In a research paper, a Federal Reserve Bank economist argues that cash-like private transactions are needed.

In a research paper to be published in the Review of the Federal Reserve Bank of St. Louis, now available as an early edition article, economist and Research Fellow Charles Kahn argues that cash-like private transactions are needed.

"Privacy in payments is desired not just for illegal transactions, but also for protection from malfeasance or negligence by counterparties or by the payments system provider itself," says Kahn in the abstract.

"Proposals to abolish cash take inadequate account of these legitimate demands for privacy. While central banks can play a useful role in setting standards for payments privacy, they are unlikely to have a comparative advantage at providing privacy. Therefore the replacement of cash by central bank electronic money is likely to spur demand for alternative means of payments to solve specific privacy problems."

Here, Kahn is referring to the possibility that central banks could one day issue their own e-money, perhaps based on the same blockchain technology that powers Bitcoin and other cryptocurrencies, and eventually phase physical cash out. This possibility was mentioned, for example, in a recent European Parliament report.

Of course, the desire for private, untraceable transactions can be motivated by illegal or criminal intentions. "If you live in a country where the classification of activities as legal or illegal is generally in accord with your own moral standards, then you'll tend to favor abolition of this kind of privacy," notes Kahn.

This doesn't apply to the residents of countries with morally questionable governments, which unfortunately exist and will continue to exist. It's important to remember that, in some countries, people can be jailed (or worse) for doing things that would be perfectly legal elsewhere.

Kahn also realizes that there are valid reasons for wanting to keep transactions private. "It is not hard to think of examples," he says: "a purchase indicating that the individual has high wealth, or a purchase that may be embarrassing, even if perfectly legal (certain medications, for example)."

"The ability to make a transaction without revealing your identity is therefore useful even when the transaction is legal. Cash is a simple way to make that possible."

However, Kahn is persuaded that governments and central banks will not be able, or willing, to provide privacy for the electronic replacement to cash.

This seems evident indeed. In fact, contrary to open and permission-less cryptocurrencies like Bitcoin, "Central Bank Digital Currencies" (CBDCs) would likely be closed and permissioned currencies monitored by the authorities.

I think it's quite likely that central banks will issue CBDCs controlled by the government, and that CDBCs will make the financial system as a whole more efficient. But the citizens won't consider CBDCs as a replacement for cryptocurrencies. On the contrary, they'll still use Bitcoin and other real cryptocurrencies for private transactions.

Kahn conclusion is:

"Not all of the privacy provided by cash is bad, and if cash disappears we will need new ways of providing that privacy. Because privacy needs are different in type and degree, we should expect a variety of platforms to emerge for specific purposes..."

Kahn recognizes that citizens want private payments, for valid reasons. This is, I think, a step in the right direction.

Picture from Wikimedia Commons.

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Crypto Insider Editor Giulio Prisco is a writer specialized in science, technology and business. He is persuaded that crypto has the potential to bring disruptive positive changes to the internet and society at large.

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