J. Michael Diehl asks:

1. How does one start a digital cash economy? How is the initial distribution of currency done? This is, of course, assuming the technical stuff is taken care of.

Issuing digital cash is easy - the problem is getting someone to take it :-) Other than anonymity, the problems of starting a digicash exchange economy are pretty similar to those of starting any other private money system - governments avoid the problem by pointing guns at people (i.e. issuing fiat currency and making legal tender laws), and commodity money systems mostly avoid it by using a commodity people care about as a standard (gold, silver, cordwood, tobacco, etc. - doesn't have to be fixed value), but everybody else has to solve it somehow. (The other main issue, which someone brought up, is whether there are applicable laws like banking law or taxable transaction reporting laws that may require you to get permits or let regulators regulate you or whatever, which vary from country to country, and also depend on how you define and manage your digicash accounts.) My current involvement in token-based currencies, aside from government fiat, includes NJ parkway toll tokens, which went up in value when the toll went up, Washington DC Metro tickets, which aren't redeemable for anything, and Joe's Coffee Money at work. Joe prints it on the Macintosh, there's a box of them on the counter, you leave a dollar when you take more, the coffee's ok, profits pay for new hardware and occasional free days, and unlike the bozos who run New Jersey's highways and Arts Center, Joe's a guy you can trust :-) One way to get people to accept your digicash is to use it for convenient anonymous payment for a service, like highway tolls or subway fares, or anonymous remailer payments. Essentially, you're getting a group of vendors together, selling digibucks for cash, and distributing the cash among the vendors according to the digibucks they've received. It's not much different from other systems using tokens. As long as the vendors agree to accept tokens at the current value for an extended period of time, you don't risk much. If you ran a barter club using tokens, you could do it with digicash; the problem then is how to agree on when tokens will be generated, and by whom. One solution that would be readily accepted is to only issue tokens in return for real cash or other valuable commodities. This means everybody knows that a digibuck is worth a buck, and has a reasonable expectation that the currency won't be inflated away. For commodities, some reasonable valuation needs to be done. (ObMovieReference - the poker game in "Benny and Joon" is marvelous :-) For payment for services, it's tougher - the demand side of your market depends on how much money is floating around as well as how many people want your services, and a market that's too small won't be able to generate much. On the other hand, unless there's some way for people to perform services that become part of the bank's assets and available to creditors, it shouldn't issue more digibucks to pay for them; that's inflating the currency merely for the bank's benefit. Another way to start a digicash system is as a credit card analogue, where the bank bills the customers later and only has enough cash backing to cover the float, but that's not much different from a cash-based system except that in a pay-first cash system, it's possible for the digibank to invest the cash in an external investment, with the usual issues of risk, liquidity, etc. that normal banks have, only the account balances exist as digibucks in people's digiwallets instead of ledger entries in the bank's computer.

2. Is digital cash supposed to be backed by actual cash on deposit at the bank? Or by a promise of future services from vendors hired by the bank (presumably for real cash), if the customers find that acceptable, but that's essentially backed by the bank's negotiable assets, including cash.

3. How would one "get out" of such an economy if he wanted to? The ideal way is by spending all your digicash, either for the Collect the system service / product if it's a vendor-based system, or for services or products sold by other members. It's somewhat of a system failure to redeem your digicash for paper cash, unless the system is basically intended as a payment system, in which case it's fine. Or abandon your investment, or sue.

4. If DC is to be backed by actual cash, is this really such a good idea?

I once knew someone who had invested in a bank-like system that denominated its accounts in gold rather than fiat currency, and paid its depositors in gold on demand. It also paid interest, which should have been a clue.... It eventually collapsed, and turned out to be a semi-scam; it had invested most of its money in high-yield, high-risk stocks (South African gold mines,mainly, which were actually doing quite well in 1980), and when it folded he had to file SEC complaints and sue them in Federal court to get them to distribute the stocks to their creditors instead of distributing stock in a worthless subsidiary company that it had formed to take over the assets. He was successful, so he lost a lot less than he could have, but being a hard-money paranoid isn't all it's cracked up to be :-( Bill