now must reinvent itself. With the announcement last week that it filed for Chapter 11 bankruptcy protection, Digicash has embarked on yet another phase of a corporate saga that has won it acclaim and admiration in both the banking and Internet communities-but precious little business. Shielded for the moment from creditor pressures, the Palo Alto, Calif., company will attempt to find the financing and forge the strategic relationships it needs to widen the appeal of its eCash product, said interim chief executive officer Scott Loftesness. The company also has a significant "intellectual property portfolio," he said, that could prove useful in other applications requiring privacy and anonymity, such as electronic voting. Mr. Loftesness indicated that Digicash has never exploited the full potential of its patents to generate licensing income, which now might help turn the operation around. Bankruptcy is but the latest of many turns for an eight-year-old venture created by David Chaum, a former University of California professor and expert on data encryption who was among the first to see a need for a cash- like payment mechanism on open networks. The design of eCash and its anonymity principles attracted widespread attention in 1994 and 1995 as banks and other corporations began exploring the Internet's commercial potential. Through a series of consulting projects and demonstrations, Digicash came close to assembling a network of banks to issue and manage the virtual currency. But the licensee group-including Deutsche Bank, Den Norske Bank, Bank Austria, Advance Bank of Australia, and Mark Twain Bank of St. Louis- never got beyond pilot stages. Things were looking up in 1997 when Digicash attracted venture capital interest from, among others, David Marquardt of August Capital, who was an early backer of Microsoft Corp. Digicash also reconstituted its board with Massachusetts Institute of Technology professor Nicholas Negroponte as chairman, and hired "professional management" led by CEO Michael Nash, a former American Express Co. and Visa International executive. Mr. Chaum remained as chief technology officer. The headquarters was moved from Mr. Chaum's base in Amsterdam to Silicon Valley. Many in the banking technology world took positive note of the fact that in June 1998, former Wells Fargo & Co. president William Zuendt joined Mr. Negroponte, Mr. Marquardt, Mr. Chaum, Toon den Heijer of Gilde Investment Funds, and others on the board. This past August, Mr. Nash was succeeded by Mr. Loftesness, who also has Visa in his background. The part of the operation that remained in Amsterdam was closed, and the staff was cut significantly from its peak of about 50. Mr. Loftesness said last week that he intends to see the Chapter 11 process through. He described eCash as "important and inevitable" for the maturity of electronic commerce. Throughout its struggles to prove it was not too far ahead of its time, Digicash has been followed closely by analysts and treated seriously by competitors. Many were impressed by the technology's cash-like anonymity and an accountability system that prevents any of the virtual coins from being spent twice, yet without compromising personal privacy. "There is a great lesson in it," said Richard Crone, vice president of Cybercash Inc. and general manager of PayNow, its version of an electronic check. "You must match the payment type to the application that is being sold." He called Digicash "a payment type in search of an application, rather than an application in search of a payment." So far in Internet consumer payments, particularly in the United States, credit cards have won the day. "We've done such a good job deploying credit cards and reassuring consumers that the security is present," Mr. Crone said, that there is no compelling need for eCash. (Cybercash's cybercoin product ran up against the same reality, but the Reston, Va., company is active in several payment modes, including credit cards.) Cybercash's inroads in markets outside the United States with lower credit card penetration-Germany, Japan, the United Kingdom-were due to financial institution partners, Mr. Crone said. "Digicash did not have the support we did." David Stewart, vice president of Global Concepts Inc., Norcross, Ga., criticized Digicash for not bridging the physical and virtual worlds. He said as currently configured, eCash compares unfavorably with MasterCard International's Mondex venture, the Belgium-based Proton system, or Avant of Finland, which are smart cards with an Internet transmission component. Because eCash "needed on-line validation of tokens spent, clearing of the transactions required authorization like a credit card," Mr. Stewart said. Another strike against eCash, he said, was the lack of major financial institution support in the United States, where there are constituencies for Mondex, Visa International's Visa Cash, and Proton, which is part-owned by Visa and American Express Co. "Digicash needs to come up with an off-line electronic cash scheme and have the backing of a serious player in the payments world," Mr. Stewart said. The one U.S. participant, Mark Twain Bank, was acquired by Mercantile Bancorp. of St. Louis 20 months ago. Larry Kirschner, Mercantile Bank senior vice president of foreign exchange, said eCash "was not profitable from the moment we inherited it. "We tried to figure out how to make it profitable and for it to appeal to our corporate and retail customers, to very little success," he said. The bank ended its three-year experiment in September. It had 5,000 eCash customers, about 20% of them in Mercantile's eight- state Midwest territory and the rest on the two coasts. They held "significantly less" than $100,000 in eCash accounts, Mr. Kirschner said. "We didn't see a strategic fit for eCash," he said. "The revenue stream was not there, the demand was not there, and quite frankly, it wasn't going to be there." The banker said eCash suffered because the public "did not have any insecurity and did use their credit cards on the Internet." But Mr. Loftesness said Digicash's board and backers have not lost faith that "eCash is inevitable. The length of time and the amount of financing to get there remain the key open questions."
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