When I get a check or ACH direct deposit, I can go to the ATM and get cash out of it and spend that cash, so while there is a record of "I got paid" and "I withdrew $200" (and "I paid my credit card bill, and here's what I bought with it"), for the things I buy with cash, there's no more record than that.

Can I do the same with digital dollars, or must it be spent directly out of the account?

I guess that's actually a practical question in general, independent of the privacy concern. Can you go to any member bank and withdraw cash?