You’ve probably read about Zcash. It’s the new kid on the bitcoin block, a cryptocurrency with the added special sauce of genuine anonymity rather than the pseudonymity that got some people into trouble for using the Satoshi system for a variety of nefarious purposes. The claim of the founders is that Zcash is electronic cash because it shares the characteristics of cash, such as fungibility. Transactions remain confidential unless the counterparties real their addresses by “selective weakening” of the cryptographic protection. Now, I am sceptical about whether confidential transactions will get much traction in the mass market, but that does not mean that do not have a point.
“If you start with a perfect electronic cash system building block, then you can build an electronic cash system with selective weakening in a way that makes sense for society.”
From ZCash Will Be a Truly Anonymous Blockchain-Based Currency – IEEE Spectrum
Adam Back is, as you would expect, completely correct about this. An electronic cash system that is going to offer some forms of privacy must be built on a truly anonymous infrastructure. You can’t do it the other way round. But… a truly anonymous infrastructure provides ample opportunities for mischief and some of this mischief might be of significant harm to society as whole. So what will happen?
Trying to think this through, it seems to me that there is something of a paradox here in our mental transaction models. We want our transactions to be anonymous because we are good people but we want other people’s transactions to be tracked, traced and monitored because they might be criminals. Obviously we don’t want child pornographers and terrorists to have access to anonymous electronic cash but we do want freedom fighters and oppressed minorities to have access to electronic cash.
So how might this paradox be resolved? Well, one option might be to assume that the anonymous cash will be used primarily by criminals and possession of it will be taken to be prima facie evidence of criminality. Thus law enforcement resources can be targeted. Remember, in an anonymous world no-one knows you’re a dog but no-one knows that you’re from the FBI either. Hence you could argue that anonymity can actually help law enforcement to carry out old-fashioned police work (and since no-one knows you’re a bot either, I’d assume that the police will have large-scale big data analysis and pattern recognition and machine learning and all sort of other things to help them). It’s not at all clear to me that a terrorist child-pornographer will be any further beyond the reach of the law because their cash is anonymous, but I’m open to debate.
What about the mass market though? As I wrote before, I can envisage an environment where some kind of what I generically refer to as “zerocash” is in existence but is never used in its “raw” state, because people, companies and governments will only use the privacy-enhanced layers on top of it.
In Zcash, there are two types of addresses, “transparent” and “shielded.” The transparent addresses and the amounts sent to and from them show up on the blockchain as they would in bitcoin. But if a user opts to use a shielded address, it will be obscured on the public ledger. And if both the sender and receiver of funds have opted to use shielded addresses, the amount sent will be encrypted as well.
From How Zcash Tries to Balance Privacy, Transparency in Blockchain | American Banker
The reminds me a little of the idea for light transactions and dark transactions that artist Austin Houldsworth put forward. The idea that counterparties can choose whether a transaction is visible or not is interesting and under explored. Whether Zcash succeeds or not, and I have no relevant knowledge to help me to decide one way or the other, the general principle strikes me as unlikely to vanish and it makes consideration of the institutions and structures that are needed in the presence of anonymous electronic money all the pressing.
This discussion takes me back to the early days of Mondex and DigiCash, when the new era of electronic money began. As indeed, did the Consult Hyperion Tomorrow’s Transactions Forum. Next year will be the 20th annual Forum (so block out 26th and 27th April in your diaries right now) so I think it will appropriate to set up an informed discussion about electronic money and anonymity to see if we can come up with a narrative for the future that makes sense for finance, technology and society. Stay tuned.
Snippings 