As the popularity of digital currency rises, so does the fear of privacy.

Helping people without bank accounts “sounds very prosperous, but what if the end result is a bank account system? says Rohan Gray, a law professor at Willamette University who worked on proposals for digital dollars, including the one that was last spring. “Now you are suddenly talking about building a monetary system where every transaction can be stored as data and create a robust social graph of the United States.”

These worries are as old as digital money. In 1994, my WIRED colleague Steven Levy profiled David Chaum, a cryptographer and inventor of a digital money form called e-cash. His idea was that people, instead of papers and coins, would carry digital tokens stored on dedicated devices that could look like a debit card or a keychain, or that they could send them by email. (This was very much in front of smartphones.) Chaum’s biggest concern was how to keep the transactions secure and private using cryptographic controls. But at the time, there was no digital dollar issued by the U.S. government. “When I called a Federal Reserve spokesman to ask for electronic cash, he laughed at me,” Levy wrote at the time. “It was as if I was inquiring about the exchange rates with UFOs.”

This was before payment programs like Paypal, before Bitcoin, and before Facebook introduced Libra, now called Diem, which promises a form of private currency designed to stay within the walls of its vast digital stronghold. It used to be, 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 digital yuan issued by the government could allow competitors, such as traditional banks, to speed up their payments and could also give the Chinese government more insight into the country’s economy.

Another impact of the competition is the dwindling use of physical cash. In Sweden, for example, officials see the e-krona as a way to ensure that money remains accessible to the public, even in a world where physical cash is difficult to obtain. Otherwise, there may be a time when buying groceries, saving for retirement, or receiving a welfare check depends on the strength of private financial networks. Although it disappears from sight, public money also offers a kind of setback in dire times. During the pandemic, fewer people used cash, but the amount in circulation actually increased as people at ATMs stocked up. Cash is a safe haven – risk free, as long as you choose a good hiding place.

But would a digital currency be a substitute for cash? In a paper published last month entitled “On the possibility of a cash-like CBDC”, researchers from Riksbank in Sweden argued that this was not really possible. The reason: privacy. No matter how a digital currency is designed, they write, someone will have to keep track of transactions to avoid the double spending problem – a digital equivalent of counterfeiting. In other words, digital transactions need to be tracked using some ledger. And with that, it would be impossible to ensure absolute privacy, not even to conceal the details of transactions or the identities of the parties involved. With bits and bytes, there is always the possibility of a back door or a leak.

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The WIRED Guide to Bitcoin

The cryptocurrency represents amazing technological advances. Bitcoin has another way to go before it becomes a true substitute for or even a supplement to the global financial system.

In theory, it would be possible for people to make transactions without leaving a trace, using forms of secure hardware on which people can load their digital dollars and make transactions without reconnecting to any central system. But current forms of secure hardware are not fault-tolerant and cause security problems, explains Neha Narula, director of MIT’s Digital Currency Initiative, whose research team is working with the Federal Reserve in Boston to develop digital dollar prototypes. Privacy should be a top priority for any payment system, but perfecting the target can set false expectations. ‘We approach it as digital cash. But that does not mean that we want to try more than cash or replace cash, ”she says.

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