Michael J. Casey is the head of CoinDesk's Advisory Board and a senior blockchain research adviser at MIT's Digital Currency Initiative.
The following article was originally featured in CoinDesk Weekly, a custom newsletter delivered every Sunday exclusively to our subscribers.
Among the barrage of comments that followed Libra's circus on Capitol Hill last week, a brief tweet by lawyer Marco Santori summarizing the core problem confronting Facebook's crypto contest – and for that matter
To understand why Facebook and its 27 Libra partners are in this dilemma, let's go back to the bitcoins roots – to the core problem, Satoshi sought Nakamoto to solve. It is there in the subheading of the famous white paper: "electronic money".
Satoshi followed a Cypherpunk dream. He or she wanted to bring privacy to digital payments, to translate the offline experience of cash transactions into the online realm. The idea: a user doesn't have to prove his or her identity to perform a transaction with anyone else on the Internet – just as it is not necessary for me to show a document showing that I'm Michael Casey every time I hand over some dollar notes to someone.
This does not apply because anyone using money or bitcoin is a launderer who avoids law enforcement, but because identification is a real barrier to trade. If society has an interest in identifying people – that economic law enforcement would argue – then we have to realize that this comes with a huge balance in terms of prior economic activity.
Think of the $ 2 billion "banned" adults from the world's developing countries, the people that Libra apparently will serve. Lack of education, bad credit record and untrustworthy issued IDs mean that these people cannot qualify for accounts with local banks (mainly because the local banks themselves are forced to adhere to strict international "knowledge of customer" procedures so they are not cut off by their foreign bank colleagues.) For a large number of the world's adults, identity is a very real barrier to trade.
But you can also think of billionaires running Wall Street's hedge fund or the giant banks and brokerage trading on their behalf. None of the guys will have their identities revealed when they place a purchase or sales order for a stock, bond or commodity. The market will only trade against them.
Identity also limits fungibility. As I have stated before, money is most useful if the past is unknown. Any dollar, or single bitcoin, must be worth the same as any single dollar or bitcoin. However, if I receive a dollar or bitcoin that may later be the subject of a legal or enforcement due to its involvement in a previous transaction, the uncertainty associated with it will by definition reduce its usefulness. This leads to a depletion of monetary fungibility. As to why there is a problem, just ask someone with an account with a brokerage or other entity whose assets are frozen for any criminal or civil action they themselves had no involvement.
So, privacy is important. If we are to bring digital, boundless commerce to the widest possible user base and expand the global economy, we must strive for privacy.
Privacy Tech meets increased surveillance
Unfortunately, bitcoin has not achieved sufficient privacy, at least in its original form. Why? Because the public ledger is, well public.
When combined with "know your customer" procedures with legally compatible encryption exchanges, traceability means that a user can be relatively easily linked to previous transactions when identified in any way by those on and off the ramps.
This is the problem that led to the creation of cryptographic curves with more robust privacy protectors such as Zcash and Monero, along with the invention of bitcoin mixers and potential side solutions for obscure transaction paths such as mimblewimble.
In fact, it is quite remarkable that while regulators are expanding their role over cryptographic curves – see the Financial Action Task Force's new rules for disclosure – and demanding increasingly user-identifying information, cryptocurrency developers are running in the opposite direction: towards more privacy, more self-custody , more trustworthy exchange solutions, more user autonomy. They strive for the goal of electronic money.
Here is the catch: If you are not based on a completely decentralized, lawless system, it is impossible to assure you users of privacy. If nodes that maintain the big box are identified as belonging to a particular list of authorized validators – e.g. The Libra Association is 28 members – authorities can, and will, require the identity of the users when they so wish, or they will have transactions censored or reversed. They will do so to meet the targets of money laundering or terrorism, or more cynically, they will make such demands to only claim control of the population (such as digital surveillance in China.)
Facebook's David Marcus, as the identifiable representative of An American company, of course, had no opportunity, but to make it difficult for Facebook's Libra application, Calibra, to meet the KYC requirements and collaborate with anti-money laundering initiatives. It was a legal no-brainer. However, it was nothing at all, as the police with only a small cross-border cooperation would be able to keep his word by the Libra Association members themselves.
Where is "don't worry, we are centralized" page of the bifurcated argument Santori referred to. It's the insurance that says "you know where to find me."
The problem is that the American people – and, in addition, their lawmakers – are kind of schizophrenic in these cases. This is due, rightly, to the fact that privacy also becomes a growing concern with regard to technology companies' data collection, and especially with Facebook. It was quite striking – in fact, satisfying – to see how many questions from lawmakers dealt with these concerns, seeking assurances that Calibra would not exploit people's personal data.
Essentially, Marcus' answer was: "Don't worry, we're decentralized." The idea was that the structure simply wouldn't allow a member to invade a user's privacy.
So it's a contradiction, but one that by definition doesn't occur in bitcoin or other decentralized cryptocurrencies, which can say much more accurately, "you don't know where to find me." (In fact, it is not "me" in such cases.)
What do we want?
In many respects, this contradiction is not a function of Facebook's involvement in this project or Libra's structure itself, but of competing public interests. We can't have our cake and eat it too. We cannot at the same time insist on absolute privacy and power to intervene in transactions to catch bad money.
I think the answer lies in a combination of technologies, system design and a more creative approach to regulation that, unfortunately, does not yet exist.
The hope lies in tools such as zero-proof and in emerging "self-asserting" identity concepts, as well as in a more open-minded regulatory model for limiting crime – one that does not depend on revealing people's personal identifying information.
But this is a way off; they will require user adoption and; To a large extent, believe in them by policemen.
For now, David Marcus and his cohorts have no choice but to continue speaking from both sides of the mouth.
David Marcus image via the House Financial Services Committee