Digital Cash

[nobody@rosebud.ee.uh.edu]

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Responding to Mike Diehl's comments about digital cash:

It is not really the right question to ask what digital cash "is".
It is better to ask how it might work, what it could be.

Digital cash is basically just a cryptographic technology that provides
tokens, messages, bit patterns, etc. which are (A) unforgeable, (B)
verifiable (by the institution that issues them, at least), and (C)
untraceable.  What you do with this technology is then limited only
by your imagination.

Eric Hughes has pointed out that you can use it for things having
nothing to do with cash.  Use it to represent fuel in a space game and
this way people can transfer fuel but can't create more.  Use it for
anything for which you want the quantity to be conserved.

If we want to use it as a substitute for cash, though, Mike asks what
gives it value.  There are many possible answers.  One is, as Duncan
suggested, to allow digital cash to be exchanged for regular cash.  But
this is not the only possibility.  Eric pointed out that it could be
used as a "play money" in a game, such as a Multi User Dungeon (MUD),
allowing cash to be transfered between games.  Another possibility would
be for a company to issue "digital coupons" good for discounts off of
its software products when you order them by email.  This would give the
coupons value and they could be used as the cash in a barter network,
perhaps.

Conceivable, a government might issue digital cash in parallel with its
paper cash.  It would then give it backing in the same way that the
paper cash is backed; among other things, you can pay your taxes in
digital cash.  This is probably not too likely among the big countries
but there are many countries in the world.

In some areas of rural England, "scrip" is used by barter networks to
help stimulate the local economies.  A twenty-first century equivalent
could use digital cash.

Mike also asks what would prevent the digital cash "bank" from just
absconding with the money, assuming that the digital cash was backed by
regular cash.  The answer is presumably the same things that stop a
regular bank from doing this.  If the cash is legal in the country of
issue, laws will allow prosecution of bankers who steal.

In the more anarchic world of international finance, people already face
the problem of safeguarding their overseas investments.  I know of a
non-profit organization that lost several hundred thousand dollars in
an overseas investment a few years ago (money it could hardly afford to
lose) due to fraud.  There are no certainties, but you can take some
care.  Invest only a small amount at first, then gradually increase your
investment as you gain confidence.  Choose a bank which has been in
business for many years.  Look at the reputations of the people behind
the bank - have they had previous positions of responsibility and trust?

These are all the kinds of things which you should do anyway, and they
should work just as well for a digital cash bank as for any other case
where you have to trust someone with your money.

Mike asks what the benefits and purpose would be for digital cash.  I
see the main benefit as allowing electronic transactions with greater
protection for consumer privacy.  Presently when you make an electronic
transaction (purchasing something from a catalog over the telephone, for
example, or buying gas with your ATM card), you as the consumer have to
trust a lot of people.  The catalog company gets your credit card number,
and you have to trust that none of the people who see it will use it
illicitly, or sell the number to criminals.  The credit card company itself
gets a full record of the transaction, and you have to trust that they will
treat this information as confidential, not sell your name to a mailing
list of people who like to purchase certain kinds of items, and safeguard
it so that computer criminals and snoopy investigators can't violate your
privacy.  Similarly, with the ATM transaction, you are trusting the bank,
the point-of-sale vendor, and many other people to keep your Personal
Identification Number (PIN) secret, and also to safeguard the records of
your transaction.

With digital cash and a smartcard, you should be able to engage in these
kinds of transactions with no organization or institution able to violate
your privacy or steal your money.  You can protect yourself, rather than
having to trust others.  This puts more power into the hands of the
consumer.

Granted, in today's political climate, empowering individuals is perhaps
not as persuasive an argument as we might wish.  But I am optimistic that
as people begin to learn that there is an alternative to trusting VISA
(through such means as Chaum's article in Scientific American, for example)
and as the inevitable horror stories continue to spread about ATM fraud,
credit card fraud, and invaded privacy, political support for this proposal
will grow.  I do think that in an increasingly networked world people are
going to be more jealous about guarding the privacy they have left.  In
this sense, digital cash may be the wave of the future.  


Hal Finney
74076.1041@compuserve.com

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