Both Alice and Bob should have the option to remain anonymous in relation to the payment. Furthermore, at the second level, they should have the option to remain completely invisible to the mere existence of a payment on their behalf. Anonymity ensures the privacy of a transaction on multiple levels. Beyond encryption, this optional untraceability feature of digital cash promises to be one of the major points of competition as well as controversy between the various providers. Transactional privacy will also be at the heart of the government's attack on digital cash because it is that feature which will most likely render current legal tender irrelevant.
If digital currency were fully untraceable, it would open up opportunities for abuse that are not available to criminals now. In the physical world, money is bulky. In the physical world, it is possible to follow people, so a kidnaper can potentially be caught if the currency is marked, if the money was being observed on location, or if the serial numbers were recorded. Fully anonymous cash might allow opportunities for counterfeiting and fraud.
On the other hand, traceable digital cash would give enormous power to the government and the credit agencies. Currently, credit card charges can be monitored and compiled to create a portfolio on you and all of your purchases. Cash is free from this threat. With non-anonymous electronic cash, there is the fear that ALL transactions will be recorded, and that consumers will lose all purchasing privacy.
Already, public and private sector organizations acquire extensive personal information and exchange it amongst themselves. Individuals have no way of knowing if this information is inaccurate, outdated, or otherwise inappropriate, and may only find out when they are accused falsely or denied access to services. New and more serious dangers derive from computerized pattern recognition techniques: even a small group using these and tapping into data gathered in everyday consumer transactions could secretly conduct mass surveillance, inferring individuals' life-styles, activities, and associations. The automation of payment and other consumer transactions is expanding these dangers to an unprecedented extent.