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.
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