The History of Cash-Like Digital Payment Instruments

As the U.S. Congress considers a digital dollar that replicates the privacy-respecting features of physical cash, a lot can be learned by seeing how previous attempts at something similar in other countries back in the 1990s ultimately failed. Many innovations have taken place since then, of course, but how and why those original projects are no longer with us today can give us an idea of what needs to be done to do it right.

This piece is part of CoinDesk's Payments Week.

Last month, Rep. Stephen Lynch (D-Mass.) introduced the Electronic Currency and Secure Hardware (ECASH) Act (H.R. 7231). The bill directs the U.S. Treasury Secretary to develop and test a digital dollar that would be a digital bearer instrument running on secured hardware devices capable of instantly settling peer-to-peer offline transactions with no need for any third-party approval or validation.

Third-party validation, in which a payors’ unspent balances are verified against a record of previous transactions (i.e., a ledger), is commonly thought to be needed to prevent double spending. However, what is being proposed here are devices that verify funds locally via a dedicated or trusted computing environment located on the devices themselves. The possibility of individual hacks causing systemic consequences would be reduced by holding and transaction size limits hardwired into the devices.

What’s old is new again

Such secure hardware technologies are not new – they have been around for decades. The Avant stored-value card, which was capable of anonymous payments using a custom-made card reader device, was issued by the Bank of Finland in 1993. At first, only non-reloadable disposable cards were issued, but reloadable cards were launched in 1994. Technically, the cards could do offline peer-to-peer payments, but that feature was disabled in the Avant system.

Initially cost-free for users, the Avant card was introduced when debit cards were pricey to use. However, fees were later added as operating the system turned out to be expensive.

When the Avant card launched, one of Finland’s leading convenience store chains, R-kioski, was recruited to sell, load and unload cards; other retailers joined the network later. Starting in 1997, existing ATMs could be used to reload and unload cards, which was technically challenging because ATMs were based on magnetic stripe technology.

However, Avant cards never gained wide acceptance. That was mostly because there were fees for reloading and unloading money while ATM withdrawals at the time were free and the cost of using debit cards was decreasing. Avant was spun off to a consortium of commercial banks in 1995, and died quietly in 2006.

Mondex

National Westminster Bank (NatWest) tested a similar stored-value payment platform, Mondex, in the U.K. for three years starting in 1995. In 1997, NatWest sold the controlling rights to Mondex to Mastercard, which expanded the pilot to other countries throughout the late 1990s. However, Mondex fizzled out before the turn of the century.

Although the various pilots demonstrated that the technology worked, as was the case with Avant, the commercial proposition was not sufficiently robust. For one thing, not enough merchants were buying or leasing the required point-of-sale devices. And even though the Mondex platform allowed person-to-person transactions, users had to buy special devices to do it.

Recent developments

New interest in a central bank digital currency has revived interest in digital bearer instruments. For example, BitMint, Idemia and WhisperCash offer digital payment platforms that are capable of consecutive offline payments, including peer-to-peer functionality without requiring an intermediary device and transaction privacy with no online tethering. In other words, they come very close to offering cash-like digital functionality. Also, DigiTally successfully tested a prototype with similar functionalities.

There are also some not fully cash-like products, such as those offered by Crunchfish and Giesecke+Devrient, that require intermediary devices or online connections to fully settle offline transactions. Although that reduces cash-likeness, it keeps the cost of the smart cards down and eliminates the need for internal battery power. For that reason, WhisperCash offers a “Lite” device that relies on NFC (near field communication)-capable phones to effect transfers. Conversely, Giesecke+Devrient’s technology isn’t bound to the use of intermediary devices.

Some argue that online settlements are necessary to avoid double spending. A 2021 memo from Riksbank, Sweden's central bank, made that assertion with little substantiation, except to say that 100% tamper-proof devices don't exist. However, even if that were true, software countermeasures can limit the impact of a hardware hack, like holding and transaction limits and mutual authentication requirements. That’s the approach that WhisperCash has taken. Plus, BitMint has patented a hardware wallet with quantum-grade security that will erase all of the currency stored in it upon any tampering attempts..

Lessons learned

The experiences of Avant and Mondex suggest that the possibility to make anonymous offline transactions isn’t as important to users as some, such as the sponsors of the ECASH Act, assume. A 2021 European Central Bank (ECB) survey claimed privacy was a top-two feature of a prospective digital euro for 58% of respondents, but a more recent ECB-run focus group effort found that very few participants opted for the kinds of high privacy levels suggested in the proposed U.S. ECASH Act.

Earlier efforts contain a lesson for digital currency issuers that is also reflected in a recent International Monetary Fund working paper. That is, digital currency should be provided at no cost to users, intermediaries and merchants. However, if it is issued by the central bank or government, using tax revenue to finance competition with private-sector banks and payment service providers could raise political issues.

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