Thursday, April 12, 2012
A new digital currency from the Royal Canadian Mint dubbed MintChip boldly claims to represent "the evolution of currency." However, digital currency is not simply about taking official money and making it useful for online and offline environments in a digitized form. The point of digital currency, and especially free-market digital currency, is to broaden the avenues for issuance and adoption of alternative nonpolitical monetary units. Most electronic cash systems already expand and revolve around the State-issued currencies although they don't have to.
I am reminded of the Mondex experiment during the 1990s which is actually when I first met MintChip Challenge judge David Birch of Consult Hyperion. Originally and laudably, Mondex wanted to replicate the characteristics of physical cash via a smart card but due to centralized authorizations, it only embraced partial and contingent privacy for the user. The true test of any anonymous cash-like system is what happens when your device or digital tokens are permanently lost or destroyed similar to burning a paper $100 bill. If they can be recovered and returned to you, then you don't have full privacy.
Then there was DigiCash and the brilliant blind signature protocol from Dutch cryptographer David Chaum. Combining a powerful centralized issuing mint with true transaction irreversibility and anonymity, DigiCash would have flourished if it weren't for the legacy intermediaries that tend to insert themselves into fledgling centralized systems when they smell a loss of revenue. The misadventures of DigiCash paved the way for needing decentralized systems and bitcoin elevated it to marquee feature by resolving the double-spend problem through the distributed block chain.
Yes, the functional goals of MintChip are commendable and we have indeed come a long way when we witness a monetary authority advocating the protection of privacy and emulating the attributes of physical cash, even if they are trying to remove physical cash from circulation at the same time. At its core, MintChip is a smartcard integrated circuit that holds electronic value and can securely transfer value from one chip to another. Since it's based on tamper-resistant proprietary hardware and currently supports microSD cards, USB sticks, and special high-end hardware security modules, it can perform transactions without an intermediary.
According to bitcoin analyst Vitalik Buterin, "It even has a few advantages over Bitcoin; secure transactions are instant, it’s backed by the Canadian dollar and it even manages to solve the double spending problem without connecting to the internet." Cautiously however, Vitalik goes on to say:
"There are other aspects of the system that Bitcoin users are likely to object to. The currency creation model is centralized: value is originally injected into the system by the Royal Canadian Mint and customers can purchase value to spend by going through trusted brokers. The system is designed to be able to force upgrades, giving the Mint the power to introduce onerous tracking features over time if it so desires. Innovative means of value storage like paper and brain wallets are out of the question, since nothing can be done without the physical chip, and it’s impossible to have an online wallet that does not require trusting the provider."Wow! That's a litany of show-stopping issues to be vigilant about -- not to mention the potential fallibility of the proprietary hardware and the sure-to-come AML (Anti-money laundering) provisions or arbitrary transaction size limitations. I get the feeling that MintChip might be better off if it processed in bitcoin units rather than Canadian dollar units but that would be redundant. Ironically, one of the leading ideas for the use of MintChip in the MintChip Challenge is to purchase bitcoin with it since it's irreversible.
My objection still lies with the fact that it is a non-free-market approach to the payments issue. Bitcoin has so far demonstrated its exchange value without being backed by anything that isn't backed by anything. Remove the standing armies and all money is essentially a mass illusion. Bitcoin just happens to be a voluntary, bottom-up mass illusion with scarcity, like gold.
If the integrated circuit chip is not hacked first, I can imagine a prestigious future gathering in the beautiful resort city of Victoria, British Columbia (similar to Jekyll Island in 1910) where the Royal Canadian Mint officials and the Government of Canada carve up the country into 12 MintChip Reserve Districts and bestow the privileged monopoly of issuance to their well-connected financier amigos. May the odds be forever in your favor.
For further reading:
"Canada Moves Closer to Cashless Society With Digital MintChip Currency", Alex Newman, April 16, 2012
"Bitcoin - The Libertarian Introduction", Erik Voorhees, April 11, 2012
"Bitcoin - Finally, Fair Money?", Scott Lenney, Mute, February 21, 2012
"The (Non-Monetary) Value of Cash", Rivendell, December 1994