The numerous discussions about the current trend of digitalizing money, which in many countries will imply the extinction of paper money, touch on various aspects of this transformation: payment systems (in the country and its interoperability with other countries), digital security, privacy, system stability, how to conduct transactions in areas without internet connectivity, among others.
We take as a given the fact that paper money allows us to conduct anonymous operations, without the person handing over their notes for payment having to identify themselves, nor the recipient being obligated to do so. This allows for quick transactions, which is very effective for small amount payments, for example, but as we have all seen in the news in recent years in Brazil, it also allows for various illicit operations to be carried out.
In an effort to eliminate these illicit practices using paper money, there was an initiative in India in 2016 to eliminate high-denomination notes (as if the R$ 50.00 and R$ 100.00 notes ceased to exist) to see if this would eliminate transactions made in the "black market." It did not work very well and caused enormous disruption in the local payment market.
At the beginning of 2023, Nigeria launched an initiative to replace the circulating paper money. The population was given a period of ninety days to exchange their old notes for new ones. After this period, the old notes would lose their validity.
This Nigerian measure had three main objectives: to have greater control over the currency in circulation, considering that more than 80% of it was outside the banks; to control illicit operations; and, on a different level, to control inflation by encouraging the population to use more digital payment means instead of physical cash. Although setbacks occurred, such as long lines and constant extensions of the exchange deadline, only the coming years will indicate whether the objectives were successfully achieved.
Numerous experiments with currency have already been conducted. In the two cases previously mentioned, with paper money, one of the goals was to identify who holds it and understand for what purpose it was being used. When we move from the environment of paper money to digital money, be it bank balances, balances in digital wallets, or any other form, the need to identify the owner of that wallet is a requirement.
It’s as if four people were in a room and someone asked them to put the bills on the table and then mix them up. These people do not know each other and do not trust one another. Who would trust that the R$ 100.00 on the table is theirs?
How would you prove that those R$ 100.00 in paper form are the ones you had in your pocket? From the moment they are all mixed together, we have R$ 400.00 on the table, but whose are they?
An easy way would be for everyone, before putting the bills on the table, to write their names on them in order to identify them. By doing this, it would be possible to know who is the holder of each amount.
One alternative would be to use transparent boxes to store the notes individually. Each person would have their own box, protected by a lock whose keys would only be in the possession of the owner of the notes. This way, although the identity of the owner of each box remains unknown (unless they use their key to unlock it), it is possible to see the amount of money in each box due to its transparency.
In the digital realm, it works more or less like this. The difference between the money being in your name or being in a locked box that only you know you own lies in the control that the system wants to have (and here the system is understood as the regulator, owner of the system, or society in the last case).
For the regulator, who would be a fifth person sitting at the table, in the first case, that of identifying the note, he clearly knows how much is on the table and how much each person has.
In the second case, he knows the total, the individual part of each one, but has not identified the real owner of the transparent box.
Now making a parallel with the current world, the case of money with your name written on it is the money you have in the bank, for example; what is in the locked box can be understood as the cash you have in your wallet, within a Blockchain, such as that of the Ethereum network.
One of the differences that stands out between these two examples is in identifying the "owner" of the money in both cases. In the first, the regulator and everyone else knows the amount each one has. In the second, this is not possible, since the key to open the transparent box that is with me today may be with you tomorrow; there is anonymity involved.
As Central Banks intensify their studies and some are already testing the implementation of Central Bank Digital Currencies (CBDC), the discussion about the level of anonymity to be granted to people in the digital field becomes crucial.
The CBDC models I have seen, in general, are of total transparency for the monetary authority regarding who owns the money and not only the stock but also the transactions. There are some discussions to allow for the non-identification of users when it comes to small amounts, but for large amounts, I have no doubt that not only stocks will be identified, but also transactions.
The most extreme case of total identification comes from Asia, more precisely from China. Due to cultural factors (valuing the collective over the individual), the issue of privacy is not present, and the development of the Chinese CBDC, or e-yuan as some call it, must be fully identified.
In Western economies with greater concern for the individual, discussions about the best model are in full swing. On one side, individual privacy; on the other, tax issues or prevention of money laundering and terrorism.
These issues are quite complex and individual to each country/culture, which is why it is not easy to see a single system for everyone functioning soon; on the other hand, as soon as all countries define their ways of issuing CBDCs, interoperability among them may be much easier than the value transfer systems we have today.
Regarding the extinction of paper money ending our privacy, what we can see is that it is a possibility, but not a predetermined path. In recent years, several Western countries have accelerated the implementation of their rules and laws regarding the protection of individuality and privacy in the digital field. In Brazil, the main one is the LGPD (General Data Protection Law), which determined what types of data and relationships between users and service providers in the digital field must exist. This was a very important step in determining the parameters that the digitalization of currency must follow.
And this makes perfect sense when we learn that the pilot of Drex, carried out between 2023 and 2024, has as one of its main focuses testing the viability of a Blockchain network compatible with EVM. This network must comply with the guidelines of the LGPD, as well as with the regulations of 'Know Your Customer' (KYC) and anti-money laundering measures.