The Essentials of Digital Cash With Jon Matonis

One of our readers, Jon Matonis, brought this to my attention and it is a truly advanced and fascinating piece of writing on digital cash.

Perhaps the most interesting twist to this work is the fact that he wrote it 12 years ago….Jon authored this piece way back in 1995. At the time he was working with VISA International and the plan was presented to them. Jon has given me permission to reprint some of the material which can from the Libertarian Alliance web site. His 12 year old ideas and concepts still rings true today.

DIGITAL CASH AND MONETARY FREEDOM
JON W. MATONIS

This paper describes the differences between mere encrypted credit card schemes and true digital cash, which presents a revolutionary opportunity to transform payments. The nine key elements of an electronic, digital cash are outlined and a tenth element is proposed which would embody digital cash with a non- political unit of value.

Key Elements of a Private Digital Cash System

As would-be currency providers should note, there are ten key elements to a successful, private digital cash system. This section compares and contrasts true digital cash to paper cash as we know it today. Each of the following key elements of a digital cash “token” will be defined and explored within the bounds of electronic commerce. I have yet to discover a working digital cash system which meets all ten criteria although several are reportedly close. In 1991, Tatsuaki Okamoto and Kazuo Ohta proposed six properties of an ideal digital cash,5 which are incorporated into elements one through six below:

1 Secure. The transaction protocol must ensure that a high level security is maintained through sophisticated encryption techniques. 6 For instance, Alice should be able to pass digital cash to Bob without either of them, or others, able to alter or reproduce the electronic token.

2 Anonymous. Anonymity assures the privacy of a transaction on multiple levels. Beyond encryption, this optional untraceability feature of digital cash promises to be one of the major points of competition as well as controversy between the various providers.7 Transactional privacy will also be at the heart of the government’s attack on digital cash because it is that feature which will most likely render current legal tender irrelevant.8 Both Alice and Bob should have the option to remain anonymous in relation to the payment. Furthermore, at the second level, they should have the option to remain completely invisible to the mere existence of a payment on their behalf.

8 Portable. The security and use of the digital cash is not dependent on any physical location. The cash can be transferred through computer networks and off the computer network into other storage devices, Alice and Bob should be able to walk away with their digital cash and transport it for use within alternative delivery systems, including non-computer-network delivery channels. Digital wealth should not be restricted to a unique, proprietary computer network.

4 Two-way. The digital cash can be transferred to other users. Essentially, peer-to-peer payments are possible without either party required to attain registered merchant status as with today’s card based systems, Alice, Bob, Carol, and David share an elaborate dinner together at a trendy restaurant and Alice pays the bill in full. Bob, Carol, and David each should then be able to transfer one fourth of the total amount in digital cash to Alice.

5 Off-line capable. The protocol between the two exchanging parties is executed off-line, meaning that neither is required to be host-connected in order to process. Availability must be unrestricted. Alice can freely pass value to Bob at any time of day without requiring third-party authentication.

6 Divisible. A digital cash token in a given amount can be subdivided into smaller pieces of cash in smaller amounts. The cash must be fungible so that reasonable portions of change can be made. Alice and Bob should be able to approach a provider or exchange house and request digital cash breakdowns into the smallest possible units. The smaller the better to enable high quantities of small-value transactions.9

7 Infinite duration. The digital cash does not expire. It maintains value until lost or destroyed provided that the issuer has not debased the unit to nothing or gone out of business. Alice should be able to store a token somewhere safe for ten or twenty years and then retrieve it for use.

8 Wide acceptability. The digital cash is well-known and accepted in a large commercial zone. Primarily a brand issue, this feature implies recognition of and trust in the issuer. With several digital cash providers displaying wide acceptability, Alice should be able to use her preferred unit in more than just a restricted local setting.

9 User-friendly. The digital cash should be simple to use from both the spending perspective and the receiving perspective. Simplicity leads to mass use and mass use leads to wide acceptability. Alice and Bob should not require an advanced degree in cryptography, as the protocol machinations should be transparent to the immediate user.

10 Unit-of-value freedom. The theme of this paper: the digital cash is denominated in market-determined, non-political monetary units. Alice and Bob should be able to issue non-political digital cash denominated in any defined unit which competes with governmental-unit digital cash.

Jon Matonis is the president and chief executive officer for Hush Communications. He has over 15 years’ managerial experience in the areas of security and encryption technology, embedded software systems, international payment systems and foreign exchange. * Jon asserts his view that people, “have a fundamental right to protect [their] personal data and communication from unwanted third-party intruders.” *

In 1982, Mr. Matonis founded the not-for-profit Institute for Monetary Freedom which has published several academic articles on monetary economics and free banking. In 1988, he developed the proprietary Freedom I Trading System which has been utilized by institutional money management funds and hedge funds in the United States. He is a former member of the National Futures Association and holds a B.A. in Economics from George Washington University. *

He is the founding director of Private Payment Systems, a research organization for private currencies on the Internet based in Moss Beach, California. He has held positions of Foreign Exchange Manager for Deak International’s World Bank office, Director of Futures Trading for Sumitomo Bank Ltd., and Foreign Exchange Manager for a major credit card association.

I’d like to personally thank Mr. Matonis for the opportunity to present some of this work for discussion on DigitalMoneyWorld.  I will continue to look at the ideas presented in this paper during the weeks ahead as we discuss the opportunities available with Loom Gold and Loomster.