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Forms of digital money have been tried before, but their failure doesn't mean the current supremacy of cards for online transactions is satisfactory. Herewith a proposal for a digital coin that carries intrinsic value-along with powerful features made possible only by electronic communication.

The idea of a universal trust currency has revolutionized the reality of commerce and trade. Money--replacing barter--was designed to facilitate maximum liquidity and transaction convenience. Paper money is handier and more fluid than heavy gold coins, and omnipresent credit cards further lubricate the machinery of business. And now we have the Internet, the electronic pipelines for bits, and money can adjust itself to a bit expression.

In this article, I define a generic framework for what I call bit-currency, and describe an emerging reality of unprecedented transaction fluidity. Within this framework, money flows through the Internet with the pinpoint accuracy of e-mail. Digital coins can be transacted with various degrees of restrictions and rules of trade, creating a universal machinery for discount, interest, risk management, loyalty marketing, and any other creative forms of payment and trade.

Today, bits are used to represent account numbers and to indicate amounts to be drawn to and from these accounts. Bit-currency captures monetary value within its bits. When bit-currency is paid, it's a done deal. There' no need to engage an issuer, an acquirer, and a credit-card association to settle the transaction. It's cash-like, yet with modern advantages born of its electronic nature. For example, one can assign rules of redemption based on dates, the identity of the redeemer, and any other criteria set forth by the original purchaser of the digital coin.

Thus, one would trade unrestricted $100 against, say, $105, limited for purchases at, say, Sears--an elegant form of store discount. A store might offer $109 against unrestricted $100, so long as the digital coin expires at a given date. Loyalty points (a sort of alternative currency in themselves), discount, risk management--all this is readily possible with bit-currency. Today, an American cannot practically pay $15 online to a European, who needs the money in Euros. Yet it's a jiffy with bit-currency: The digital coin is bought in dollars, e-mailed in bits, and redeemed in Euros.

The Internet enables individual connections between far-flung strangers. This leads to countless instances where trade is mutually desired and payment must be made--across national borders, through cultural barriers, and despite the absence of physical contact. Today's common solution, to use credit cards, means the seller needs a merchant account. This proves to be a hurdle for individuals and many small merchants.

And the problems with cards don't stop there. Credit-card payments involve an ever-more tedious security dialogue. They may be subsequently challenged. They may be fraudulent. And they are ill-suited for both micropayments and person-to-person transactions. In online credit card transactions, it's account numbers--not money--that flow through the veins of the Internet. A bit-currency, by contrast, would be a modern form of cash, not an intent to pay that must be settled and closed some time in the future.

A Cash Analog:

In what I propose, bit-currency would be a bit entity composed of:

At the option of the parties to a transaction, the entity could also include a set of public and private encryption keys. It could be written on a USB stick, a CD, or any bit media.

Every digital coin is "minted" in a "mint." Traders buy a digital coin from the mint, and sell it back at will.

Trader Alice might pay $T to buy a digital coin, C, expressed as a unique identification bit string, and a contents bit string that expresses the monetary value of the coin. In that case, the nominal value associated with the contents string equals $T. The content string is constructed in such a way that upon examination by the mint, it becomes clear that it stands for unredeemed $T. In practice, Alice would pay a tad more than $T, with the difference equaling a fee to the mint for its services.

Alice may pass the digital coin to Bob, who could live across town or across the country. Bob might approach the mint and redeem the coin. The net result is that Alice paid Bob, aware only of his e-mail address. And since the value is carried intrinsically by the coin, this transaction does not require a follow-up process in which an issuer, an acquirer, and a credit-card association all interplay, check, dispute, and finally settle.

The only entity apart from the traders Alice and Bob is the mint. If the mint has international presence, then Alice could buy the digital coin with her local currency, and Bob would redeem it in his.

In short, bit-currency is a digital analog to cash-only better than cash in many instances. Even if Alice could fold dollar bills into a funnel linked to her computer and send the bills over the Internet to Bob, this would be less convenient for Bob than receiving bit-currency if Bob is, say, European. He would almost certainly prefer to get his money in Euros rather than in wrinkled dollars.

Another fundamental advantage of bit-money is the fact that the value is inextricably linked to an ID-string. That string can be subjected to rules of redemption and payment set by the buyer of the coin and enforced by the mint. As we shall see later, this feature provides for a great deal of fluidity, flexibility, and financial creativity.

Since the value is expressed in the coin itself, it is possible to add coins to form a single larger payment, and similarly it is possible to divide a coin into smaller denominations. Alice could buy a $1,000 coin and divide it into five $200 coins to distribute among her five children.

In implementing this vision, I concede that planners would have to first resolve the question of how to construct the identification string and the content string, and how to provide security against fraud and abuse. These are difficult but not intractable issues that require far more space than is available in this article. Herewith I focus on the general framework.

Since every digital coin is uniquely identified, it is possible for its purchaser to set forth rules for its redemption. The same is true for law-enforcement authorities: A judge can deny redemption of certain digital coins on claims of fraud.

Redemption Rules: A purchaser of a digital coin would set up his or her own rules of redemption for that coin. Once the rules are set forth, they cannot be changed, even by the purchaser. These rules become an integral part of the identity of the coin.

The rules of redemption comprise intrinsic rules and associated rules. The former relate to time constraints and claimant constraints; the latter, to any other logical constraints.

A digital coin can be defined with zero restrictions. In that case, anyone presenting the coin to the mint, at any time, will receive its nominal value in a currency of his choosing. This is roughly equivalent to cash.

At the other extreme, a coin may be redeemable only to a particular claimant at a given point of time. No other claimant can redeem it, and the coin itself is unredeemable before the set time, and worthless afterwards.

Between these extremes lies a wide range of possibilities. A coin could be redeemed only by a particular group of claimants (say, restaurants), and only after a certain date, or only until a certain time point (like time-stamped coupons).

Intrinsic rules of redemption may be used for several purposes:

Security: Travelers checks are a form of cash that can be redeemed by only a designated person. They provide strong security. The very same function can be provided by digital coins, only with more flexibility. The purchaser of a coin would designate a list of allowed claimants, not necessarily a single person. If the coins are lost or stolen, they cannot be redeemed. If there is only one allowed claimant, then a lost coin can be voided and replaced, just like travelers' checks.

Control of Use: A purchaser may wish to designate his money to be used for a particular purpose. A current solution to this dilemma is found in gift cards and company credit cards. These are instruments used by a business to offer customers cash that must be spent within that store. This places limits on the solution. With bit-currency, if a person wishes to spend $700 on a piece of furniture, but is not clear on which store has what he wants, then that person can use digital coins set by the buyer to be redeemable in any store within a list of stores. The rules of redemption would specify where the money can be spent.

Suppose a person wishes to give cash to another person and ensure that the cash holder can't spend the money right away. This cannot be done with outright cash. Post-dated checks might do it, where legal, and, of course, writing a check every week would accomplish the same result. But it would be much easier to buy, all at once, a digital coin redeemable right away, an additional coin redeemable only from next week on, and a third a week later, etc.

Loyalty and Discount: A store might wish to secure a customer's spending by offering, say, a digital coin at a nominal values of $100.00 in exchange for a $90.00 unrestricted digital coin. The higher-denomination coin would come with a restriction that it can only be used at that particular store. This amounts to a 10% discount for every item in the store. The store has secured the business of that customer, and the customer gets a 10% discount for committing to it.

The store might be more aggressive and offer $115.00 for unrestricted cash in the amount of $90.00, with the added limitation that the money must be redeemed at that store within a given time limit. A coin issued July 15 becomes null and void on, say, Aug.1. Now the store knows not only that the money is going to be spent on its merchandise, but that it's going to be spent in a timely manner. Currently loyalty is rewarded at the back end. One must fly a certain number of miles to get air miles; one must check in for so many nights before getting a free room from a hotel chain. Bit-currency offers loyalty upfront.

Interest-Bearing Accounts: By limiting the redemption date of a digital coin to a certain point in the future, the mint would be able to sell that coin for less than its nominal value. This would amount to the coin-buyer lending money at interest to the mint. Or, the coin purchaser could deposit his money with the mint for an interest reward. The mint, then, acts like a regular bank. The restricted coin, though, can be freely traded, which is not the case with locked saving accounts or CDs.

Anonymity: It is possible to purchase a digital coin anonymously by simply walking into an outlet of the mint, laying cash (or a cashier's check) on the table, and walking away with the bit-currency. And similarly, in reverse, for redemptions.

It's further possible to do the same with security. The bit-currency would be payable only to persons who present a secret key, set forth when the coin was purchased. The original coin purchaser might pay with the coin, and pass along the secret key. Thus the redeemer may redeem the coin against credit to his bank account, without admission that he or she is the original purchaser of the coin.

Escrow: Escrow today is a heavy-set mechanism to handle conditional payment. It generally requires an all-party trusted escrow agent, numerous money transfers, and signed agreements. With bit-currency, it's so much easier. Alice transfers money payable to Bob (and only to Bob), with Alice retaining a time-limited veto option. By invoking her veto power, Bob cannot redeem his digital coin, but neither can Alice. If left unresolved, any dispute between the two will go to mediation, arbitration, or the courts.