DEFINITION of 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 and that set his currency apart from its competitors. In this way, DigiCash was also an important predecessor of the digital currencies of today. While DigiCash enjoyed several years of operation, it never broke into the mainstream to the degree that its developers had intended. It declared bankruptcy in 1989 and was later sold off to eCash Technologies, a rival digital currency company.

BREAKING DOWN DigiCash

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. In this way, 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. 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.

Although Chaum's Blind Signature technology had the potential to revolutionize the payments industry, he found little support for DigiCash. Indeed, there was only one U.S. bank to support DigiCash systems. Deutsche Bank, headquartered in Germany, became only the second bank to back Chaum's system.

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.

According to a profile by CoinDesk, Chaum's DigiCash project came "within close range of achieving a global level of success." However, it ultimately failed to grow its user base to a sufficient size to support its operations. It may have been a combination of infighting among DigiCash developers and team members and a lack of adoption around the world that ultimately led to the downfall of the system.

One other barrier to DigiCash's potential success was that a number of promising conversations with major banks and credit card companies failed to yield any deals for the service. 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.

Another important component in the downfall of DigiCash was Chaum's decision to exit the company in 1996 following a period of intense fighting between DigiCash leadership and employees. At the time, Chaum explained the issue as a chicken-and-egg problem, suggesting that "it was hard to get enough merchants to accept it, so that you could get enough consumers to use it, or vice versa." After that, it was only two more years before the company filed for bankruptcy. Chaum continues to be involved in the cryptography and digital payments worlds up to this time. 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.