Re: In Search of Genuine DigiCash

A few days ago I asked:

> Can a case be made that anonymous digicash is less risky
> (to a bank) than NON-anonymous digicash? 



There were no takers.  Therefore, I'll ask different questions:

Would a Chaum-style anonymous digital cash service be more profitable to a  
bank than a NON-anonymous digital cash service?

Are the costs involved in offering and supporting anonymous digital cash  
more, or less, than the costs associated with NON-anonymous digital cash?

In other words, why might a bank chose to offer/support anonymous digital  
cash over NON-anonymous digital cash?

If a "bank-centric" case for anonymous digital case over NON-anonymous  
digital cash can't be made, then there's little chance we'll see anonymous  
digital cash any time soon.

 

Jim_Miller@suite.com

> 
> A few days ago I asked:
> 
> > Can a case be made that anonymous digicash is less risky
> > (to a bank) than NON-anonymous digicash? 
> 
> There were no takers.  Therefore, I'll ask different questions:
> 
> Would a Chaum-style anonymous digital cash service be more profitable to a  
> bank than a NON-anonymous digital cash service?

	I think that very few would have the initiative to lay out the
money for a no-transaction cash system.  With credit cards and checks 
there is a transaction trail that you can follow to spot and get rid of
fraud.  For someone in the banking community who is used to giving out
paper transaction slips and taking deposit slips, I think it is a frightning
idea.

> Are the costs involved in offering and supporting anonymous digital cash  
> more, or less, than the costs associated with NON-anonymous digital cash?
>

It depends on what kind of hardware/software you are attempting to set up.  
Will it be a replacement to ATM and credit cards or would it be a concurrent
working solution? (ie, is a merchant who has just spent $1000 on a spiffy POS
machine that read checks, takes every credit card in existance, and ATM 
cards going to want to junk his equipment for a smart-card reader?) .

I think at this point, it is pretty obsurd to think that everyone will be
carrying around thier 486 laptop to act as a "representative" for their
smart card. 

If it is going to work:

	1. It must be convient for the customer; and/or
	2. It must save money or time; and/or	
	3. It must provide additional benifits for customers or merchants
	   (ie, privacy for customers, undeniable transactions for merchants).
 
> In other words, why might a bank chose to offer/support anonymous digital  
> cash over NON-anonymous digital cash?
> 
> If a "bank-centric" case for anonymous digital case over NON-anonymous  
> digital cash can't be made, then there's little chance we'll see anonymous  
> digital cash any time soon.

Chaum writes (sciam.txt available via ftp at: digicash.nl):

      Blinded electronic bank notes protect an individual's privacy, but
      because each note is simply a number, it can be copied easily. To
      prevent double spending, each note must be checked on-line against a
      central list when it is spent. Such a verification procedure might be
      acceptable when large amounts of money are at stake, but it is far too
      expensive to use when someone is just buying a newspaper. 

This was as I said in my earlier post-- that I would include an  
online-verification to make sure notes are real and not double-spent.  


-- 
Joe N. Turner		Telecheck International
turner@telecheck.com    5251 Westheimer, PO BOX 4659, Houston, TX 77210-4659
compu$erv: 73301,1654	(800) 888-4922  *   (713) 439-6597

I think that very few would have the initiative to lay out the
   money for a no-transaction cash system.  With credit cards and checks 
   there is a transaction trail that you can follow to spot and get rid of
   fraud.  

I trust that for "transaction" above you mean "audit".  You still have
transactions and you still have audits.  It's just that this
information does not allow for the derivability of the customer's
transaction.

Assume four accounts in the books of an issuing bank: one asset
account, cash, and two liability accounts, one for a customer and one
suspension account for digital banknotes issued by not yet redeemed.

The withdrawal transaction posts a debit to a customers demand deposit
account (decreasing it) and a credit to the suspension account
(increasing it).  Now suppose the customer buys something from a
merchant, and the merchant redeems the digital banknote cash.  The
deposit transaction posts a debit to the suspension account
(decreasing it) and a credit to the cash account (also decreasing it).

As you can see, there are perfectly good journal entries for each of
the two transactions just described.  What is missing is an audit
trail to determine which debit to the suspension account corresponds
to which credit to the suspension account.  An assurance that these
match up is provided by two properties.  First, for each banknote
issued there is one and only feasibly computable modification of it
that is acceptable for redemption.  (In Chaum's scheme this is the
unblinding.)  Second, a database of the banknotes as redeemed is kept,
which prevents multiple redemption.

   Will it be a replacement to ATM and credit cards or would it be a concurrent
   working solution?

Concurrent, of course.  There's very little point to scrap any
existing system as a system.  Individual merchants may decide not to
support older systems eventually, but that is a different issue.
Nonetheless, I have argued at length at other times that digital cash
will not be viable as a physical retail system very soon.

Where digital cash is immediately useful is online as a retail level
wire transfer system.

Chaum:
	 Such a verification procedure might be
	 acceptable when large amounts of money are at stake, but it is far too
	 expensive to use when someone is just buying a newspaper. 

Maybe a physical newspaper today, but the cost of networking is
dropping and the cost of computation is dropping.  I personally don't
expect that off-line digital cash techniques will ever actually be
economically most efficient.  Existing alternates (e.g. credit cards)
work well enough today, and by the time PDA's work well enough and are
cheap enough to be universal, the cost of an online verification will
be down in the fractions of a cent.

Eric

Can a case be made that anonymous digicash is less risky
   (to a bank) than NON-anonymous digicash? 

In certain circumstances, it might be.  Where a bank is at risk of
violence when it does not reveal transaction information, not
possessing such information poses less risk.  On the other hand, in
the USA a bank is at risk of violence when it does not possess
transaction information.

   Would a Chaum-style anonymous digital cash service be more profitable to a  
   bank than a NON-anonymous digital cash service?

Maybe.  It depends on what the demand curve for transaction services
of various kinds looks like and what the relative demand for privacy
is.

If there were already a fully identified digital money system, then
creating an anonymous digital cash system would grab you most of the
market which was willing to pay a premium for privacy services.  That,
by the way, is not everybody.  There will be at least a local maximum
at some large premium, simply because certain benefits of bank secrecy
are so large.

On the other hand, there is likely also a local maximum where the
premium is fairly small.  In this case you get not only all the people
above, but a large percentage of the people who are willing to pay
just a little more for privacy.

As to where these local maxima actually are, and which yields the
larger profits, I have no idea.

   Are the costs involved in offering and supporting anonymous digital cash  
   more, or less, than the costs associated with NON-anonymous digital cash?

The costs associated with anonymous digital cash may well be less that
for identified digital money systems.  There are additional services
being sold in most identified systems, including statements of
transaction logs, reversibility of transactions, delay in settlement,
and availability of logs to government.  This last service is sold to
the government with each transaction, a hidden fourth party which
taxes the bank with the requirement to offer this service, in order to
permit the bank to operate.  These additional service take resources
to operate.  Reversibility, I suspect, is the most expensive to
operate, since it's all human labor that can't be easily handled by
computer.

Digital cash, on the other hand, needs a redeemed note database, but
this is one of its only unique costs.  Since settlement is immediate,
reversibility is not an issue, and neither is any delay in settlement.
There are far fewer long term records to keep.

It is likely that digital cash is more efficient economically, since
it unbundles a bunch of previously linked services and allows them to
be purchased separately by those who actually need them.

Eric