Online vs Offline Digital Cash
Online digital cash means interacting with a bank, either via a modem or network, in order to transact with a third party. Offline digital cash lets consumers complete a transaction without involving a bank directly. Offline anonymous digital cash is therefore the most complicated type of digital cash as it may be very easy to copy, and then spend both the original and the copy. Real digital cash systems must prevent this duplication, otherwise we could all get rich quickly!!
Online systems require that merchants must contact the bank's system with each sale. The bank stores information on all digital cash that it has handled and can therefore indicate whether a piece of digital cash is still 'good'. If the bank finds that the digital cash has already been spent it will alert the merchant who can then refuse the sale. This system has similarities to credit card verification systems.
There are currently two ways in which offline digital cash systems can help prevent duplication of the e-cash. The first is to produce a tamper-proof smart card which keeps track of the digital cash spent and will detect any attempt to duplicate digital cash and not allow it. If this smart card is tampered with, it would permanently damage the card. The second way is to encrypt the digital cash duplicated to identify the individual by the time the digital cash reaches the bank.
The difference between offline anonymous digital cash and offline identified digital cash is that the anonymous digital cash can only be traced if the digital cash is duplicated and spent. If this is not the case then the original spender cannot be determined. However, with identified offline digital cash, the trail can always be traced and the bank will always know who bought what, where, and when. And if the bank knows - the tax man does too.