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Digicash files Chapter 11

Electronic-cash pioneer seeks bankruptcy protection after shrinking its payroll to about six people.

Electronic-cash pioneer DigiCash said today it's filing for Chapter 11 bankruptcy protection after shrinking its payroll to about six people from nearly 50 in February.

The company, which has been running off a bridge loan from its venture capital investors since June, is seeking new investors from established financial institutions or a buyer for its software technology. The company's operations in the Netherlands, where it was founded, were liquidated in September.

"To really launch and brand something like this in the Internet space is likely to take a fair amount more capital," said Scott Loftesness, DigiCash's interim CEO since August. "It's more appropriate for strategic investors, corporate players or banks themselves as a consortium model."

Electronic-cash schemes have found difficult sledding recently. First Virtual Holdings, which had a form of e-cash, exited the business in July. CyberCash's CyberCoin offering hasn't really caught on. Digital Equipment, now part of Compaq Computer is testing its Millicent electronic cash, and IBM is in early trials for a product called Minipay.

Under bankruptcy laws, DigiCash's Chapter 11 filing allows the company to continue operations, while keeping its creditors at bay as the company reorganizes. Most of DigiCash's $4 million in debt is owed to its initial venture capital financiers who extended the bridge loan, August Capital, Applied Technology, and Dutch investment firm Gilde Investment.

DigiCash's eCash allows consumers to make anonymous payments of any amount--and anonymity differentiates eCash against other e-cash schemes. DigiCash's intellectual property assets include patents, protocols, and software systems that also could be used for applications, like online electronic voting or private scrip issued by a particular retailer.

DigiCash suffered a setback in September when the only U.S. bank offering its scheme, Mark Twain Bank, dropped the offering. But a number of major banks in Europe and Australia offer or are testing DigiCash's electronic cash.

Also in September, DigiCash closed its Dutch operations and liquidated its assets there.

Loftesness said DigiCash has a list of 35-40 potential partners, and he has been talking to players like IBM for months. He expects to resolve DigiCash's status in the next five months.

"Everybody feels anonymous e-cash is inevitable, but the existing situation was not going to get there from here," said Loftesness, who is frustrated by potential partners telling him, "This is absolutely strategic, but unfortunately it's not urgent."

The company was founded by David Chaum and was well-known in the Internet's earliest days. MIT Media Labs' Nicholas Negroponte is a director of DigiCash.