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The biggest problem of the balance – CoinDesk



Michael J. Casey chairs the CoinDesk Advisory Board and Senior Advisor on Blockchain Research at MIT's Digital Currency Initiative.

The following article was originally published in CoinDesk Weekly, a newsletter created especially for our customers, which is delivered exclusively to subscribers every Sunday.


Among the commentaries accompanying Capitol Hill's Libra circus last week was a single tweet by lawyer Marco Santori that summarized the core problem of the Facebook cryptocurrency project ̵

1; and in this case – Um To understand why Facebook and its 27 Libra partners are in this dilemma, we return to the roots of Bitcoin – the core problem that Satoshi Nakamoto sought to solve. It's right there in the subheading of the famous white paper, "Electronic Cash."

Satoshi pursued a Cypherpunk dream. He / she wanted to protect the privacy of digital payments in order to transfer the offline experience of cash transactions to the online area. The idea: A user does not have to prove his identity to make a transaction with someone else on the Internet – just as I do not have to submit a document every time that proves that I'm Michael Casey when I hand over a few dollar bills to someone.

This is not important because anyone who uses cash or Bitcoin is a money launderer who escapes prosecution, but because identification is a real barrier to trade. If society has an interest in identifying people – as financial officials would argue – we must acknowledge that this involves a huge compromise on outstanding economic activity.

Data Protection Issues

Think of the 2 billion non-bank adults from the developing world, the people the Libra is supposed to serve. Lack of education, poor credit ratings, and untrustworthy state-issued identification papers mean that these individuals can not qualify for accounts at local banks (mainly because these local banks themselves are forced to follow strict international procedures to know their customers, so they will not be cut off by their foreign counterparts.) For a very large number of adults around the world, identity is a very real barrier to trade.

You can also imagine the billionaires who run Wall Street's hedge funds or the giant banks and brokers acting on their behalf. None of these guys wants to reveal their identity when they place a buy or sell order for a stock, bond, or commodity. The market will only act against them.

Identity also restricts fungibility. As I said earlier, money is most useful when its past is unknown. Every single dollar or bitcoin must have the same value as any other single dollar or bitcoin. However, if I receive a dollar or a bitcoin for which a claim to enforcement may be made based on participation in an earlier transaction, the uncertainty associated with it will by definition reduce the benefit. This leads to a depletion of monetary fungibility. To find out why this is a problem, just ask someone who has an account with a broker or other institution whose assets have been frozen for a criminal or civil action in which he himself was not involved.

In order to make digital, limitless commerce accessible to as broad a user base as possible and to expand the world economy, we must strive for the protection of privacy.

Privacy technologies meet increased surveillance

Unfortunately, Bitcoin failed, at least in Germany, to achieve sufficient privacy protection in its original form. Why? Since his public ledger is public.

In combination with the procedures for getting your client to know about a compliant crypto-exchange, its traceability means that a user can be relatively easily connected to previous transactions once they have been identified at any point from these entries and exits.

This is the problem that has led to the creation of cryptocurrencies with more robust data protection such as Zcash and Monero, along with the invention of bitcoin mixers and potential sidechain solutions for obfuscating transaction paths, such as Mimblewimble.

Indeed, it is noteworthy that regulators are simultaneously expanding their jurisdiction over cryptocurrencies – see the new disclosure rules of the Financial Action Task Force – and more and more user-identifying information is calling for developers of cryptocurrencies to take the opposite direction: more privacy, more self-governance , more trustless exchange solutions, more user autonomy. They aim for the goal of electronic money.

The Centralization Contradiction to Decentralization

Here's the catch: if you do not build on a completely decentralized, permissionless system, it's impossible to ensure this privacy user. If the nodes holding the ledger are identified as belonging to a specific list of authorized auditors – e.g. The 28 members of the Libra Association – Authorities can and will demand the identity of users if they so wish or if they have censored or canceled transactions. They will do so in order to achieve the objectives of combating money laundering or terrorism, or more cynically, to enforce control of the population (eg digital surveillance in China).

David Marcus of Facebook, As an identifiable representative of a US-based company, he naturally had no choice but to swear that the Facebook Libra application Calibra meets KYC requirements and works with anti-money laundering initiatives. It was a breeze. However, it was not so important, because law enforcement agencies can, with a little cross-border cooperation, bring it to its own using the members of the Libra Association.

Therein lies the "Do not worry, we are centralized. "This is the argument to which Santori alludes. It is the certainty that "you know where to find me".

The problem is that the American people – and more broadly the legislature – are schizophrenic on these issues. This is because data protection is rightly becoming more and more important with regard to data collection by technology companies, and Facebook in particular. It was quite conspicuous – satisfying indeed – to see how many questions lawmakers dealt with these concerns as they reassured themselves that Calibra would not exploit people's personal information.

Essentially, Marcus answered, "Do not worry, we are decentralized. "The idea was that the structure does not allow a member to invade a user's privacy.

It is therefore a contradiction that by definition does not occur within Bitcoin or any other decentralized structure. Cryptocurrencies can say much more precisely: "They do not know where to find me." (In fact, there are such No "me".)

What do we want?

In many ways This contradiction is not a function of Facebook's involvement in this project or the structure of Libra itself, but competing public interests. We can not have our cake and eat it too. At the same time, we can not insist on complete privacy and the power to intervene in transactions to catch bad guys while laundering money.

I think the answer lies in a combination of technologies, system designs and a more creative approach to regulation, which unfortunately does not exist yet.

The hope lies in tools such as knowledge-free evidence and emerging "self-sovereign" identity concepts, as well as a more open regulatory model to curb crime – one that does not depend on revealing people's personal identification information. they require a user adoption and; still largely the faith of politicians to them.

For the moment, David Marcus and his cohorts have no choice but to keep talking from both sides of the mouth.

David Marcus's image via House Financial Services Committee


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