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Paper money is, in its way, amazing stuff. It is, for instance, easily transferable and widely accepted. You can pay the baby sitter without even thinking about the complex financial dynamics underlying the transaction. Cash--especially U.S. dollars--is also portable, storable and exchangeable. (Just ask the thousands of Russian mafiosi who pay for nearly everything with crisp $100 bills.) And it holds up pretty well. If you're afraid of banks, you can still grab a coffee can, dig a hole in the backyard and have a pretty secure deposit. But paper cash does have some awful drawbacks. Lose it and it's gone; sit on it and it may lose its value overnight: think about what just happened in Asia, or earlier in South America.
Enter electronic cash. The idea of digital money is simple enough: instead of storing value on paper, find a way to wrap it in a string of digits that's more portable and (most important) smarter than its paper counterpart. Smart money? Well, yes. Because digital cash is endlessly mutable, you can control it much more precisely than paper money. Think about the $2,000 check you send to your daughter at college for expenses. How is that money really spent? Books...or beer? Electronic cash takes that relatively simple transaction--passing an allowance--and makes it into a much more intelligent process. And one that hardly requires something as old-fashioned as a bank.
For starters, you can send the money over the Internet encoded in an E-mail instead of sending a check. This saves you the trouble of balancing the checkbook at the end of the month, and it gives you the option of transferring the money from wherever you want: mutual fund, money market, even an old-fashioned checking account. Your daughter can store the money any way she wants--on her laptop, on a debit card, even (in the not too distant future) on a chip implanted under her skin. And, perhaps best of all, you can program the money to be spent only in specific ways. You might instruct some of the digits to go for books, some for food and some for movies. Unless you pass along a few digits that can be cashed at the local pub, she'll have to find someone else to buy the drinks.
Smart, digital cash may also address some of the other problems of paper money. If you lose your digital cash, for example, you will be able to replace it instantly by asking your computer to invalidate the disappeared digits and replace them with a fresh set. And unlike paper money--which stops earning interest as it shoots out of the ATM slot--smart money can keep earning interest until the moment you spend it.