Popular writings on chaos theory mean that most people are now aware that a butterfly can "beat its wings in London and cause a hurricane in Florida". This metaphor captures the notion that minor actions can have major, and unforeseeable, outcomes if they act within a system characterised by positive feedback.

The history of innovation demonstrates the butterfly syndrome well. The development of the internal-combustion engine was intended to reduce the dreadful pollution of inner city streets caused by horse drawn transport. The widespread ownership of motor cars not only cleaned up inner city streets but has also meant that no CBDs have been built since. The contraceptive pill was meant to make every child a wanted child and shore up family life. The result has been a huge increase in teenage and other unwanted pregnancies and possibly the demise of the family as we knew it. The turbo-jet aircraft engine was designed to help military aircraft defend national borders against military invasion. Wide bodied jets create tourist invasions which dwarf the largest armies.

But none of these inventions have had much impact on the integrity of the nation state. The Internet was invented by the US military to help preserve the nation state of America in the event that nuclear weapons "took out" that country's centres of communication. Recent developments in the world of cyberspace seem destined to undermine the way we think about national borders, and the power of the nation state to tax. And we don't talk about governing from the 'treasury benches' for nothing.

Once even kings were forced to carry their Treasury with them. Modern citizens carry cheque books or credit cards, and use coins or banknotes mostly for small transactions or to feed other machines. Most large transactions now move around the world or between cities in the form of electronic 'bits', but their journeys begin and end in conventional bank accounts where they are available to inspection by tax inspectors and other agencies of state.

Most New Zealand exporters are probably paid by electronic transfer into their local NZ accounts. Many of them may then spend some of this money on the book-stores and other 'shops' on the Internet, routinely comparing prices between the UK, Canada, the US, and even Australia and New Zealand. They presently pay by credit card. New commercial services come on to the World Wide Web every day. Real Estate companies present their top of the market properties in full colour and take potential buyers on a room by room tour through the rooms and gardens. You can inspect your rental villa in Tuscany before you fly there.

Normal competitive pressures are forcing companies to adopt technologies which can maximise the benefits of the Web. Lands End of the US combines bargain priced garments with first class service for international mail-order shoppers who increasingly order by fax or eMail. Levi Strauss, the jean manufacturer, provides a made-to-measure interactive service for its in-store shoppers which will provide an even greater benefit to customers who want to buy their jeans in cyberspace. These leading edge retailers will make an easy transition to the Web where the benefits of low cost interactive service are self-evident to both suppliers and purchasers. Many of their customers are already familiar with the technology of the internet and almost all have adopted the mind-set of home shopping. This is especially true of the new ex-urbanites who find 'mail-order' from their lifestyle blocks the routine way to shop. The closed-up shops in the countryside do not mean that no one is buying. It just means that they are buying my 'mail-order' in one form or another.

All that is missing for mail-order houses, and a host of other commercial activities, to transfer a large chunk of their activities to the Internet is a system which provides a convenient, acceptable and secure system of payment.

Given the commercial potential of the internet (A market which has at least 100 million browsing shoppers with more arriving every day) it is no surprise that teams of computer scientists and cryptographers around the world are working to provide such a system. DigiCash of the Netherlands is one of the most prominent designers of on-line cash transfer systems. This company is dedicated to developing codes and cyphers safe enough for the world to bet its money on.

The DigiCash system will allow people to open accounts with participating banks and then down-load 'eMoney' into their terminals or into their 'electronic purses'. These electronic purses can be connected to the Internet using new developments in encryption which permit eMoney transactions to take place freely without risk of interception. This means that the remitters' transactions remain anonymous and can operate independent of border controls or other interventions by governments. But the payee is known to the banks and you can trace your cash distributions.

The benefit of remitter anonymity must be weighed against the fact that lost eMoney is as unretrievable as paper money in a stolen wallet. Users will need to guard their hard-drives, and their stored data, as carefully as they currently guard their cash, jewels and other valuables. Computer viruses will be as frightening as real life burglers ­ an invader which destroys your bank balance is no joke. Any tendency for the courts to treat computer hackers as youthful pranksters will disappear when the first few judges lose their electronic wallets to some high school 'nerd' who has taken their eMoney to ogle the Baywatch girls at California.

The Department of Computer Science at the University of Newcastle in Australia is one of many organisations which has been testing the systems developed by DigiCash as part of an international trial. Associate Professor Graham Wrightson was quoted in 1995 (by Morris Jones in "The Electronic Economy") as saying "It appears that there might be some technical problems. However, I am confident that these problems, if they exist, will be overcome very soon." And they have been.

Professor Wrightson pointed out that once such transactions could be guaranteed to be both secure and confidential, that advanced eMoney systems would be developed with no links to existing banks and would deal in purely digital currency with no analogue in conventional money. He believes it is possible for an entire alternative economy to be created in cyberspace and foresaw that "the banks could be at some risk by people being able to avoid them in much of their financial dealings. This would be a real devolution of power in the sense that the banks' or other financial institutions' costs and profits would be avoided."

The Internet is seriously challenging the pricing structures of conventional transmissions using telephone networks. The emergence of eCash now seems certain to undermine the cost structures of banks and other financial institutions. The days of paying NZ25 dollars for telegraphic transfers must surely be numbered.

Skilled individuals with access to eMoney accounts will soon chase their own best deals in the financial markets of the world. Any residual distinction between 'domestic' and 'foreign' investment will be even further eroded.  Nations and business interests will compete for the anonymous funds of cyberspace rather than be totally dependent on local or foreign institutional investors.

And what about the tax collectors?

Consider the typical exporters of New Zealand ­ especially those who are in the information technology and telecommunications business They will soon be asking for their export earnings to be credited to their "electronic purse" in cyberspace. They will then be free to use their eMoney to buy books from Harvard, suits from the Saville Row, airline tickets from wherever, computers from Taiwan, diamonds from Capetown and shares from Wall Street.

How will the tax collectors measure these exporters' incomes? As Professor Negroponte pointed out during his tour of New Zealand a couple of years ago "Income tax is about to become a voluntary activity."

Governments will once again be forced to collect most of their revenue from consumption taxes within their borders. Otherwise only those folk whose earnings are restricted to PAYE wages will be paying their full rates of tax ­ which will be unacceptable on both efficiency and equity grounds.

Nations will be forced to make some hard choices. Governments of highly regulated and highly taxed economies may try to keep the Internet at bay so that they can continue to maintain their currency controls, foreign investment regulations, tariff barriers and progressive income tax regimes. Such nations will pay a heavy price because their exporters, importers and consumers will be isolated from the world's largest shopping and trading bazaar while their technocrats, researchers and academics will be isolated from the world's greatest repository of information.

The future will belong to those nations which choose to provide comprehensive and low-cost access to the Internet and so encourage their traders to 'export' goods to the markets of cyberspace while allowing their citizens to shop there. After some settling down, the rules of competitive advantage will apply and if the free-trade theorists are correct, then all people, everywhere, will be better off ­ provided they have been allowed to join in the game.

Regional trading blocks have no long term future; and the only exchange regimes which will matter will be the one set by the millions of traders in cyberspace.

The economy driven by the eMoney of cyberspace could be the biggest political issue to grow out of the Internet. Politicians presently excite themselves about pornography and bomb manuals. What will they do when they see large chunks of their tax base disappear? How will they respond to having their fiscal and monetary policies set by millions of consumers spread around the world and doing private deals in cyberspace? Money which was once based on the solid value of gold and silver in the Treasury is now based on the policies of central banks. Are we are about to enter a world in which money is anchored in the silicon sands of encryption chips?

In such a world will such concepts as sovereignty, nationhood and even citizenship come to be redefined? Such notions used to be based on the relationship between our personal 'atoms' and those of the ground on which we stood. In future our relationship to the 'bits' of cyberspace may be much more critical in forging national identities and establishing our international relationships.

Ironically, European governments are wrangling over their relationships to the EU and the single currency policy at precisely the time when events may make these issues irrelevant. Closer to home the Alliance, as always, can be depended on, to advocate a highly progressive income tax and a financial transaction tax which are about to become obsolete, on the one hand, and still-born, on the other. They long for total economic sovereignty in an age when economic boundaries are increasingly transparent and the economic market-place is driven by individual citizens rather than by large corporations or the centralised power of the state.

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In Going Digital, Professor Nicolas Negroponte of the MIT Media Lab tells us that the modern electronic revolution in communications is all about replacing the movement of 'atoms' with the movement of 'bits'. Borrowing a book from the library used to require a visit to the building and the withdrawal of the book. By removing the book's 'atoms' from the shelf deprived the borrower deprived others of its use and each volume could be available to no more than say twenty borrowers per year. 'Borrowers' using the libraries of the internet require no more that a few keystrokes on a computer to down-load the volume's 'bits' on to their computer disc. There is no limit to the number of people who can 'borrow' these 'bits' ­ and they can do it all at once if need be.

Owen McShane, Rangiora Road, R.D. 2, Kaiwaka, Northland 1240
Phone: 64 9 431 2775
Fax:   64 9 431 2772