The Nontrackable Cashless Future Isn't Here Yet -- But It's Within Reach
As debit, pre-charged, and credit card transactions become more and more ubiquitous, it's worth exploring the question: what would a cashless society technologically look like?
A headline from this spring, "Sweden moving towards cashless economy," highlighted various stories coming out of the Nordic nation's seemingly inevitable push to drop cash from financial transactions. Already, Sweden's cash only accounts for three percent of existing transactions, while the average in the U.S. is seven percent.
But in every story about Sweden's shift to a cashless economy (a story that seems to have made the rounds for a couple of years at least), the theme has been that Sweden's population and businesses are adopting technologies and infrastructures that already exist, not coming up with new ones.
That existing tech is something with which we're all mostly familiar: the debit and credit cards that make it easy to buy things with a tap or swipe. But there is still a major societal issue when one uses these tools: because they all rely on some form of centralized authorization, ultimately the transactions you make will be tracked by that centralized authority. Even cutting-edge payment systems, like the iPhone app that lets you go into the Apple store and buy something in a pretty white box without dealing with a person in a blue t-shirt, relies on a payment source account somewhere.
This is big problem with current cashless systems. Privacy advocates are vehemently opposed to this kind of tracking, and consumer advocates also point out the added costs and fees that consumers or merchants have to contend with when using credit/debit payment systems.
Not coincidentally, this is also probably a big reason why there's been an increasing amount of discussion about cashless economics of late: banks would definitely not mind more users within such a system. But it's not the only reason; consumers themselves are becoming more willing to trade off their privacy for the sake of convenience.
And merchants may not mind, either. Yes, they may have to incur more fees with centralized cashless systems (debit swipe fees alone were estimated at $16.2 billion in 2009), but a 2004 joint study from AEI and the Brookings Institute estimates that a nation would save about one percent of GDP shifting from cash to cashless. In the U.S., that would be in the neighborhood of $146 billion a year, based on the 2010 GDP.
The savings would be realized in costs required to handle currency: physically transporting it around alone costs a lot for merchants, once you take into account staffing costs and insurance fees for moving cash. Without cash, stores could shift to self-service checkout lanes, thus reducing personnel costs.
We typically don't see these costs as consumers, because for us, they are unseen: crime, resources to transport, and opportunities to cheat the system with cash. But the costs add way up. Cash, it seems, is more expensive than cashless.
But that's of little comfort to the millions of unbanked Americans who rely on cash on a daily basis, nor to the millions who are very unwilling to give up their privacy just for the sake of saving a bank or a merchant some trouble. So how could a cashless system work that would satisfy the privacy needs of consumers and still be secure enough to use ubiquitously?
The road to e-cash
One of the most publicized attempts to build a cashless infrastructure was DigiCash, a late 1990s venture founded by U.S. cryptologist David Chaum. DigiCash's life as a business was ill-fated, but the basic premise was sound: the system would still rely on a centralized authentication system, but that system would be heavily encrypted and transactions would be irreversible, thus ensuring the anonymity of cash and eliminating the classic problem of e-currency: the double spend.
Double spend is easy to describe: if a certain set of bytes represents a given amount of currency, why not just duplicate that set of bytes infinitely and have bucketloads of virtual moolah? Apart from being, well, illegal, this kind of activity would quickly crash any virtual currency system if left unchecked.
For a variety of reasons, DigiCash failed to get off the ground. Some have argued that the very banks that invested in DigiCash were also responsible for changing it to the point that its original intent was lost.
But there were kernels of an idea that were salvaged: keep the heavy encryption and irreversibility of a transaction, but decentralize the virtual currency. By eliminating the central authentication authority, suddenly you don't have to worry about tracking or even connectivity. A stored amount of currency on your device would be enough to conduct a transaction.
This would be the basis of the bitcoin digital currency that would dominate the cashless discussion when it was first described in 2008. To combat the double-spend problem, bitcoin uses a distributed ledger chain that tracks every bitcoin spent. (Bitcoin users use a portion of their PC's processing time to maintain this ledger chain, while also mining for and receiving bitcoins for their trouble.)
But as the value of bitcoins jumped to dizzying heights in 2011, the utopian vision of an anonymous cashless world started unraveling at the seams. In order to keep their money protected and stored, bitcoin users would use online wallet services that were soon prone to theft and fraud. Exchanging their online money for actual currency also left trails to follow and increased fraud risks. Various large-scale hacks and accidents would send the value of bitcoins plummeting in late 2011.
The basic concept of bitcoin was (and still, to some extent, is) sound. The only flaw in the system was that storing the bitcoins on traditional PCs and online servers left the currency open for crime. Plus, bitcoin's value is not backed by any government. Money, even the dollar or euro, depends on a lot of collective belief in its value -- and also that, at the end of the day, there's a government somewhere that will back it up. This is something that bitcoins don't have.
But one government is stepping up to put its hat in the ring.
In the spring of 2011, even as the news cycles were pointing to Sweden as the model for what a cashless society would be, the Royal Canadian Mint launched their own venture in cashless infrastructure: the MintChip.
The MintChip represents a new step in the evolution of digital currency, and could be a real look at what a cashless world will look like. And in contrast with bitcoins, the MintChip system would be backed by an actual state-issued currency, the Canadian dollar.
MintChip, when officially launched, will use trusted hardware in the form of a chip that can be used on a smart card, USB stick, smartphone, or micro SD card. Consumers can get their money transferred to the MintChip device by a third-party broker and, unlike bitcoins, the value in Canadian dollars is easily stored within the MintChip.
The system is designed for what the Mint calls mini-transactions -- $10 or less -- so the risk of heavy fraud is minimized. Critics of the new MintChip technology praise the transportability of the currency, but see some potential problems with the system. Bitcoin analyst Vitalik Buterin points out that an integrated circuit could be a big hole in the system's security. "Such systems are nothing new, and time has shown them, like all other forms of digital rights management, to be far too insecure to build an economy around. About two years ago, the supposedly 'unhackable' Infineo chip was hacked by Christopher Tarnovsky using an electron microscope, needles, and acid, and one can only imagine how quickly such a feat would be repeated when doing so essentially gives you an unlimited license to print money," Buterin wrote.
There are other potential flaws. Buterin argues that because it will be the Royal Canadian Mint that will be inserting value into the system, the infrastructure will not be as decentralized as bitcoin. But this is a compromise MintChip users may be willing to work with, particularly given that once the money is on the MintChip, it becomes anonymous again. And, of course, the money is backed by a hard currency with understandable value.
"All currencies rely on the underlying belief by people who use them -- that they have and will have value. So in that way, you could argue that all currencies are ethereal phenomena. MintChip, backed by hard currency held in trust, could gain wide acceptance on its applicability," Royal Canadian Mint CFP Marc Brule said in a May interview with Wired.
MintChip may not have all the answers, but it could be the next big step towards implementing a cashless society that doesn't rely on the auspices of a centralized management system.
This article, "The nontrackable cashless future isn't here yet -- but it's just within reach," was originally published at ITworld. For the latest IT news, analysis and how-tos, follow ITworld on Twitter and Facebook.
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