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An American touring Europe is immediately impressed with the richness and convenience of electronic payments. Europeans can spend themselves silly using nothing but their cell phones. Pseudo-anonymous payments and loyalty points are numerous and easy. When it comes to credit transactions, the average credit card used by Europeans is so much more secure, more comprehensive, and more powerful.

In Canada, consumers accumulate alternative currency as they shop. Historically known as "Air Miles," this money can be used to purchase household gadgets unrelated to travel (it's a nation-wide enterprise, as most Canadians carry the Air Miles card). In Italy, you can pay 500 euros and get a number-only debit card usable anywhere Visa and Mastercards are. Hong Kong and Singapore have successfully fielded refillable cash cards, which are widely accepted.

In the U.S., by contrast, where the decades-old magnetic-stripe card is king, the news stories hit us almost every day. The private data of U.S. veterans have been exposed. The same happened to retirees of a large grocery chain. Earlier this year, a California-based financial-data warehouse admitted a devastating security compromise. Most of these mishaps have been foreseen, but the federal authorities failed to use their considerable regulatory power to usher in remedies long used elsewhere.

The culture in the U.S. strongly resents federal intervention, and a powerful lobby advocates self control by the industry. This does not work. A financial institution is committed to its bottom line. As long as it is cheaper to repay electronic fraud losses than to prevent them, the repaying will prevail. The federal government, on the other hand, is beholden to the public welfare, and should be mindful of the non-financial pain of identity theft. We have seen federal power with the "Do-Not-Call" regulation against telemarketing abuse. After years of heavily lobbied--and failed--self regulation, the law has offered an effective remedy.

The European Union is much more regulatory by nature, and Asia is even further from the American penchant for laissez faire. China is just now awakening to the power of electronic payment. Most of the activity there is in debit cards--replete with security regulations.

Yet, the situation is quite the reverse when it comes to the up-and-coming e-payment revolution in digital cash. Here, while taking such a hands-off approach to conventional electronic payments, the U.S. is over-controlling, to the point of suffocation. The southern border is practically open, U.S. harbors admit thousands of crates unchecked, and countless visa holders get lost in our city streets. The Department of Homeland Security appears overwhelmed by these challenges, and directs its energy to financial harassment. Hoping to prevent the next 9-11 attack, the Feds disallow Internet payment systems that would let an American husband send flowers to his wife, electronically and anonymously.

So digital-cash know-how leaves our shores, and buds overseas. Of course, like the bird flu, digital cash cannot be stopped at political borders. Americans already play at offshore casinos--the classic venue for money laundering. In Europe, by contrast, anti-terrorism concerns place a volume limit on digital-cash transactions, which is a rational counter measure. Unlike paper cash, the digital variety offers the authorities an effective tracking mechanism against the bad guys without a wholesale ban on anonymous transactions for the population at large.

"Tell me your spending habits, and I'll tell you who you are" is a rule well known at the Central Intelligence Agency. We all disclose our preferences by the things we decide to purchase. It would be much smarter to keep it easy to open bank accounts and move money around. If terrorists use these openings, they will be detectable. But as it is, our anti-laundering rules push the evil-doers outside our radar sweeps. How can we find them? If, because of current U.S. regulation, the hubs of e-payment networks develop on foreign soil, we lose our present subpoena power over their records. The law of unintended consequences kicks in, in full force: We wish to protect the welfare of Americans and catch our adversaries, but we end up inconveniencing our public and wiping out the financial footprints of our mortal enemies, even as they blend in amongst us.

In comparison to the rest of the world, clearly, the U.S. is too lax on eponymous (identity-based) transactions, and too strict on anonymous transactions (digital cash). This is counter to our public interest. We need our identity-based transactions to be perfectly secure and our cash transactions to be perfectly anonymous. Rising financial rivals to U.S. firms cater to these needs, and if the trend here is not reversed, we will soon find ourselves facing unacceptable risks of fraud and terror while the expertise we should be leveraging instead flourishes elsewhere.