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Anonymity is a cherished quality

Categories : Uncategorized
December 6, 2017
Tags : Cash restrictions, Central Bank, Cryptocurrency, Currency, Privacy and anonymity
Central banks must not ignore cash's capacity to protect people's privacy and anonymity and this should become a key topic of discussion for any future debates about an all-digital central bank-issued currency.
Viktoria Dijakovic

A growing number of countries are justifying their move to impose cash restrictions and the demonetization of larger denominations by citing the fight against crime and fraud as the culprits. They state that it is mostly criminals and tax evaders that make use of cash, but where are the numbers? Right; there are none. Indeed, there has yet to be a serious study that proves or disproves the link between cash and crime. With the little data available, it has actually been shown that there is no direct correlation between cash usage and the shadow economy. In fact, Germany being one of the biggest cash users in the EU has a shadow economy equal to 12.2% of GDP compared to 13.2% of Sweden. In Austria the shadow economy amounts to only 8.2% of GDP.

The suitcase full of greenbacks is more of a Hollywood obsession than reality. Undeniably, criminals and tax evaders have long ago found other ways to circumvent the law. Just look at the example in Greece where businesses evaded taxes thanks to POS terminals that sent money to Bulgaria via Malta or the miserable $16 billion (1%) of $1.6 trillion of laundered money that is caught by the financial system. It’s hard to imagine how all that money travels in briefcases each year.

And although the anonymity of cash is often the target for anti-cash, or less-cash supporters, this unique attribute should be seen as just that: as a positive and unique attribute. Sure, it has its downsides when it comes tracking shady transactions, but most bills are settled by honest, taxpaying citizens that simply don’t care to have all their purchases tracked – and that’s not trivial.

In fact, bitcoin’s initial attractiveness was indeed its anonymity and its independence from any government or financial system. That is no longer the sole reason for its popularity (i.e. its high speculative potential), but it is definitely an quality that central banks should take into consideration as the world becomes increasingly digitalized. Some central banks have already started exploring digital solutions for their currencies that could be used interchangeably and in parallel to tangible money. But if they are to go in that direction, anonymity and financial censorship should become central to this debate.

As JP Koning says in his blog “When central bankers monopolized the issuance of banknotes in the 1800s and early 1900s, little did they know that a hundred years later anonymity would become an important public good.” Banknotes are also uncensored, he continues, “this means that [they] are available for anyone to use—i.e. they are highly resistant to censorship. There are no gateways involved, no need to get permission ahead of time by opening an account or installing some sort of proprietary software or hardware, and no way for the issuer to halt a payment while it is being made.”

So although there is much talk about bitcoin and cryptocurrencies, none currently respond to all three pillars necessary to make money currency: medium of exchange, store of value, and standard of value (i.e. agreed upon medium of exchange allowing for transactions between economic entities). Meanwhile, an all-digital central bank-issued currency that mirrors all of cash’s attributes, including anonymity and censorship, would allow central bankers to continue providing the public service they have committed to offering since the 19th century. As Konig writes “in this context blockchain technology isn’t anything special, it’s just another technology among many that central bankers might use to upgrade the quality of the public services that they are already providing.”