Electronic Cash - The Holy Grail of Payments?

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What is electronic cash?

We generally think of cash as a way to give somebody money, which is an asset, to a shop keeper, colleague or even a member of the family. The core characteristics are that it is direct and immediate.

If I give you a £10 note you have got it and I have lost it. Making a cash payment is literally an asset transfer. In this particular case it is a P2P or Person to Person transaction which until recently was very difficult to do with traditional payment systems. By comparison when we use a debit card we are instructing the bank holding our assets to make a payment to another person's bank account which traditionally would be a shop keeper in this case a C2B or Consumer to Business transaction.

However cash is more than this, you don't need any relationship with a bank or any financial institution, when you make the payment you don't pass any information about yourself or your bank or financial status and for all practical purposes the transaction is anonymous, also there is no subsequent trace of your involvement due to the payment mechanism alone. Equally there is no concept of charge backs as the result of some dispute relating to the payment which is by its very nature irrevocable. There is no third party involved in the transaction it is just between you and the other person and any dispute has to be handled accordingly, once you have handed over your £10 note only they can give it back to you.

Then to the subject of cash, we have called it an asset but there are two types of cash, fiduciary currency which has little or no intrinsic value and commodity currency such as gold and silver. In the case of notes and coins they are a fiduciary currency with little intrinsic value. The recoverable asset value is by command of the government (printed on every UK note issued by the Bank of England is a commitment ‘I promise to pay the bearer....'). We call this a Fiat currency.

Another characteristic of cash is that there are no transaction fees, since the payment is only between you and me and since there are no intermediaries there is nobody offering a service that needs compensation. However there may be a fee involved in getting cash if for example you take it out from an ATM and in the case of a merchant there will likely be a fee in putting cash back into a bank account. In this case you are paying the bank for the costs of managing cash, its transport and the necessary security.

Now to the question, can we achieve the properties of cash by some electronic medium? There are two historical systems that set out to achieve these properties, DigiCash and Mondex. Very active today is a virtual currency called Bitcoin which the inventor presented as a P2P version of electronic cash and the newest of all these schemes is MintChip which sets out to be the digital evolution of physical currency. None of these schemes is directly the same as cash although some come much closer than others. However what they all share is the ability to make a remote electronic payment using your PC or mobile device.

DigiCash

digicashDigiCash was really the first practical scheme to offer a cash like product. The concept was invented by David Chaum in 1982 and was based on the idea of a trusted Agent (e.g. a bank) creating an electronic bill as a digitally signed record of its value, $10, $1 down to a 1 cent coin. Anybody receiving this digital note could check the signature and therefore know they have a valid electronic note. However as with any digital representation the receiver needs to know that it has not already been spent, the classical double spend problem. In the case of DigiCash the payee would need to send the electronic bill to the issuing agent to confirm it has not already been spent. The creation of the electronic bills involved what David called a blinding mechanism so that the receiver of the bill couldn't determine the identity of the presenter of the bill.

Mondex

mondexDesigned by David Everett in 1990 and developed by the UK's National Westminster Bank and later on adopted by MasterCard. Mondex was architected to optimise an electronic cash P2P payment in the physical space. It worked by moving an electronic asset between one smart card and another using a cryptographic protocol. These smart cards were particularly chosen for their security properties. In the case of a merchant they would also have a smart card in their terminal to receive the Mondex value. For a particular transaction only the two smart cards were involved in the transaction and the associated protocol was designed to prevent the double spend. The same process was used to get Mondex value, a transaction between the bank's smart card and the consumer's smart card. In the case of a merchant they could cash in Mondex value by connecting their smart card to the bank's smart card.

Bitcoin

bitcoinBitcoin was proposed by Satoshi Nakamoto (a pseudonym) in 2009. He defined his scheme as a peer to peer version of electronic cash that could be sent from one person to another without going through a financial institution. This scheme is also an asset transfer scheme where the holder of a Bitcoin can transfer it (or a subdivision of a unit coin) to another person using a digitally signed cryptographic protocol. This protocol is implemented in an electronic wallet held by the owner of the Bitcoin(s) in their PC or mobile device or by a third party acting on behalf of the owner of the Bitcoin(s). Bitcoin handles the double spend problem by maintaining a transaction ledger in the internet accessible to all. The ledger (actually called a block chain) is routinely updated by Bitcoin miners who add new transactions to the block chain and create an integrity check sum (hash) that validates the block chain. There is a work function attached to producing these hash values which results in the miners earning Bitcoins and also a typical delay of 10 minutes between validated updates of the block chain. This means you can’t validate a payment for ten minutes. Lots of people have tried to work out the identity of Satoshi, the New Yorker came up with Michael Clear from Trinity College in Dublin, another suggestion was Shinichi Mochizuki from Tokyo University but all have denied the identity.

MintChip

mintchipDesigned by David Everett in 2009 and developed by the Royal Canadian Mint. This is also an asset transfer system that moves value from one secure element to another which can be totally off-line and has been optimised for low value payments even as low as 1 cent. A particular feature of this scheme is the ability to push a value message to another party without their previous involvement. It meets the classical cash scenario of tipping the porter.

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