To be widely acceptable and therefore successful, electronic cash systems will ultimately have to strike a balance between anonymity and traceability. Traceable e-cash would make it harder to commit many crimes but would also threaten users' privacy. Completely untraceable digital cash would pose new difficulties for law enforcement agencies.
Although physical cash has certain properties of an anonymous medium, its anonymous use is significantly constrained by the following considerations:
- Bulk: large amounts of money take up a certain amount of space. The U.S. Bureau of Printing and Engraving, for example, no longer prints bills in denominations greater than $100, so a million dollars roughly fills up a large briefcase. This sort of bulk sometimes helps authorities track money.
- Transactional delays: the process of transferring, verifying, and counting bills takes at least a few seconds. For larger quantities, the times required are even less trivial.
- Palpability: physical cash cannot be transferred over a computer network, and transferring it securely to a remote payee takes time and resources that may render the process somewhat visible.
- Traceability: if law enforcement authorities know the serial numbers of bills being tracked, financial institutions may be able to help identify the next person who deposits them.
These properties can hamper certain types of criminal activity, including mugging, kidnapping, and other forms of extortion. One of the major challenges for a kidnapper, for example, is to get the payer to provide ransom in an anonymous form. With physical cash, the problem can be difficult: if the payer and the police cooperate, it can be hard to transfer a briefcase full of bills--despite even the coercive leverage of the kidnapper. Moreover, once the bills have been transferred, spending them without being identified is often troublesome because the serial numbers may well have been recorded. For muggers, too, it is not easy to remain anonymous after getting victims to hand over their loot. What's more, the mugger is limited to the anonymous money in the victim's pockets and perhaps to a few hundred dollars more obtained from a risky trip to an automatic teller machine and its camera.
E-cash and its problems
By contrast, with completely anonymous e-cash, the criminal's problem would be reduced to obtaining anonymous use of any one bank account. This might be achieved by setting it up under a false identity before an attempt at extortion began or by using a third party's account. Either way, once the account had been set up, the payer-victim would put the money in it, either directly or through the criminal, who would withdraw the money in a completely anonymous form.
Money laundering, too, is hampered by physical cash and would be made easier by a completely anonymous electronic counterpart. Currently, if people suspect that the government is tracing physical cash, they may be forced to transport it to a foreign financial institution that will not continue the trace and there exchange it for different bills. This may be quite an inconvenience. With anonymous e-cash, money-laundering would be as simple as depositing one set of electronic "coins" in an account under an assumed name and withdrawing another set from the same account.
Moreover, it is now difficult for criminals to transport large amounts of money from one country to another; its sheer bulk makes it awkward to get past customs inspectors. With anonymous e-cash, however, it would be easy for a payer in one country to transfer funds to an overseas payee who would never have to explain where they came from.
Furthermore, consider the case of counterfeiting. With physical cash, even someone ambitious enough to acquire all the information, materials, and equipment needed to make apparently perfect counterfeit bills still has a problem: they would have serial numbers duplicating those of legitimate bills or made-up serial numbers that did not match those on any legitimate bill. In the former case, banks would eventually notice the existence of two or more bills with the same number and alert the proper authorities--in the United States, the Secret Service. In the latter, banks could in theory find out about the counterfeiting by comparing the numbers of bills they received with a database of legitimate numbers.
In completely anonymous e-cash systems, though, if a digital minting key used to create electronic coins were compromised, the result would be counterfeit cash indistinguishable from the legally "minted" electronic variety. So long as the system managers were unaware that the digital minting key had been compromised, the counterfeiting could go on undetected. Of course, once system managers became aware of the crime, they could shut down the system temporarily, cash in the old money, and start up again with a new minting key. But there would be only one sure-fire way for them to find out that they had a problem: namely, observing that too much money had been deposited into accounts given the amount minted legitimately, together with the presumed amount of money currently in consumers' pockets and wallets.