Can Crypto Deliver on Private Transactions in Cashless World?

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Editor's note: As part of CoinDesk’s Payments Week, we asked a number of engineers, executives and experts to weigh in on the substantial issues raised by the crypto industry.

As Eswar Prasad noted in his recently published book on the future of money – cash is quickly being replaced in the developed and developing world. Since 2018, for instance, China has seen mobile payments make up at least 80% of the total payments market share across its economy. The trendline is slower, but similar, in parts of Europe and the Americas

But there are certain affordances that only cash and coins provide – namely, privacy. In this roundtable discussion, our experts wonder whether crypto can deliver on private transactions for a world where cash is dead.

Consumer choice means consumers must choose

Yes, absolutely, crypto payments can provide a similar level of privacy to cash – if certain conditions are met. One way or another, cryptographically based digital money will replace cash in consumer transactions. This is a foregone conclusion.

First, cryptocurrencies must be as easy to use as identifier-linked, noncash instruments (like debit cards) or their phone app equivalents. This ease-of-use includes time to transaction finality and being universally accepted. Currently, cryptocurrencies are not able to meet these fundamental requirements.

Second, crypto must be at least as private as paper banknotes (bearing in mind that banknotes can be traced via their serial numbers). Techniques like eCash in the 1990s were created to provide this level of privacy. (They allow an encrypted number to be modified “through” the encryption so as to assign monetary value to it, such that when the encryption is removed, it retains the modification and can be spent anonymously.)

Third, crypto must – obviously – be resistant to “double spending.” Payees need to be able to check instantly at time of payment that the currency they’re using has not been already spent elsewhere. This can be done privately without any more personal or financial details being revealed to them.

And last, crypto should likewise resist aggregation by criminal or terrorist organizations. Remedies like daily limits on consumer withdrawal amounts will not resolve the issue. One way to tackle this would be to make a digital currency cease to be fully private after it is spent the first time.

Right now, central banks around the world are scrambling to create their own digital currencies (CBDCs) that will meet these requirements. Their surveys show that privacy has emerged as a top concern among citizens and bankers. One or more stablecoins may emerge that can also meet the requirements. It’s up to us – the community – to ensure that the right instruments are adopted.

– David Chaum, legendary computer scientist and creator of xx network

Monero, bearer instruments and resistance

The war on cash looks like the war on private cryptocurrencies. Governments have been slowly reducing cash’s usefulness over the last few decades with increased reporting. I fully expect them to do this more directly with cryptocurrencies, which are ultimately bearer assets. The easiest way to regulate this is through regulating exchanges, but they can also expand the definition of what requires registration.

If cash was invented today, I think governments would freak out. They prefer bank transfers where, in theory, a third-party is involved in and can be held accountable for every transaction. Cryptocurrencies reminded people that digital transfers can be bearer assets as well without a centralized intermediary, and they can even have strong privacy properties. This change is still sinking in years later.

Ultimately, the resiliency of bearer assets will depend on people’s willingness to use them. If private digital payments are only used by a small minority, then private digital payments will also be “dead.” So privacy-preserving crypto use must be widespread and circular.

Sadly, Monero is the only major name in the game of privacy. Monero had 693,425 transactions in March 2022 that hid the sender, receiver and amount. Comparatively, only 2,154 bitcoin transactions were mixed using the popular privacy tool for Bitcoin, Samourai, in that same period.

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