1/ On Thursday Nov 19 at 12:15 ET I am presenting a paper on “Financial Freedom and Privacy in the Post-Cash World” at #CatoMonCon:

https://www.cato.org/events/38th-annual-monetary-conference

Publication will come later in the Cato Journal, but here’s a thread on the key points

2/ Payments are evolving from bearer asset transactions to mechanisms of surveillance and control.

As fintech grows and cash fades, I explore the civil liberties implications of two contenders to replace the social role of banknotes:

Central Bank Digital Currencies and Bitcoin

3/ In particular, I look at how CBDCs and Bitcoin could approximate the three social roles of cash as a tool for:

a) Savings

b) Private payments

c) Small payments

4/ For context, financial freedom and privacy is being eroded across the world. Especially for the 4 billion+ under tyranny, but even in democracies.

In the US, for example, the Bank Secrecy Act and Travel Rule are part of a growing dragnet on citizen financial activity

5/ The dominant banks + fintech companies rarely face penalty for their corruption and malfeasance (just 1 US banker went to prison as a result of the Global Financial Crisis), yet the average person’s freedoms continue to shrink. And in tyrannies, citizens can't lobby for reform

6/ Decades ago people used paper money to conduct daily business, where the merchant didn't have to collect customer info.

Today payments are done via swipe, QR code, tap, or wearable, where a huge amount of info is collected and shared with merchants, third parties, and govts

7/ The rise of corporate fintech via credit cards and Venmo, Apple Pay, and WeChat easily replaces the "small payments" social role of cash, but fails at providing privacy, and doesn't replicate the savings aspect either as user funds are easily frozen and subject to confiscation

8/ This new money isn’t a central bank liability, but shifting entries on a corporate ledger. Central banks worry about waning influence in the digital age. This sets the stage for the war on cash, where traditional CB liabilities (banknotes) are phased out for fintech + CBDCs

9/ Today nearly every major govt on earth is experimenting with CBDCs. They claim this tool will give them better control over the economy, but it can also help them implement negative interest rates and “turn off” money for political opponents, journalists, or minority groups

10/ Western govts pay lip service to privacy, saying they’d like to issue CBDCs that protect rights, but they warn there must be a "balance," and that anonymity isn't possible. CBDCs in dictatorships will definitely be surveillance tools, but it also looks that way in democracies

11/ Even if a Canada/Sweden wanted to build a private CBDC, it’s not technically easy. Decentralized anonymous money isn’t possible at scale, so they must build something centralized, like Chaumian ecash. But here, even with purest intentions, authorities still control user funds

12/ Either way, most people on earth aren’t in the “lucky billion” of U.S., Europe, Japan, and a handful of other electoral democracies.

Most people’s govts will *never* implement privacy protections for CBDCs and will insist on backdoors, for AML compliance or security reasons

13/ As we can see from China, surveillance fintech can be used in the service of tyranny. The CCP is harnessing mobile payments to create an Orwellian surveillance state and launch massive social engineering projects. The Chinese CBDC, called DC/EP, is already being rolled out

14/ If fintech money is swallowing up most daily purchases, and banknotes are being replaced with CBDCs, what other options exist for financial freedom and privacy?

The Cypherpunk dream was open source private money

15/ The Cypherpunks won the "crypto wars" of the 1990s by writing code to protect communications.

Today, tens of millions of people use apps like Signal to protect their privacy, powered by Cypherpunk innovations like public key cryptography

16/ After private messaging, the Cypherpunk's next challenge was private money.

Bitcoin's 2009 birth was built on the shoulders of many earlier innovations in digital cash.

In the past decade, as it has grown into markets in every major city on earth, it has shown big potential

17/ The problem is, replicating digital cash isn’t easy.

Cash serves three social functions: a) savings, b) private payments, and c) small payments.

Today, Bitcoin is mainly being used for a), with some use for b) as a parallel global economy, but with negligible use for c)

18/ Bitcoin’s ability to replace banknotes as a way for people worldwide to “save” outside of the banking system is on full display.

And because of its scarcity-based, decentralized monetary policy, its prospects are even stronger than banknotes, which govts can easily devalue

19/ But privacy in Bitcoin is a major challenge. The system is pseudonymous, and while it doesn’t natively contain any PII, this info can be linked to addresses by exchanges and other third parties. Tech is being built to fluster this surveillance activity, but not fast enough

20/ Yes, a major upgrade to Bitcoin taking place in the next year called Taproot should facilitate some of these innovations.

But much more user-friendly Bitcoin privacy tool growth and acceptance is necessary, especially by wallets and merchants

21/ Small payments in Bitcoin are the biggest challenge. And likely won’t become feasible or common until merchants face enough customer demand to start integrating/accepting Bitcoin or second-layer tech like Lightning into payment apps.

22/ But here is where code could change the world. Just like innovators today build open source tools that prevent govts from spying, innovators of tomorrow might wield Bitcoin’s open source money to prevent govts from stealing citizen funds and microtracking our behavior

23/ For now, it is a big if. The jury is out on whether Bitcoin can replicate the privacy and small payments functions of banknotes.

It already serves the savings function for millions and has a programmable foundation, but significant social and technical challenges remain.

24/ What is certain is that CBDCs won’t replicate banknotes for most on earth. For a lucky billion, there’s a chance that public money advocates can lobby for private digital cash, and there’s a chance it can be built and function without backdoors, but that chance is small

25/ And either way, no CBDC will allow citizens to save "outside the system" as cash allows today.

For most, Bitcoin -- though far from where it needs to be -- might be the only hope of financial freedom and privacy in a post-cash world. Fin.