Digital Money vs. Digital Cash

This article is part of a six-part educational series in cooperation with the non-custodial, peer-to-peer Bitcoin exchange Vexl.

“Everyone has the right to own property alone as well as in association with Others.” – UN Convention on Human Rights, Article 17(1)

When listening to the majority of current Bitcoin discourse, it seems most value that BTC has a fairly fixed market cap: A digital asset that cannot be inflated by Government decree. The real landmark invention in Bitcoin, however, is not that it is a decentralized asset that is hard to tamper with – it’s that it is a monetary value that can be exchanged freely on the internet without an intermediary, just like cash.

Cash has a lot of favorable properties. It’s hard to seize depending on how well it is kept secret, it can’t be denied by a cashier because some AI algorithm has decided you engaged in wrong speak, and it is available to anyone, regardless their place of birth or nationality.

But cash is hard to transfer over distances. For a truly cypherpunk internet, in which anyone has the same rights to access, a money that was based on the same properties as cash was needed to prevent arbitrary censorship. 

As countries around the world slowly shift toward cashless societies, it is these arguments that are often neglected. Instead, Governments argue, a cashless society based on digital money can offer all the benefits of digital payments – namely fast transfers and less risk of loss of funds – while offering none of the benefits of physical money. 

The Risks of Digital Money

It is broadly estimated that in the US, only 10% of money in circulation exists in physical form. This means that the majority of our financial transactions are already made electronically – from Google- and Apple Pay to PayPal, Venmo, and debit or credit transfers. 

All of these transactions are already monitored by compliance programs and financial intelligence officers, so from a surveillance perspective, a switch to actual “digital money”, as in a monetary system based on tokens, such as issued by a CBDC or private stablecoin providers like Circle or Tether, is not much of a downgrade.

The difference between electronic money as it exists in societies today and digital money is that digital money is programmable. Imagine, for example, that the state had placed some form of penalization on you – say you are under criminal investigation and should remain in the city. With programmable money, the state would now be able to block any payments you attempted to make for travel, such as train or plane tickets. 

While some may argue that this would be a powerful tool to ensure compliance with state sanctions, we should remember that you may like whoever is ruling your country today, but that doesn’t have to be the case tomorrow. With programmable money, the state could enforce bans on any kind of item it deems unfavorable for specific people, from alcohol and cannabis to firearms.  

Payment Cards, Digital Identities & Social Credit

In several German states, asylum seekers are now provided with a state-issued payment card which limits cash withdrawals to 50€ per person and 25€ per minor. Local politicians want to go even further, asking for the cards to be programmed to deny the purchase of alcohol and tobacco. In the UK, asylum seekers are provided with a similar card that limits cash withdrawals for some and outright bans cash withdrawals for others. 

In the US, the Department of Homeland Security is currently phasing in REAL ID, a 9/11 era program that aims to ensure data consistency across states. In reality, REAL ID is set to revolve around mobile drivers licenses that provide law enforcement with real-time access to a person’s data. As the primary form of identification, a mobile drivers license would enable law enforcement to see whenever a person showed their ID at age-restricted venues and for age-restricted purchases, such as bars or nightclubs.

The consequences of such programmable money in combination with digital identities can currently be seen in China, where citizens increasingly face travel bans for low social credit scores. Every misdemeanor, such as jaywalking or failing to pay a court bill, lowers a person’s trustworthiness. This, in turn, may land people on a “Dishonest Persons List”, restricting them from purchasing property, traveling certain train lines, or taking out a loan.

According to the HRF, 138 jurisdictions are currently exploring CBDC programs to implement programmable money. The differences between digital cash, like Bitcoin, and digital money, like CBDCs and stablecoins, could not be starker.