Privacy –vs– Anonymity

My friend and business partner, Manny Perez holds elective office. As New York State politicians go, he is an all around decent guy! The first things colleagues and constituents notice about him is that he is ethical, principled, has a backbone, and is compassionate for the causes he believes in.

Manny wears other hats. In one role, he guides an ocean freighter as  founder and co-director of CRYPSA, the Cryptocurrency Standards Association. Manny-guitar-sWith the possible exceptions of Satoshi Nakamoto and Andreas Antonopoulos, Manny knows more about Bitcoin than anyone.

But Manny and I differ on the role of privacy and anonymity in financial dealings. While he is a privacy advocate, Manny sees anonymity —and especially civilian tools of anonymity—as a separate and potentially illegal concept. He is uneasy about even discussing the use of intentionally architected anonymity in any financial or communications network. He fears that our phone conversation may be parsed (I agree) and trigger a human review (I agree) and that it could be construed as evidence of promoting illegal technology. This is where we differ… I agree, but I don’t care how anyone who is not party to a private conversation construes it! Yet, I see anonymity as either synonymous with privacy or at least a constituent component. You can’t have one without the other.

Manny was raised in Venezuela, where he was schooled and held is first jobs. He was involved in the energy industry. He acknowledges that experience with a repressive and graft-prone government, lead to a belief in a more open approach: free markets coupled with a democratic government.

Perhaps this is a key source of our different viewpoints. Manny comes from a repressive land and has come to respect the rules-based structure within his comfort zones of banking, energy and government. He is a certified AML expert (anti-money laundering) and believes strongly in other financial oversight rules, like KYC (Know Your Customer) and RICO (Racketeer Influenced and Corrupt Organizations Act).

Because Manny is appreciative of the opportunity and benefits conveyed by his adoptive country, he may overlook a fact that whispers in the minds of other privacy advocates: That is, we may one day need protection from our own government. After all, who but a conspiracy nut or white supremacist could imagine the US government suppressing its populace. Sure, they engage in a little domestic spying—but if you have nothing to hide, why hide at all?!

This week, Manny posted an open letter to the cryptocurrency community. His organization, CRYPSA is at the intersection of that community with law, technology and politics. His letter addresses privacy, anonymity and transparency, but the title is “How can you report a stolen bitcoin?” For me, the issue is a non-sequitur. You needn’t, you shouldn’t, the reporting superstructure shouldn’t exist, and in a well designed system, you can’t.* More to the point, the imposition of any centralized reporting or recording structure would violate the principles of a decentralized, p2p currency.

To be fair, Manny is not a sheep, blindly falling into line. He is shrewd, independent and very bright. But in response to my exaggerated and one-dimensional Manny, I have assembled some thoughts…

1. Privacy, Anonymity and Crime

Bitcoin pile-sThe debate about Bitcoin serving as a laundering mechanism for cyber-criminals is a red herring. Bitcoin does not significantly advance the art of obfuscation or anonymity. There have long been digital E-golds and stored value debit cards that offer immunity from tracking. They are just as easy to use over the Internet.

Moreover, it’s common for crime or vice to drive the early adoption of new technology, especially technology that ushers in a paradigm shift. The problem with linking Bitcoin to crime is that it drives a related debate on transparency, forensics and government oversight. This is a bad association. Transparency should be exclusively elective, being triggered only after a transaction—if and when one party seeks to prove that a payment was made or has a need to discuss a contractual term.

On the other hand, a good mechanism should render forensic analysis a futile effort if attempted by a 3rd party without consent of the parties to a transaction. We should always resist the temptation to build a “snitch” into our own tools. Such designs ultimately defeat their own purpose. They do not help to control crime—Rather, they encourage an invasive government with its fingers in too many people’s private affairs.

CRYPSA is building tools that allow Bitcoin users to ensure that both parties can uncover a transaction completely, but only a party to the transaction wishes to do so!. For example, a parent making a tuition payment to a college can prove the date, amount and courses associated with that payment; a trucker or salesman with a daily expense account can demonstrate to his employer that a purchase was associated with food and lodging and not with souvenirs. And, of course, a taxpayer under audit can demonstrate whatever he wishes about each receipt or payment.

But in every case, the transaction is opaque (and if properly secured, it is completely anonymous) until the sender or recipient chooses to expose details to scrutiny. I will never accept that anonymity is evil nor evidence of illicit intent. Privacy is a basic tenet of a democracy and a government responsible to its citizens. CRYPSA develops tools of transparency, because commerce, businesses and consumers often need to invoke transparency—and not because any entity demands it of them.

We are not required to place our telephone conversations on a public server for future analysis (even if our government saves the metadata or the complete conversation to its clandestine servers). Likewise, we should not expose our transactions to interlopers, no matter their interest or authority. The data should be private until the data generator decides to make it public.

2. Reporting a Transaction (Why not catalog tainted coins?)

Manny also wants to aid in the serialization and cataloging of tainted funds, much like governments do with mass movement of cash into and out of the banking network. This stems from an earnest desire is to help citizens, and not to spy. For example, it seems reasonable that a mechanism to report the theft of currency should be embedded into Bitcoin technology. Perhaps the stolen funds can be more easily identified if digital coins themselves (or their transaction descendants) are fingered as rogue.

The desire to imbue government with the ability to trace the movement of wealth or corporate assets is a natural one. It is an outgrowth of outdated monetary controls and our comfort with centralized trust-endowed. In fact, it is not even a necessary requirement in levying or enforcing taxes.

Look at it this way…

  1. Bitcoin transactions are irreversible without the identification and cooperation of the original payee (the one who received funds). Of course, identification is not a requisite for making a transaction, any more than identification is required for a cash purchase at a restaurant or a newsstand.
  2. There are all sorts of benefits of both anonymous transactions and secure, irrevocable transactions—or least those that cannot be reversed without the consent of the payee. This is one of the key reasons that Bitcoin is taking off despite the start-up fluctuations in exchange rate.
  3. Regarding the concern that senders occasionally wish to reverse a transaction (it was mistaken, unauthorized, or buyer’s remorse), the effort to report, reverse or rescind a transaction is very definitely barking up the wrong tree!

The solution to improper transactions is actually quite simple.

a) Unauthorized Transactions

Harden the system and educate users. Unauthorized transactions can be prevented BEFORE they happen. Even in the worst case, your money will be safer than paper bills in your back pocket, or even than an account balance at your local bank.

b) Buyer’s Remorse and Mistaken transactions

Buyer beware. Think before you reach for your wallet! Think about what you are buying, from whom, and how you came to know them. And here is something else to think about (issues that are being addressed by CRYPSA)…

i.   Do you trust that the product will be shipped?
ii.  Did you bind your purchase to verifiable terms or conditions?
iii. Is a third party guarantor involved (like Amazon or eBay)?

All of these things are available to Bitcoin buyers, if they only educate themselves. In conclusion, “reporting” transactions that you wish to rescind is a red herring. It goes against a key tenant of cryptocurrency. It is certainly possible that a distributed reverse revocation mechanism can be created and implemented. But if this happens, users will migrate to another platform (call it Bitcoin 2.0).

You cannot dictate oversight, rescission or rules to that which has come about from organic tenacity. Instead, we should focus on implementing tools that help buyers and businesses identify sellers who agree to these extensions up front. This, again, is what CRYPSA is doing. It is championing tools that link a transaction to business standards and to user selective transparency. That is, a transaction is transparent if—and only if— the parties to a transaction agree to play by these rules, and if one of them decides to trigger the transparency. For all other p2p transactions, there is no plan to tame the Wild West. It is what it is.

* When I say that you should not report a stolen coin, I really mean that you should not run to the authorities, because there is nothing that they can do. But this is not completely accurate.

20130529_102314a1. There are mechanisms that can announce your theft back into a web of trust. Such a mechanism is at the heart of the certificate revocation method used by the encryption tool, PGP (Pretty Good Privacy). CRYPSA plans to design a similar user-reporting mechanism to make the cryptocurrency community safer.

2. Authorities should still be alerted to theft or misuse of assets. They can still investigate a crime scene, and follow a money trail in the same way that they do with cash transactions, embezzlement or property theft. They can search for motive and opportunity. They have tools and resources and they are professionals at recovering assets.


 

Disclosure: Just like Manny, I am also a CRYPSA director and acting Co-Chairman. (Cryptocurrency Standards Association). This post reflects my personal opinion on the issue of “reporting” unintended, unauthorized or remorseful transactions. I do not speak for other officers or members.

Is the US dollar backed by more than Bitcoin?

Bitcoin is getting to be a frequent topic here at AWildDuck.* Regular readers know that I am bullish on the exchange medium. Not just as an investment, but as an emerging world currency. And, as the story continues to unfold, the fundamentals just keep getting better and better.

Bitcoin has been around since late 2010. Less than 3 years. As an immature exchange medium, its wild swings make it too volatile to be recommended in any portfolio with short term objectives. But with bungling at the largest and earliest exchange and a perceived tie to the criminal bazzar, Silk Road, events have muddied the inevitable path toward legitimacy. They amplify the small risk and delay widespread adoption.

I’m cool with that, because with widespread misunderstanding comes opportunity for those that see the long term picture—especially when it comes to a tectonic paradigm shift. As a long term investment, Bitcoin is a slam dunk. It can’t go down, any more than an original Rembrandt can lose value in the long run.

But, what surprises me, is that three years on, we are still faced with pundits who fail to appreciate the dramatic tipping point that is looming just down the road. They point to volatility rather than fundamentals. Perhaps, most frustrating, they point to the lack of government backing or a central bank as a deficit rather than a bonus and—in fact—the Raison d’être.

Bitcoins are backed by something even better than US dollars

Backing that beats US dollars

Here is a new article from a credible source that ought to understand the intersection of technology with economics:

When armchair analysts dig into the risk or folly of Bitcoin as a currency or investment, I bite my tongue. (Well, not this time!).

Let’s talk about item #2, If Bitcoin fails, it has no safety net. The argument is built around a premise that Bitcoin is backed by the “expectation of acceptance by others” while the US dollar is backed up by something more tangible (e.g. a government that can “step in”). That premise is wholly ludicrous. Both the dollar and Bitcoin have value that is backed by nothing tangible. And Bitcoin wins handily on the intangibles.

Background

In 1933, Teddy Roosevelt ordered Americans to redeem all private reserves of gold for printed notes. Americans were no longer allowed to own gold coins, bullion or certificates. (That left only the gold content of industrial products, jewelry and ornaments). For the next 40 years, the US insisted that it was still on a “gold standard”, because it amassed a stockpile of gold bullion in Fort Knox, Kentucky. With this as collateral, the government guaranteed the value of printed currency and it pegged the dollar value of what it printed. Of course, it was a guarantor only in theory, because it was illegal for US citizens to redeem their gold. They weren’t even allowed to own gold overseas.

From 1934 until the early 1970s, the value of a dollar was fixed at 1/35 oz of gold. In other words, the US government was effectively promising foreign treasuries the foreign trade settlement was bound by the transfer of gold at a value of $35 for each oz.

The dollar’s relative stability throughout the post war era was a result of the Bretton Woods agreement in which a large number of nations pegged their own currencies to the US dollar.* In fact, the value of the dollar increased, even though it was still worth 1/35 oz of gold. Everyone trusted the USA to maintain the value of its own currency with something. Most hoped that it was the gold at Fort Knox, but some economists say that it didn’t really matter, because the US was such a dynamic and growing economy, with a history of predictable inflation. And therefore, it had a high degree of trust.

But as we approach the ’70s, trust probably accounted for more dollar purchasing power than gold. In 1971, under Richard Nixon, the US terminated convertibility of the dollar to gold, even for foreign banks. By 1973, the US decoupled its currency from gold altogether, and in 1974, Americans could, once again, legally buy gold in any form.

So, what backs the dollar today? In academic jargon, it is a fiat currency.* To economists, it is backed by the full faith and credit of the US government. But in reality, this just means that the US can print or borrow more money to pay past debts. In truth, it is backed by something, but that something is no more than what backs a Bitcoin: It’s value is based on the confidence of the person accepting or saving the coin that it will be accepted in the future by someone else—and at a rate they can believe in today.

But wait! Though both the US dollar and Bitcoin are fiat money—backed only by the perception of buyers and sellers, in fact, Bitcoin has the distinct edge…

Why Bitcoin?

Why is the long term value of a Rembrandt painting unlikely to tank? To retain value, any asset must meet two criteria: Limited availability and precious to behold (I use art as a metaphor—preciousness can be anything valued by a pool of perspective owners). Bitcoin is a limited commodity by pedigree and it is precious because of a vast trust-matrix built on a foundation of mathematics. When a two-sided market develops around something with a provably limited supply, trust becomes more durable than decree.

Bitcoin is the future of currency because it has the edge in all areas: it can be more certainly trusted, it offers an advantage to saving, it is a stateless exchange medium and requires no backing. This isn’t to say it is not backed… In fact, it is backed by solid mathematical principles that are open to peer review.

In the long run, the dollar is a weaker and more risky currency than Bitcoin. It has no natural cap and is subject to counterfeiters and manipulation by the people who authorize its printing. A wallet or bank cannot easily be provably “backed up” and its value inflates rather than deflates with adoption. Although armchair economists who focus on protectionism, exceptionalism, or short term objectives may see some of these things as benefits, they are all serious deficiencies.

Advantage: Bitcoin

Ellery Davies is editor of awildduck.com. He is a frequent contributor
to The Wall Street Journal, Yahoo News, CNet and PC World.

Past Posts about Bitcoin

* Resources