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December 16, 2021

Digital identities could be a solution to the privacy issues of a cashless society

By GlobalData Thematic Research

The trade of goods and services has come full circle

We are once again moving towards a cashless society, but not in the form of the bartering systems of the past. Instead, digital payments are replacing notes and coins.

Physical banknotes have become a rare sight in many regions, with Asia and Europe leading the pack and countries like Sweden projected to be fully cashless by 2023. The shift to digital spending was facilitated by technological developments, for example, the introduction of digital wallets, NFC capabilities, and digital-only banks. It has since been further catalyzed by COVID-19, as many stores during the pandemic mandated contactless-only payments, acclimatizing consumers to cashless transactions even more. Cashless payments will continue to thrive, with consumers recognizing the convenience they offer beyond just the hygiene concerns of handling cash in the aftermath of the pandemic.

Cashless transactions are the norm for Gen Z but privacy is at risk

Gen Z has grown up with the operations of neobanks that challenge traditional practices. GlobalData’s 2020 banking and payments survey found that over half of those aged 18–24 prefer non-traditional providers for their main current account (think Starling, Monzo, or Revolut). However, along with the convenience, security, and budgeting benefits of a cashless society, there exists one key dystopian element: surveillance.
Privacy breaches are a threat from corporations, sovereign bodies, and hackers. This will pose a particular risk within authoritarian regimes that could trace, monitor, and infringe on its population’s privacy.

We continue to detach from the gold standard

Despite privacy concerns, the shift towards a cashless society seems inevitable as we move further and further away from the gold standard. The boom of the cryptocurrency market (as it surpasses a $3 trillion market cap) is another indicator of investments moving into a digital financial system. The underlying blockchain technology of cryptocurrencies presents the best solution to the privacy obstacles of a cashless society. Many blockchain components are specifically designed to protect consumers’ privacy and common solutions include ZKPs, zk-SNARKs, commitment schemes, and ring signatures—all of which give individuals control over how their personal data is kept and used.

Blockchain-based digital identities present the best solution to privacy concerns

These decentralized digital identities (DIDs) act as a new way of identity management that allows users to create and manage multiple digital identities. Control over data sharing is left to the user. DIDs also simultaneously solve the other big issue of a cashless society: those who have no proof of identity or are under/un-banked can still create a digital identity for transactions. However, there is still a long road ahead until DIDs are perfected and met with comprehensive legal and regulatory frameworks. One thing is clear though, transparency from authorities will not be enough to secure a cashless future. Instead, trustless technology-backed systems are paramount.