Digital holography can be used to capture the whole Fresnel field from a reflective or transmissive object. Applications include imaging and display of three-dimensional (3D) objects, and encryption and pattern recognition of two-dimensional (2D) and 3D objects. Often, these optica l systems employ discrete spatial light modulators (SLMs) such as liquid-crystal displays. In the 2D case, SLMs can encode the inputs and keys during encryption and decryption. For 3D processing, the SLM can be used as part of an optical reconstruction technique for 3D objects, and can also represent the key during encryption an d decryption. However, discrete SLMs can represent only discrete levels of data necessitating a quantisation o f continuous valued analog information. To date, many such optical systems have been proposed in the literature, y et there has been relatively little experimental evaluation of the practical performance of discrete SLMs in these systems. In this paper, we characterise conventional phase-modulating liquid-crystal devices and examine thei r limitations (in terms of phase quantisation, alignment tolerances, and nonlinear response) for the encryption of 2D and 3D data. Finally, we highlight the practical importance of a highly controlled discretisation (optimal quantisation) for compression of digital holograms.