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Clouds gather over Amsterdam as I ride into the city center after a day at the headquarters of DigiCash, a company whose mission is to change the world through the introduction of anonymous digital money technology. I have been inundated with talk of smart cards and automated toll takers and tamper-proof observer chips and virtual coinage for anonymous network ftps. I have made photocopies using a digital wallet and would have bought a soda from a DigiCash vending machine, but it was out of order.

My fellow passenger and tour guide is David Chaum, the bearded and ponytailed founder of DigiCash, and the inventor of cryptographic protocols that could catapult our currency system into the 21st century. They may, in the process, shatter the Orwellian predictions of a Big Brother dystopia, replacing them with a world in which the ease of electronic transactions is combined with the elegant anonymity of paying in cash.

He points out the plaza where the Nazis rounded up the Jews for deportation to concentration camps.

This is not idle conversation, but a topic rooted in the Chaum Weltanschauung - state repression extended to the maximum. David Chaum has devoted his life, or at least his life's work, to creating cryptographic technology that liberates individuals from the spooky shadows of those who gather digital profiles. In the process, he has become the central figure in the evolution of electronic money, advocating a form of it that fits neatly into a privacy paradigm, whereby the details of people's lives are shielded from the prying eyes of the state, the corporation, and various unsavory elements.

Fifteen years ago, David Chaum seemed a Don Quixote in Birkenstocks, a stray computer scientist talking of a technology that appeared more rooted in science fiction than high finance. Today, still bearded, but wearing a well-tailored suit, he stands in the thick of a movement that seems unstoppable - the digitization of money. His passion now is to explain that the change need not be oppressive. He travels among bankers and financiers, he runs a company, he proselytizes. And he hopes somebody listens, because the wild card in the era of digital money is anonymity, and David Chaum thinks we're in trouble without it.

Dollar bills or bill dollars

The next great leap of the digital age is, quite literally, going to hit you in the wallet. Those dollar bills you fold up and stash away are headed, with inexorable certainty, toward cryptographically sealed digital streams, stored on a microchip-loaded "smart card" (a plastic card with a microchip), a palm-sized "electronic wallet" (a calculator-sized reader and loader for those cards), or the hard disk of your computer, wired for buying sprees at the virtual mall.

Of course, real money - the trillions of dollars handled each day by banks, other financial institutions, and government clearinghouses - is already digital. No physical tokens are exchanged: all transactions are conducted using streams of bits. But digitizing the final mile of electronic money, where the coin and dollar bill go the way of the vinyl LP, will make all the difference in the world. It will not only change the physical way you spend your money, it will alter the way you view your own economic being. And depending on the manner in which it is implemented, digital money might allow others to view your financial status with a decidedly discomfiting intimacy.

Is e-money really going to happen? Inevitably. Hard currency has been a useful item for a few millennia or so, but now it has simply worn out its welcome. A recent paper by several cryptographers at the Department of Energy's Sandia National Labs in Albuquerque, New Mexico, begins by enumerating what all e-money advocates identify as the fatal flaws of cold hard cash: "The advent of high-quality color copiers threatens the security of paper money. The demands of guarding it make paper money expensive. The hassles of handling it (such as vending machines) make paper money undesirable. The use of credit cards and ATM cards is becoming increasingly popular, but those systems lack adequate privacy or security against fraud, resulting in a demand for efficient electronic-money systems to prevent fraud and also to protect user privacy."

"Cash is a nightmare," says Donald Gleason, president of the Smart Card Enterprise unit of Electronic Payment Services Inc. "It costs money handlers in the US alone approximately US$60 billion a year to move the stuff, a line item ripe for drastic pruning. The solution is to cram our currency in burn bags and strike some matches. This won't happen all at once, and paper money will probably never go away (hey, they couldn't even get rid of the penny), but bills and coinage will increasingly be replaced by some sort of electronic equivalent."

The coming of e-money would seem to demand that the governments of the world get together and implement a scheme to make the shift in an orderly fashion. But that's not happening. The US, in particular, is promulgating public cluelessness. When I called a spokesperson for the Federal Reserve to ask about electronic cash, he laughed at me. It was as if I were inquiring about exchange rates with UFOs. I insisted he look into it, and he finally called me several days later with the official word: the Federal Reserve is doing nothing in that area.

Outside the Fed, there are people in government interested in the issue - isolated visionaries in the Department of the Treasury and Congress, in the Office of Technology Assessment - but while they ponder it, plenty of other institutions are devising schemes that will knock our currency preconceptions for a loop. The timetables are short, and as the players look around and see what their potential competitors are doing, those timetables get even shorter, particularly in the race to be first to deliver a plan that offers transactions on computer nets.

For starters, there is CyberCash Inc., sort of an all-star team of pre-digital cash technologies. Headed by Bill Melton, the creator of the Verifone system that handles credit-card transactions between merchants and banks, the principals include Jim Bidzos, president of the cryptography provider, RSA Data Security Inc., Steve Crocker, vice president of Trusted Information Systems Inc. (another prominent crypto-firm), and Dan Lynch is chair and founder of Interop Co. (which produces the largest Internet trade show worldwide). "We will provide cyberspace with financial communications that will be safe and secure and convenient," says Bruce Wilson, CyberCash's chief operating officer. In the first quarter of 1995, CyberCash will offer a network equivalent of debit-card transactions, then expand to credit cards. The next step: cash-like components that support peer-to-peer payments.

Visa has gathered a consortium of financial institutions to design "Electronic Purse," specifications for low-cost purchases at gas stations, convenience stores, grocery stores, fast-food restaurants, and school cafeterias, in addition to such routine items like calls from pay phones, road and bridge tolls, and videogames.

Citibank has been running a prepaid card test in a Long Island facility. There is the aforementioned Smart Card Enterprise of the Electronic Payment Services company, which wants to piggyback spending money on its network of ATMs.

There is the NetCheque project, a debit-card system, developed by the Information Sciences Institute at the University of Southern California. And there is the Information Networking Institute, part of Carnegie Mellon University, whose NetBill is also based on the debit-card model.

Many transit companies envision fare tickets as coinage to buy newspapers and sundries. The phone companies issue phone cards with similar pretensions.

In Denmark, Danmont has distributed over 100,000 cards with money for spending on such things as parking meters and laundromats. Similar systems exist in Portugal and Singapore.

Mondex, a consortium led by two British banks, will roll out its digital-cash system, involving an estimated 40,000 cardholders, to the public in Swindon, England, next year. Its creators envision the system spreading worldwide, as people slip their smart cards into special phones and wallets to conduct cash-like, tamper-proof transactions, even across borders. "It will become ubiquitous - it's the cheapest way of moving money around," says Dave Birch, spokesperson for the project's consultants, Hyperion. "There's the state of Ohio which has in the works a smart-card system for replacing welfare checks with electric money. At Mankato State University in Mankato, Minnesota, students are issued "MavCards," to be used not just for MCI long-distance calls and dining-hall meals but for cash services like photocopying, vending, and laundry.

Finally and inevitably there's Microsoft. For months, it had been quietly organizing a digital money group, presumably to put its own stamp on the emerging phenomena of digital transactions. But things went into overdrive in October, when it laid out $1.5 billion worth of stock to snatch up Intuit, Inc. a financial software company which was determinately moving towards automating money. Along with the buyout, Scott Cook, Intuit's president, became Microsoft's executive vice president of electronic commerce - reporting directly to chairman Gates, begging the question, will dollar bills be replaced by Bill dollars?

As a result of this mad rush, the road to digital cash is not so much a smooth transitional path but a multi-lane cloverleaf with infuriating turnoffs, circles, and dead ends. "A lot of people assume there's going to be a single form of digital money," says Microsoft's chief technical wizard, Nathan Myhrvold. "Today we have a zillion different ways of doing financial transactions. There's cash, checks, credit cards, debit cards, wiring money, traveler's checks ... each of these has a particular point. We're going to see that much diversity in digital money."

Kawika Daguio, a Washington, DC, representative for the American Bankers Association, is familiar with the issue and says, "We may be in a situation analogous to the 1860s - in those days, before our current Federal Reserve system, bank checks backed by different institutions weren't as widely accepted - they circulated and were usually discounted. Chartered banks also printed private-bank notes. Now, we see that some institutions are interested in printing their own versions of electronic money and following their own rules."

Sholom Rosen, a vice president at Citibank, puts it more succinctly: "There are going to be winners and losers, but everybody is going to play." Michael Nash, Visa's senior vice president in charge of the cash-products division, recalls the excitement among executives last June when they witnessed a test of the credit-card consortium's smart-card experiment at a retreat in Cancun, Mexico: "We had senior banking executives lining 70-deep to try this out!"

Considering all these schemes in the aggregate, it is possible to envision the way money will work in the future. But we must distinguish between forms of electronic commerce - including credit cards and bill paying - and electronic cash, in which money is in a fungible, universally accepted, securely backed format and can be passed, peer to peer, through many parties while retaining its value. You know, money.

First of all, imagine that all the uses of credit cards and debit cards are seamlessly integrated into electronic format. Now start to think about real money. Cash will reside in credit-card-sized plastic smart cards which can be stored in palm-sized "electronic wallets." The days of nervously accessing the ATM machine at 2 a.m., looking over your shoulder for muggers, are over. You'll download money from the safety of your electronic cottage. You will use these cards in telephones (including those in the home), as well as electronic wallets, disgorging them whenever you spend money, checking the cards on the spot to confirm that the merchant took only the amount you planned to spend. The sum will be automatically debited from your stash into the merchant's. Cash will be a number, a digitized certificate you'll probably never see.

Commerce on the Net will reproduce the process in cyberspace: you will download money from your bank, put it in a virtual wallet, and spend it online. You will also be able to receive money from your employer, someone who buys something from you, or a friendly soul who lends you a virtual sawbuck until payday.

Exactly what goes on inside smart cards, wallets, and computers won't be apparent. But the protocols chosen by the lords of e-money are all-important. Depending on how they work, the various systems of electronic money will prove to be boons or disasters, bastions of individual privacy or violators of individual freedom. At the worst, a faulty or crackable system of electronic money could lead to an economic Chernobyl. Imagine the dark side: cryptocash hackers who figure out how to spoof an e-money system. A desktop mint! The resulting flood of bad digits would make the hyperinflationary Weimar Republic - where people carted wheelbarrows full of marks to pay for groceries - look like a stable monetary system.

A privately circulated paper written by Kawika Daguio sketches out some of the problems in the form of questions:

Who is going to create the monetary value?

In other words, who will back up the money, assuring trust. Will it be government? Banks? Visa? The New York City Transit Authority?

"A dollar bill is a piece of paper - what's the difference between that and another piece of paper?" asks Sholom Rosen of Citibank. "It is the ability to present that piece of paper and get assurance of a return. It's not backed. There was a time when it was backed, but those times are gone. What gives it value? The banking system. The paper is the liability of the banking system. The supply of money is grown and disappears in the banking system."

Yet others seem to think that, if universally trusted, a digital currency system can, in effect, float on its own momentum. "If you have money on the network, you can make private money on the network," says Eric Hughes, a co-founder of the privacy champions, the Cypherpunks. He is now exploring the possibility of setting up a cyberspace bank. "It's easiest not to turn the money into paper if you don't have to."

What security features will be included?

How will these systems protect against fraud? Can they be hacked or counterfeited? What will be the trade-offs between ease-of-use and security?

"People get sticky fingers," says Rosen. "The most honest guy in the world will find some cash and stick it in his pocket. When outsiders hear about digital-cash schemes, the first thing they say is, 'I'm going to break in.' "

Of course, smart cards have to be tamper-proof so people can't reverse engineer them and double-spend. The prime protection is cryptography. "The bits in a container have to move from one to the other," explains Rosen. "When you're done, you have to have less in one container and more in the other. Also, your transaction can't be intercepted. Crypto can secure the transition. How strong the crypto is depends on who's going to try to break in - if it's the Mafia or a national government, they'll have plenty of resources."

David Chaum thinks, for instance, that some canny dark-side entrepreneurs can crack the Mondex system now being tested in England. Though its mathematical protocols are strong, he says, too much depends on the tamper-proofing of the cards. "One device can say, 'OK, I'm transferring $100,000 to you,' and the other one says, 'Oh, fine, I believe you.' So if you break either one of those open (defeating the tamper-proof technology) and tell it you've got a zillion dollars, the whole system just dies." (Mondex insists its scheme cannot be cracked, but will not provide further details. "Suffice it to say we're betting the shop on it," says Dave Birch.)

Will they work so the value will be restored if they're lost?

Everybody seems to agree that smart cards holding digital cash should provide an option to punch in a Personal Identification Number before buying something; but there is also a consensus that most people won't use that option. "The consumer won't bother with that," says Visa's Michael Nash. "The key here is that we imagine this as expanding what you do with credit cards. We do not think the electronic purse is appropriate for people buying jewelry or automobiles." In many systems - Mondex is a good example - losing your stored-value smart card is like losing a wad of bills. Don't carry more than you can afford to lose.

Who's going to regulate electronic money?

At the moment, all the players are proceeding as if no one is. They extrapolate a regulatory system growing out of the current one, while they are aware that as the digital economy becomes pervasive there may be calls for new limits and regulation. As for now, the rush is to get everything in place, and no traffic cops seem to be slowing anybody down.

Who's going to pay for it?

"I don't believe that it's sound policy to charge somebody royalties for engaging in the virtual world's equivalent of putting your hand in your pocket, pulling out a bill, and handing it to somebody," says Kawika Daguio. He is particularly perturbed by the claims of Online Resources & Communications Corporation, a company in Virginia that insists that it holds a patent (US # 5,220,501) giving it "exclusive rights to process real-time electronic transactions of consumers who use any in-home terminal to purchase goods and services, pay bills, and bank through a debit network, including the automated teller machine networks." Online Resources further claims that "the patent covers all in-home terminals, including telephones, computers." (The patent may be challenged by banks and ATM processors.)

On the other hand, Microsoft's Myhrvold, perhaps anticipating a licensing revenue that would make DOS look like a drop in the bucket, challenges Daguio's assertion, claiming that we already pay the equivalent of such a fee. "Of course you do," he says. "Explicitly or implicitly there's a fee involved. Even in a pure-cash transaction, you pay for those costs. Cash is an expensive thing to move around. You have to hire guards from Brinks with guns and all that bullshit. That's all included in the price of things you buy."

The bottom line is that nothing is free, especially when it comes to money. You will pay for e-money, either in transaction fees or, as in the CyberCash model, by allowing others to earn interest on your electronic cash - even as it sits in your virtual wallet.

In short, the various systems have implicitly or explicitly postulated tentative answers to some of these questions, and the answers to others, such as the regulatory structure, will have to evolve as the idea catches on. But one question remains open: the dichotomy between privacy and traceability.

Hard cash, of course, is anonymous - you can spend your printed bills with the assurance that no one can trace your expenditures or compile a dossier on your lifetime spending records. But electronic cash has no such assurances. Its computer-mediated nature makes traceability the course of least resistance. This gives rise to a provocative question: Can digital cash become anonymous, as real-world money is? And if so, should it be?

And these questions lead us back to Amsterdam - headquarters of DigiCash, the company formed by David Chaum.