What Is DigiCash?

Founded by electronic currency pioneer David Chaum in 1989, DigiCash was one of the earliest electronic money companies.

Chaum developed a number of cryptographic protocols that governed DigiCash transactions, which set his currency apart from its competitors and made DigiCash an important predecessor of the digital currencies of today.

DigiCash was in business for less than a decade, and during that time it was unable to convince banks to adopt its technology. The company filed for bankruptcy in 1998, ten years before the financial crisis that would be the catalyst for the development of blockchain-based cryptocurrencies like Bitcoin.

Key Takeaways

  • DigiCash was a company founded by David Chaum, a proto-cypherpunk who published a groundbreaking paper on the technology of anonymous cash transfers in 1982, "Blind Signatures for Untraceable Payments."
  • DigiCash was active from 1989 to 1998 when it filed for bankruptcy. Its failure was due in part to the perfectionism of its founder and the embryonic state of digital payments at the time.
  • Many of DigiCash's innovations laid the groundwork for the development of blockchain technology in the 2000s.

Understanding DigiCash

Digicash is both the name of the currency David Chaum developed and the company that administered it.

Early History: David Chaum and Cryptography

David Chaum earned his doctorate in computer science from the University of California, Berkeley in 1982. His dissertation "Computer Systems Established, Maintained and Mutually Trusted by Suspicious Groups" is a prototype of blockchain technology.

That same year, Chaum founded the International Association for Cryptologic Research (IACR), which was a leading institution for research into and development of digital cryptography.

Chaum published Blind Signatures for Untraceable Payments in 1982, which presents the formal system for mathematically encrypting payments. The system was a significant development of digital cash because it anonymizes payments so that banks and the government can't trace the payer in a two-party transaction. It is different from blockchain technology, however, because it requires banks to act as trusted third parties to electronic transactions.

The Formation and Failure of DigiCash

Chaum founded DigiCash in Amsterdam, the Netherlands by 1990 to capitalize on his theoretical work in digital currency. By 1995, the company had entered agreements with the Mark Twain Bank in St. Louis (now Mercantile Bancorporation), and in 1996 DigiCash struck a deal with Deutsche Bank, Credit Suisse, the Australian bank Advance Bank, Norske Bank and the Bank Austria.

After an auspicious start in the mid-1990s, DigiCash failed to build on early successes. Some sources put the blame on Chaum who reportedly didn't trust his employees and put perfection before practicality when developing his product. He also refused to enter into partnerships with large banks like ING and was distrustful of big tech players like Microsoft and Netscape.

Had DigiCash been able to secure a partnership with one or more major financial institutions in this way, it would likely have had a much better chance of surviving in the rapidly digitizing financial world. One of the most promising (and yet ultimately disappointing) potential partnerships was with Citibank. The bank engaged in long-term negotiations with DigiCash about the possibility of integrating, only to ultimately shift toward other projects.

Chaum said in an interview in 1999 that company's problem scaling was due to a classic chicken and egg problem in tech: "It was hard to get enough merchants to accept it, so that you could get enough consumers to use it, or vice versa."

For users to conduct transactions using DigiCash, they needed to utilize a particular type of software. This allowed for the withdrawal of notes from a bank via the use of designated encrypted keys. It also allowed users to send DigiCash payments to other recipients.

DigiCash utilized a digital currency called "cyberbucks." The Guardian newspaper suggested in a 2003 report that DigiCash saw its highest levels of support from libertarians and others in favor of a digital, international currency that would exist outside of the control of any government.

DigiCash provided a broad and unique set of payment sizes for users, including micropayments. An email mailing system was set up for currency trading, and many traders also took part in off-market exchanges as well.

After Digicash

DigiCash was a crucial early proponent of public and private key cryptography, the same basic principle that is used by digital currencies today. Known as "Blind Signature" technology, Chaum's invention both enhanced security for DigiCash users and made electronic payments untraceable by outside sources.

Chaum continues to be involved in the cryptography and digital payments world. Although DigiCash never fully got off the ground, it nonetheless helped to lay the foundation for the bustling cryptocurrency world that exists today. Whether digital currencies like bitcoin and ether will manage to succeed where DigiCash ultimately failed remains to be determined.