How Does eCash Work?


How exactly does eCash work? To have a better understanding, let’s first familiarize ourselves with how money traditionally flows using eCash.

  • Withdrawal. Users have the ability to convert money from their eCash accounts into eCash coins. However, access can only be granted to the eCash account if the user can sign the withdrawal request. The signature is checked against the public key that has been registered with the ecash account since the coins are accessed using a password-encryption.
  • Payment. In order to pay a specified amount, a set of coins that equal the desired amount must be selected. If you were using the on-line ecash system, the set of coins would be encrypted for the bank through the bank’s unique public key. The shop then deposits the payment at their bank, who then credits the merchant’s eCash account, as long as all coins are valid. The accepted coins are added to the database of spent coins to prevent them from being spent again.
  • Payment deposit. Again, using the on-line ecash system, this protocol would be completed by the shop or merchant. The most important component of the payment protocol is that the payment deposit will be made specifically to the payee.
  • Coin redemption. Coins can be directly returned to the mint without using them in a payment if they’ve expired, need to be refreshed, or need improved distributions.
  • Recovery. If coins that have been lost they can be recovered through a protocol carried out between the user and the mint.

How it flows

Now that we’re aware of how the money flows, it’s time to realize that the money flow can only be accomplished through the cooperation of the following four components:

  • Issuers. These can either be financial institutions, or non-bank institutions.
  • Customers. These are the individuals who spend eCash.
  • Merchants or traders. These are the vendors who receive eCash.
  • Regulators. Authorities or state tax agencies.

Once all of the parties are involved, the basic idea of an eCash transaction involves at least one of the components; the issuer, customer, and merchant who will accept the eCash in exchange for the products or services rendered. There are then three general stages for the transaction to be completed.

Account Setup

The Consumer has to open an account with a bank that provides eCash accounts. The merchant who is willing to participate in eCash transactions must have access to these accounts with a number of banks in order to support the transaction of the consumer who may use any of these various bank accounts. However, the banks will manage both the consumers’ and merchants’ accounts.


Once the consumer decides to purchase a good or service, he or she will transfer the eCash amount from their bank account to either their electronic purse (on-line system) or eCash token (off-line system). The eCash payment will then be transferred to the merchant so that they are compensated for the goods or services provided. The eCash payment will be either a softcopy (via software) or token based. For most transactions through the Internet, the process will be encrypted.


After receiving the electronic payment from the consumer, the merchant will receive a confirmation from the bank. The bank will then authenticate the electronic transaction. During this same step, the bank will debit the consumer’s account for the amount that was agreed upon. Finally, the merchant delivers the products or services and will inform the bank to deposit the payment into their bank account.

Although these stages may sound complicated if you’re new to eCash, digital cash actually acts very similarly to physical cash. The obvious difference is that electronic is digital. Here’s an example of how an eCash system would work:


A bank creates a unique digital bank note that includes a message which issues a serial number (with a primary or public key) and value of the note. This is sent to Person A. Whenever Person A withdraws this note, it will use Chaum’s Cryptographic technique. This will alter the serial number. As a result, the bank will not recognize the note when it is withdrawn. The note will be returned to the bank with a new serial number.

Person A will then pay Person B electronically by sending the bank note to him or her. Then, Person B will check the note’s validity by decrypting it through the bank’s public key to check its signature, a.k.a. the new serial numbers validity. Person B ships the note off to the bank, which checks the serial number to confirm that this specific bank note has never been spent before. The serial number, which is different from the note number that was withdrawn by Person A, will prevent the bank from linking the two transactions.

The final phase includes the enabling bank checking the new serialized key account for the amount of the transaction. If validated, the amount will be transferred via a depository notice. Person B, who is using the same encrypting technique, will return the depository notice with the new serialize account. Again, the enabling bank will be aware of who the merchant is. The bank will only know that that money is available and can be used as a payment.

In other words, think of this eCash transaction as a debit card transaction. However, there is no other information besides the amount of the transaction, making the process secure.

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