Security Notes: Digital Cash, Round Two

Gideon Samid • Gideon@BitMint.com

Money and payment were inherently anonymous throughout the centuries. Only when online transactions came to be did we lose that security blanket, and today we stand naked before Big Brother and his many cousins. Visa and MasterCard have an eerily accurate profile of my whereabouts, my habits, my weaknesses, my moods, just by mining the growing pile of transactional data they have about me. They can sell my profile to a myriad of merchants, promoters, and activists of all kinds.

Whether we are fully aware of this nakedness, or just vaguely cognizant of it, it is stressful even if you have nothing to hide. This unease is the reason cash is still alive and well. Yes, cash is the preferred mode for criminals, but also for innocent, private people who may wish to buy “The Motorcycle Diaries” without being tagged as “Marxist” by some snooping algorithm.

In the late 1990s, David Chaum invented and published cryptographic solutions for online payment anonymity. It was a clever scheme in which the bank collected, say, $100 and provided against it a digital string, which the bank signed to be authentic in the same way that digitized contracts are validated by a crypto signature. Chaum’s ingenious novelty was to devise a way to convince the bank to sign the digital money string blindly, that is, without seeing what it signs. In this way, when the digital money string was submitted for redemption, the bank did not know where it came from because the bank had signed countless $100 bills, all blindly.

It was on the basis of this idea that Chaum, with great fanfare, founded his company, which he called DigiCash. The math behind Chaum’s scheme is solid, and it assumes only that RSA has not been defeated. Still, banks hesitated to sign blindly a commitment to redeem a digital money string against nominal dollars. Crypto math was not convincing enough (indeed, we have no proof that RSA is effective for the purpose we use it for).

Now, a decade plus later, the world goes gaga over a digital cash that is much more ambitious, much more controversial, and relies on the same class of unproven crypto primitives. What’s more, unlike Chaum’s idea, this one is inherently, violently volatile.

Why has the public reception for Bitcoin been so different from that for DigiCash? For one thing, we have moved more and more of our lives to the cloud. Our email address is much more in use than our house address, for example. We are entertained in cyberspace, we work there, we socialize there. And where we are, there payment has to follow, and the desire to emulate the anonymity provided by cash is ever so strong.

The other reason for the difference is that Bitcoin did not require a participating bank to kickstart the process. Bitcoin is money that is generated by willing traders and carefully designed to remain scarce. This keeps the majority of traders in charge and resistant to any attempt by an oppressive minority to dictate the disposition of the trade.

In that sense, Bitcoin is auto-powered, and when enough traders join in, the issue of the exchange rate between this new currency and the old currency, the dollar, becomes a marketplace issue. Since Bitcoin is a wholly enclosed system where all payments are in the same Bitcoin currency, its initial exchange rate to the dollar was zero. From that ratio it could only climb up, and climb it did. Anything of value that appreciates attracts buyers and keeps appreciating.

That is what happened to Bitcoin. The currency is going strong, primarily because it offers anonymity. It’s “opium for the masses” and a nightmare to law enforcement.

Now the battle rages. It’s between the powerless masses, strong only in numbers, and the powerful money emperors, central banks, banks, and national treasuries, all armed with the law, regulation, and … guns. The battleground encompasses the whole world, the time line is five to eight years ahead, and the outcome is anyone’s guess.

My guess is that both sides will win and both sides will lose. Digital money minted by a bona fide, well-regulated financial institution will be traded anonymously on the Internet. Bitcoin (and its imitators) will lose their bid to introduce a brand-new currency, but the establishment will concede the cash-like anonymous exchange.

I, for one, believe that the future belongs to non-speculative digital currency, and on that assumption I steer our contender, BitMint.