The End of Cash
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also Cash is dirty -- the New Jersey Turnpike tried to punish toll collectors recently for wearing latex gloves (thus giving the driving clientele a "bad impression"), but who can blame them? Cash is heavy -- $1 million in $20 bills weighs more than you can lift, and drug dealers have been disconcerted to note that their powdered merchandise is handier for smuggling than the equivalent money. Cash is inequitable -- if you are one of the 50 million Americans poor enough to be "unbanked," you pay extortionate fees to seedy, bulletproofed check-cashing operations (even more extortionate than the fees charged for automatic teller machines, often up to 1 or 2 percent and rising). Cash is quaint, technologically speaking -- unless you're impressed by intaglio-steel-plate-printed paper with embedded polyester strips (meant to inconvenience counterfeiters). Cash is expensive -- tens of billions of dollars drain from the economy each year merely to pay for the printing, trucking, safekeeping, vending, collecting, counting, armored-guarding and general care and feeding of our currency.
  Cash is obsolete.
  So here come Bitbux, E-Cash, Netchex, CyberCash, Netbills, and DigiCash -- through the Patent and Trademark Office and into the marketplace. A frothing mix of public, private, semipublic, bank and nonbank institutions are rushing in with new forms of money. As the Internet booms, those experimenting with commerce at an electronic distance are struggling to perfect the sending of cash over wires.
   The credit card companies have realized that their products are no longer about credit but rather about convenient payment for goods and services; they are entering the cash game with "smart cards" making heavily marketed debuts in Atlanta this month and New York at year's end. A British-based project called Mondex is promoting a global standard for digital cash at sharp odds with the Visa and MasterCard approach. Like their competitors, the Mondex people have noticed that cash changes hands 300 billion times a year in the United States alone, and they want their cut. They believe that electronic money has reached the stage of a classic emerging market and that the test for every participant will be to survive the next two years.
  The big players are not alone. Internet startup ventures, overseas telephone companies, universities and city transit systems are all experimenting with digital payment schemes with extraterritorial ambitions. A battle has begun for market share -- and also for a quintessential modern commodity, sometimes overlooked but always coveted: float. Float is wealth in transit -- money that has been parked temporarily in a place where someone, probably not you, can earn interest on it. If the issuer of a traveler's check or subway token or smart card can grab a piece of your money and collect interest for days or even hours, it gains an edge. No wonder everyone seems to wants to mint money -- except the Mint, which is carefully standing aside, for now.
   But are these new creations really money? When money cannot be touched, when it turns to electrons, when it dematerializes, some people start to worry about what they really have. Will it enough for a bank, or a credit-card company, or even the Government to validate some chip as "money" -- can it ever be as real as a dollar bill? The nightmare parable of digital cash goes this way:
   You check your favorite leather jacket in a restaurant and get a receipt. On the way out, you present the receipt to the attendant. He sniffs it, rubs it, holds it to the light, cryptanalyzes it and -- relief! -- confirms its authenticity. He hands the receipt back and assures you: "That is your jacket."
  Digital money is perfect money, flawless money, intangible money. It is money that has been robbed of its substance -- the opportunity to get scuffed, worn, dirty and perhaps lost. It is networked money, and point-of-sale money, and money on a card, and money on a computer. It is money that weighs nothing and moves at the speed of light. It is money incarnated, finally, as pure information.
  That comes as a shock; yet information is what money has always been. It is information about value and wealth. Let's say you go on line and buy a bottle of Martelli Vineyard Puncheon Select Gewürztraminer from Virtual Vineyards, an Internet site. The wine is real -- the parcel service burns jet fuel to get it to your door. You are obliged to become $14 poorer and Virtual Vineyards is entitled to become $14 richer. You could send dollar bills by mail -- those little green symbols of wealth acquired in past transactions. Once perhaps you could have sent a sliver of gold bullion -- a symbol in its own way, now stripped of its special legal status. Only the information need change hands, so now you can send an experimental form of electronic payment called CyberCash. Does it matter? This long-distance commerce becomes the ultimate extension of a process that began a century ago, when the Western Union Telegraph Company -- a communications company, not a bank -- jury-rigged a way to turn cash into bits flowing across wires. The wiring of money means something different now, when the transport medium, the Internet, is decentralized, international and uncontrolled.
  In a real sense, money has already gone digital -- or virtual, or notational. The creased bills in your pocket are a language as outmoded as Morse code. The money supply of the United States amounts to more than $4 trillion dollars. Every business day more than half that amount sloshes about among banks and other institutions in purely electronic form: signals flowing over wires. These accounts are reconciled by transfers not of actual dollar bills but of mere bits -- the information is the be-all and end-all. "People today do not put $5 billion in a truck and drive it from one bank to another -- that's just irrational" says Kawika Daguio, a specialist in payments technology for the American Bankers Association.
  In fact, of the broad American money supply, only a small fraction -- less than one-tenth -- exists in the form of currency. All the bills and coins in consumer pockets, bank vaults and elsewhere amount to about $400 billion. And most of that currency, as much as two-thirds, has long since departed the country, probably forever, mainly in the form of $100 bills. They belong to overseas money launderers and other enterprises that for one reason or another prefer not to keep their wealth in local denominations and local banks.
  The vast daily traffic in money across the interbank network is not backed by dollar bills. Nor of course is it backed by the stores of gold at Fort Knox and elsewhere, the gold standard having long since gone the way of ducats and pieces of eight. "Money is the current liability of a bank," asserts Sholom Rosen, Citibank's electronic-cash guru. "It's as simple as that: it's not gold, it's not silver, it's the current liability of a bank."
  You believe in banks, don't you? That's good, because ultimately money is backed by nothing but your own confidence, habit, and faith -- a form of faith as powerful and essential to modern life as any religious belief. The coming digital era will make this plain to everyone, as never before. Still, the stock of old-fashioned cash out there is growing, not shrinking. About $1,400 in bills exists somewhere for every American. "That's a lot of paper money," says Lawrence Summers, the Deputy Treasury Secretary. "The question isn't why it's so small. The question is why it's so big."
   Cash is growing, yet it is dying. You will carry some around for years to come, and perhaps barely notice when you stop using it in grocery stores, at gas stations, in vending machines. But the first forms of digital money to hit the market will not be the best forms; the rules that lawmakers have developed for managing paper money will not be the best rules.
  For everyone who uses cash, everyone who stores it and everyone who regulates it, a challenge is nearing. The challenge will be to make choices. Some kinds of electronic currency will protect privacy, and some will violate privacy. Some will make crime easier, and some will make it extraordinarily difficult. Some will tax commerce parasitically, and some will catalyze it. The new minters of money will have enormous power to choose -- unless consumers, on the one hand, and Government officials, on the other, decide to make their own choices.
  "Digital cash -- the stuff that circulates -- isn't the only winner on the horizon, if it's a winner at all," says Daguio. Alternatives will be emerging from within the banking system and from the on-line world.
  "If you didn't have to dig in your pocket for a coin and could drive by a tollgate at 65 miles an hour, everybody benefits from that," he says. "If you can send money to your children, or send money to someone you've never dealt with before, it opens up new opportunities and eliminates obstacles to electronic commerce. With credit cards there's always the risk that somebody isn't going to pay; with electronic cash that risk is done away with, and transaction costs can come down significantly.
  "And people wouldn't have to pay those abominable fees to check-cashers. It's amazing what can happen, if the technologies are deployed correctly and the regulatory structure makes sense."

Brother, Can You Spare a Chip?

Vice presidents of Visa International, Visa U.S.A., and an assortment of associated banks have been thick on the ground in Atlanta over the past month, trying out the new cash card. It works in the Visa company cafeteria. Mastercard has already rolled out the equivalent in Australia and begun advertising it on American television. About 5,000 Atlanta merchants have agreed to install networked card-reading devices and accept the card in lieu of cash. Visa hopes to have "several million" cards in the marketplace before the Olympic Games end this summer -- an ambitious number, considering that the Olympics expect to draw barely 2 million visitors.
   The card is a chip embedded in plastic: a wafer-thin computer with, in this year's version, 2 kilobytes or 4 kilobytes of memory. The memory lets it store about 80 times as much information as the typical magnetic stripe on a credit card or fare card, and the processor makes possible the use of cryptographic methods to secure the data.
  Using the card is supposed to be fast and easy. Unlike the cards that persuade automated teller machines to spit out cash, these smart cards require no PIN or password. Cardholders do not sign the cards; nor do they show any identification to merchants. They just insert the card into a small terminal. The card and terminal engage in a quick electronic conversation, validating each other's tiny identities, and if all goes well, a carefully recorded transaction takes place. The tally of cash on the card goes down, and the tally on the terminal goes up. If you lose the card, you have lost the money (don't come crawling to Visa -- this is cash, or so the theory goes).
   Visa and other credit-card companies have adopted a technology that requires physical contact between card and card reader, but contactless technology is also available. You can wave your card in the vicinity of a turnstile or speed through a highway tollbooth, and a transaction can take place wirelessly. A card-reader debits your card from a distance of a few inches or a few feet. (Convenient -- then again, the next generation of pickpockets may need to do no more than brush on by you wearing the right card reader inside their raincoats.)
   Considerable thought is being given to the question of where your cash goes -- something like $2 trillion a year changes hands in amounts of $10 or less -- and how to take slices of ever-smaller transactions. A Visa promotional video shows a motorist, having been caught speeding, cheerfully handing over his smart card to the trooper for instant justice: "Good afternoon, sir," the trooper says. "You have the option to take care of that right here on the spot." ("Is that his personal card reader or the county's?" Elliot Schwartz, analyzing digital cash for the Congressional Budget Office, says laughing.) Children's allowances are a very real sliver of the money supply, and the Tooth Fairy is still believed to deal in cash. Mondex points out, euphemistically, that cash is "an important mechanism for spontaneous charitable donations"; it is certainly hard to imagine beggars trading cups for card-readers.
   At first the cards will be used until empty and thrown away; soon they will be reloadable. Next winter Visa and MasterCard plan a joint test in one of the world's most consumer-driven neighborhoods, the Upper West Side of Manhattan. The experiment is designed to make sure their competing cards will work in the same machines. And will New Yorkers use them? Smart-card manufacturers know that many people dislike anything resembling computers. They know that cash has a magical aura for some -- that in movies, for example, we love it (crassly) when bundles of cash glow from inside suitcases or piles of cash provide an aphrodisiac bedding material. Then again, in cooler moments we despise cash, too, so perhaps it is just as well that there is nothing romantic about a stored value card. Whatever the emotions at play, Visa cites studies suggesting that consumers tend to spend 5 or 25 or 40 percent more with a cash card than with cash -- perhaps because they are lulled by the unreality of it all.
   These spinoffs of credit cards will be the first big, mainstream digital cash, but this does not mean that they will succeed in dominating the market or -- a separate issue -- that they are ideal from the point of view of public policy. Still, the ultimate shape of electronic money will depend enormously on who wins the early market-share battles. Money, as a product, will offer a perfect example of the Law of Increasing Returns. The more people use any given type of money -- the closer it comes to universal acceptance -- the more useful and attractive it will become. Just like fax machines and Microsoft Windows, any particular form of electronic money will take off when, and only when, it achieves a certain level of penetration in the marketplace, a critical mass. By then it will have required a huge investment in the infrastructure of card readers and other associated technologies; that will raise the barrier for potential new competitors.
   It seems natural to the credit-card companies to divide the world between buyers and sellers. In their system, an extension of the credit-card model, you are either a consumer or you are a merchant. Only merchants have the hardware and the authority to accept electronic money. Visa and MasterCard have made enormous investments in creating a payment-clearing infrastructure, all the millions of linked card-reading hardware around the world and the decades of consumer habits that make it all work, and their smart cards are meant to build on the power of that infrastructure.
   The Mondex experiment is different. It imagines a world where everyone's telephone and everyone's computer can read money from smart cards and write money back. A trial has been running since last summer in the town of Swindon, England -- Mondex cards loading and unloading in hundreds of stores and through street telephones with special screens. "I was able to give my 6-year-old daughter a pound," says Tim Jones, Mondex's chief executive. "If we were both talking on Mondex phones, I could pop my card in, and you could pop your card in, and we could exchange funds. That for me is the core notion of a product that wants to call itself money."
  Those hoping to ride the wave of commerce on the Internet agree that the distinction between merchant and customer is breaking down, along with the distinction between reader and publisher. Everyone on the World Wide Web suddenly seems to have information to sell, or advertising space. If only those Webmasters could conveniently collect a bit of your cash each time you drop by their sites! "It goes back to preindustrial society," Jones says. "Economies are brought alive by markets where everybody goes along as a producer of goods and everybody also goes along as a consumer. People can purchase information from their peers and sell information to their peers, just as if they were taking clothes or food to the agricultural market." With a difference: this marketplace is global.
   These are expensive experiments -- all those chips, all those terminals, all that marketing. The card-issuing companies presumably intend to make money, though they speak in slightly vague terms about just how. There are ways. They can take a slice of a few percentage points from every transaction, from the merchants' side. That way it is invisible to consumers; it is a kind of tax nonetheless. Issuers can sell advertising space on the card itself; residents of Singapore, for example, are already accustomed to using what look like miniature Calvin Klein billboards to pass through transit-system turnstiles. The credit-card companies may be able to profit from information sifted from the vast mass of purchase records -- information that could be of use in marketing. They may profit in a small way from one of the weird psychological side-effects of anything to do with money: people like to collect it. Visa is already working with companies that specialize in marketing "commemorative" coinage, in hopes that customers will buy smart cards and set them aside, more or less forever, on the mantelpiece. And issuers of digital cash hope to profit generally from lost cards -- telephone companies and transit systems already figure gains ranging from 1 percent to a phenomenal 10 percent -- but there may be a surprise lurking in state escheatment laws, which require banks to turn over unclaimed accounts to the government after some period of time.
   And then there is the little matter of float. "I've got a card for $50 in my wallet, and it'll probably take me a month to use that up," says Doug King, a vice president of Wachovia Bank, one of the partners in the Visa project. "You multiply that out by millions of people, and there'll be some float there."\
   The ability of financial institutions to earn interest on your electronic money may not mean much now. When cash goes truly digital, it may mean everything. It is seldom recognized that the Government benefits directly from the float on the cash in your pocket, the cash on your dresser, the cash waiting inside parking meters, the cash roaming around in armored trucks, the cash resting in the dachas of the Russian mafia, and all the rest of the $400 billion in cash outstanding. Holders of cash lend their wealth to the United States, interest free, just as holders of American Express traveler'Fs checks lend their money to American Express. The Federal Reserve is required to buy and hold Treasury securities in an amount equal to that cash, and every year it turns over the interest it earns, currently about $20 billion. This income, known as seigniorage, represents revenue the Government stands to lose as cash gives way to privately issued electronic currencies.As, of course, it already is. At grocery stores and gas stations, ATM debit cards have an early head start; in Europe, gas stations now operate during some periods with a staff of zero. As cards wax, currency wanes: $100 bills are legal tender, in theory, but in real life many merchants will no longer take them -- there is too much counterfeiting and too much plain uneasiness, as the Mint switches over to the odd-looking new-style bills. Certainly there is nothing to stop smart cards from replacing cash in stores, subway systems and taxicabs, or at pay telephones and vending machines. Nothing, that is, but confusion, warring standards, business anarchy and, perhaps, a loss of faith.

Whose Currency Is It?

Once upon a time, American commerce was bursting across a new frontier so explosively that the technology of cash could not keep up. Coins and bullion were too awkward to handle and too slow to move. In the early 19th century a multitude of banks, large and small, began issuing private notes instead: money made of paper. Immediately there were standards problems. Notes that were trusted in one state traded elsewhere at discounts that varied with distance, if the notes were accepted at all. By the outbreak of the Civil War, 10,000 brands of paper money were circulating, and as much of a third of it was phony. Only then did the Federal Government step in, creating a national paper currency and deliberately driving the competing forms of money out of existence through the imposition of a 10 percent tax.
   This was controversial. The Supreme Court held that Congress has the power to restrain "the circulation as money of any notes not issued under its own authority." To a few officials, most notably the Director of the Mint, Philip Diehl, there may be an interesting analogy here. "Coins are a declining second-wave technology of commerce," he has said. "What we are wrestling with here today are the implications of these emerging electronic third-wave substitutes for coinage." If smart cards are a new form of money, shouldn't they be issued by the one true minter of money, the authority with the power to cut through a war of confusing, conflicting standards -- the Government?
   "Government-issued electronic currency would probably stem seigniorage losses and provide a riskless electronic payment product to consumers," Alan Blinder, then vice chairman of the Federal Reserve, told a recent Congressional hearing. But he and most of the Federal Reserve and the Treasury have taken the view that direct government involvement in the roiling digital-cash business would be hazardous and stifling.
   In the "current climate," as those in Washington tend to say, anything that smacks of an expanded role for the Government is anathema. Policy-makers at the Treasury are reluctant even to talk about electronic money on the record. "It's easy to go in and say, 'oh, we're going to regulate everything,' without knowing what everything is," says a senior Treasury official. "We want to know what everything is." He adds: "There are very serious policy issues -- seigniorage, money laundering, financial stability issues, there are consumer issues that are genuinely important that we must address and look hard at. It may be sensible for the Government to issue a card -- that's conceivable -- but what if you issue it and nobody uses it?"
   A task force headed by the Controller of the Currency is considering these policy issues, at a deliberate crawl. The many private institutions getting into the money business agree, with all their hearts, that the Government ought to just stay out of their way. They are not quite so worried that no one will use their products.
   DigiCash, an Amsterdam-based company run by an American cryptography expert, David Chaum, is experimenting with money in varying degrees of reality. One version cannot be converted back to dollars or any other national currency, yet thousands of Internet users have begged to have some to spend in slightly whimsical Internet shops. The Ecash Shop of Internet Lining sells six on-line images of Japanese scenery, for one-and-a-half cyberbucks (c$1.5). For c$5, the American Book Center Grand Lottery Extravaganza will offer you the chance to win an actual, tangible, material object: a hardback copy of John Grisham's potboiler, "The Rainmaker" -- "delivered to your home, for FREE!!" But real commerce is available, if not quite convenient, with another version of DigiCash's technology, issued through the Mark Twain Bank of St. Louis. This lets users store dollars in tightly encoded form on the hard disks of their computers. CyberCash, an altogether different operation based in California, issues digital "wallets" -- items with no more or less tangible reality than the digital dollars they contain -- for use in Internet commerce. At the moment, you have to open bank accounts with old-style cash, or at least turn over your credit-card number, to get any of these digi-cyber-electro-dollars.
   To bankers, this looks like anarchy. The one place they would like the Government to take action is the place where nonbanks start to step on their toes: banks are subject to many regulations and safeguards that, so far, their less orthodox competitors remain gaily free from.
   Over at Citicorp, the Emerging Technology group is creating (and fighting patent battles over) what the bankers hope will be the most securely based of all these systems. Their vision encompasses not just cash, but also the huge portion of the payments system that runs, almost as archaically, by check. Millions of people have begun paying bills electronically, tossing into the trash the little windowed envelopes that come each month. Nevertheless, nearly all company-to-company transactions today are by means of checks, expensive to process and highly vulnerable to counterfeiting. The average American signs 270 checks a year, according to Citibank, compared with 10 for the average German. This is a burden of which Citibank would love to be relieved.
   "We're going to have to go to this technology for reasons that have nothing to do with consumer convenience," says Colin Crook, senior technology officer of Citicorp. "This is profoundly important long term. It will change the entire infrastructure of banks. It takes $150 billion a year just to run the U.S. banking system. That's a crazy number at the end of the day."
   Meanwhile, guises of money continue to multiply. The post office issues 200 million money orders a year. Traveler's checks, food stamps, even frequent-flyer miles are becoming tradable and convertible to merchandise. Ersatz private monies have always existed -- tokens, tickets, and chits of all kinds. But these are blending in the mainstream economy as never before, just as real cash comes to seem less and less distinctive. When so many objects can serve as money, currency loses its special status.
   Inflation and technology have conspired, anyway, to make American currency seem ill-configured as never before. The dollar bill of 1996 buys about what a dime did in 1941. The 1941 dime was more convenient. But the Government has not seriously considered a dollar coin since the debacle of the poorly designed Susan B. Anthony dollar nearly two decades ago. Because we use paper money for amounts as small as the 1996 dollar, a whole vending-machine technology has sprung up to cope with dollar bills; still, your chances of straightening, uncrimping and stuffing any particular bill successfully into a machine are frustratingly small.
  To return the currency to its 1940's condition, the smallest bill would have to be the $10; the smallest coin, the dime. At the bottom of the ladder, pennies are an expensive nuisance, blatantly disrespected. Take one, leave one. Billions of them simply vanish from the economy each year -- another hidden cost of money. Oft-cited polls by Gallup and others that purport to show a continuing fondness for pennies -- made mostly of zinc -- are commissioned by, of course, the zinc industry. Many people do believe that eliminating pennies would lead to sneaky rounding-up price increases, but logic suggests this is not so: a two-dollar toy that now goes for $1.99 would likely drop to $1.90 rather than rise to $2.00. The Treasury believes officially that the currency is fine and popular as is. Americans are conservative about their dollars and cents. They may not want it to change, but it has changed and is changing: shrinking, fading, stepping back into a crowd.
   Could a host of new monies undermine our collective confidence in Money -- in the mass delusion that has made the United States dollar such a bedrock? Does the Government have the responsibility, or even the standing, to take action? Federal officials are watching and waiting, hoping that dollars will always be dollars and trying to let many flowers bloom. "I think we should maintain an enormous presumption in favor of letting people participate in markets and compete and do all those things, while insisting on a whole set of regulatory safeguards that insure that electronic money is not marketed by people who are then going to default," says Summers at the Treasury. Neither the Government's traditional monopoly on the minting of money, nor the threat of lost revenue from seigniorage, persuade him that the Government should act.
   "I don't think that setting up the Government Electronic Money Corporation is particularly attractive," he says. "That is the philosophy that brought you the world's state-run airlines, the world's state-run telephone companies and the world's state-run electric companies, and by and large it hasn't been very successful."
   True -- but by standing aside, the Government risks abdicating its responsibility for deep policy decisions. Consider, for example, the unanticipated rise of credit cards over the past two decades. Credit cards are no longer, for most of their users, a significant source of credit. They are simply payment devices -- money at a distance. As a practical matter, it has become difficult to buy an airplane ticket or rent a car without a credit card. The vast bulk of mail-order and phone-order commerce depends on credit cards -- or, more precisely, credit-card numbers, for merchants no longer need see or touch the actual card. The credit-card companies not only handle the payments conveniently; they have also come to serve, day in and day out, as a sort of shadow judicial system. You can trust a mail-order house with your credit-card number as you would never trust it with cash, because you know that the credit-card company will hear your complaints, examine parcel-service records, and back you if the merchandise fails to arrive. The days of C.O.D. are over. You pay for this system, of course, in the form of higher prices for everything sold by merchants who accept credit cards. In fact, because the credit-card companies have mostly succeeded in forbidding merchants to offer discounts for cash purchases, you pay for this system even if you do not use credit cards -- for example, if you are poor.
   In effect, the economy has spawned an enormous privately managed payment system, financed by a hidden sales tax. A completely distinct, equally private system is the network of automated teller machines that has sprung up over the past two decades. These, too, carry high charges in percentage terms and are mostly unavailable to the poor. Electronic cash could evolve in the same way -- public policy made without public debate.
   In its quiet way, the Government has contributed to the decline of cash. Many people believe that, if they wanted to, they could get a $1,000 bill or even a $10,000 bill. Not so -- the United States has long since discontinued bills in denominations greater than $100, even as it has added new laws making it harder and harder to make big payments in cash. It has imposed ever-tighter restrictions on your ability to drop off a secret suitcase stuffed with cash at your bank or at your lawyer's office. Cash, the Government believes, has become largely a tool of criminals. This is true.

Laying Golden Eggs

Whether or not you think you're ready for a smart card, surely you could be tempted by the not-so-smart card known in digital-money circles as the Evergreen Card. The Evergreen Card is digital cash with one flaw: the counter in its built-in chip gets stuck and fails to deduct the charge. In other words, it is the legendary magic purse, always ready with another coin.
   Does it exist? Only in a cloud of speculation and myth, though a rumor swept a meeting of cryptography aficionados recently that Daguio, of the American Bankers Association, had actually seen one.
   "Oh, God, I didn't say that, I really didn't," Daguio says. Not exactly, anyway. He merely pointed out that, no matter how good the design, technology always has implementation problems. Smart cards rely on software, and software always has bugs. "These things are so, so complex that just a little defect in a card in the wrong place on a random basis in a large batch could produce really interesting stuff," he says. "You know how hard it is to program software. Some of these bugs might not show up until you debit 60 cents, credit 40 cents, and then debit $1.50. If it becomes widely knowknown that that's what you have to do . . ."
   Visa officials are fairly sure that none of their Atlanta cards will be evergreen. "We'd never say never, but we haven't experienced that kind of a problem," says Gordon Howe, senior vice president. They also know that some people will not wait for the flaws but will try to create their own. "The chip is a physical thing; anything physical, the security people will tell you can be attacked," Howe says.
   As money enters a new age, so does counterfeiting. The ultimate threat is the perfect copy -- the virtual coin that proves mathematically identical to the real thing. If money is a string of bits, then someone, somewhere, can make a perfect copy . . . and another . . . and another . . . An arms race is already raging between those working to armor-plate digital cash with doubly and triply secure cryptography and those working to pierce the armor. Security experts assume that nefarious characters, in search of an unending stream of money, are already investing millions in the next stages of research and development.
   At first, issuers of smart cards with chips will be relying in part on how much easier it is to counterfeit smart cards with magnetic stripes. No sooner had New York's subway system virtualized its fare tokens in the form of magnetic-stripe cards than a few ingenious citizens discovered that they could throw together some cheap circuitry and heads from an old tape recorder and produce their own Metrocards. "You can reproduce cards ad nauseam -- it's magnetic data." says Jerome Page, general counsel and vice president for business development at the Metropolitan Transportation Authority. At least the payoff is just a ride on the subway, for now, though the M.T.A., like so many other semipublic agencies, has wider electronic-money ambitions for its product. When counterfeits are detected, turnstiles can be reprogrammed by the central computers in a matter of hours, blocking the bad cards. Some users are shameless. "This is New York," Page says. "People come in to customer service and say, 'Joe sold me this $80 card for $30 and it doesn't work -- I want my money back.' " The credit-card companies, too, will be able to invalidate counterfeit or defective smart cards from a distance -- if they detect them.
  For every new idea in tamper-resistance, there is a new idea in tampering. Any chip can be cracked open and examined with an electron microscope -- at least in theory. Manufacturers can put extra layers of oxide and metal over the silicon. Attackers need to etch these layers away carefully. Manufacturers can inject caustic agents that become active when exposed to oxygen, destroying the chip before it can be inspected. They can make some cells light-sensitive, programming them to erase critical data. Attackers can crack open cards in oxygen-free chambers or in the dark. Manufacturers can encase the chip in an epoxy containing diamond or carbide dust, to dull machine tools. . . . "At least you can cause people to have to spend a lot of money," says Eric Hughes, a cryptography expert who is founder of Simple Access, an Internet services company. "But doing the second chip is far, far less money than the first. And if you could make a master chip that spoke the right protocol, you could make a little money mint for yourself."
  He and others believe that the best strategy for a would-be latter-day counterfeiter is to work now, invest, and wait -- resisting the temptation to attack the new systems in their embryonic stages. They also suspect that the biggest vulnerabilities will come from laziness and carelessness, not from inherent flaws in the technology. In the hot competition for early market share, companies may just cut corners.
   "Information warfare is going to make people very worried downstream," says Crook at Citicorp. "We have an immense paranoia about how dangerous it's going to be. I think that the security requirements in our industry are going to be more severe than at the Department of Defense."
   Follow the money, as Deep Throat once said.
   No one knows how much of the economy is still underground, in the sense of untraced by banks, credit-card companies and Internal Revenue auditors. But if someone says, "You understand, I have a cash business," you do understand: a cash business today means an operation that evades taxes by concealment and deceit, keeping double sets of books and laundering money. If you learn that your city councilman has been putting cash into his safe deposit box, you are rightly hard-pressed to imagine a noncriminal explanation. If your painter demands payment in cash, you will not assume that he is paying his taxes in full. When small contractors routinely offer discounts for cash payment, it is not because cash is convenient, or because they enjoy the smell of old-fashioned greenbacks.
   So a world where all money has gone digital could be a world where honest plumbers and restaurateurs, accounting for all their income and paying all their taxes, would not have to feel like schlemiels. Eliminating cash would free the world of the single biggest form of tax fraud. It could also wipe out a host of other crimes: bribery, kidnapping, extortion, and even robbery. All these depend on the existence of cash as an anonymous and untraceable means of payment.
   Yet this could also be a world where vast computer databases keep track of every magazine you buy, every bus you ride, every hot dog you eat, every beer you drink, every video you rent, every sawbuck you borrow. If the network can follow the trail of all your spending, it can become more omniscient than a private detective who follows you around with a camera. In the money business, knowledge is power: your spending habits, your likes and dislikes, are valuable to marketers. That is not necessarily bad. Many smart-card issuers have plans for including clever extraneous information on their chips: credit-card companies imagine storing your vital health data, for example; transit systems imagine storing trip histories that would make possible frequent-rider discounts or special rates for bus-to-subway transfers. Still, the possibilities are chilling to anyone who cares about privacy. Separate information sources are becoming linked, letting your various watchers compare notes, and the detail in their dossiers is becoming finer and finer.
   "The granularity of information that's revealed about payments is going to explode," says Chaum of DigiCash. In cryptographic circles, Chaum is the best-known advocate of a form of electronic money that could preserve anonymity, using advanced encoding techniques to create protective envelopes. Cryptography is as close as modern mathematics comes to magic. Banks could, for example, register every digital dollar they issue and verify the dollars when they return, while remaining unable to trace the spending trail in between. Chaum's scheme is not symmetrical: it preserves the anonymity of the buyer while recording the identity of the merchant. And by a clever mathematical device, if the buyer tries to spend the same digital dollar twice, his cover is blown.
   He fervently believes that this is a flavor of money that consumers will want. "Privacy is inherent in the notion of a free market," he says. "If we don't get the national currencies in electronic form properly, then the market will route around them and make other currencies."
   It's simply a design choice. Smart cards, or their on-line equivalents, could function as blindly as raw cash. They could be even less traceable than in Chaum's system. That is a frightening prospect to law-enforcement authorities. Having finally made life difficult for drug smugglers with heavy cash suitcases, they will not casually allow the manufacture of half-ounce chips that could make possible blind transfers of hundreds of millions of dollars: the money launderer's dream. Even if the Government takes no other action in the electronic-money arena, it will surely move to extend its restrictions on cash to cover digital equivalents. And so far, the large institutions entering the electronic-money arena are leaning toward less anonymous, less private approaches than Chaum's -- betting that most of us will be willing to sacrifice more pieces of privacy for, say, convenience. Chaum could prove right, but only if the marketplace is willing to cast its votes for privacy.
   To a degree that is little appreciated, the Government and financial institutions have already succeeded, mostly, in eliminating the anonymity of cash in bulk quantities. By making it difficult to move large sums of cash in secrecy, they have tightened a net. Most Americans will say in public-opinion surveys that they worry about their financial privacy, that they do not want to give anyone the ability to follow the cash trail they leave every day. Then, they go ahead and leave that trail without giving it a second thought.
   Most of our economic life is already networked: every check, every credit-card payment, every telephone call exists in a computer somewhere. Sure, you can sneak out anonymously and purchase a copy of Penthouse, but if you order a dirty pay-per-view movie from your cable company, you probably do not worry that the information finds its way to a data base somewhere. Meanwhile, more than one adulterer has been revealed, more than one murderer hunted down, because they could not avoid leaving a trail of credit-card receipts. If nothing else, the heightened fear of counterfeiting in the digital-cash world may drive banks, rightly or wrongly, to make sure that all money is networked money. "It's arguable," Daguio says dryly, "that banks have a right to determine whether somebody spent the same coin a thousand times." We have private money: cash. We have networked money: everything else. Digital money is inherently neither private nor networked. The technology can go either way. Ultimately someone will make a choice -- the marketplace, or the Government, or the credit-card companies or the banks -- and the technology will support it.
   In 1996, virtually no one in or out of Washington thinks that the Government should step in, take charge, and issue an electronic currency. There is a case to be made: That money is not just another product, best left to the vagaries of the market, but the irreplaceable underpinning of society. That confidence in money requires one currency, not a multitude. That only the Government, after public debate among contending interests, can set standards equitably, rather than leaving the critical choices to, say, the credit-card companies.
   But the Treasury does not want the responsibility of guessing the future and maybe guessing wrong -- creating an Edsel or Susan B. Anthony. It is just too soon. "There's this race," says Philip Webre, a principal analyst with the Congressional Budget Office. "We're at the gate. We don't even know how long the race is or how many horses are in the race." We do know that the computer industry does not want lawyers and Congressmen imposing judgments about technologies of which they have proved famously ignorant. The old-line banking industry, and the nascent digital-cash industry, want the chance to sell their own products.
   And, of course, they are all fighting for the float. Will you fight as hard for the right to earn interest on your cash? Will you decide that you want that last shred of privacy that comes with dollars that do not have your name and Social Security number built in? Or will someone decide for you? While you still can, why not reach into your pocket for a few last vestigial dollar bills, make sure you have exact change for the bus, and buy yourself a secret, nonnetworked hot dog.

Copyright 1996 James Gleick
First published in the New York Times Magazine 16 June 1996