There’s big business in distributing your stimulus check. Most people will get it through direct deposit at a bank. But it could also arrive via a payment app, like Venmo or CashApp, which have vied to receive your “stimmies” over the past year with promises of cash advances that cut down on the wait. Then there are checks printed and mailed by the government. But that process is slow and usually means some company has to cash it for you, maybe for a fee. Depending on whom you ask, the system for handling your stimulus looks like classic American competition or predation.
Last spring, during debate over the first round of payments, some progressive lawmakers proposed an alternative: The government would distribute relief directly as digital dollars. This would require no extra printing of physical dollars or minting of coins; no checks would need to be mailed. The government would open accounts for people directly at the Federal Reserve, which people could access for free with the help of local banks or even the post office.
It’s an odd concept, considering most dollars we deal with are already electronic. But those Venmo balances and credit card debts are not actual dollars and cents; they’re representations of money held by or owed to banks. When we deposit money in a checking account or buy GameStop stock, those banks adjust the lines on their ledgers, and occasionally physical dollars change hands between them. But the only time we experience the Platonic ideal of the US dollar is through physical coins and paper.
A digital dollar, however, would have an inherent value, just like physical cash. It would be the thing itself, not a representation of something else. There are many forms that could take. One option, and perhaps the easiest to visualize, would involve a digital token stored on your phone or some other piece of hardware, like a debit card. When you buy something, you would send that token electronically to the other person, not unlike handing a physical dollar to a cashier. Or it could be account-based, where transactions involve credit and debits directly to your Federal Reserve account.
Some countries, including China and Sweden, are testing versions of this idea. The Bahamas has already released a central bank digital currency, or CBDC, which it calls the Sand Dollar. Dozens of others are considering experiments. In the US, the digital dollar proposal didn’t end up in last year’s relief package, but both Federal Reserve chair Jerome Powell and Treasury secretary Janet Yellen have spoken approvingly of the concept in recent months. There are plenty of details to work out. Who will oversee digital coinage? How will it connect to private banks and payments services? Will anybody even care to use it? “It has to be as good as the other payment systems or even better,” says Peter Bofinger, an economist at the University of Wurzburg in Germany. No guarantees there.
Another problem: Digital payments have a hard time staying private. When we make payments using bank accounts and credit cards, we make a Faustian bargain: convenience in exchange for the knowledge that our transactions will be visible to the companies involved. Every swipe and transfer leaves a trail. But we also know that our information is at least a few layers removed from law enforcement. Even government officials can see the problem with removing that distance. “It’s not something that would be particularly attractive in the United States context,” Powell told lawmakers last year. “It’s not a problem in China.”
In China, officials have coined a concept of “controllable anonymity” for the digital yuan, in which participants in transactions are anonymous to each other, but the central bank can unmask all those transactions. There are ways that governments could make those transactions more private—ways of organizing these systems and advanced cryptography to reduce the amount of information they share. But it’s hard to make guarantees. That’s unlike physical money, which works offline—and, for the most part, anonymously.
Helping people without bank accounts “sounds very bleeding heart, but what if the end result is a surveilled bank account system?” says Rohan Grey, a professor of law at Willamette University who has worked on digital dollar proposals, including the one last spring. “Suddenly now you’re talking about building a monetary system where every transaction could be stored as data and create a robust social graph of the United States.”
Those concerns are as old as digital money. In 1994, my WIREd colleague Steven Levy profiled David Chaum, a cryptographer and inventor of a digital form of money called e-cash. His idea was that, instead of papers and coins, people would carry around digital tokens stored in dedicated devices that might look like a debit card or a key fob, or they could send them by email. (This was well before smartphones.) Chaum’s primary concern was how to keep those transactions secure and private using cryptographic controls. But at the time, a digital dollar issued by the US government wasn’t in the cards. “When I called a spokesperson for the Federal Reserve to ask about electronic cash, he laughed at me,” Levy wrote at the time. “It was as if I were inquiring about exchange rates with UFOs.”
That was before payments apps like Paypal, before Bitcoin, and before Facebook proposed Libra, now called Diem, which promises a form of private currency designed to remain within the walls of its vast digital fortress. It was before, in other words, central banks had much competition. In China, for example, private payment systems such as Alipay and WeChat Pay are near-ubiquitous. A government-issued digital yuan could allow competitors, such as traditional banks, to muscle their way into payments and would also potentially give the Chinese government more visibility into the nation’s economy.
Another impact of that competition is the dwindling use of physical cash. In Sweden, for example, officials view the e-krona as a way to ensure that money remains accessible to the public even in a world where physical cash is hard to come by. Otherwise, there might come a time when buying groceries, saving for retirement, or receiving a welfare check would depend on the strength of private financial networks. Even as it fades from view, public money also offers a kind of backstop in dire times. During the pandemic, fewer people are using cash, but the amount in circulation has actually increased as people stock up from ATMs. Cash is a safe haven—risk-free, so long as you pick a good hiding spot.
But would a digital currency be a replacement for cash? In a paper published last month titled “On the Possibility of a Cash-Like CBDC,” researchers at Sweden’s Riksbank argued that, no, it wasn’t really possible. The reason: privacy. Regardless of how a digital currency is designed, they wrote, someone would have to keep track of transactions to prevent what’s known as the double-spend problem—a digital equivalent of counterfeiting. In other words, digital transactions need to be tracked using some kind of ledger. And with that, it would be impossible to ensure absolute privacy, even with efforts to conceal details of transactions or the identities of the parties involved. With bits and bytes, there’s always the potential for a backdoor or a leak.
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In theory, it would be possible for people to transact without leaving a trace, using forms of secure hardware, on which people could load their digital dollars and transact without connecting back to any centralized system. But current forms of secure hardware aren’t fault-proof and raise security concerns, explains Neha Narula, director of the Digital Currency Initiative at MIT, 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 setting sights on perfection can set up false expectations. “We’re approaching it as digital cash. But that doesn’t mean we’re trying to get beyond cash or replace cash,” she says.
It’s possible to get very good privacy for digital payments, says Ari Juels, a cryptographer at Cornell University who has studied digital currency designs for central banks. But it’s unclear how much privacy governments will permit and how much privacy will compromise efficiency and security. In a recent paper, Juels and colleagues evaluated the potential of privacy-preserving techniques such as zero-knowledge proofs, used in cryptocurrencies like zCash, for wider public payments. Scaling those methods will be difficult, and there’s no guarantee that they can’t be gamed or hacked—perhaps unwittingly to users. “I am not too optimistic about technology alone solving this problem,” Juels says. He thinks the most robust protections will likely come from laws that prevent the government from unfettered access to transactions made using private banks or credit cards.
If anything, the privacy debate reinforces the importance and uniqueness of cash as a financial instrument. “The coins in your pocket are the best guarantee of your freedom,” Grey says. But people should continue pushing for offline and anonymous digital cash, he adds, despite the technical hurdles. A “near enough is good enough” strategy, as he puts it, may lull people into thinking that the government is providing a digital equivalent to physical cash and stop asking important questions about the differences. “Is there a list of transactions that somebody can de-anonymize? Can somebody turn that system off?” he asks. “Average people need to be thinking about those questions.” As for anything that involves storing your financial history at the Federal Reserve, the Swedes have it right, he says: Don’t dare call it cash.
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