Editor's note: As part of CoinDesk’s Payments Week, we asked a number of engineers, executives and experts to weigh in on the substantial issues raised by the crypto industry.
As Eswar Prasad noted in his recently published book on the future of money – cash is quickly being replaced in the developed and developing world. Since 2018, for instance, China has seen mobile payments make up at least 80% of the total payments market share across its economy. The trendline is slower, but similar, in parts of Europe and the Americas.
But there are certain affordances that only cash and coins provide – namely, privacy. In this roundtable discussion, our experts wonder whether crypto can deliver on private transactions for a world where cash is dead.
Consumer choice means consumers must choose
Yes, absolutely, crypto payments can provide a similar level of privacy to cash – if certain conditions are met. One way or another, cryptographically based digital money will replace cash in consumer transactions. This is a foregone conclusion.
First, cryptocurrencies must be as easy to use as identifier-linked, noncash instruments (like debit cards) or their phone app equivalents. This ease-of-use includes time to transaction finality and being universally accepted. Currently, cryptocurrencies are not able to meet these fundamental requirements.
Second, crypto must be at least as private as paper banknotes (bearing in mind that banknotes can be traced via their serial numbers). Techniques like eCash in the 1990s were created to provide this level of privacy. (They allow an encrypted number to be modified “through” the encryption so as to assign monetary value to it, such that when the encryption is removed, it retains the modification and can be spent anonymously.)
Third, crypto must – obviously – be resistant to “double spending.” Payees need to be able to check instantly at time of payment that the currency they’re using has not been already spent elsewhere. This can be done privately without any more personal or financial details being revealed to them.
And last, crypto should likewise resist aggregation by criminal or terrorist organizations. Remedies like daily limits on consumer withdrawal amounts will not resolve the issue. One way to tackle this would be to make a digital currency cease to be fully private after it is spent the first time.
See also: Internet Privacy Is an Inalienable Right | David Chaum
Right now, central banks around the world are scrambling to create their own digital currencies (CBDCs) that will meet these requirements. Their surveys show that privacy has emerged as a top concern among citizens and bankers. One or more stablecoins may emerge that can also meet the requirements. It’s up to us – the community – to ensure that the right instruments are adopted.
– David Chaum, legendary computer scientist and creator of xx network
Monero, bearer instruments and resistance
The war on cash looks like the war on private cryptocurrencies. Governments have been slowly reducing cash’s usefulness over the last few decades with increased reporting. I fully expect them to do this more directly with cryptocurrencies, which are ultimately bearer assets. The easiest way to regulate this is through regulating exchanges, but they can also expand the definition of what requires registration.
If cash was invented today, I think governments would freak out. They prefer bank transfers where, in theory, a third-party is involved in and can be held accountable for every transaction. Cryptocurrencies reminded people that digital transfers can be bearer assets as well without a centralized intermediary, and they can even have strong privacy properties. This change is still sinking in years later.
Ultimately, the resiliency of bearer assets will depend on people’s willingness to use them. If private digital payments are only used by a small minority, then private digital payments will also be “dead.” So privacy-preserving crypto use must be widespread and circular.
Sadly, Monero is the only major name in the game of privacy. Monero had 693,425 transactions in March 2022 that hid the sender, receiver and amount. Comparatively, only 2,154 bitcoin transactions were mixed using the popular privacy tool for Bitcoin, Samourai, in that same period.
See also: Monero: The Privacy Coin Explained
The demand for private cryptocurrencies is significant, or should be. Further, I predict countries will ultimately fail to curtail the use of private digital assets despite trying to limit their use (sometimes through authoritarian means).
However, this freedom will require resistance from people who care.
– Justin Ehrenhofer, vice president of operations at Cake Wallet
Privacy will be an option for crypto, but not the default
Most cryptocurrencies in the future are likely to be transacted on open ledgers. Better key management solutions and wallets will allow end consumers to manage their public-facing addresses with more care. This will promote rotating public addresses frequently, thereby fostering privacy, while also keeping a consumer’s keys safe.
When users need privacy, they can engage smart contract mixers that can obfuscate the contents of their transaction. Nevertheless, these privacy solutions come at a small financial cost every time someone engages. Further, while I do believe cryptocurrency technologies will largely be the rails for the future of global currency, it may be very difficult to handle high amounts of transaction volume at low latency if smart contracts for privacy must be involved.
The reality is many of the greatest innovations that will occur in Web 3 (as in every industry) are creative beyond what we can currently imagine. In arenas where many may doubt the ability for a new technology to thrive, technology continues to move forward. Cash may always have a place for transactions in different regions of the world, but seamless electronic payments are where society is heading.
– Joshua Tobkin, CEO and co-founder of SupraOracles
Yes, it absolutely can. Cryptocurrency demolishes the false dichotomy between relatively decentralized, private physical payments and centralized, monitored electronic payments. Of course, this does require privacy-protecting technologies like anonymous payment channels or privacy coins – not just transparent on-chain transactions – but those are mostly solved problems.
The hard problem is making a cryptocurrency that people would actually use as money rather than a speculative asset. Bitcoin's too volatile, and stablecoins are too tied to fiat to be a real alternative.
– Eric Tung, founder of Themelio
Conversion layers create honeypots
Right now, the simple answer is no – crypto cannot deliver on similar privacy to cash. There are currently too many issues that prevent crypto transactions from replacing the fiat transactions of the current payments landscape. Notably, the fluctuation in the prices of cryptocurrencies makes it unlikely they can be a “main” payment option for most. In addition, any merchant transacting in crypto will need to convert crypto into fiat, relying on an over-the-counter (OTC) service to access liquidity. This means that anyone accepting crypto will either have to be, or partner with, a local regulated exchange that can tap into larger trading volumes – and most exchanges with sufficient liquidity are enacting know-your-customer (KYC) provisions. Further, these payment layers add hidden fees for consumers and create more spots where data could leak.
– Korapat Arunanondchi, project co-lead at EvryNet
Privacy technology is expanding across blockchains
Most commonly you’ll hear about the public ledger when it comes to blockchains, where everyone, in theory, can see transactions. A few solutions work to create truly private transactions, like Zcash – one of the first privacy coins. The creation of zk-Snarks, a “zero-knowledge proof,” in the cryptography world enables completely private transactions. This technology is being expanded to most programmable blockchains, including Ethereum and Solana.
– Kyle Zappitell, CEO of Neon
Crypto must deliver on privacy!
Crypto not only can deliver on private transactions for a world where cash is dead – it must! Crypto is the only chance we have left for a cash equivalent digital payment option that preserves privacy between sender and receiver. Without this option, society gives up yet another right to privacy. With proper tools, such as zero-knowledge proofs, the transaction can be selectively revealed later on if an audit is required for compliance. But that shouldn't mean that all transactions should be visible to everyone! We now have the technology to make transactional privacy safe and secure.
– Warren Paul Anderson, vice president of product at Discreet Labs
More from Payments Week:
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Down The Silk Road: Where Crypto Has Always Been Used for Payments
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