From: hfinney@shell.portal.com
Date: Thu, 19 Aug 93 22:51:38 PDT
To: cypherpunks@toad.com
Subject: Re: Physical to digital cash, and back again
Message-ID: <9308200517.AA14990@jobe.shell.portal.com>
MIME-Version: 1.0
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I agree with Anonymous that there are problems with the actual use of
digital cash in the near term.  But it depends to some extent on what
problem you are trying to solve.

One concern I have is that the move to electronic payments will decrease
personal privacy by making it easier to log and record transactions.
Dossiers could be built up which would track the spending patterns of
each of us.

Already, when I order something over the phone or electronically using
my Visa card, a record is kept of exactly how much I spent and where I
spent it.  As time goes on, more transactions may be done in this way,
and the net result could be a great loss of privacy.

Paying in cash is still possible through the mail, but it is insecure and
inconvenient.  I think that the convenience of credit and debit cards will
overcome most people's privacy concerns and that we will find ourselves
in a situation where great volumes of information exist about people's
private lives.

This is a place that I could see digital cash playing a role.  Imagine a
Visa-like system in which I am not anonymous to the bank.  In this model,
imagine that the bank is granting me credit similar to a credit card.
But instead of giving me just an account number which I read over the phone
or send in an email message, it gives me the right to request digital cash
on demand.

I keep some digital cash around and spend it for transactions as I described
in my previous posts.  When I get low I send some email to the bank and get
some more dcash.  Every month I send a check to the bank to cover my account
just as I do with my credit cards.  My relations with the bank are very
similar to my current relationships with the credit card companies: frequent
withdrawals and a single payment each month by check.

This has several advantages over the system which we are heading towards.
No records are kept of where I spend my money.  All the bank knows is how
much I have withdrawn each month; I may or may not have spent it at that
time.  For some transactions (e.g. software) I could be anonymous to the
vendor; for others the vendor might know my real address, but still no central
location is able to track everything I buy.

(There is also a security advantage over the ridiculous current system in
which knowing a 16 digit number and an expiration date allows anyone to
order anything in my name!)

Furthermore, I don't see why this system could not be as legal as
current credit cards.  All that really differs in this system is the
inability to track where users spend their money, and as far as I know
this ability was never an important legal aspect of credit cards.
Certainly nobody will admit today that the government has a vested interest
in moving towards an environment in which every financial transaction is
tracked.

Granted, this does not provide full anonymity.  It is still possible to see
roughly how much each person spends (although nothing stops a person from
withdrawing much more cash than he will spend in a given month, except per-
haps for interest expenses; but maybe he can lend the extra digicash itself
and gain interest on that to compensate).  And it is oriented around the same
customer/vendor model that Anonymous criticized.  But I maintain that this
model represents the majority of electronic transactions, today and in the
near future.

It's worth noting that it is not trivial to become a merchant who can
accept credit cards.  I went through this with a business I had a couple
of years ago.  We were selling software through mail order, and this makes
the credit card companies very nervous.  There is so much phone fraud in
which credit card numbers are accumulated over a few months, then large
amounts of charges made against them.  By the time the user receives his
monthly statement and complains, the vendor has disappeared.  In order to
get our credit card terminal we went to a company which "helps" startups
with this.  They seemed like a pretty shady outfit, themselves.  We had to
fudge our application to say that we'd be selling something like 50% of
the units at trade shows, which apparently counted as over-the-counter sales.
And we had to pay about $3,000 up front, as a bribe, it seemed.  Even
then we probably couldn't have done it if we hadn't had an office in the
business district.

Under the digital cash system, this might be less of a problem.  The main
problem with digital cash is double-spending, and if you are willing to go
with online verification (reasonable for any business which is going to take
anything over several hours to deliver the merchandise) this can be
completely prevented.  So there is no longer any possibility of merchants
collecting credit card numbers for later fraud.  (You still have problems
with non-delivery of merchandise, though, so not all risks are eliminated.)
This might eventually make the system more widely available than current
credit cards.

I don't know whether this system could be used to support illegal actions,
tax evasion, gambling, or whatever.  That is not the purpose of this
proposal.  It does offer the prospect of improving personal privacy and
security, in a framework that might even be legal, and that's not bad.

Hal Finney
hfinney@shell.portal.com