Canada's MintChip Greases the Wheels for Digital Currencies

MintChip, the Royal Canadian Mint's experiment with electronic currency, could solve some of the biggest problems for another nascent form of digital money, one with no government behind it: Bitcoin.

Like Bitcoin, MintChip is designed to mimic cash. Transactions in these currencies cannot be reversed, a disadvantage for users but a selling point for merchants fed up with chargebacks on credit card sales.

Unlike Bitcoin, which has no central issuing authority and runs on a widely dispersed peer-to-peer network, MintChip is denominated in Canadian dollars and requires specific hardware. Value is loaded directly onto a chip in a USB, mobile or tablet device and can be instantly transferred to another chip. Experts say the technology can accommodate other currencies, including Bitcoin.

Designed by a pseudonymous software developer, Bitcoin has spawned a budding economy of tech startups, speculators and, allegedly, outlaws. There are about 9 million Bitcoins in circulation worldwide, worth a total $45 million at recent market prices.

Bitcoins are hard to obtain. They must be "mined" from the cloud (which requires a powerful computer) or purchased on one of a handful online exchanges. The exchanges are not equipped to take transfers directly from bank accounts, so purchasers must first send their money to an alternative payment provider like Dwolla.

MintChip's real-time transfers have the potential to remove some of the friction.

"In the Bitcoin world, transferring value in and out is a big barrier to more widespread adoption, so MintChip could very well be a nice lubricant," says Gavin Andresen, lead developer for the open-source software behind Bitcoin.

With Bitcoin, barriers to entry and exit are more than an inconvenience. Tradehill, a Bitcoin exchange, folded suddenly in March, and later blamed Dwolla for its demise, saying the payments provider improperly clawed back $100,000. Tradehill sued Dwolla, which called the complaint "specious" and, without specifically addressing Tradehill's charges, said chargebacks are necessary when customers report fraud.

MintChip could offer a way around such situations. Using MintChip devices to store and send Bitcoin would be like using cash in a receiptless transaction: Once it's done, it's done.

"MintChip is like Dwolla, but irreversible," and Bitcoin developers "would see it as a venture leading you to Bitcoin," says Jon Matonis, a payments industry veteran, consultant and blogger.

MintChip, which is in a testing phase, arose from the initiatives of Canada's Task Force for the Payments System Review, launched by the government in 2010 to modernize the system. Doing so could save the Canadian economy about $32 billion a year, the task force says. The savings would come from eliminating the processes around handling pennies and checks, among other things.

The Royal Canadian Mint has sent 1,000 chips to software developers, each preloaded with $100 to encourage application development. Though MintChip in theory can handle transactions of any size, it will likely be used for those of $30 or less. "The core technology of MintChip does not preclude it from supporting all payments," says Bob Zintel, director of MintChip for the Mint. "We do believe, however, that the strengths of MintChip are more closely associated with micro- and nanopayments."

The hardware requirement poses problems. It's an open question how to distribute the devices, as well as how to persuade consumers to use them. Security is also critical. "Anytime you bring hardware into it, you are subjecting the security of the payment system" to the security of device, says Andy Schmidt, the research director for global payments at CEB TowerGroup.

In light of Canada's plan to take the penny out of circulation, MintChip seems like a bid to digitize micropayments, defined as those under $10, says Brian Riley, a senior research director for bank cards at CEB TowerGroup.