How DigiCash Blew Everything (complete)

Robert Hettinga (
Wed, 10 Feb 1999 14:52:29 -0500

--- begin forwarded text

Date: Wed, 10 Feb 1999 15:41:05 -0400 (AST)
From: Ian Grigg <>
Subject: How DigiCash Blew Everything (complete)
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Editor's note. This was translated by some dutch natives, and
then edited by myself for style, tricky job really as translation
should be done into ones native language. There are some editorial
corrections from the first half sent a few days ago. No promises
as to accuracy!


The author is unknown. Next! Magazine published it, and the
original Dutch is at

How DigiCash Blew Everything

In September 1998 the high-tech company DigiCash finally went bankrupt.
The office in Palo Alto, California remained open for a while but it
was merely a stay of execution. Two months ago the company filed for
Chapter 11.

Nobody realises, but with the "pending failure" of DigiCash, a bit of Dutch
Glory died. The company made a brilliant product. Even Silicon Valley was
jealeous of the avant garde technology invented in the Amsterdam Science

Internet "guru" Nicholas Negroponte went so far as to call the electronic
payment system, ecash (1), "the most exciting product I have seen in the
past 20 years."

The rise and fall of DigiCash: a story of paranonia, idealism, amateurism
and greed.

David Chaum

The name of one man stands out way above anyone else in the history of
DigiCash: David Chaum, US citizen, born into a wealthy family, brilliant
mathematition and one who had to always have things his own way (2).
After travelling around the world he ended up in Amsterdam in the late
80's. Here, he became head of the cryptography department of the CWI
(Centre of Mathamatics and Information Science). Cryptography is the
science of encoding and decoding of data, in order to maintain privacy.

Chaum had built a big reputation in this field in the previous
few years. Insiders estimated he was in the top 5 of the world at the
time. And at the CWI, they also worked on electronic payment systems.

In the early 90s, Rijkswaterstaat (3) became interested as they were
thinking about introducing automatic toll-collection roads. Chaum got
together a few researchers, mainly from earlier contacts with the
university of Eindhoven. All guys who knew each other through a
"young researchers" programme sponsored by Philips. They had all
spent their youth programming behind a computer. Enthusiastically
they started, and within little over a week the job was done.


Rijkswaterstaat was satisfied and the team got another assignment.
That was the moment when Chaum smelt money. Why couldn't he turn
the patents he claimed in the 80s into money?. On the 21st of April,
1990, the company DigiCash first saw light of day.

Unfortunately Rijkswaterstaat decided to put the advanced system on
the shelf and to continue with the old standby, number plate recognition.
Chaum could have divested himself of the company and continued his work
at the CWI, but he had apparently tasted the forbidden fruit of business.
He decided to market his research other ways: smart cards, point-of-sale
applicatons, cash registers and telebanking.

Of course, he had to quit his job at the CWI because of the risk of
conflict of interest. Financing of the company was done privately
by the American. Former DigiCash employees agree that Chaum and his
wealthy family had at least contributed a few million.

It all started out quite nicely. The brand new company sold a smart
card for closed systems which was a cashcow for years. It was at
this time that the first irritatants appeared. Even if you are a
brilliant scientist, that doesn't mean you are a good manager.

David Chaum was a control freak, someone who couldn't delegate
anything to anyone else, and insisted upon watching over everybodys'
shoulders. "That resulted in slowing down research," explains an
ex-DigiCash employee who wished to remain anonymous. "We had a
lot of half-finished product. He continuously changed his mind
about where things were headed."

This drove a few people crazy and it didn't take long before the
first few turned their back and started their own company. In 1992
Boudewijn de Kerf and Eduard de Jong quit the company and went to
Silicon Valley where they invented and sold an operating system to
Sun Microsystems for a substantial sum.


Annoying as he was, David Chaum had brilliant ideas. In 1993 he
invented the digital payment system ecash. According to insiders,
it was a technically perfect product which made it possible to
safely and anonymously pay over the Internet.

This was a field in which a lot of work needed to be done, according
to the ever-paranoid cryptographers. They considered that to pay with
your credit card was extremely insecure. Someone only had to intercept
the number to be able to spend someone else's money.

Credit cards are also very cumbersome for small payments. The transaction
fees are simply too high. Ecash however was perfectly suited to sending
electronic pennies, nickels and dimes over the Internet.

It was especially this idealism that prevented people from leaving
the stubborn Chaum. Enthusiasm waxed for the elegance of his perfect
inspirations. There were even people flying in from the US to witness
the birth of something this beautiful, which was unusual, as this is
usually only associated with big pay checks plus leased Mercedes in the
parking lot (4).

An ex-employee: "And no nonsense like 'We are going to make
this company as big as possible, as soon as possible, and cash
out'. No, we really wanted to make this product as big as

People who visited and walked around the Matrix building of
the Amsterdam Science Park acknowledged that there was a young
and dynamic atmosphere. No fast suits, but more like a school-
yard gang. Real whizz kids who got coffee from the machine with
their own electronic gagdets.

Lengendary Suspicion

But even this enthusiasm was unable to withstand the bad feelings
generated out of decisions made by CEO David Chaum. Almost every
ex-DigiCash employee who you ask is able to tell you a story of his
legendary suspicion. 'Paranoid' is a word frequently heard. Raymond
Stofberg, nowadays owner of the Internet company EURO RSSG Interactive,
was responsible for DigiCash financial affairs untill August 1996.
He explains the story from the beginning.

A few years ago Stofberg came to an agreement with Henderson Investment
Management. They would invest two tranches for a total of 10 million
dollars. When Chaum saw the agreement, he immediately faxed it to all
the other venture capitalists which he was negotiating with. Via
message drums, word leaked out to Henderson, and the agreement was

A little later ING Investment Management was interested. This deal was
about 20 million guilders (5). The plans were all laid out. ING Barings
together with Goldman Sachs would also bring DigiCash to the stockmarket
within 2 years.

"The day we were all set to sign, David didn't want to", tells
Stofberg. "He was so paranoid, that he always thought something
was wrong. There were 8 people from ING, including the CEO, and
David simply refused to sign!"

Earlier Chaum was contacted by the unavoidable Bill Gates of
Microsoft. He would integrate ecash in every copy of Windows
95. Rumor had it, the giant from Seattle offered something like
100 million dollars. David Chaum refused to sell it for less
than 1 or 2 dollars per sold copy and that stubborn attitude
killed another agreement. "A really sad story," reflects Stofberg.

Chaum killed an agreement with another American company, Netscape,
in the same way, by insisting straight away that everybody sign
non-disclosure agreements, even before negotiations had started.
Exit Netscape.

DigiCash was also involved in the first version of I-Pay (6).
The contracts were there, just the signatures were missing. But
a week before the deal was made Chaum decided to tell a large
Dutch newspaper that the Chipper and Chipknip systems (7) were
absolutely insecure.

"The smartcard is broken," he said. The banks had just invested 250
million guilders in the system, so it wasn't suprising that ABN-Amro
executive De Ribourdouille personally killed the DigiCash deal.

David Chaum always bailed out at the last moment. Early 1996
there were negotiations with credit card company Visa. The
Americans wanted to invest 40 million dollars in the company.
"But David suddenly demanded 75 million," Raymond Stofberg recalled.

"Get lost," was Visa's reply.

Retrospectively, a lot of ex-DigiCash employees understand why
Chaum was so paranoid. As a cryptographer you have to assume
the whole world is trying to rip you off. A certain amount of
paranoia is part of the job.

Chaum had also worked for intelligence agencies, and that
didn't fortify his faith in the good intentions of humankind.
His vision of the privacy of the individual was almost an
obsession. In 1996 he said, in the relations magazine of
Honeywell-Bull: "The difference between a bad electronic cash
system and well-developed digital cash will determine whether
we will have a dictatorship or a real democracy."

Whilst David might have had little faith in humankind, the
employees were getting annoyed with their director. In the
beginning they forgave him if another promising deal didn't
go through, because David always said there were bigger fish
to catch. The world was at their feet. It had to be, because
in the whole world there was no product that could even come
close to DigiCash.

It was this feeling of technological superiority and arrogance
that would kill DigiCash. The employees weren't only annoyed with
the deals that were cancelled a few days before being closed, but
also about the work enviroment.

"David is a real nice guy and you can have a lot of fun with him,
but at the same time he abused this employees", tells an ex-employee
who wants to stay anonymous. "He always expected an enormous
committment (8); once every few weeks you had to work for nights on

"And there was nothing to compensate for that. Once you were
lured inside, you never received pay rises, no extras, nothing.
That was very frustrating, but they kept the carrot in front of
the donkey (9) with the promise that 'once we make that big deal,
we'll all be rich.' "

"But we never got any shares. It was a hollow promise."

The Coup

In March 1996, tensions had reached a critical level. The irritation
over a series of blunders led to a meeting of eleven important employees.
They decided to give David a simple choice: "You're out or we're out."

"That was the only way David could no longer fuck up the company,"
said one of them. The plan was to set up their own company, it had
been done before, ex-DigiCash people had set up their own company with

Accepted tradition (10) has it that two out of the eleven members -
Jelte van der Hoek and Wouter Habraken - went to David who panicked and
immediately made them interim-managers. He then disappeared into the
background, and eventually returned to the US a year later.

The remaining nine co-conspirators were not happy, but they accepted
it for the moment. They had achieved their objective of getting rid
of Chaum. But this acceptance was soon replaced with anger at the
two new managers.

"Jelte was a technical guy, who had been programming since he
was seven, he couldn't manage at all. And Habraken wasn't suited
either. He was too much a deal-maker, not a manager" according
to an ex-employee.

Wouter Habraker wasn't impressed with the criticism. From Australia he
emailed: "DigiCash was founded by crypto-people, and good crypto-people
are a bit paranoid. That's why it's not surprising there are different
views on the Jelte's and my reasons. That's a pity, but our objective
was to get investment and find a new manager. And that's what we did"

Nonetheless frustrations grew. "Three weeks later, I found out they
wanted to bypass me and get rid of me", said Raymond Stofberg. "From
that time on I knew for sure that Chaum had trusted the wrong people."

Other employees shared that belief and hardly 3 months after things
had settled down there was a exodus of employees. Since then there
is an in-joke that goes: "If you can survive DigiCash, you can handle
anything that life throws at you."

Amazingly enough DigiCash was still a very sexy company for the rest of
the world. A rising star in a world where Internet companies like
Netscape and Yahoo showed there were enormous risks, but also enormous
benefits. DigiCash was hot and venture capitalists were stampeding to
invest in it.

Early in 1997 it received an investment of a total of 16 million guilders
from Gilde Investment, a daughter company of the Rabobank, and also
Nicholas Negroponte, director of the Medialab of MIT and writer
of visionary books about the Internet. Also included was the well-known
venture capitalist, David Marquardt, general partner at August Capital.

A new CEO

The new investors immediately appointed a new Chief Executive
Officer: Michael Nash, an American from the credit card company Visa.

Most employees didn't really like Nash. "Fast guy, smooth talker, but no
content", said one. Nash came from a big bureaucratic company and had no
clue on how to run a small company that had to fight in the front line.

There were also angered at the fact that Nash immediately opened an
office in Palo Alto. You could justify the decision from a marketing
point of view, but the result was that the development was split.
The costs sky-rocketed to a completely new heights, because the
communications between the two departments was slow and cumbersome.

The salaries in Silicon Valley were of course much higher than in the
Amsterdam Watergraafsmeer (11). And the American programmers absolutely
didn't do a better job then their Dutch collegues.

According to an ex-employee, Nash had his head in the clouds (12).
Everyone had to work on avant garde products like ecash, for which
there was only a very slowly growing market. Real products, with
which good money could be made, like smart cards and road-toll systems,
were left to slowly die.

"Mike would rather talk to Swatch, because he wanted ecash in watches.
That didn't help us at all, because ecash is made for a PC. You are
allowed to shout about futuristic things, but you should not believe
in the hype you have yourself created."

DigiCash did have a very impressive board with, for example, David
Chaum - who had disappeared into the background - and the influential
Nicholas Negroponte. But what good did those names do for the company?

"A guy like Negroponte is only there for his image," says yet another

"For relatively little money he had a share in a high profile company.
But that doesn't help with the management of the company itself.
Negroponte is just like any ordinary rock star, he gets out of the
plane and when he walks down the stairs he still doesn't know which
country he is in. That's been very destructive."

The Credit Card Triumphs

Meanwhile the management tried very hard to sell the ecash system to
banks and was more or less succesful in it. The Mark Twain Bank, in
America, was the first to experiment with ecash. Later, another 7
banks followed, banks like Deutsche Bank and Credit Suisse.

Banks are very conservative, they did business with DigiCash to
prevent them from falling behind, not to storm ahead and be the
first. DigiCash never dealt with the "normal" departments but
always with a "special product" department.

And why would the banks be in any hurry to implement the revolutionary
new systems of DigiCash? The electronic payment market was dominated
by credit cards, and plenty of money was made off them.

Neither were consumers so unhappy with the current situation. They
weren't too convinced about the possibilities of fraud; even if
something did go wrong, they weren't the ones to pay, the credit
companies were. No worries there. They didn't really care about
anonymity either, and certainly with the delivery of physical
products this was completely irrelevant.

Everything was in stalemate. The banks were not in a hurry, the
consumers didn't see any advantages. Although providers were the
ones who would profit mostly from micropayment systems like ecash,
they couldn't do anything but wait and be patient.

Imagine: CNN receives millions of hits on their website every day.
If you could ask one cent every time someone requests a page, that
would make millions every year.

Halfway through 1998 everything seemed lost. The high salaries -
estimates were that they were shelling out a million a month - quickly
ate away reserves and there were no revenues to compensate for that.

The company never had a clear marketing strategy. It wasn't till
June 1998 that the sales manager at the time, Jan Kees Dunning, chose
to change tactics. The dogma of Chaum, that DigiCash should aim for
the virtual world, was abandoned. It was no use trying to compete
against the credit card companies; they would squash you if you
upset them.


Jan Kees Dunning explains that from now on, ecash should be offered
as a part of a complete range of payment methods. "No longer as the
money maker for banks, because it was never that. All banks suffer
losses on the traditional payment systems, and with a much cheaper
system you could only minimize those losses."

"Nowadays, a consumer isn't that loyal anymore. He demands from his bank
that it offers all services, if they don't he'll just switch to another
bank. Ecash has to be one of those services."

At least that was a clear strategy. But once again things were ruined,
this time because of never-ending negotiations with the big American

Citibank was a very attractive partner for DigiCash. In the first place,
there was a large amount of clients: seventy million. Just as important,
the backing of Citibank might convince the other, more skeptical, banks.

Citibank is known as very aggressive. In the 70s they introduced
a universal payment system which enabled them to have very competitive
fares and services. If they had started with ecash, none of the other
banks could have afforded to lag behind.

But at the crucial moment Citibank decided to merge with the Traveler
Group, which focused attention away from DigiCash. At the same time,
the stock market valuation of CitiBank dropped to about half of recent
values and at times like that, knee-jerk management rules in the US.
So much for DigiCash.

Jan Kees Dunning is convinced that the business could have turned
out differently to the fatal chain of events that seems to have
happened. He estimates that DigiCash needed only another 6 months
to secure a break-through.

But the American venture capitalists had had enough at this point.
They first pulled the plug on the Amsterdam team, and the Palo Alto
team is currently floating between life and death (13). Only 6 people
remain with the company, and the one thing the new CEO Scoff LoftesDale
[sic] (14) - Nike Nash was fired in August of 1998 - has left to do is
announce the firesale of the DigiCash patents.

Which are getting cheaper every minute, because the people who
developed the product have all found work elsewhere. The ecash
project now conjures up a feeling of history, dead and buried.
There has not been any product maintance, and that's fatal in
an environment where everything is changing this rapidly.

The future of especially ecash is very uncertain. Either it is
sold for a maximum of 5 million guilders to a company like IBM,
who has lagged 2 years behind with a similar product, according
to Dunning, or it disappears.

A sad fate for a path-breaker in a digital technique which will have
completely eliminated regular cash in, say, 20 years. Everybody is
convinced of that; the days of cash are numbered. It's too expensive,
too cumbersome and too old-fashioned.

David Chaum has since been seen around Berkeley, walking with his
soul under his arm (16). He was far ahead of his time -- too far.

(1)  In the original article, the two words "e cash" were used.
(2)  "Tot op het bot."
(3)  Dutch Department of Public Works.  Responsible for waterways and roadways.
(4)  "Lease-bak" is a derogative term in Dutch.
(5)  About 10 million dollars.  The guilder trades at 1.8 to 2 per dollar.
(6)  A Dutch payment system operated by a cartel of all major Dutch banks.
(7)  Smartcard systems operating competitively in the Dutch market.
(8)  "Inzet."
(9)  "Hielden aan het lijntje."
(10) "Volgens de overlevering."
(11) Suburb in Amsterdam where the Science Park was located.
(12) "Met zijn hoofd in de wolken."
(13) "Zweven tussen leven en dood"
(14) Scott Loftesness.
(15) (German) "Das war einmal"
(16) "Lopen met zijn ziel onder de arm."

--- end forwarded text

----------------- Robert A. Hettinga <mailto:> Philodox Financial Technology Evangelism <> 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

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