Author: Hal Finney
Source: https://nakamotoinstitute.org/library/digital-cash-and-privacy/
The original article was published in August 1993.
I agree with "Anonymous" that there are currently problems with the practical use of electronic currency. However, to some extent, it also depends on what problems you want to solve.
One concern I have about migrating to electronic payments is that it will compromise personal privacy because it makes recording transactions much easier. Someone could build an answer to track the spending patterns of every single one of us.
This is already the case: when I order goods via my phone or computer and pay with my Visa card, there's a clear record of how much I spent and where I spent the money. As time goes on, more and more transactions will be recorded this way, potentially leading to a major privacy breach.
Paying cash via mail is indeed possible, but it's neither secure nor convenient. I believe the convenience of credit and debit cards will outweigh most people's privacy concerns, and we'll end up in a world where a vast amount of information about people's private lives is generated.
This is where I see the potential in electronic cash. Imagine a system similar to Visa, where I am anonymous to the bank. In this model, the bank grants me credit, like a credit card. However, instead of giving me an account number that I can access via my phone or attach to an email, it gives me the right to request electronic cash on demand.
I kept some electronic cash on hand and used it for a few transactions. When I ran out of cash, I emailed the bank to get some. Every month, I sent a check to the bank to cover my account expenses, much like the credit card experience. My relationship with this bank was very similar to my relationship with credit card companies today: frequent withdrawals and monthly billing.
But compared to the systems we use today, such an electronic cash system has several advantages. It leaves no record of where I spend my money. Banks only know how much I withdraw each month; but I can spend it immediately or leave it unspent, and they won't know. For some transactions (such as software), I can be anonymous to the vendor; for others, the vendor might know my home address, but still no central authority can record everything I buy.
(It also has a security advantage. In today's absurd systems, anyone could buy anything in your name simply by knowing your 16-digit account number and an expiration date!)
Moreover, I believe there's nothing that would preclude such a system from being as legal as a credit card. The only difference is that it can't track where users spend their money; as far as I know, this capability has never had significant legal implications in credit cards. Of course, no one today would deny that governments have a vested interest in facilitating an environment where every financial transaction can be tracked.
Of course, such electronic cash cannot offer complete anonymity. It's still possible to roughly know how much each person has spent (while it's impossible to prevent users from withdrawing far more cash than their monthly expenses, only to incentivize them with interest; but perhaps, the person could also lend out excess electronic cash and earn interest elsewhere). Furthermore, it's rooted in the customer/supplier model criticized by "Anonymous." However, I believe this model represents the core of electronic transactions, both today and in the near future.
It's also worth noting that becoming a merchant that accepts credit card payments is no easy feat. A few years ago, a company I worked for went through this process. We sold software via mail orders, which made credit card companies very nervous. Back then, there were many phone scams: spending months collecting a large number of credit card numbers and then suddenly demanding huge payments. By the time users received their monthly bills and complained, the supplier had disappeared. To get credit card terminals, we visited a company that claimed they could "help" us get started. They seemed like the kind of shady business. We had to misrepresent the purpose, saying that 50% of our products were sold at trade shows, which would obviously be considered off-site sales. And we had to prepay $3,000 (apparently as a bribe). Even then, without an office in the business district, we probably wouldn't have been able to get it done.
In an electronic cash system, this might not be a problem. The main issue with electronic cash is double-spending, which can be completely prevented as long as you're willing to verify online (which is reasonable for any business that needs several hours to ship a product). Therefore, merchants no longer have the opportunity to collect credit card numbers first and then commit fraud. (There might still be instances of merchants refusing to ship, so not all risks are eliminated). This could ultimately lead to wider adoption of electronic cash than current credit cards.
I don't know if such a system could be used to support illicit transactions, tax evasion, gambling, and so on. Those are not the purpose of this proposal. It provides the benefits of enhanced personal privacy and security, within a framework that may be legalized, and that is enough.
