There has been a lot of speculation among some libertarians that digital financial transactions combined with strong encryption will eventually make it very difficult for the state to track money, and thus potentially reduce one of its major source of revenues — taxes. Others have been a bit more skeptical, noting that the U.S. government is especially tenacious about going after money launderers and is unlikely to let up any time soon.
Regardless of which side is right, one thing is for certain — the government itself is very worried about electronic transactions. Wired recently obtained a draft copy of a Treasury Department report that complains while technology will help it keep betters tabs on Americans spending habits to ferret out those hiding cash, at the same time strongly encrypted digital cash transactions could thwart such surveillance efforts.
Wired quotes the draft report as saying,
The development of new technologies — such as electronic cash, electronic purses, Internet or smart card based electronic payment systems, and Internet banking — is increasing the ability of individuals to rapidly transfer large sums of money, and could pose a challenge for FinCEN and other law enforcement agencies combating money laundering.
Both the Treasury Department and those who favor secure, anonymous financial transactions typically frame the issue in terms of the drug war, with the Clinton administration arguing financial privacy only makes the drug war more difficult to fight, while civil libertarians argue this is another example of the war on drugs taking away the civil liberties of average Americans. The more important impact, however, will be felt with the IRS which needs to be able to track income in order to tax it. Already large numbers of Americans admit they hide financial transactions from the IRS, and this number would only increase if cash transactions suddenly had the easy of non-cash transactions thanks to secure, anonymous digital systems.
One of things that would help in this area is an educational effort to let people know just how retrograde the laws currently are. For example, I doubt very few people know that if they want to use cash to make say a $10,000 down payment on a large purchase and withdraw $5,000 from a bank account on Monday and the other $5,000 on Tuesday that they have just committed a felony (in fact people unaware of the existence of this law have been prosecuted for doing precisely this).
On the other hand, it is also very ironic that for at least a couple decades the government has at time studies various ways of discouraging people from holding cash — one proposal looked at the technical feasibility of putting a strip in money so that if you get a $20 bill today, it would begin declining in value with a few days unless it was spent or deposited into an account where it could be more easily tracked. How fitting that the high technology that the government thought would make it easier to track people’s money also turns out to be a potential boon to allow them to evade such invasions of their privacy.