dbts: The Economic Cause of Privacy

[Robert Hettinga <rah@shipwright.com>]

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Date: Mon, 19 Oct 1998 11:20:38 -0400
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From: Robert Hettinga <rah@shipwright.com>
Subject: dbts: The Economic Cause of Privacy
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At 7:45 AM -0400 on 10/19/98, Anonymous forwarded this to the dbs list:

> see http://www.zolatimes.com/V2.23/anonymittext.html

It's just another financial privacy rant, though a relatively decent one. It's
from J. Orlin Grabbe, who was at FC98, BTW. When I met him at S&PBank's party
at Cap Julaca, he seemed like a nice, though fairly intense, guy. Financial
privacy *makes* you intense, I suppose.

Nonetheless, like all financial privacy rants, Orlin's reverses cause and
effect, but it's not really his fault.


Remember, the reason we have no financial privacy these days is because we
have book-entry settlement, which relies on biometric identity, known physical
location, and the force of a nation state as the ultimate "error-handler" to
prevent repudiation in the transaction protocol.

The reason we have book-entry settlement itself is because it is several
orders of magnitude cheaper than physical delivery of paper bearer
certificates.


The *only* way to have financial privacy in a book-entry world is to engage in
the financial equivalent of steganography, which, no matter how financially
and legally facile -- even elegant -- it is, at the margin it costs more to
hide money than not to. It will always cost more in a book-entry economy, and
for structural reasons.

Worse, most of these accounting and legal gyrations are just plain old
security by obscurity, something most crypto-clueful people learn, fairly
early on, to treat with the utmost scorn and derision.


If my hypothesis is right, and digital bearer settlement is significantly
cheaper than book-entry settlement, say three orders of magnitude cheaper,
then financial privacy will be the default state of affairs sooner or later.
It will actually cost *more* to keep transaction records and the physical
location of economic actors than not to. No amount of physical force, much
less law, accounting, or "policy", will change that physical, economic, fact.
A fact which every economic actor, from the smallest proprietor to the largest
nation state, will end up ignoring at their peril.

The reason digital bearer settlement will be faster, and thus cheaper, is
because the cryptographic protocol breaks before the transaction can. Unlike a
book entry protocol, where you can execute a trade and then renege on it
later, causing bounced checks, charge-backs, broken trades, DKs and the like,
software using a digital bearer protocol can execute *only* if both parties
cannot renege on the transaction in the first place.

One of the best guarantors of that inability to renege is, paradoxically,
cryptographically certain anonymity. Immediate and final clearing and
settlement means that you tend not to care who you've done business with in
the first place, but cryptographic anonymity not only makes the transaction
stronger and safer, it is the very enabling technology of the process, the
thing which makes digital bearer transaction settlement the fastest, and,
systemically, the cheapest transaction technology to use.

Again, it's just like air travel. You can go very fast on land, much faster
than it takes to fly even without wings, as sound-barrier-breaking speed
records show us. But, the physical, economic fact is, people can travel the
fastest and cheapest over the longest distances when they fly, so that's what
they do. They don't fly just because the view's nicer, or, as I've joked
before, "to slip the surly bounds of earth".

And, most important, this economic reality, that economics ultimately
determines a technology's use, is true no matter what the intent is of any
airplane -- or bearer protocol -- designer.


The cost of anything is the foregone alternative. One of costs of book-entry
settlement is privacy, surely, but in a world of strong financial cryptography
and ubiquitous geodesic networks, the primary cost of book-entry settlement is
wasted time and computing resources. Costs which will eventually force the
adoption of digital bearer transaction settlement, giving us ubiquitous
financial privacy -- and freedom -- as a result.

Effects of our technology, in other words. Not its cause.

Cheers,
Bob Hettinga



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Robert A. Hettinga <mailto: rah@philodox.com>
Philodox Financial Technology Evangelism <http://www.philodox.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

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-----------------
Robert A. Hettinga <mailto: rah@philodox.com>
Philodox Financial Technology Evangelism <http://www.philodox.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'