The Royal Canadian Mint is to begin testing its MintChip electronic payment system by the end of the year, according to reports. Software engineers at the Mint will begin piloting the system as a new means of paying for goods and services using smart phones and other devices.

Announced in April 2012, MintChip isn't a virtual currency. Instead, it is a mechanism for holding Canadian dollars - and potentially other currencies - electronically as digital cash that can be transferred between participants. The concept has languished publicly, with nothing of note happening since a developer challenge designed to encourage third party innovation around MintChip ended 18 months ago.

Now, however, head of the Royal Mint Marc Brûlé has been busy giving interviews, apparently designed to kindle interest in the idea. The Mint is already working on version 2.0 of the as-yet unimplemented concept.

MintChip uses a silicon chip to store value, but unlike bitcoin, the value is created digitally by the Mint, just as coins are physically minted. This value will then be sent to brokers, who will trade with consumers and businesses.

Those buying chips from brokers will load them onto a chip with a unique ID. To instigate a payment, the specification says that a receiving chip can optionally request the payment, sending its unique ID to the sending chip, along with an amount to be paid. It can also include information such as a text annotation describing the purchase, and a destination URL for the payment to be sent.

The sending chip then generates a value message, cryptographically encoded using a digital signature. This contains the value being transferred, and other information. On receipt, it is verified using the sender's public certificate, and then each chip is debited and credited to reflect the transaction.

To avoid duplicates, the MintChip specification also requires a challenge to be sent. The challenge is complex enough so that the same one will never be sent twice to the same recipient when transferring the same amount.

MintChip devices can be embedded in phones, USB sticks, wallets, laptops, or tablets. The system also allows for hosted MintChip accounts, storing value online with a third-party service provider.

The specification holds some tantalising possibilities. One of the fields in the value message is a currency code. '1' indicates the Canadian dollar, which the specification says is the only one in use at the moment. But it potentially opens up the possibility for other currencies to be used. How open this might be depends on how the specification is finally released, and how tight a grip the Mint retains over it.

As yet, that’s unknown. “MintChip remains an R&D project whose technology and business case we are continuing to test and refine. As such, we are not in a position to comment on its future commercialization,” said Royal Mint spokesperson Alex Reeves, when asked about a go-live date. “Also, note that the Mint does not compare its technology to other digital payment solutions, preferring instead to focus on its unique attributes as a form of digital cash, issued by the trusted custodian of a national currency system.”

It has its critics. Our own Jon Matonis has commented elsewhere on the centralized nature of the MintChip project, which keeps control firmly in the hands of the Mint. And others have similar concerns.

“There is no way in hell it will permit no-limit transactions between private parties anywhere in the world,” said Erik Vorhees in a Reddit post about the currency. Vorhees is the founder of the hugely successful SatoshiDice (which he sold this year) and Coinapult, a site that lets US and Canadian residents send bitcoins via email and SMS. He warned:

Nevertheless, Canada seems to need something new. In 2011, a report produced by the Task Force for Payments System Review, a government-mandated review body, highlighted the need for payment reform in Canada. Some 27 EU countries and the BRIC region were significantly outpacing Canada's transition to digital payments, the review body said. “Even Peru and Romania" were ahead of the country, it said.

Thoroughly modernising the payments system could save the Canadian economy up to 2% of GDP in productivity gains, or $32 billion, annually, the report suggested.

“Consumers … increasingly want to pay for purchases online, but too often have limited choices," it pointed out, adding:

“They also want to pay bills online, only to find out that processing takes days, often resulting in unwarranted late charges when transactions failed to clear by the deadline."

Canadians can currently use Interac for online and in-person debit transfers, and Visa Paywave or Mastercard Paypass provide one-tap payments. Google’s Wallet payment service is not yet permitted in the country.