We need to replicate the unique properties of cash in the digital realm

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Cash is censorship resistant. It’s the only payment mechanism where you don’t need anyone’s permission to spend it. Will we miss it once it’s gone?

This question is urgent as we move rapidly into the digital realm. Governments are considering the introduction of central bank digital currencies (CBDCs), and the exact ways in which these electronic equivalents of physical money will work are now being determined.

Governments and central banks must answer this: If physical cash is no longer relevant – which seems the most likely route – it means that our historic right to make payments undetectable or censored by the state would die on the same day. ?

The drop in cash at the store level

ATM withdrawals are still 30-40% lower than before Covid. Many wonder if this drop in retail cash means a digital equivalent needs to be launched. However, the exact characteristics that a CBDC would have are political questions, not dry questions of economics or technology.

This is because it is completely unclear that a CBDC that has no real cash features would meet a realistic unmet consumer need. So we risk the worst of all worlds: building expensive new CBDC systems that are not accepted by consumers. We also risk the possibility of a public reaction when citizens realize that a huge amount of their money has been spent on initiatives that hasten the end of their historic right to make payments to whomever they want without having to ask for permission.

In countries without mature payment infrastructures, the case for CBDC is easy to make, with or without the slightly political overtones. However, the reality is that electronic payments work very well in most of Europe and the UK. It’s so easy to tap and pay on your card that you might be wondering what issues are left to be solved. However, what is often missed about the architecture of the payment card networks is that every payment involves an “authorization”: every time you tap, there is an opportunity for your bank to say “no”. Cards alone don’t offer the same features as cash; you never have to worry about your cash payment “not going through”.

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Indeed, since people trade with each other, it is possible to trade directly, without the consent of a third party. If cash has to disappear, something has to replace it. We will regret the loss of the unique property that cash, and no other payment method, gave us. We may regret not pushing harder today to ensure that the digital cash replacement was real cash, with all the good — and bad — that entails.

After all, the ability to hold and spend cash without authorization is not just a source of personal freedom and privacy; it is also a driver of crime and terrorism. So it’s completely natural for policymakers to see the demise of cash as an opportunity to fight back against the forces of darkness. However, it would be a historic tragedy if we also wiped out all that is good.

In short, sooner or later we need an informed debate about the right balance between freedom and law enforcement. Who can spend money without permission? How much are they allowed to execute or hold trades? Where and on what could such digital money be spent?

Convenience vs. Privacy

An honest answer to my argument would be to say, “If consumers appreciate the uniqueness of cash that much, they have a funny way of showing it!” One lesson technologists learn — often to their dismay — is that what consumers say they want and what they do next are two completely different things. In this case, consumers prefer the convenience of electronic payments over the privacy and freedom of physical payments.

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However, if cards are so easy to use and cash increasingly cumbersome, is it safe to apply this rule of thumb and conclude that consumers won’t complain if their right to keep their transactions private is gone? In a world that feels like nothing is private and with growing concerns about data privacy, it seems safer to assume that consumers will continue to expect to be able to pay for some items or services without feeling like they’re being watched. So it seems reasonable to insist that a digital form of cash has this property.

Collaboration between public and private sector is essential

It would be natural for policymakers to instinctively fear a system that would allow people to make payments that cannot be traced or blocked. Some central banks have even claimed that they see CBDCs as a new kind of money, not a substitute for cash. But if a CBDC doesn’t have some element of this capability, my prediction is it will fail. There would be no reason for consumers in mature economies to adopt such a thing. So whether a CBDC is positioned as a new form of money or a replacement for the oldest form of money – cash – it is still important to analyze through the same lens of consumer attractiveness.

If the private sector itself could provide a real cash-like product, we wouldn’t need this debate. However, the reality is that the mainstream private sector alone cannot provide this kind of financial privacy without significant support and involvement from government policy. It may therefore come as no surprise that the only digital cash-like systems in use today are Bitcoin and the systems it inspired: completely outside the control and oversight of the government, with no restrictions on how “censorship resistance” becomes. applied.

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The irony, therefore, is that it is only possible by enabling a certain amount of cash in a CBDC, with all that goes with it, that governments and central banks retain a critical role when the last cash payment ever is made. created.

Successful digital money substitution requires real partnership between the private and public sectors. Fortunately, these relationships are strong and active. For example, R3, like other companies, is working on these issues and has participated in trials of various models of CBDC delivery. In the case of R3, the Corda enterprise blockchain is being used for multiple projects around the world, most recently Project Jura.

With all of this in mind, I think we’re in a time where the delicate, political question of “what should cash actually be?” is rapidly becoming the question that will determine the implementation of the future monetary systems of entire countries.

Richard Gendal Brown is the chief technology officer at R3.

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This post We need to replicate the unique properties of cash in the digital realm

was original published at “https://venturebeat.com/2022/07/09/we-should-replicate-the-unique-properties-of-cash-in-the-digital-realm/”

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