Cashless Society or Digital Cash?
Southwestern Society of Economists
March, 1994For more than a decade there have been predictions of the elimination of physical cash as a transaction medium and the substitution of one form or another of an electronic payments system. Some forecasters view the prospect with delight, looking on it as increasing the efficiency of the economy. Others behold it with foreboding, anticipating it to be another way in which the details of our lives become subject to scrutiny. This paper examines the issues surrounding the prospect of a "cashless society" and the possible alternative of digital cash.
Attention to the possibility of a cashless society seems to have been widespread recently, with articles in various publica- tions such as The Futurist , Information Week , and The Technology Teacher . The author of "The Cash-Free Society" in The Futurist, David R. Warwick, was especially enthusiastic in extolling the elimination of cash:The immediate benefits would be profound and fundamen- tal. Theft of cash would become impossible. Bank robberies and cash-register robberies would simply cease to occur. Attacks on shopkeepers, taxi drivers, and cashiers would all end....Urban streets would become safer....Security costs and insurance rates would fall. Property values would rise....Sales of illegal drugs, along with the concomitant violent crime, should diminish. Hospital emergency rooms would become less crowded....A change from cash to recorded electronic money would be accompanied by a flow of previously unpaid income-tax revenues running in the tens of billions of dollars. As a result, income-tax rates could be lowered or the national debt reduced. Not all proponents are as ecstatic about the benefits as that author. However, regardless of the advantages (or disadvan- tages), some observers think "it is only a matter of time before the cashless society arrives."  Others, though, describe the elimination of coins and currency any time soon as "a myth". 
Forms of Non-cash paymentsCertainly the elimination of cash transactions is fast becoming technically feasible. There need not be a unitary, government run electronic monetary system such as visualized by Warwick for cash to disappear. Many electronic and other non- cash payments means are already in use. Credit cards, debit cards, prepayment cards, and smart cards are established compo nents of a non-cash transactions system. Checks, of course, are a non-cash payment means also, but don't fit either into the electronic cashless society visualized by its proponents.
Credit and Debit Cards.Credit cards are so widespread in use as to hardly require discussion. A Wall Street Journal article  described the credit card business as "a saturated market". Not strictly a payment means, but a promise of deferred payment, credit cards nonetheless can substitute for the use of cash. Debit cards have been available for years. They represent a true payment means since the amount of the purchase is taken from an account belonging to the customer. Despite there being some 40 million debit cards in use, the relative volume of pur chases made with them is minuscule. 
Use of debit cards seems likely to grow in the rest of the nineties. Many banks have been reluctant to issue them in the past because of technical problems and the perceived difficulty of making them profitable.  However, both Visa and MasterCard have launched campaigns to gain more extensive use of their debit cards.  These campaigns encompass trying to sign up more banks as issuers and educating consumers in their use. They have also been seeking additional outlets which haven't traditionally taken credit cards, including taxi cabs and fast food outlets.  Even welfare recipients may be using debit cards if the program in Maryland spreads to other areas. 
ATMs.Even ATMs, presently facilitating the use of cash by making it easily available, may help the move away from cash. ATMs which dispense "scrip" spendable at the retailer in which the ATM is located are coming into use.  These devices appeal to retailers as another means of making it easy for customers to spend while being much cheaper and less attractive to criminals than cash ATMs.
Prepayment Cards.Prepayment cards store value on magnetic, electronic, or optical media, often in appearance much like a credit card. When used, e.g. in a pay phone, the accepting device erases the proper portion of the value. (The old paper multi-ride tickets which were punched each time they were used were a precursor of the more modern cards.) Prepayment cards have substantial use in Japan. Nippon T & T alone sells hundreds of millions of them a year.  There use is also rather wide spread in Europe, but not in the United States.   Some are being used on college campuses and Sprint has begun issuing them for long-distance phone calls. 
Smart Cards.Smart cards are in a sense an extension of the prepayment cards. Like the prepayment cards, they can store value for future use, but they also include an internal microchip based processing capability. Smart cards have been little used in the United States, but are common in Europe. The leading manufacturer (a French firm) has shipped over 100 million of the cards, but only 2 million of them have been sent to the U.S. 
Barriers to Achieving the Cashless Society
Economic Hurdles.Economic hurdles may limit the develop ment of systems which are technically feasible. The cost of paper handling and getting authorizations accompanying the ac ceptance of credit and debit cards has been such a barrier in the past, especially for moderate size transactions. The development of low cost point of sale terminals has been eliminating the need for this paper handling since it makes possible the exclusively electronic handling of the transaction.  This has resulted in more than a 90% reduction in the cost of an average credit au thorization over the past decade.  The cost of handling transactions electronically is approaching the level that makes even relatively small purchases with electronic payment means feasible. Such non-paper exchanges can now have a cost advantage over checks.
Consumer Resistance.Lack of consumer acceptance has re tarded the spread of debit cards  and may also slow further advances in electronic payments means. The problem may partly have been the name "debit card". To offset this, MasterCard is calling its debit card a "cash card" and Visa its debit card a "check card".  Another obstacle is that for many consumers there is no net advantage to debit cards. There is an element of convenience over carrying cash or even a checkbook. However, the user loses the deferred payment feature inherent in credit cards and assumes greater potential liability if the card is lost or stolen. Considering these factors, Consumer Reports advised: "People who pay off their credit-card balances every month will in most cases be better off with one of the many no-fee credit cards now available than with a debit card."  Many consumers are likely to reach the same conclusion, though those who don't qualify for credit cards may find the debit cards appealing.
Consumers still use cash more than any other payment means for personal consumption expenditures and the Nilson Report estimates that it will still be used in almost half of such spending in the year 2000.  
Privacy Concerns.It is not merely drug dealers who are concerned with the privacy afforded by cash transactions. Others are worried about the detailed record of their transactions left by non-cash transactions. Nick Szabo, in a posting to the alt.privacy Usenet newsgroup, expressed this apprehension espe- cially well:The point of digital cash is privacy, which is lost with the current electronic credit and smart cards. Call me paranoid, but I'd rather not have strangers accumulating and swapping dossiers showing what videos and games I rent, or what I buy at the drug- store and bookstore, nor do I trust the oblivious clerks at grocery stores who say that the POS-ATM cards don't accumulate marketing info (the people who make the cards say they can and do, because it's quite lucrative for junk mail marketers to know which customers buy rubbers, smoke, etc. Also lucrative for insurers once they catch wind of the data.) Nor do I trust politicians who tell us that by snooping in everybody's databases they will succeed in protecting our privacy, rather than using the data for their own political purposes: collecting taxes and reducing National Health Care costs at my expense, getting ree- lected, preventing me from getting elected, all sorts of fun stuff they can do with information on what we used to call our "private life". In cyberspace, I don't want AMIX or Prodigy recording my reading material, or MUDs logging my behavior, for the edification of some marketer or future cop or other miscella- neous snoop. Fears of being tracked in detail are not groundless. Last year, for example, Visa introduced a new service "that allows banks to more precisely analyze cardholders' buying patterns and target sales promotions to customers." 
Prepayment cards are generally anonymous in use. However, there is no technological barrier to the issuer encoding informa- tion about the purchaser on the card and tracking its use. Some systems already have point-of-use devices networked to computers to spot misuse of the cards (e.g. reloading them fraudulently).  It is not hard to visualize the practice expanding.
An Alternative: Digital CashOf particular interest in meeting the privacy concerns is the work of cryptographers toward the development of "digital cash". Their aim is to develop a payment means which provides the benefits of electronic payments systems with the privacy of physical cash.
How might such digital cash work? Here is an example from Finney :The bank...creates a digital bank note by signing a message which specifies the serial number and value of the note, and sends it to Alice. Alice, as she withdraws it, uses Chaum's technique to alter the serial number so that the bank will not recognize the note as being from this withdrawal. She then pays Bob electronically by sending the bank note to him. Bob checks the note's validity by decrypting using the bank's public key to check its signature. He then sends the note to the bank, which checks the serial number to confirm that this bank note hasn't been spent before. The serial number is different from that in Alice's withdrawal, pre- venting the bank from linking the two transactions.Several problems come to mind in considering this use of digital cash. Counterfeiting would seem to be much easier with such electronic bank notes than with paper money since they are merely electronic signals. However, the development of public key cryptography provided a means of eliminating this problem. In public key cryptography an entity (in this case the bank) generates two keys such that a message encrypted with one of the keys can be decrypted only with the other. One of the keys (called the "public key") is published so that anyone can use it. The other key is kept secret (and thus called the "private key"). This system can be used to send encrypted mail which no one but the recipient can decrypt and read. In the case of the digital bank notes above, the bank encrypts its signature with its pri- vate key so that when Bob decrypts it with the bank's public key, he knows that the bank really signed the note.
Another potential problem is that of double spending. What if Alice, having received a valid note from the bank, sends one copy to Bob and at the same time another copy to Carl? In the system outlined above, the bank records the serial number of the note when Bob deposits it. If Carl then tries to deposit it also, the bank tells him that it is no longer valid. To be safe Bob or Carl would need to check with the bank before accepting the note to be sure it had not already been spent.
The above outline shows how digital cash would work over a network such as the Internet. David Chaum  has set out an offline system that would work similarly. Here the "cash" would be loaded into a special version of the smart card, with encrypt- ed signatures as before. The smart card would be designed to prevent double spending while maintaining the anonymity of the user. An experimental version of such a system is in use in Amsterdam. 
Chaum et.al.  have also proposed an approach which does not require the recipient of the electronic note to immediately check with the bank. Through a mathematical protocol they enable the bank to guarantee to Alice that her use of the note cannot be traced to her account so long as she uses the note only once, but which protects the merchants and the bank by providing a high probability of it being able to trace it to her account if she spends it twice.
The digital notes described above do meet the privacy con- cerns of users, but they won't really be cash. The notes do not circulate from entity to entity, but must be redeposited with the bank. Thus, they are more comparable to money orders (or travel- ers checks in the smart card case) at present. When you buy a money order, there's a space for your name (& often address) as sender. However, this need not be your real name and if you paid for the money order with cash the use of the money order cannot be linked to you by the issuer. The anonymous feature of digital cash seems the same to me except that you can pay for the digital note from your account with the bank.
Okamota and Ohta  extended the earlier work into a set of protocols which they claim make the electronic cash transfera- ble. They provide a means for each recipient to check the au- thenticity of the electronic money without a need to track the complete path it has taken from the issuing bank. This seems an important additional step toward making electronic money function like physical cash. However, their system still has some significant shortcomings:
Thus, the digital cash procedures need further refinement before they truly match the characteristics of physical cash.
- 1. Each user of their "electronic coins" must be a customer of the issuing bank.
- 2. Like the scheme of Chaum et.al., their system will almost certainly reveal the identity of the customer to whom the coin is issued if that customer uses it twice. However, it appears that there is not the substantial protection if a subsequent holder spends the coin twice.
An obstacle to the widespread use of digital cash is the complexity of the mathematical procedures necessary for the customer to request issuance of the electronic money and for the authentication of it as it is used. Chaum  suggests the development of "personal representatives" to handle the proce- dures almost automatically for users. These personal representa- tives could be palmtop computers as well as software loaded on the user's microcomputer. If the use of personal assistants like Apple's Newton becomes more common, the digital cash functions could be included in them.
ConclusionsThe elimination of physical cash from our economy is already feasible from a purely technological perspective. The economic barriers are also disappearing, though a substantial additional investment in equipment and cards would be needed to permit even purchases such soft drinks to be made. Some mechanism to easily permit transfers from one person to another would also have to be provided. There do not seem to be adequate incentives to induce any entity or group of entities to make this substantial invest- ment in the near-term. Thus, any transition to a cashless socie- ty is constrained to be gradual.
An even greater obstacle to the elimination of physical cash is consumer resistance. In spite of the availability of a varie- ty of non-cash payment means already, there has been only a slight decline in the relative usage of cash over the past dec- ade. Even among those consumers who are not concerned by the privacy implications, simple inertia requires a greater incentive for change than has so far been evident.
Digital cash is an intriguing alternative which conceivably could speed the move to a cashless society. There must be a sufficient array of possible users to provide the potential demand to move it from concept and experiment to practical medi- um. The growth of commercial transactions through the Internet may provide this array. However, it will be a big jump from sophisticated computer users to the ordinary consumer. The role of digital cash is likely to be that of a supplement to, rather than replacement for, physical cash for many years to come.
The cashless society, then, seems a far distant vision, only a few years closer to fulfillment than when first expounded many years ago.
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