The Blockchain Isn't the Future of Digital Cash

You'll need something that doesn't leave a paper trail if you desire the privacy of paper money.

What comes to mind when you hear the term "digital cash"? Perhaps a payment software like Venmo that you use in instances where paper bills were previously required, such as paying a friend for dinner. Perhaps you're thinking about cryptocurrency. After all, "Bitcoin: A Peer-to-Peer Electronic Cash System" is the title of the first Bitcoin white paper.

However, none of these digital payment solutions are truly equivalent to cash. They require both an internet connection and a bank account to utilize, unlike conventional money. Most importantly, they lack the secrecy that has long made currency the favorite medium of civil libertarians, dissidents, and criminals alike. Paper is the only type of money that does not leave a paper trace.

A bill filed in Congress on Monday aims to digitally recreate the benefits of currency, including privacy. The ECASH Act would require the US government to test issuing digital dollars that are held on hardware rather than in bank accounts and may be used without a connection. The concept of a new, surveillance-resistant currency will almost certainly be met with skepticism in government. However, with paper money on its way out, the demand for a true digital substitute will only strengthen.

It's simple to see why apps like Venmo, which notoriously makes your transactions public by default, aren't a great cash alternative. Anyone sending money around with an app should be aware that they're creating a persistent digital trail that the government or bad actors could access. The lack of privacy with crypto, on the other hand, is rather counterintuitive. Bitcoin's original attraction hinged on its ability to maintain anonymity. The blockchain, according to early crypto fans, would liberate people from Big Brother. Instead of a centralized ledger, a distributed ledger would eliminate the need for a bank-like middleman who could obstruct transactions. Transactions would be anonymous if accounts were tied to cryptographic wallet addresses rather than offline identities. As a result, a slew of criminal activities involving cryptocurrencies arose.

However, as my colleague Andy Greenberg shows in his next book, early trust in crypto anonymity was mistaken. While your transactions are disguised behind a crypto wallet address, they are also permanently stored on a public database with blockchains. It didn't take long for law authorities to discover out how to link those transactions and wallets to the real-world identities that were behind them.

"In the broad scheme of things, the difference between a distributed ledger and a traditional ledger on the topic of cash-like privacy is almost meaningless," says Rohan Grey, a law professor at Willamette University. He emphasizes that the more important distinction is between two separate currency models: tokens and accounts. When you pay with cash, you're actually handing up a physical token. The money belongs to whoever has the token, and there is no third party involved in the transaction. When you use Venmo or a bank to transmit a payment, you're simply telling them to update your account by changing some numbers around in their records. The only significant difference with cryptocurrencies is that the network as a whole, rather than a financial institution, approves transactions.

This means that, despite the different methods for conducting online payments, there is no such thing as actual digital cash. This isn't only a semantic distinction. Paper money has been on the wane for years, but during the epidemic, the tendency intensified as more and more companies decided to stop accepting it. This creates a problem, particularly for the so-called unbanked—those who cannot afford a bank account and hence cannot use non-cash payment methods.

Governments all around the world have been looking into so-called central bank digital currencies, or CBDCs, after being alarmed by the rise of privately produced cryptocurrencies. Consider a government-run PayPal or Venmo. This could help to tackle the unbanked problem by providing low-income people with a public banking option, but it would not replace cash. As the economy evolves inexorably toward all-digital transactions, a future in which our only alternatives are payment apps, banks, crypto, or CBDCs means that every financial transaction is potentially exposed to government or private company surveillance.

Representative Stephen Lynch, a Massachusetts Democrat and chair of the House Task Force on Financial Technology, sponsored the ECASH Act to avoid this fate. (The Electronic Currency and Secure Hardware Act is an excellent legislative acronym.) The law, on which Grey advised, would order the US Treasury Department to undertake a pilot program for a digital currency that functions similarly to cash.

"If we're going to have a public option for digital banking, it has to cover everyone," says Ral Carrillo, a Yale Law School scholar who, like Grey, provided input on the bill. "Being able to go offline is a big part of that."

What would that entail? The Treasury would issue digital dollars, just as it has done since the 1860s with paper money. The money can't exist on the government's records or on a distributed blockchain ledger in order to act as cash. This necessitates the storage of balances on hardware. That may be a standalone device or a secure hardware environment in your phone, similar to a SIM card—basically, a chip that is physically separated from the rest of the device so that it isn't reliant on the operating system's security.

This concept has been around for quite some time. Companies like Mondex developed stored-value cards that could be used for offline payments in the 1990s. Governments, on the other hand, were not enthusiastic about the idea of issuing digital currency, and those businesses were acquired by the credit card industry. (In 1994, WIRED's Steven Levy said, "When I called a Federal Reserve spokeswoman to enquire about electronic cash, he laughed at me.") It seemed as though I was asking UFOs about exchange rates.")

Today's technology is more refined, and its applications are more obvious. I chatted with Razvan Dragomirescu, WhisperCash's chief technology officer, last week. He showed me his company's items via Zoom. One resembles a credit card and includes a touchscreen keyboard as well as a miniature electronic ink display in the style of a Kindle. Payments between cards can be made over Bluetooth or by entering the recipient's ID number and the amount. The transaction generates a 10-digit cryptographic hash in the latter case, which encodes the participants to the transaction as well as the amount. The receiver must enter the code into their own card to receive it. WhisperCash's other key product, a secure chip that attaches to a SIM card, transforms a phone—even a cheap "feature phone" like those used in underdeveloped countries—into a digital cash wallet.

On a technical level, the key to making this work is security—not from outside attackers, but from the person holding the money. The most serious threat to any digital currency is the so-called double-spend problem, in which someone repeatedly spends the same amount of money, causing the system to crash. Anyone with a digital cash device has a strong motive to try to circumvent its anti-double-spending safeguards.

Dragomirescu claims that the device is "the user's enemy." "The user will try to double spend, counterfeit money, and generally get around any restrictions."

Dragomirescu admits that WhisperCash, like any other piece of hardware, can't guarantee complete security. The practical goal is to make hacking the chip so difficult and time-consuming that no one would bother. Any version of state-backed money will have limits on how much may be stored on a device and moved in a transaction, similar to how American banks are compelled to disclose cash withdrawals and deposits exceeding $10,000. Even if a hacker was able to unlock a digital cash wallet for double spending, spending the money would be difficult because everyone else's device would be capped.

The roadblocks to digital cash are currently political rather than technological. Officials in government enjoy being able to keep track of who spends what. Despite law enforcement's increasing effectiveness in finding criminals using crypto, politicians in the United States remain concerned. It will be difficult to offer a digital currency that is even more resistant to surveillance in such climate.

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