bitcoin Foundation that "cryptography is the reason no one can steal
bitcoins," theft is widespread.
[27]
Black markets
In 2012, it was estimated that 4.5% to 9% of all transactions of all bitcoin exchanges in the world were for drug
trades on a single deep web drugs market, Silk Road. The bulk of bitcoin purchases during the time were speculative
in nature, so drugs must have constituted a greater percentage of the actual goods purchased with bitcoins c. 2012.
Silk Road was shut by US law enforcement in October 2013 leading to a short-term fall in the value of bitcoin.
[28]
Alternative sites were soon available, and in early 2014 the Australian Broadcasting Corporation reported that the
closure of the Silk Road had little impact on the number of Australians selling drugs online, which had actually
increased.
Several news outlets have asserted that the popularity of bitcoins hinges on the ability to use them to purchase illegal
goods. Non-drug transactions were thought to be far less than the number involved in the purchase of drugs, and
roughly one half of all transactions made using bitcoin c. 2013 were bets placed at a single online gambling website,
Satoshi Dice. One source stated online gun dealers use bitcoin to sell arms without background checks. The bitcoin
community branded one site, Sheep Marketplace, as a scam when it prevented withdrawals and shut down after an
alleged bitcoins theft. In a separate case, escrow accounts with bitcoins belonging to patrons of a different black
market were hacked in early 2014.
Bitcoin
54
Money laundering
Bitcoins may not be ideal for money laundering because all transactions are public. Authorities have expressed
concerns, however. The European Banking Authority and the FBI have both stated that bitcoin may be used for
money laundering.
[29]
In early 2014, an operator of a US bitcoin exchange was arrested for money laundering.
Ponzi scheme
Various journalists, US economist Nouriel Roubini, and the head of the Estonian central bank have voiced concerns
that bitcoin may be a Ponzi scheme.
[30]
Bitcoin supporters disagree. A 2012 report by the European Central Bank
states, "it [is not] easy to assess whether or not the bitcoin system actually works like a pyramid or Ponzi scheme."
In an alleged Ponzi scheme that utilized bitcoins, The Bitcoin Savings and Trust promised investors up to 7 percent
weekly interest, and raised at least 700,000 bitcoins from 2011 to 2012. The SEC charged the company and its
founder in 2013 "with defrauding investors in a Ponzi scheme involving bitcoin...".
Thefts
A theft is an unauthorized transfer from a bitcoin address using the private key to unlock the address. Because
transactions are irreversible and the identity of users difficult to unmask, it is rare that stolen bitcoins are recovered
and returned. Theft occurs on a regular basis despite claims made by the Bitcoin Foundation that theft is impossible.
Generating and storing keys offline mitigates the risk of theft. Most large-scale thefts occur at exchanges or online
wallet services that store the private keys of many users. The thief hacks an online wallet service by finding a bug in
its website or spreading malware to computers holding the private keys.
Many high-profile thefts have been reported. In late November 2013, an estimated $100 million in bitcoins were
stolen from the online illicit goods marketplace Sheep Marketplace, which immediately closed. Users tracked the
coins as they were processed and converted to cash, but no funds were recovered and no culprits identified. A
different black market, Silk Road 2, stated that during a February 2014 hack bitcoins valued at $2.7 million were
taken from escrow accounts. In late February 2014 Mt. Gox, one of the largest virtual currency exchanges, filed for
bankruptcy in Tokyo after its computer system was hacked and approximately $477 million in bitcoins were stolen.
Flexcoin, a bitcoin storage specialist based in Alberta, Canada, shut down on March 2014 after saying it discovered a
theft of about $650,000 in bitcoins. Poloniex, a digital currency exchange, reported on March 2014 that it lost
bitcoins valued at around $50,000.
Malware
Bitcoin-related malware includes software that steals bitcoins from users using a variety of techniques, software that
uses infected computers to mine bitcoins, and different types of ransomware, which disable computers or prevent
files from being accessed until some payment is made. Security company Dell SecureWorks said in February 2014
that it had identified 146 types of bitcoin malware; about half of it undetectable with standard antivirus scanners.
Unauthorized mining
In June 2011, Symantec warned about the possibility that botnets could mine covertly for bitcoins. Malware used the
parallel processing capabilities of GPUs built into many modern video cards. Although the average PC with an
integrated graphics processor is virtually useless for bitcoin mining, tens of thousands of PCs laden with mining
malware could produce some results.
Several reports of employees or students using university or research computers to mine bitcoins have been
published.
Bitcoin
55
Botnet cases
In mid-August 2011, bitcoin mining botnets were detected, and less than three months later, bitcoin mining trojans
had infected Mac OS X.
In April 2013, electronic sports organization E-Sports Entertainment was accused of hijacking 14,000 computers to
mine bitcoins; the company later settled the case with the State of New Jersey.
German police arrested two people in December 2013 who customized existing botnet software to perform bitcoin
mining, which police said had been used to mine at least $950,000 worth of bitcoins.
For four days in December 2013 and January 2014, Yahoo Europe hosted an ad containing bitcoin mining malware
that infected an estimated two million computers. The software, called Sefnit, was first detected in mid-2013 and has
been bundled with many software packages. Microsoft has been removing the malware through its Microsoft
Security Essentials and other security software since January 2014.
Malware stealing bitcoins
Some malware can steal private keys for bitcoin wallets allowing the bitcoins themselves to be stolen. The most
common type searches computers for cryptocurrency wallets to upload to a remote server where they can be cracked
and their coins stolen. Many of these also log keystrokes to record passwords, often avoiding the need to crack the
keys. A different approach detects when a bitcoin address is copied to a clipboard and quickly replaces it with a
different address, tricking people into sending bitcoins to the wrong address. This method is effective because
bitcoin transactions are irreversible.
Cases of theft
One virus, spread through the Pony botnet, was reported in February 2014 to have stolen up to $220,000 in
cryptocurrencies including 335 bitcoins from 85 wallets. Security company Trustwave, which tracked the malware,
reports that its latest version was able to steal 30 types of digital currency.
A type Mac malware active in August 2013, Bitvanity posed as a vanity wallet address generator and stole addresses
and private keys from other bitcoin client software. A different trojan for Mac OS X, called CoinThief was reported
in February 2014 to be responsible for multiple bitcoin thefts, including one user who lost 20 bitcoins. The software
was hidden in versions of some cryptocurrency apps on Download.com and MacUpdate.
Ransomware
Another type of bitcoin-related malware is ransomware. One program called Cryptolocker, typically spread through
legitimate-looking email attachments, encrypts the hard drive of an infected computer, then displays a countdown
timer and demands a ransom, usually two bitcoins, to decrypt it. Police in Massachusetts said they paid a 2 bitcoin
ransom in November 2013, worth more than $1,300 at the time, to decrypt one of their hard drives. Linkup, a
combination ransomware and bitcoin mining program that surfaced in February 2014, disables internet access and
demands credit card information to restore it, while secretly mining bitcoins.
Bitcoin
56
Security
Further information: Bitcoin network
There are two main ways the blockchain ledger can be corrupted to steal bitcoins: by fraudulently adding to or
modifying it. The bitcoin system protects the blockchain against both using a combination of digital signatures and
cryptographic hashes.
The Addition Attack and digital signatures
Payers and payees are identified in the blockchain by their public cryptographic keys: most bitcoin transfers are from
one public key to a different public key. (Actually, hashes of these keys are used in the blockchain, and are called
"bitcoin addresses".) In principle, an attacker Eve could steal money from Alice and Bob by simply adding
transactions to the blockchain ledger like Alice pays Eve 100 bitcoins, Bob pays Eve 100 bitcoins, and so on, using of
course these people's bitcoin addresses instead of their names. The bitcoin protocol prevents this kind of theft by
requiring every transfer to be digitally signed with the payer's private key; only signed transfers can be added to the
blockchain ledger. Since Eve cannot forge Alice's signature, Eve cannot defraud Alice by adding an entry to the
blockchain equivalent to Alice pays Eve 100 bitcoins. At the same time, anyone can verify Alice's signature using her
public key, and therefore that she has authorized any transaction in the blockchain where she is the payer.
The Modification Attack and mining
The other principal way to steal bitcoins would be to modify blockchain ledger entries. Eve could buy something
from Alice, like a sofa, by adding a signed entry to the blockchain ledger equivalent to Eve pays Alice 100 bitcoins.
Later, after receiving the sofa, Eve could modify that blockchain ledger entry to read instead: Eve pays Alice 1
bitcoin, or even delete the entry. Digital signatures cannot prevent this attack: Eve can simply sign her entry again
after modifying it.
To prevent modification attacks, the bitcoin system first requires entries be added to the blockchain not one at a time,
but in groups or blocks. More importantly, each block must be accompanied by a cryptographic hash of three things:
the hash of the previous block, the block itself, and a number called a nonce. A hash of only the first two items will,
like any cryptographic hash, always have a fixed number of bits (e.g. 256 for SHA-256). The nonce is a number
which, when included, yields a hash with a specified number of leading zero bits. Because cryptographic hashes are
essentially random, in the sense that their output cannot be predicted from their inputs, there is only one known way
to find the nonce: to try out integers one after the other, e.g. 1, then 2, then 3, and so on. This process is called
mining. The larger the number of leading zeros, the longer on average it will take to find a requisite nonce. The
bitcoin system constantly adjusts the number of leading zeros so that the average time to find a nonce is about ten
minutes. That way, as computer hardware gets faster over the years, the bitcoin protocol will simply require more
leading zero bits to make mining always last about ten minutes.
This system prevents modification attacks in part because an attacker has to recalculate all the hashes of the blocks
after the modified one. In the example above, if Eve wants to change 100 bitcoins to 1 bitcoin, she will not only have
to recompute the hash of the block that transaction is in, but of all the blocks that come after it; she will have to
recreate the chain of blocks. Although she could do this in principle, it would take her about ten minutes on average
per block. Concurrently, the network will continue to add blocks at a much faster rate than Eve alone can mine. Eve
would have to recalculate all the blocks before the network could add a new one, or at least catch up with or overtake
the network's miners. To achieve this would require roughly as much computing power as all existing bitcoin miners
combined which would be prohibitively expensive and, if the bitcoin network is large enough, essentially unfeasible.
Moreover, due to the financial incentives of mining new bitcoins, it would make more economic sense for Eve to
devote her resources to normal bitcoin mining instead. Thus the system protects against fraudulent blockchain
modifications by making them expensive and, if the attacker is rational, unappealing because they make less
financial sense than becoming a miner. The more miners there are, the more expensive and less feasible such attacks
Bitcoin
57
become, making the whole system even more secure.
Double-spending
Bitcoin system is based on an innovative solution of a problem common to all digital currency and payment
schemes: that of so-called double-spending. With paper money or physical coins, when the payer transfers money to
the payee, the payer cannot keep a copy of that dollar bill or coin. With digital money, which is just a computer file,
this is not the case, and the payer could in principle spend the same money again and again, copying the file over and
over. With bitcoin, when Eve offers to pay Alice some bitcoins, Alice can always first check the blockchain ledger to
verify that Eve actually owns that many bitcoins. Of course, Eve could try to pay many people simultaneously; but
bitcoin can defend against that. If Eve offers to pay Alice some bitcoins in exchange for goods, Alice can stipulate
that she will not deliver the goods until Eve's payment to Alice appears in the blockchain, which typically involves
waiting about ten minutes.
Types of attacks
Race attack
If the transaction has no confirmations, shops and services which accept payment can be exposed to a so-called race
attack. For example, two transactions are created for the same funds to be sent to different shops/services. System
rules ensure that only one of those transactions can be added to the block chain.
Shops can take numerous precautions to reduce this type of attack. It is always good to consider whether you should
accept transactions without any confirmation.
Finney attack
Shops or services which accept transactions without any confirmation are affected. A Finney attack is an attack
which requires the participation of a miner to premine a block sending the money to be defrauded back to the
fraudster. The risk of such an attack cannot be reduced to nothing regardless of the preventative measures taken by
shops or services, but it does require the participation of a miner and an ideal combination of contributing factors. It
is no mean feat, the miner risks a potential loss of the block reward. Just as with the other type of attack, the shop or
service must seriously consider its policies concerning transactions without any confirmation.Wikipedia:Citation
needed
Vector76 attack
Also called an attack with confirmation, this is a combination of the 2 aforementioned attacks which gives the
perpetrator the ability to spend funds twice simply with a confirmation.Wikipedia:Citation needed
Brute force attack
This attack is possible even if the shop or service is expecting several transaction confirmations. It requires the
attacker to be in possession of relatively high-performance hardware (hash frequency).
The perpetrator sends a transaction to the shop paying for a product/service and at the same time continues looking
for a connection in the block chain (block chain fork) which recognizes this transaction. After a certain number of
confirmations, the shop sends the product. If the perpetrator has found more than n blocks at this point, he breaks his
block chain fork and regains his money, but if the perpetrator has not succeeded in doing this, the attack can be
deemed a failure and the funds are sent to the shop, as should be the case.
The success of this attack depends on the speed (hash frequency) of the attacker and the number of confirmations for
the shop/service. For example, if the attacker possesses 10% of the calculation power of the bitcoin network and the
shop expects 6 confirmations for a successful transaction, the probability of success of such an attack will be
0.1%.Wikipedia:Citation needed
Bitcoin
58
>50% attack
If the perpetrator controls more than 50% of the bitcoin network power, the probability of success of the
aforementioned attack will be 100%. By virtue of the fact that the perpetrator can generate blocks more often than
the other part of the network, he can create his own block chain until it becomes longer than the "integral" part of the
network.
In the media
A bitcoin documentary film called The Rise and Rise of Bitcoin made its debut at the Tribeca Film Festival in New
York on 23 April 2014, chronicling bitcoin's origins to its explosive growth in 2013.
[31]
In Fall 2014, undergraduate students at the Massachusetts Institute of Technology will receive $100 in bitcoins "to
better understand this emerging technology". A student had the idea of a Bitcoin Club and raised more than half a
million dollars from a high frequency trader.
Some US political candidates, including New York City Democratic Congressional candidate Jeff Kurzon have said
they would accept campaign donations in bitcoin.
Notes
[1] https:/ / blockchain. info/ charts/ total-bitcoins?timespan=all& showDataPoints=false& daysAverageString=1& show_header=true&
scale=0& address=
[2] [2] It is not known whether the name "Satoshi Nakamoto" is real or a pseudonym, or whether it represents one person or a group of people.
[3] There is no uniform convention for bitcoin capitalization. Some sources use Bitcoin, capitalized, to refer to the technology and network and
bitcoin, lowercase, to refer to the unit of account.<ref name="capitalization">
[4] [4] For WSJ, see
For Chronicle of Higher Ed, see
[5] [5] For theft, see
For lack of chargebacks, see
[6] http:/ / en. wikipedia. org/ w/ index. php?title=Bitcoin& action=edit
[7] [7] For use of different address for each transaction, see
For mixing services, see
[8] [8] For ATMs, see
For buying in person, see
[9] [9] For wallets holding bitcoins, see
For wallets storing bitcoins, see
[10] http:/ / www.coindesk. com/ bitcoin-version-0-9-0-brings-transaction-malleability-fixes-branding-change/ .
[11] [11] For 2011 stoppage, see
For EFF accepting bitcoins , see
[12] [12] For Mt. Gox being a large exchange, see
For suspended withdrawals, see
[13] [13] For Magic: The Gathering, see
For waning popularity, see
[14] [14] To obtain 35,000 figure, 16,000 merchants signed up with Bitcoin payment processor Coinbase are added to 20,000 merchants signed to
BitPay.
For 16,000 Coinbase merchants, see
For 20,000 BitPay merchants, see
[15] [15] .Blogs.ft.com (16 April 2013). Retrieved 20 April 2013.
[16] [16] For Andresen, see
For Hearn, see
[17] The Guardian newspaper: Silk Road's legacy 30,000 bitcoin sold at auction to mystery buyers, 1 July 2014 (http:/ / www. theguardian. com/
technology/ 2014/ jul/ 01/ silk-road-bitcoin-auction)
[18] CryptoCoinNews: Foundation Report Discourages BitLicense-Style Bitcoin Regulations in Canada (http:/ / www. cryptocoinsnews. com/
news/ foundation-report-discourages-bitlicense-style-bitcoin-regulations-canada/ 2014/ 07/ 26)
[19] Bloomberg (http:/ / www. bloomberg.com/ news/ 2014-07-10/ bitcoin-by-bitcoin-the-winklevii-etf-inches-closer-to-reality. html)
Bitcoin
59
[20] [20] Duhaime Law
[21] [21] Duhaime Law
[22] Summary of Bank of Japan Press Conference, at 10 (http:/ / www. boj. or. jp/ announcements/ press/ kaiken_2013/ kk1312c. pdf)
[23] Money & Tech: Japans new Bitcoin business advocacy group, The Japan Authority of Digital Asset, has launched with the governments
explicit support, aiming to help establish standards and codes of conduct for its member organizations. (http:/ / moneyandtech. com/
july-11-news-update/ )
[24] http:/ / leginfo. legislature. ca.gov/ faces/ billNavClient. xhtml?bill_id=201320140AB129& search_keywords=
[25] [25] For obfuscation of transactions and seizure of bitcoins from black market Utopia, see
For seizure of bitcoins from black market Silk Road, see
[26] [26] For Bitcoin enthusiasts worries that the currency may be stigmatized as "drug barter tokens", see Chen, Adrian (1 June 2011). . Gawker.
For attention by law enforcement and regulatory bodies, see
[27] [27] For claim, see
For widespread theft, see
[28] [28] For law enforcement action, see
For drop in value, see
[29] [29] For FBI, see
For EBA, see
[30] [30] For journalist, see
For economist, see and
For head of central bank, see
[31] http:/ / newsbtc.com/ 2014/ 03/ 17/ bitcoin-documentary-film-rise-rise-bitcoin-debut-tribeca-film-festival/
References
This article incorporates text from this source (http:/ / en. bitcoinwiki. org/ Double-spending), which is
licensed under CC-BY-SA 3.0 (http:/ / creativecommons. org/ licenses/ by-sa/ 3. 0/ ).
External links
Wikimedia Commons has media related to Bitcoin.
Look up bitcoin in Wiktionary, the free dictionary.
The Wikibook Professionalism has a page on the topic of: BitTorrent and BitCoin
The Wikibook Strategy for Information Markets has a page on the topic of: Micropayments
Bitcoin (http:/ / www. dmoz. org/ Science/ Social_Sciences/ Economics/ Financial_Economics/
Currency_and_Money/ Alternative_Monetary_Systems/ Bitcoin) at DMOZ
Regulation of Bitcoin in Selected Jurisdictions (http:/ / www. loc. gov/ law/ help/ bitcoin-survey/ 2014-010233
Compiled Report_. pdf?loclr=bloglaw) The Law Library of Congress
Bitcoin video series (https:/ / www. khanacademy. org/ economics-finance-domain/ core-finance/
money-and-banking/ bitcoin/ v/ bitcoin-what-is-it) at Khan Academy
Bitcoin: a cryptographic currency (http:/ / cert. inteco. es/ extfrontinteco/ img/ File/ intecocert/ EstudiosInformes/
int_bitcoin_en. pdf) INTECO
Promissory note
60
Promissory note
A 1926 Promissory Note from the Imperial Bank
of India, Rangoon, Burma for 20,000 Rupees plus
interest
A promissory note is a legal instrument (more particularly, a financial
instrument), in which one party (the maker or issuer) promises in
writing to pay a determinate sum of money to the other (the payee),
either at a fixed or determinable future time or on demand of the payee,
under specific terms. If the promissory note is unconditional and
readily salable, it is called a negotiable instrument.
[1]
Referred to as a note payable in accounting (as distinguished from
accounts payable), or commonly as just a "note", it is internationally
defined by the Convention providing a uniform law for bills of
exchange and promissory notes, although regional variations exist.
Bank note is frequently referred to as a promissory note: a promissory
note made by a bank and payable to bearer on demand. Mortgage notes are another prominent example.
Overview
The terms of a note usually include the principal amount, the interest rate if any, the parties, the date, the terms of
repayment (which could include interest) and the maturity date. Sometimes, provisions are included concerning the
payee's rights in the event of a default, which may include foreclosure of the maker's assets. Demand promissory
notes are notes that do not carry a specific maturity date, but are due on demand of the lender. Usually the lender
will only give the borrower a few days' notice before the payment is due. For loans between individuals, writing and
signing a promissory note are often instrumental for tax and record keeping. A promissory note alone is typically
unsecured,
[2]
but these may be used in combination with security agreements such as mortgage, in which case they
are called mortgage notes.
International law
Definition and usage of promissory notes are internationally established by the Convention providing a uniform law
for bills of exchange and promissory notes, signed in Geneva in 1930. Article 75 of the treaty stated that a
promissory note shall contain:
the term "promissory note" inserted in the body of the instrument and expressed in the language employed in
drawing up the instrument
an unconditional promise to pay a determinate sum of money;
a statement of the time of payment;
a statement of the place where payment is to be made;
the name of the person to whom or to whose order payment is to be made;
a statement of the date and of the place where the promissory note is issued;
the signature of the person who issues the instrument (maker).
Promissory note
61
United States law
A promissory note issued by the Second Bank of
the United States, December 15, 1840, for the
amount of $1,000
In the United States, a promissory note that meets certain conditions is
a negotiable instrument regulated by article 3 of the Uniform
Commercial Code. Negotiable promissory notes called mortgage notes
are used extensively in combination with mortgages in the financing of
real estate transactions. One prominent example is the Fannie Mae
model standard form contract Multistate Fixed-Rate Note 3200, which
is publicly available. Promissory notes, or commercial papers, are also
issued to provide capital to businesses. However, Promissory Notes act
as a source of Finance to the company's creditors.
The various State law enactments of the Uniform Commercial Code define what is and what is not a promissory
note, in section 3-104(d):

3-104. NEGOTIABLE INSTRUMENT.


...
(d) A promise or order other than a check is not an instrument if, at the time it is issued or first comes into possession of a holder, it
contains a conspicuous statement, however expressed, to the effect that the promise or order is not negotiable or is not an instrument
governed by this Article.
Thus, a writing containing such a disclaimer removes such a writing from the definition of negotiable instrument,
instead simply memorializing a contract.
British law

83. BILLS OF EXCHANGE ACT 1882. Part IV.


...
Promissory note defined
(1)A promissory note is an unconditional promise in writing made by one person to another signed by the maker, engaging to pay, on demand
or at a fixed or determinable future time, a sum certain in money, to, or to the order of, a specified person or to bearer.
(2)An instrument in the form of a note payable to makers order is not a note within the meaning of this section unless and until it is indorsed
by the maker.
(3)A note is not invalid by reason only that it contains also a pledge of collateral security with authority to sell or dispose thereof.
(4)A note which is, or on the face of it purports to be, both made and payable within the British Islands is an inland note. Any other note is a
foreign note.
History
Historically, promissory notes have acted as a form of privately issued currency. Flying cash or feiqian was a
promissory note used during the Tang dynasty (618 907). Flying cash was regularly used by Chinese tea
merchants, and could be exchanged for hard currency at provincial capitals. According to tradition, in 1325 a
promissory note was signed in Milan. There's constance of promissory notes being issued in 1384 between Genova
and Barcelona, although the letters themselves are lost. The same happens for the ones issued in Valencia in 1371 by
Bernat de Codinachs for Manuel d'Entena, a merchant from Huesca (then part of the Crown of Aragon), amounting
a total of 100 florins.
[3]
In all these cases, the promissory notes were used as a rudimentary system of paper-money,
for the amounts issued could not be easily transported in metal coins between the cities involved. Ginaldo Giovanni
Battista Strozzi issued an early form of promissory note in Medina del Campo (Spain), against the city of Besanon
in 1553. However, there exists notice of promissory notes being in used in the Mediterranean commerce well before
that date.
Promissory note
62
Difference from IOU
Promissory notes differ from IOUs in that they contain a specific promise to pay along with the steps and timeline
for repayment as well as consequences if repayment fails. IOUs only acknowledging that a debt exists. In common
speech, other terms, such as "loan", "loan agreement", and "loan contract" may be used interchangeably with
"promissory note" but these terms do not have the same legal meaning.Wikipedia:Citation needed
Difference from loan contract
A promissory note is very similar to a loan - each is a legally binding contract to unconditionally repay a specified
amount within a defined time frame - but a promissory note is generally less detailed and rigid than a loan
contract.
[4]
For one thing, loan agreements often require repayment in installments, while promissory notes typically
do not. Furthermore, a loan agreement usually includes the terms for recourse in the case of default, such as
establishing the right to foreclose, while a promissory note does not. Also, while a loan agreement requires
signatures from both the borrower and the lender, a promissory note only requires the signature of the borrower.
[5]
Negotiability
Negotiable instruments are unconditional and impose few to no duties on the issuer or payee other than payment. In
the United States, whether a promissory note is a negotiable instrument can have significant legal impacts, as only
negotiable instruments are subject to Article 3 of the Uniform Commercial Code and the application of the holder in
due course rule. The negotiability of mortgage notes has been debated, particularly due to the obligations and
"baggage" associated with mortgages; however, in mortgage notes are often determined to be negotiable instruments.
In the United States, the Non-Negotiable Long Form Promissory Note is not required.
References
[1] Whaley DJ. (2012). Mortgage Foreclosures, Promissory Notes, and the Uniform Commercial Code (http:/ / wsulawreview. org/ DWhaley.
pdf). Western State University Law Review. LexisNexis entry (https:/ / litigation-essentials. lexisnexis. com/ webcd/
app?action=DocumentDisplay& crawlid=1& doctype=cite& docid=39+ W. + St. + U. + L. + Rev. + 313& srctype=smi& srcid=3B15&
key=b4ff3146a501f1f969b427ea9ebfba75)
[2] The Promissory Note (http:/ / www.expertlaw. com/ library/ business/ promissory_note. html). ExpertLaw.com.
[3] As noted by Manuel Sanchis Guarner in La Ciutat de Valncia. Ajuntament de Valncia, Valncia. Cinquena Edici 1989, plana 172. Quote
in Catalan
[4] Promissory Note Definition (http:/ / www. investopedia. com/ terms/ p/ promissorynote. asp), Investopedia.com
[5] Difference Between a Promissory Note & a Loan Agreement (http:/ / www. promissorynotetemplates. org/
difference-between-a-promissory-note-and-a-loan-agreement. php), Promissorynotetemplates.org
Wikimedia Commons has media related to Promissory notes.
Look up promissory note in Wiktionary, the free dictionary.
Debt
63
Debt
For other uses, see Debt (disambiguation).
Not to be confused with Debit.
Finance
v
t
e
[1]
Corporate finance
Working capital
Cash conversion cycle
Return on capital
Economic Value Added
Just-in-time
Economic order quantity
Discounts and allowances
Factoring
Sections
Managerial finance
Financial accounting
Management accounting
Mergers and acquisitions
Balance sheet analysis
Business plan
Corporate action
Societal components
Financial market
Financial market participants
Corporate finance
Personal finance
Public finance
Banks and banking
Financial regulation
Clawback
Debt
64
v
t
e
[2]
Personal
finance
Credit and debt
Mortgage
Car loan
Credit card
Unsecured personal loan
Rent-to-own
Student loan
Pawn Transaction
Title loan
Payday loan
Refund anticipation loan
Refinancing
Debt consolidation
Bankruptcy
Employment contract
Salary
Wage
Salary packaging
Employee stock option
Employee benefit
Retirement
Pension
Defined benefit
Defined contribution
Social security
Business plan
Corporate action
Personal budget
Financial planner
Financial adviser
Stockbroker
Financial independence
Estate planning
See also
Banks and credit unions
Cooperatives
Debt
65
v
t
e
[3]
A debt is an obligation owed by one party (the debtor) to a second party, the creditor; usually this refers to assets
granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and
other interactions not based on economic value.Wikipedia:Citation needed
A debt is created when a creditor agrees to lend a sum of assets to a debtor. Debt is usually granted with expected
repayment; in modern society, in most cases, this includes repayment of the original sum, plus interest.
In finance, debt is a means of using anticipated income and future purchasing power in the present before it has
actually been earned. Some companies and corporations use debt as a part of their overall corporate finance strategy.
Terms
Interest
Interest is the fee charged by the creditor to the debtor. Interest is generally calculated as a percentage of the
principal sum per year, and is generally paid periodically at intervals, such as monthly or semi-annually.
Interest rates may be fixed or floating. In floating-rate structures, the rate of interest that the borrower pays during
each time period is tied to a pre-established benchmark such as LIBOR or, in the case of inflation-indexed bonds,
inflation.
Repayment
Loans may be structured so that the entire principal balance is due at the maturity of the loan; so that the entire
principal balance is paid slowly or amortized over the term of the loan; or so that the loan partially amortizes during
the term of the loan and a larger "balloon payment" is due at maturity. Amortization structures are common in
mortgages and credit cards.
Collateral and recourse
A debt obligation is considered secured if creditors have recourse to specific collateral. Collateral may include
claims on tax receipts (in the case of a government), specific assets (in the case of a company) or a home (in the case
of a consumer). Unsecured debt comprises financial obligations for which creditors do not have recourse to the
assets of the borrower to satisfy their claims.
Issuers of debt
Governments
Governments issue debt to pay for ongoing expenses as well as major capital projects. Government debt may be
issued by sovereign states as well as by local governments.
The overall level of indebtedness by a government is typically shown as a ratio of debt / GDP. This ratio helps to
assess the speed of changes in government indebtedness and the size of the debt due.
Debt
66
Businesses
A company may use various kinds of debt to finance its operations. The various types of debt can generally be
categorized into:1) secured and unsecured debt, 2) private and public debt, 3) syndicated and bilateral debt, and 4)
other types of debt that display one or more of the characteristics noted above.
[4]
Private debt comprises bank-loan type obligations, whether senior or mezzanine. Public debt is a general definition
covering all financial instruments that are freely tradeable on a public exchange or over the counter, with few if any
restrictions.
A basic loan or "term loan" is the simplest form of debt. It consists of an agreement to lend a fixed amount of money,
called the principal sum or principal, for a fixed period of time, with this amount to be repaid by a certain date. In
commercial loans interest, calculated as a percentage of the principal sum per year, will also have to be paid by that
date, or may be paid periodically in the interval, such as annually or monthly. Such loans are also colloquially called
bullet loans, particularly if there is only a single payment at the end the "bullet" without a "stream" of interest
payments during the life of the loan. There are many conventions on how interest is calculated see day count
convention for some while a standard convention is the annual percentage rate (APR), widely used and required by
regulation in the United States and United Kingdom, though there are different forms of APR.
In some loans, the amount actually loaned to the debtor is less than the principal sum to be repaid; the additional
principal has the same economic effect as a higher interest rate (see point), and is sometimes referred to as a banker's
dozen, a play on "baker's dozen" owe twelve (a dozen), receive a loan of eleven (a banker's dozen). Note that the
effective interest rate is not equal to the discount: if one borrows $10 and must repay $11, then this is ($11$10)/$10
= 10% interest; however, if one borrows $9 and must repay $10, then this is ($10$9)/$9 = 11 1/9% interest.
[5]
A syndicated loan is a loan that is granted to companies that wish to borrow more money than any single lender is
prepared to risk in a single loan. A syndicated loan is provided by a group of lenders and is structured, arranged, and
administered by one or several commercial banks or investment banks known as arrangers. Loan syndication is a risk
management tool that allows the lead banks underwriting the debt to reduce their risk and free up lending capacity.
A bond is a debt security issued by certain institutions such as companies and governments. A bond entitles the
holder to repayment of the principal sum, plus interest. Bonds are issued to investors in a marketplace when an
institution wishes to borrow money. Bonds have a fixed lifetime, usually a number of years; with long-term bonds,
lasting over 30 years, being less common. At the end of the bond's life the money should be repaid in full. Interest
may be added to the end payment, or can be paid in regular installments (known as coupons) during the life of the
bond. Bonds may be traded in the bond markets, and are widely used as relatively safe investments in comparison to
equity.
A letter of credit or LC can also be the source of payment for a transaction, meaning that redeeming the letter of
credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value,
for deals between a supplier in one country and a customer in another. They are also used in the land development
process to ensure that approved public facilities (streets, sidewalks, stormwater ponds, etc.) will be built. The parties
to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a
client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e.,
cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming
bank, if any. In executing a transaction, letters of credit incorporate functions common to giros and Traveler's
cheques. Typically, the documents a beneficiary has to present in order to receive payment include a commercial
invoice, bill of lading, and a document proving the shipment was insured against loss or damage in transit. However,
the list and form of documents is open to imagination and negotiation and might contain requirements to present
documents issued by a neutral third party evidencing the quality of the goods shipped, or their place of origin.
Debt
67
Consumers
Common types of debt owed by consumers include mortgage loans, car loans, and credit card debt.
Private households
Besides these more formal debts, private households also lend informally to other people, mostly relatives or friends.
One reason for such informal debts is that many people, in particular those who are poor, have no access to
affordable credit. Such debts can cause problems when they are not paid back according to expectations of the
lending household. In 2011, 8% of people in the 28 European Union countries reported their households has been in
arrears, that is, unable to pay as scheduled 'payments related to informal loans from friends or relatives not living in
your household'.
[6]
Debt markets
Market interest rates
Main article: Bond valuation
Role of central banks
Central banks, such as the US Federal Reserve System, play a key role in the debt markets. Debt is normally
denominated in a particular currency, and so changes in the valuation of that currency can change the effective size
of the debt. This can happen due to inflation or deflation, so it can happen even though the borrower and the lender
are using the same currency.
Role of rating agencies
Specific bond debts owed by both governments and private corporations are rated by rating agencies, such as
Moody's, Standard & Poor's, Fitch Ratings, and A. M. Best. The government or company itself will also be given its
own separate rating. These agencies assess the ability of the debtor to honor his obligations and accordingly give him
or her a credit rating. Moody's uses the letters Aaa Aa A Baa Ba B Caa Ca C, where ratings Aa-Caa are qualified by
numbers 1-3. S&P and other rating agencies have slightly different systems using capital letters and +/- qualifiers.
A change in ratings can strongly affect a company, since its cost of refinancing depends on its creditworthiness.
Bonds below Baa/BBB (Moody's/S&P) are considered junk- or high risk bonds. Their high risk of default
(approximately 1.6% for Ba) is compensated by higher interest payments. Bad Debt is a loan that can not (partially
or fully) be repaid by the debtor. The debtor is said to default on his debt. These types of debt are frequently
repackaged and sold below face value. Buying junk bonds is seen as a risky but potentially profitable form of
investment.
Securitization markets
Main article: Securitization
Securitization occurs when a company groups together assets or receivables and sells them in units to the market
through a trust. Any asset with a cashflow can be securitized. The cash flows from these receivables are used to pay
the holders of these units. Companies often do this in order to remove these assets from their balance sheets and
monetize an asset. Although these assets are "removed" from the balance sheet and are supposed to be the
responsibility of the trust, that does not end the company's involvement. Often the company maintains a special
interest in the trust which is called an "interest only strip" or "first loss piece". Any payments from the trust must be
made to regular investors in precedence to this interest. This protects investors from a degree of risk, making the
securitization more attractive. The aforementioned brings into question whether the assets are truly off-balance-sheet
Debt
68
given the company's exposure to losses on this interest.
Metrics and functions
Risk free interest rates
Main article: risk-free interest rate
Lendings to stable financial entities such as large companies or governments are often termed "risk free" or "low
risk" and made at a so-called "risk-free interest rate". This is because the debt and interest are highly unlikely to be
defaulted. A good example of such risk-free interest is a US Treasury security Wikipedia:Disputed statement it
yields the minimum return available in economics, but investors have the comfort of the (almost) certain expectation
that the US Treasury will not default on its debt instruments. A risk-free rate is also commonly used in setting
floating interest rates, which are usually calculated as the risk-free interest rate plus a bonus to the creditor based on
the creditworthiness of the debtor (in other words, the risk of him or her defaulting and the creditor losing the debt).
In reality, no lending is truly risk free, but borrowers at the "risk free" rate are considered the least likely to default.
However, if the real value of a currency changes during the term of the debt, the purchasing power of the money
repaid may vary considerably from that which was expected at the commencement of the loan. So from a practical
investment point of view, there is still considerable risk attached to "risk free" or "low risk" lendings. The real value
of the money may have changed due to inflation, or, in the case of a foreign investment, due to exchange rate
fluctuations.
The Bank for International Settlements is an organisation of central banks that sets rules to define how much capital
banks have to hold against the loans they give out.
Consolidation
Main article: Debt consolidation
Debt consolidation involves taking out one loan to pay off many others, i.e. combining multiple loans into a single
loan. It is often done to secure a lower interest rate, secure a fixed interest rate, or for the convenience of servicing
only one loan.
Cancellation
Main article: Debt relief
Short of bankruptcy, it is rare that debts are wholly or partially relinquished. Traditions in some cultures demand that
this be done on a regular (often annual) basis, in order to prevent systemic inequities between groups in society, or
anyone becoming a specialist in holding debt and coercing repayment. An example is the Biblical Jubilee year,
described in the Book of Leviticus.
Under English law, when the creditor is deceived into relinquishing the debt, this is a crime under the Theft Act
1978.
International Third World debt has reached the scale that many economists are convinced that debt cancellation is
the only way to restore global equity in relations with the developing nations. Wikipedia:Citation needed
Debt
69
Effects of debt
Debt allows people and organizations to do things that they would otherwise not be able, or allowed, to do.
Commonly, people in industrialised nations use it to purchase houses, cars and many other things too expensive to
buy with cash on hand. Companies also use debt in many ways to leverage the investment made in their assets,
"leveraging" the return on their equity. This leverage, the proportion of debt to equity, is considered important in
determining the riskiness of an investment; the more debt per equity, the riskier. For both companies and individuals,
this increased risk can lead to poor results, as the cost of servicing the debt can grow beyond the ability to pay due to
either external events (income loss) or internal difficulties (poor management of resources).
Excesses in debt accumulation have been blamed for exacerbating economic problems. For example, prior to the
beginning of the Great Depression debt/GDP ratio was very high. Economic agents were heavily indebted. This
excess of debt, equivalent to excessive expectations on future returns, accompanied asset bubbles on the stock
markets. When expectations corrected, deflation and a credit crunch followed. Deflation effectively made debt more
expensive and, as Fisher explained, this reinforced deflation again, because, in order to reduce their debt level,
economic agents reduced their consumption and investment. The reduction in demand reduced business activity and
caused further unemployment. In a more direct sense, more bankruptcies also occurred due both to increased debt
cost caused by deflation and the reduced demand.
It is possible for some organizations to enter into alternative types of borrowing and repayment arrangements which
will not result in bankruptcy. For example, companies can sometimes convert debt that they owe into equity in
themselves. In this case, the creditor hopes to regain something equivalent to the debt and interest in the form of
dividends and capital gains of the borrower. The "repayments" are therefore proportional to what the borrower earns
and so can not in themselves cause bankruptcy. Once debt is converted in this way, it is no longer known as debt.
Etymology
The word comes from the French dette and ultimately Latin debere (to owe), from de habere (to have).
[7][8]
The
letter b in the word debt was reintroduced in the 18th century, possibly by Samuel Johnson in his Dictionary of 1755
several other words that had existed without a b had them reinserted at around that time.
History of debt
See also: History of money
The anthropologist David Graeber argues in Debt: The First 5000 Years that trade starts with some sort of credit
namely the promise to pay later for already handed over goods. Therefore credit and debt existed even before
coins.
[9]
Criticisms
Main article: Criticism of debt
Some argue against debt as an instrument and institution, on a personal, family, social, corporate and governmental
level. Islam forbids lending with interest even today.
Debt will increase through time if it is not repaid faster than it grows through interest. This effect may be termed
usury, while the term "usury" in other contexts refers only to an excessive rate of interest, in excess of a reasonable
profit for the risk accepted.
In international legal thought, Odious debt is debt that is incurred by a regime for purposes that do not serve the
interest of the state. Such debts are thus considered by this doctrine to be personal debts of the regime that incurred
them and not debts of the state.
Debt
70
In an economy with high interest rates, debt will be more costly to a business than more flexible dividends on equity
investment. It may be easier for a struggling business to be financed through equity investment as it may be possible
to avoid paying a dividend if times are hard.
At the household level, debts can also have detrimental effects. In particular when households make spending
decisions assuming income to increase, or remain stable, for the years to come. When households take on credit
based on this assumption, life events can easily change indebtedness into over-indebtedness. Such life events include
unexpected unemployment, relationship break-up, leaving the parental home, business failure, illness, or home
repairs. Over-indebtedness has severe social consequences, such as financial hardship, poor physical and mental
health,
[10]
family stress, stigma, difficulty obtaining employment, exclusion from basic financial services (European
Commission, 2009), work accidents and industrial disease, a strain on social relations (Carpentier and Van den
Bosch, 2008), absenteeism at work and lack of organisational commitment (Kim et al., 2003), feeling of insecurity,
and relational tensions.
[11]
Levels and flows
Main article: Debt levels and flows
Global debt underwriting grew 4.3% year-over-year to $5.19 trillion during 2004. It is expected to rise in the coming
years if the spending habits of millions of people worldwide continue the way they do.
References
[1] http:/ / en. wikipedia. org/ w/ index. php?title=Template:Finance_sidebar& action=edit
[2] http:/ / en. wikipedia. org/ w/ index. php?title=Template:Corporate_finance& action=edit
[3] http:/ / en. wikipedia. org/ w/ index. php?title=Template:Personal_finance& action=edit
[4] Joseph Swanson and Peter Marshall, Houlihan Lokey and Lyndon Norley, Kirkland & Ellis International LLP (2008). A Practitioner's Guide
to Corporate Restructuring page 5. City & Financial Publishing, 1st edition ISBN 978-1-905121-31-1
[5] Formally, a discount of d% results in effective interest of UNIQ-math-0-a56e88be94275d2b-QINU
[6] Eurofound, (2013). Informal debts, http:/ / www.eurofound. europa. eu/ pubdocs/ 2013/ 73/ en/ 2/ EF1373EN. pdf
[7] http:/ / dictionary.reference.com/ browse/ debt
[8] http:/ / www. merriam-webster. com/ dictionary/ debt
[9] David Graeber: Debt: The First 5000 Years, Melville 2011. Cf. http:/ / www. socialtextjournal. org/ reviews/ 2011/ 10/
review-of-david-graebers-debt.php
[10] Fitch et al (2011) The relationship between debt and mental health: a systematic review. Mental Health Review Journal; 16,4: 153-166.
http:/ / dx. doi. org/ 10. 1108/ 13619321111202313
[11] Dubois & Anderson (2010) Managing household debts: Social service provision in the EU. Working paper. Dublin: European Foundation
for the Improvement of Living and Working Conditions. http:/ / www. eurofound. europa. eu/ areas/ socialprotection/ householdebts. htm
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