Digital currencies and payment systems are big news these days. Everyone from governments to private companies to groups of hackers and geeks compete to invent the next killer app in payment systems. Creating a successful digital currency offers rewards such as payment processing fees, reduced minting costs, reduction or elimination of counterfeiting, seigniorage (the profit earned from issuing a currency), improved transaction security, reduced transaction costs, the ability to make micro payments and improved privacy. The rewards could run into the tens of billions or more for the successful creator of the hottest new digital currency. Canada (or more precisely, the Royal Canadian Mint) plans to cash in on these new technologies by releasing their own digital currency and payment system. If successful, the Royal Canadian Mint’s ‘MintChip’ technology promises to bring all of these benefits to the Canadian government and people.

However, if unleashed on the public in it’s current incarnation, MintChip will destroy the Canadian Dollar and economy.

First, a quick overview of how MintChip works: MintChip takes its name from the chip which acts as a digital wallet in the system. The Royal Canadian Mint designed the chips to look and act like the MiniSD memory cards compatible with many cell phones, digital music players and computers. This allows them to work with existing technologies with the addition of some software. The chips themselves store the wallet balance and authorize transactions using secure messages. The software talks to the chip and transfers the authorization messages via the Internet, direct connection or NFC (the technology preferred by Google Wallet). The system can even process payments securely without a network connection. From an end user perspective, MintChip acts just like cash. Value is transfered person to person without the necessity of a middle man, exchange of personal information or the option to reverse the transaction. The whole thing depends on secure hardware and industry standard encryption technology to protect and verify payments.

At first glance, this appears to be an ideal replacement for cash and credit-card based electronic payment systems. Unfortunately, MintChip contains a fatal flaw. According to documentation publicly available on the MintChip website (http://MintChipChallenge.com), the security of the system depends on the security of the individual chips or wallets in the system.

According to the site:

“The Chip is a secure smartcard integrated circuit, which provides the electronic purse functionality of MintChip.”

These devices generally provide adequate protection against remote or ‘passive’ attackers. Under direct attack, however, their security always fails.

Anyone with direct access to one of these devices could break into it and steal the encryption codes that keep it secure. “So what? If it acts like cash, stealing my MintChip gives the thief access to all the funds on it, right?” Right. The weakness in MintChip doesn’t allow theft of individual funds. Instead, it allows the unlimited ‘counterfeiting’ of funds. Because the chip stores the actual balance of the wallet, a motivated attacker could modify it to change his balance or never subtract from it when making transactions. This attacker could also extract the digital ‘keys’ the chip uses to authenticate transactions and use them to pose as the chip on the Internet or to transfer counterfeit value to other, non-hacked chips.

“So what? There are counterfeiters in the current system. The have little effect on the economy and the authorities usually track them down pretty quickly.”

This is where the MintChip system really starts to break down. A hacked MintChip will function as a digital printing press for the hacker. The counterfeit transactions appear to be completely legitimate because the hacked chip authenticates them in the same way as a normal chip, creating a perfect, undetectable counterfeit. A hacker could use his hacked chip to ‘Top up’ legitimate chips without risk of detection.

The time to hack a system like this is usually measured in weeks or months, so within a year or less of releasing they system to the general public, there will be hundreds or thousands of hacked MintChips cranking out as many perfect counterfeit Canadian Dollars as their owners want to spend. By the time the authorities notice the excessive balances moving through the system, it will be too late. If they are lucky, Canadian authorities will have enough time to cut MintChips off from the rest of the economy and declare them worthless before the economy is overwhelmed. If unlucky, the Canadian Dollar will crash and burn in a flaming ball of hyperinflation, taking the rest of the Canadian economy with it.