Offline digital cash unsuitable to current legal environment

[Howard Gayle <howard () hal com>]

A number of ingenious offline digital cash schemes have been
invented.  In offline systems, depositors must initially
identify themselves to their bank.  Then, if they behave
honestly, they can anonymously create accounts, deposit and
withdraw digital coins, and spend digital coins.  If a digital
coin is spent more than once, the identity of the double
spender is revealed when the second copy of the coin is
deposited.

If tamperproof observers were feasible, then double spending
could be prevented, not simply revealed afterwards.  However,
if the rewards are large enough, tampering becomes cost
effective.  All that is required is to extract the secret key
corresponding to the observer's public key.  This may not be
worth doing if digital coins are limited to, say, US$1000, but
may become profitable if coins for millions of dollars are
allowed.

Offline digital cash systems are useful in specialized
applications like paying highway tolls.  In the current world
legal environment, however, they are unsuitable for general use
with large sums of money.  The governments of most
industrialized countries would oppose general digital cash
systems, so banks would have little chance of prosecuting
double spenders.

Anonymous bank accounts are illegal in almost all
industrialized countries.  Austria used to have anonymous
accounts for Austrian citizens.  I don't know if they're still
available.  Governments will try to prohibit general digital
cash systems for the same reason they prohibit anonymous bank
accounts: the (justified) belief that depositors will use
digital cash to buy and sell things of which the government
disapproves, and to evade taxes.  Bank records provide
governments with a surveillance tool they will want to keep
just as much as, say, wiretaps.

If a bank is to offer general digital cash (or digital metals),
it would have to be an "offshore" bank, for example on a
Caribbean island.  But such a bank would have no recourse
against a depositor who double-spends in some other country
where digital cash is prohibited.  The bank could transfer all
the risk to the merchant accepting the (second copy of the)
digital coin, but this would simply cause merchants not to
accept digital coins.

If people in most industrialized countries are to have the
benefits of general digital cash in the current legal
environment, then I think on-line systems will have to be used.
In on-line systems, every transaction is performed through the
bank.  On-line systems permit completely anonymous accounts,
and double spending is easily prevented.  The disadvantage is
that, for every transaction, realtime communication is needed
with the (possibly offshore) bank.  If digital cash is
prohibited, then the realtime communication must be done in a
way that makes traffic analysis infeasible.

In practice, I think we'll see a hybrid system with offline
digital coins offered up to some limit plus on-line transfers
for larger amounts.

--
Howard Gayle
HAL Computer Systems, Inc.
1315 Dell Avenue
Campbell, California 95008
USA
howard () hal com
Phone: +1 408 379 7000 extension 1080
FAX  : +1 408 379 5022