From the early days of cryptography, researchers proposed using it to create anonymous digital currencies.
But what was the first cryptocurrency that could be used online? Who created it? And why did it ultimately fail?
The story of DigiCash is a fascinating tale of the turbulent and brief life of a truly innovative company. Read on…
Who Created DigiCash?
DigiCash was created by David Chaum, an American cryptographer.
Chaum studied computer science in the late 1970s and early ‘80s. This was the early era of the internet and online payment was still fairly new.
Chaum was particularly interested in developing systems to provide anonymity to people conducting transactions online.
He wasn’t just motivated by the technical challenges of his work. Chaum held strong beliefs about the dangers to the public of online tracking of payments.
His doctoral thesis at Berkeley was published in 1981/82 and titled “Blind Signatures For Untraceable Payments”.
Chaum’s blind signatures
Chaum proposed to use cryptography in two ways to ensure anonymous digital payments:
- mask the contents of the digital message containing the “money”
- create a digital signature for the payer so that the payee could not identify where the transaction had originated
Chaum patented his cryptography inventions, but this was all still hypothetical.
That would change when he went to work in the Netherlands.
When Was DigiCash Started?
In the late 1980s, Chaum was appointed the Head of Cryptography at a research center in Amsterdam.
He was working for the CWI – the Centre of Mathematics and Information Science.
The Dutch department of transport asked the center to develop a prototype for automatic toll payments. This kind of cashless payment (without a teller) was a new departure.
Chaum recruited some graduate researchers from Eindhoven University and delivered the project quickly.
At this point, Chaum recognized the commercial opportunity of adding his cryptography patents to new methods of cashless payments.
As it happened, the Dutch government department decided that automation was too complex. They didn’t go ahead with a bigger project.
However, the seed had been planted in Chaum’s mind. He left the CWI and founded his own company.
In 1990, Chaum established DigiCash to create cashless banking software.
DigiCash launched eCash as their digital payment system in 1993.
How did DigiCash Work?
Let’s first explain the principles in the same way that David Chaum did in an early thesis.
Private wallets and sealed ballots
David Chaum took inspiration from our current methods of voting by sealed ballots.
An electoral agent verifies the voter’s identity and ensures that they haven’t already put a ballot paper into the box i.e. voted twice. But the agent doesn’t know which candidate the voter has chosen.
And when the votes are tallied at a later date, the counters and the candidates don’t know the sources of their “credited” amounts i.e. their votes.
How DigiCash implemented untraceable payments
DigiCash launched a digital currency that they called Cyberbucks. The company created one million tokens.
Customers would buy Cyberbucks from the DigiCash platform. When they paid using their traditional bank accounts, they could download the Cyberbucks to their local computers.
When the customer wanted to make online payments, they used the DigiCash platform to send these Cyberbucks to the vendor.
The platform also created blind signatures to track that the Cyberbucks were only used once. The vendor never received identifying information about the payer.
Of course, a growing pile of Cyberbucks mightn’t be of much use to the vendors. They had to use a bank that recognized the value of the Cyberbucks and convert it to dollars.
Issues that held DigiCash back
Much of the problems for DigiCash came from being innovators.
They had to negotiate with banks to ensure that the Cyberbucks could be converted by the vendors into dollars.
Of course, this reliance on banks was what later cryptocurrency sought to get away from.
Another issue was that the DigiCash platform was a large enterprise system like most others of that time. It wasn’t decentralized across many platforms and systems.
This made it a single point of failure. But as I said, that was how enterprise systems were. This was long before the “cloud”.
Why Did DigiCash Fail?
The simple answer is that the company was ahead of its time. But as is often in life, the answer isn’t as simple as that.
Let’s take a look at the different factors.
DigiCash required both innovative financial software and a robust platform for conducting financial transactions. That takes a lot of money.
Chaum initially got the company off the ground with private investment. It’s believed that he raised early funds from family and friends to the tune of a few million dollars.
But the company could only survive with a much larger injection of investment. Chaum brought in an experienced CFO (chief financial officer), but he retained tight control on negotiations.
It seems that the cryptographer wasn’t as adept at this part of management.
One investment company was prepared to pump $10 million into DigiCash. But Chaum was simultaneously negotiating with other investment firms. The initial company wasn’t happy with proceedings and pulled the plug.
ING, one of the big Dutch banks, was also interested. But the negotiations went on too long for their linking.
Bill Gates wanted to bundle eCash into Windows 95. That could have been a game-changer in terms of take-up, and Microsoft was offering a large chunk of change.
But apparently, Chaum wasn’t happy with the details. Microsoft eventually moved on.
Slow take-up of banks
Perhaps the biggest downfall was that DigiCash relied on banks to use their platform.
They certainly got a lot of initial interest. Citibank, Credit Suisse, and Deutsche Bank got involved in running tests.
Unfortunately, these projects didn’t result in the banks launching Cyberbucks to their customers.
First use of DigiCash
By the end of the company, only one bank had rolled out the payment system. That honor fell to the Mark Twain bank in St Louis, Missouri.
But even though there was only one independent rollout, this marks the point in history where real customers used cryptocurrency to pay for online goods and services.
It’s said that there were significant communication issues within the senior management levels.
Staff started leaving the company, and some established payment firms of their own.
The problems came to a head in 1996/97 when Chaum was challenged by a group of senior management. This led to him withdrawing from day-to-day operations and returning to the United States.
However, ousting Chaum like this didn’t lead to a turnaround in fortunes.
The company secured a big investment in 1997 from a subsidiary of Rabobank. The new investors promptly appointed a new CEO who came from Visa.
David Chaum was still on the board. So was an enthusiastic Nicholas Negroponte, the noted tech visionary from MIT.
It seems that the new CEO changed the company direction towards a more traditional financial enterprise – and less of a start-up.
He opened an office in Palo Alto and hired a second team of Silicon Valley engineers. Of course, this meant that costs sky-rocketed. The company was running out of road. They needed a major bank to adopt the platform.
Withdrawal of Citibank
DigiCash had been involved in lengthy negotiations with Citibank. If they had come on board, this story may have been different.
Unfortunately for the payment platform, Citibank merged with the Traveler Group in 1998. This put any deal on the backburner.
The investors needed to make some cost savings. To the chagrin of the original developers, the investors shut down the development team in the Netherlands. Meanwhile, efforts limped on for a few months in Palo Alto.
DigiCash filed for bankruptcy in 1998.
This was the demise of a genuinely innovative company. However, the experiences would have a big influence on the development of other cryptocurrencies.
Was DigiCash The First Cryptocurrency?
DigiCash is considered to be the first cryptocurrency that was released for public use.
There were earlier patents and academic proposals that described similar untraceable and encrypted currencies. But DigiCash was the first company that had real customers using the digital currency to make online purchases.
Was DigiCash A Blockchain?
Digicash was a cryptocurrency but it was not based on blockchain.
Banks used digital signatures provided by the DigiCash platform to confirm the validity of the financial transactions. This was a centralized system.
This goes against the principles of blockchain which is based on distributed voting.