The Future of Digital Cash Is Not on the Blockchain | WIRED

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When you hear the phrase “digital cash,” what comes to mind? Perhaps a payment app, like Venmo, that you use in situations that used to call for paper bills, like paying back a friend for dinner. Or maybe you think of cryptocurrencies. After all, the original Bitcoin white paper is titled “Bitcoin: A Peer-to-Peer Electronic Cash System.”

But none of these digital payment options are really like cash. Unlike paper money, they require both an internet connection and a bank account to use. Above all, they lack what has long made cash the preferred medium of civil libertarians, dissidents, and criminals alike: privacy. The only kind of money that leaves no paper trail is paper.

A bill introduced in Congress on Monday seeks to re-create the virtues of cash, privacy and all, in digital form. The ECASH Act would direct the US government to experiment with issuing digital dollars that are stored on hardware, not in bank accounts, and can be used without an internet connection. The idea of new, surveillance-proof currency will surely face skepticism within government. But with paper money on a slow path to extinction, the case for a real digital alternative will only grow stronger.

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It’s easy enough to understand why apps like Venmo, which infamously makes your transactions public by default, are an imperfect substitute for cash. Anyone using an app to send money around should be aware that they’re leaving a permanent digital trail that could be accessed by the government or malicious actors. With crypto, on the other hand, the lack of privacy is a bit counterintuitive. Privacy was an essential part of Bitcoin’s original appeal. Early crypto enthusiasts believed that the blockchain would free them from Big Brother. Using a distributed ledger rather than a centralized one would remove the need for a banklike middleman that could block transactions. And tying accounts to cryptographic wallet addresses, rather than offline identity, would keep transactions anonymous. This led to a profusion of illegal activity taking advantage of cryptocurrencies.

But, as my colleague Andy Greenberg illustrates in his forthcoming book, the early faith in crypto anonymity was misplaced. The thing about blockchains is that while your transactions might be hidden behind a crypto wallet address, they are also permanently stored on a public database. It didn’t take law enforcement agencies too long to figure out how to connect those transactions and wallets to the real-world identities behind them.

“In the grand scheme of things, distributed ledger versus regular ledger is almost irrelevant on the question of cash-like privacy,” says Rohan Grey, a law professor at Willamette University. The more meaningful distinction, he explains, is between two different currency models: tokens and accounts. When you pay for something with cash, you’re handing over a physical token. Whoever holds the token has the money, and there is no third party to the transaction. When you send a payment using Venmo, or a bank, on the other hand, you’re just directing them to update your account by moving some numbers around in their books. The same thing is true of cryptocurrencies; the only meaningful difference is that the network as a whole, rather than a financial institution, approves the transactions.

This means that, despite the various options for making online payments, true digital cash doesn’t exist. This is not merely a theoretical distinction. Paper cash has been on the decline for years, a trend accelerated during the pandemic, as more and more businesses decided to stop accepting paper money. This poses risks, most notably for the so-called unbanked—people who can’t afford to have a bank account and thus can’t access non-cash forms of payment.

Governments around the world, spooked by the rise of privately issued cryptocurrencies, have been exploring so-called central bank digital currencies, or CBDCs. Imagine a government version of PayPal or Venmo. This could solve the unbanked problem by creating a public banking option for low-income people, but it would not replace cash. As the economy shifts inexorably toward all-digital transactions, a future where our only options are payment apps, banks, crypto, or CBDCs means a future in which every financial transaction is potentially subject to surveillance by the government or private companies.

The ECASH Act, introduced by representative Stephen Lynch, a Massachusetts Democrat and chair of the House Task Force on Financial Technology, seeks to avoid that fate. (It stands for the Electronic Currency and Secure Hardware Act—an impeccable legislative acronym.) The bill, which Grey consulted on, would direct the US Treasury Department to conduct a pilot program for a version of digital dollars that work just like cash.

“If we’re to have a public option for digital finance, it needs to include everyone,” says Raúl Carrillo, a researcher at Yale Law School, who like Grey consulted on the legislation. “A key part of that is being able to go offline.”

What would that look like? The Treasury would issue digital dollars, just as it has issued paper money since the 1860s. To function as cash, the money can’t live on the government’s books or on a distributed blockchain ledger. That means balances must be stored on hardware. That could look like a stand-alone device, or it could be a secure hardware environment on your cell phone, similar to a SIM card—essentially a chip that is physically segregated from the rest of the device, so that it doesn’t depend on the security of the entire operating system.

This idea has been around for a while. In the 1990s, companies like Mondex developed stored-value cards that could support offline payments. Governments, however, didn’t take to the idea of issuing digital currency, and those companies were bought up by the credit card industry. (As WIRED’s Steven Levy wrote, in 1994, “When I called a spokesperson for the Federal Reserve to ask about electronic cash, he laughed at me. It was as if I were inquiring about exchange rates with UFOs.”)

Today, the technology is sleeker, and its applications more apparent. Last week, I spoke with Razvan Dragomirescu, the chief technical officer of WhisperCash. Over Zoom, he showed me his company’s products. One looks like a credit card that has both a touchscreen keypad and a miniature, Kindle-style electronic ink display. Payments can be sent between cards either using Bluetooth or by entering the recipient’s ID number and the amount. In the latter case, the transaction generates a 10-digit cryptographic hash that encodes the parties to the transaction and the amount. To receive it, the recipient has to enter that code into their own card. WhisperCash’s other main product, a secure chip that sticks onto a SIM card, turns a phone—even a cheap “feature phone,” of the type common throughout the developing world—into a wallet for digital cash.

The key to making this work on a technical level is security—not so much from outside attackers but from the person holding the money. The main danger for any digital currency is the so-called double-spend problem, where someone spends the same money over and over again, wrecking the system. Anyone holding a digital cash device has a powerful incentive to try to hack past its defenses against double spending.

The device “is the user’s enemy,” Dragomirescu says. “The user will try to double spend, will try to counterfeit money, will generally try to bypass any limitations.”

Dragomirescu acknowledges that WhisperCash, like every piece of hardware ever built, can’t offer perfect security. The realistic goal is to make it so expensive and time consuming to hack the chip that no one would bother. Any version of state-backed money will involve restrictions on how much can be stored on a device and how much can be moved in a transaction—similar to the way in which American banks are required to report cash withdrawals or deposits above $10,000. Even if a hacker managed to unlock a digital cash wallet for double spending, it would be hard to actually spend the money, because everyone else’s device would still be capped.

At this point, the barriers to digital cash are political, not technological. Government officials tend to like being able to monitor who spends what. In the US, lawmakers remain freaked out about criminals taking advantage of crypto, despite law enforcement’s growing success in catching them. In that environment, a digital currency that’s even more resistant to surveillance will be a tough sell.

The ECASH Act tries to anticipate these concerns. It specifies that digital cash must be “subject to existing anti-money laundering, counterterrorism, Know Your Customer, and financial transaction reporting requirements and regulations.”

Privacy is not the only selling point for hardware-based digital cash. Because it doesn’t have to connect to a network, it would work even in places with no internet access or in the event of a natural disaster (a prospect that grows ever likelier thanks to climate change). For that reason, the near-term future of the technology is most likely as an offline backup option for central bank-issued digital currency. So far, that’s WhisperCash’s market. “I think the first wave of customers will be countries where there’s concern about natural disaster risk or there’s large parts of the country that are not online,” says John Kiff, a former analyst at the International Monetary Fund and an adviser to WhisperCash. In that situation, people would need to be able to make transactions with no internet access, but these transactions would have still have to be periodically uploaded to the central bank.

The question of whether the public deserves true digital cash is ultimately philosophical. It depends on whether you believe that people should have the right to a degree of privacy in their personal finances—and that as life shifts ever more online, and our purchases generate detailed data that merchants and marketers eagerly sweep up, the government should take the initiative to carve out a zone of confidentiality that even it can’t pierce.

The supporters of the ECASH Act want to force Congress to take a stand on the issue. “Protecting the liberties that we have always enjoyed with physical cash in a digital form is going to be essential to preserve the liberties that we already have,” says Rohan Grey. “If people want to get rid of privacy, they should probably own that.”