Helping people without a bank account “sounds very bloody, but what if the end result is a supervised bank account system?” says Rohan Gray, a law professor at Willamette University who has worked on digital dollar proposals, including the one last spring. “Suddenly you’re talking about building a monetary system in which every transaction could be stored as data and create a robust social graph of the United States.”
These concerns are as old as digital currency. In 1994 my colleague from WIREd Steven Levy profile David Chaum, a cryptographer and inventor of a form of digital currency called e-cash. His idea was that instead of papers and coins, people carried digital tokens stored in dedicated devices that could look like a debit card or keychain, or could email them. (This was long before smartphones.) Chaum’s main concern was how to keep these transactions secure and private using cryptographic controls. But at the time, a digital dollar issued by the US government was not in the cards. “When I called a spokesperson for the Federal Reserve to ask him about e-money, he laughed at me,” Levy wrote at the time. “It was as if I was learning about exchange rates with UFOs.”
It was before payment applications like Paypal, before Bitcoin, and before Facebook offers Balance, now called Diem, which promises a form of private currency designed to stay within the walls of its vast digital fortress. That was before, in other words, central banks had a lot of competition. In China, for example, private payment systems such as Alipay and WeChat Pay are almost ubiquitous. A government-issued digital yuan could allow competitors, such as traditional banks, to break into payments and also potentially give the Chinese government more visibility into the country’s economy.
Another impact of this competition is the decrease in the use of cash. In Sweden, for example, officials see e-krona as a way to ensure that money remains accessible to the public, even in a world where physical money is hard to come by. Otherwise, there might come a time when buying groceries, saving for retirement, or receiving a welfare check would depend on the strength of private financial networks. Even if they disappear from view, public money also provides a kind of safety net in times of trouble. During the pandemic, fewer people use cash, but the amount in circulation has actually increased as people get their supplies from ATMs. Cash is a safe haven – risk free, as long as you choose a good stash.
But would a digital currency replace cash? In a paper published last month titled “On the possibility of a cash-like CBDC”, researchers at the Swedish Riksbank argued that no, it was not really possible. The reason: privacy. Regardless of how a digital currency is designed, they wrote, someone should track transactions to avoid what’s known as the double-spending problem – a digital equivalent of counterfeiting. In other words, digital transactions need to be tracked using some sort of ledger. And with that, it would be impossible to ensure absolute confidentiality, even while striving to conceal the details of the transactions or the identity of the parties involved. With bits and bytes, there is always a risk of backdoor or leakage.
In theory, it would be possible for people to transact without leaving a trace, using forms of secure hardware, onto which people could load their digital dollars and transact without reconnecting to a centralized system. But current forms of secure hardware are not fault-proof and raise security concerns, says Neha Narula, director of the Digital Currency Initiative at MIT, whose research team is working with the Federal Reserve in Boston to develop prototypes of digital dollars. Privacy should be a top priority for any payment system, but striving for perfection can create false expectations. “We approach it like digital money. But that doesn’t mean we’re trying to go beyond cash or replace cash, ”she says.