Will Banks Ever Be Digital Privacy 'Heroes'?

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I read a moldy oldie from American Banker's archives, and it damn near broke my heart.

The 1995 article serves as a poignant reminder that digital cash has long been feasible – as in a payment system that eliminates the inefficiencies and costs of physical money and ensures true privacy while preventing counterfeiting.   

The subject was David Chaum, the legendary cryptographer and founder of a company called Digicash, which according to the article was "the first to demonstrate payments over the Internet." A few passages jumped out at me:

Banks are uniquely placed "to take the technological possibilities in hand, create a market, and steal the show," Mr. Chaum said. … "I tell bankers that if they offered customers something that looked after their interests, they might be able to create the kind of relationship that Apple got with its Macintosh. Some people just love that company, and that's not something you see in banking or credit cards."

Just swap in "iPad" for "Macintosh" and that quote sounds like something you hear all the time today.

Here's how American Banker described the digital cash Chaum was pitching:

Ecash is not designed to handle transactions that people would prefer to put on credit cards. … Ecash, in fact, appears as coins on the computer screen. Banks would serve as Ecash issuers, certifying that coins used to pay for, say, a downloaded picture or piece of software have not been illicitly duplicated.

And this is how Chaum dissed a rival digital-cash system:

"The (Mondex) system conceivably could be used to find out about your transactions and build a dossier," Mr. Chaum said. "As a participant, you are not in control, you are not empowered to protect your own interests."

The last few paragraphs really hit home for me:

"Privacy is just a part of the more general notion of people controlling their side of a transaction, protecting their financial interests against mistakes, against (dissemination of) unnecessarily detailed information about them and what they are doing," he said.

"My mission is to create a market for this sort of thing, and the best way to create it is on the demand side – by letting people know what is available to them, so they can control their lives and not be a passive participant [sic] in someone else's game."

If only bankers would be bold enough to be the empowerers, Mr. Chaum said, "they'd be heroes."

Well, that didn't quite happen, now did it? 

By all accounts the Ecash technology worked brilliantly, but it was a hard sell for banks. Digicash eventually went bankrupt. That's life. That's business. But it's disappointing that today there's no mainstream version of the virtual cash envisioned by Chaum and others at the time

Sure, we can securely make payments online with our credit cards, through online banking, or via PayPal. But all these methods require leaving a record of purchases. And, as I argued in my previous post, once paper bills and metal coins are gone, if the only payment options are traceable ones, we're all going to go nuts.

The decentralized, unregulated Bitcoin system offers a way to perform transactions online anonymously. But it requires a bit of a learning curve to use, as I found out last year, and merchant acceptance is limited. More troublingly, there's speculation in the Bitcoin community that a government crackdown is nigh, as politicians, financial regulators and law enforcers have made noises about the system's potential use for money laundering and the illicit drug trade.

If Washington were to tread on Bitcoin, it might be reassuring if the U.S. Mint then took a page from its counterpart in Canada and tried to co-opt crypto-currencies. In other words, copy elements of the technologies developed by cryptographers like Chaum and Satoshi Nakamoto (Bitcoin's pseudonymous creator), and issue a virtual, anonymous, untraceable version of the Greenback. But there would have to be absolutely no "back doors" permitting the government to somehow identify the holders. Don't even think about it, Joe Biden.

Who am I kidding? Given the bipartisan disregard for privacy in Washington, a federal electronic cash program that ensures anonymity seems exceedingly unlikely. 

Will major financial institutions stick their necks out and try to become the privacy "heroes" Chaum spoke of? It's hard to imagine in the current environment. After the recent fines and regulatory orders against banks for money laundering violations, the big debate was whether executives should be locked away in cages. Certainly, it's unfair that the government takes a light touch with megabanks when it routinely throws the book at people like a mom-and-pop check casher in Los Angeles and a Somali immigrant who wired less than $1,500 back home. But there's been scant examination of the notion that financial services providers should spy on their customers and report "suspicious activities" to the authorities in the first place.

The bulwarks of financial privacy may have to be unsanctioned networks like Bitcoin, and/or start-up companies run by youngsters brave (or naïve) enough to test the legal and regulatory limits (a la Uber or Airbnb). If such innovators were to succeed in the marketplace, would the facts on the ground make a government clampdown politically unpalatable? If so, would banks then follow them into the world of digital cash?

The interrelated struggles between disruptive innovators and regulated incumbents, between new technologies and old habits, between financial crimes enforcement and financial privacy, are going to make one of the great stories of the coming years. And that's why I'm excited to tell you that Jon Matonis will be regularly writing op-eds on emerging payments methods and banking opportunities for BankThink and our sister publication, PaymentsSource.

Jon brings a unique perspective to these topics. He's worked both in financial services (including stints at Visa and the Chicago branch of Sumitomo Bank) and in the privacy-enhancing technology field (he is a former CEO of Hushmail, an encrypted email service). I think he's going to provoke a lot of thought, discussion and debate on these pages – which is what we're all about.

Ladies and gentlemen, Jon Matonis.

Marc Hochstein is the Executive Editor of American Banker. The views expressed are his own. Follow author on Twitter @MarcHochstein

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