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Digital cash to change the nature of money as we know it

October 6, 1998

Web posted at: 10:00 AM EDT

by Daniel Akst

(IDG) -- In the 1950s a charge card was something businessmen used in restaurants. Who would have guessed that just a few decades later most of us would casually charge almost everything we buy, purchasing far more on Visa and MasterCard than in cash?

Expect the same impact from digital cash Ð or, in the slogan of DigiCash, a leading advocate of this new technology, "numbers that are money." Digital cash is a medium of exchange uniquely suited to the Internet, which is itself uniquely suited to facilitating exchange. You can't buy much today with true digital cash, but in the not-so-distant future some form of this ethereal-seeming gelt will account for a large part of the payment system.

The implications of a move to digital cash are enormous. It stands a good chance of revolutionizing how we use the Internet Ð and that may be the smallest part of it. The decisions we make concerning digital cash may also have profound implications for our personal freedom, the global monetary picture and even national sovereignty. If handled properly, digital cash could enhance global prosperity and help bring people together. In the worst case, it could lay the foundation for a form of totalitarianism more extreme than any that has yet occurred.

Digital cash is already being used in many forms. At UCLA, for example, you need a magnetic stripe card to make photocopies, and New Yorkers can pay their subway fare using a similar system. These devices are simple: You pay in advance and they store value. The system is reasonably private but prone to loss.

But this is only the beginning. Digital cash is becoming more sophisticated; cash cards increasingly store information about their users on memory chips. And digital cash will soon be used online or off, in America or abroad, in dollars or other currencies Ð make no mistake, it will be.

On the Internet, the most sophisticated forms of digital cash depend on the well-established concept of the dual-key digital signature. Using this system, users can "sign" messages by encoding them with a private key that can be verified by anyone using the signer's public key.

From dual-key encryption, it's a small step to digital cash. A serial number, for example, can be "signed" by an Internet bank at a value of $20 (of course, it will only issue this certification if you deposit that much). Add some relatively simple systems to perform a clearing function and prevent dual spending, and voila! Internet cash.

For the Internet, a means of collecting small payments from thousands or even millions of individuals would alter the nature of the medium. Such "micropayment" systems haven't worked so far, mainly because they're too cumbersome. If they can be made to work, though, better information should become available, because providers would finally have a way to get paid for it. Whether you're the next Matt Drudge or an expert on tuberoses with an idea for a newsletter, you'll have a greater chance than ever to make a living Ð and influence the zeitgeist Ð via the Internet.

But money will also flow in the other direction. Some firms already offer incentives to motivate you to visit a page or read an ad. It's not at all that far-fetched to assume that sometime soon you might get paid to read advertising, respond to a survey or accept somebody's cookies onto your hard drive.

Internet gambling, already a growing phenomenon, would likely flourish with anonymous and instantaneous payments, since digital cash could make its way to offshore servers as easily as anywhere else.

But the implications go even further. Just as RealAudio enabled people to get on the radio without an FCC license or access to a broadcast tower, digital cash eliminates the need for printing presses and central banks from the process of issuing money. All the world's major currencies are now fiat money, unbacked except by a kind of collective faith. Imagine if some of the world's major financial institutions issued a new form of currency that was strictly digital and that was backed by some basket of assets placed in trusteeship.

You might not prefer these units to dollars, but they would probably beat the heck out of Brazilian cruzeiros or Thai baht. Global currency fluctuations are already beyond the control of the world's central bankers, and individual nations are finding it more and more difficult to influence their own monetary fates. Digital cash could hasten the end of the central banks' dominance once and for all. Or it could provide just the sort of competitive discipline many currencies need.

The Nobel Prize-winning economist Friederich A. von Hayek contended that currency competition within national borders would cure governments of the historical tendency to inflate their currencies. The idea was that if workers and businesses could demand payment from among competing currencies, they would invariably choose the strongest one, leaving flabbier currencies to wither.

However, digital currencies also introduce a tax problem. Cash businesses are notoriously attractive because their owners often don't declare all payments they receive. A form of cash that has no mass to speak of, takes up no space under the mattress, requires no trips to the bank and is anonymous by nature becomes awfully difficult for tax authorities to trace. The temptation to cheat, even for otherwise honest people, could become overwhelming.

Taxes are already a thorny issue on the Internet, where it's sometimes hard to say where a transaction is taking place, and digital cash will make it even harder for governments to take a piece of the action when deals happen online.

The key question about digital cash isn't whether it will happen, but how? One of the virtues of old-fashioned cash is that it can change hands without either party knowing the other's identity. Believe it or not, digital cash can also work this way. David Chaum, the founder of DigiCash, is an ardent advocate of private digital cash, but the existing system Ð banks, credit card companies, taxing agencies and so forth Ð is likely to be against him.

Businesses thrive on obtaining information about their customers, and governments tend to want to expand their power. Imagine that you could only buy something by giving the seller complete identifying information about yourself. You'd be amazed what your purchases say about you. Now imagine that the government had access to that information and could render you a financial nonentity with the press of a button.

The privacy afforded by traditional cash is too attractive to be completely abandoned, and I wouldn't be surprised if, in the electronic world, it persists marginally, and at a price. But I'm hoping we come to our senses before that. "Money is coined liberty," said Dostoyevsky, and I for one would like to keep it that way.

Cash is king

Digital money may sound glamorous, but the fact of the matter is that paper-based payments rule. In the cash arena, physical greenbacks blow away their new electronic competitors. And in the noncash payment category, paper checks and credit cards run the show.

Breakdown of All Payment Transactions* Cash 89% Noncash 11%

Breakdown of Noncash Payments** Paper Checks and Credit Cards 90% Other 10%

Daniel Akst is the author of St. Burl's Obituary, a novel. He writes frequently about technology.