Six months and several million dollars processed later, Stripe informs us we’re going to be deplatformed because Wells Fargo (their banking partner) had reviewed our account (apparently because of its volume) and determined we violated their standards because of the nature of the toys.
We did a bit of back and forth where Stripe suggested we alter the colors available (seriously) to assuage Wells Fargo’s puritanical concerns, and Stripe insisted it wasn’t their moralizing, but rather Wells Fargo (paragons of fucking virtue as they are), but we weren’t willing to compromise on the nature of our product or have our product’s options or colors dictated to us by one of the most corrupt banks on the planet.
We ended up deplatforming and moving to a high-risk processor who was willing to match our competitive Stripe rate. That processor sucks and their fraud protections are weak and their interface is garbage, but they’re not telling us how to run our business.
When I shared this on Twitter, people were very surprised, and that in turn surprised me. Yes, the specific details in this case are funny, which is why I tweeted it, but it’s par for the course of what merchants on the fringes of the mainstream deal with. Before I give you my perspective, though, I have to answer the first question most people asked: What was the offending color? Well, according to the merchant, here is the message Stripe sent them:
Our banking partners recently notified us that they are no longer willing to support the sales of realistic sex toys. I understand that your products were designed to depict the body parts of mythological and fantastical creatures, and we have indicated this to our banking partners in an effort to advocate for continuing to support your business here on Stripe. As a result of these discussions, our banking partners have agreed that they are willing to continue supporting your business as long as you are not selling products that are colored such that they might be mistaken for human flesh.
With that out of the way, here’s my take. I believe Stripe when it says they didn’t want to do this but had no choice. Stripe is an incredibly user-first company, and from what I know of the people there, this is not what they would choose to do. In fact, what I wanted to highlight in sharing the anecdote was how beholden payment service firms like Stripe or Coinbase are to their banks. Without a willing bank providing access to the payments system, they have no business, and they’re rarely doing so big that they can stand up to the banks.
So why does a bank like Wells Fargo care about the color of sex toys? Well, in this particular case, who knows? Maybe it was just an especially prudish rogue executive flexing their muscles because why not. But in general, why do banks care about fringe merchants as long as their business is legal and lucrative?
The first thing to note is that fringe merchants are often not that lucrative since they’re probably correlated with higher numbers of chargebacks, etc. It might be easier and more cost-effective for a bank to prohibit a whole class of merchants than it is to police them. But that seems like a problem that can be outsourced to partners like Stripe who are well-positioned to do that kind of policing profitably.
What better explains seemingly irrational “derisking” could be the fact that banks also have someone they’re afraid of: their regulators. More specifically, though, it’s their bank examiners. Most people don’t know this, but large banks have government employees called examiners located on-site in their offices literally looking over their shoulders.
Just last month OCC chief Brian Brooks penned an op-ed lamenting that COVID lockdowns have kept examiners out of bank offices, and promising they’ll be back. Here are a couple relevant snippets:
In his 1971 book “Silent Messages,” Dr. Albert Mehrabian posited that a vast majority of a speaker’s credibility is conveyed through nonverbal cues rather than by spoken words. …
Now apply that concept in a complex discipline that requires individuals to identify risk and to assess personal motivation, which also requires the close analysis of thousands of datapoints arrayed across a variety of disciplines. That is the challenge of a bank examiner, whose work relies on open, honest and effective communication.
That communication and the relationship between examiner and banker work better in person. And because of that, bank supervision remains a high-touch business. …
As former vice chairman of a bank, I saw firsthand the value of on-site supervision. What I appreciated most was how accessible examiners were and being able to simply speak with them any time — in the hallway, cafeteria or conference room.
Examiners are there to look out for risk and ensure the safety and soundness of banks, and they can do this precisely because they don’t share the same incentives as the bank. However, their incentive might be to avoid risk at almost any cost. That’s because they’re not rewarded for taking a risk that pays off, but will get dinged for risk-taking that blows up. The result is that completely legal activities will go unbanked because examiners see them as too risky (or even politically problematic as we saw with Operation Chokepoint).
And here’s the insidious thing: An examiner doesn’t have to be explicit that he wants a bank to cut off a perfectly legal business. As Brooks points out, body language goes a long way. All an examiner has to do is start asking question about a particular customer or class of customer. No matter the answers, he can just keep asking questions and demand to see more documents, etc. At some point, doing business with those customers isn’t worth the hassle with the examiner in the office next door, and so a line of business is “derisked.” And yet the examiner never said the bank couldn’t take the risk on the legal business; they were just asking questions. Next time the examiner frowns or raises their eyebrows at the mention of a particular business, the bank executive will think twice.
In reaction to my tweet, many said this highlights why we need cryptocurrency, and that’s true. As I’ve written at length, if we are to preserve the individual privacy and autonomy necessary for an open society, we need digital cash as an escape valve from intermediated payments. That said, cryptocurrency exists today and fringe businesses are barely using it. If asked, they would much rather use Stripe. I don’t think it’s heresy to say that Bitcoin has much to improve before it can be a serious payments option.
Which leads me to a provocation. If what you care about is not not inflation-hedging or state control, and instead what you want to optimize is the ability of people and businesses outside the mainstream to be able to freely and easily engage in legal commerce without having to worry about the whims of banks or other intermediaries, then what you might want to wish for is a token-based, bearer, and anonymous digital dollar from the Federal Reserve. Official U.S. digital currency with those features could solve the problem of unjust derisking of edgy users. You could sell whatever legal product to whomever you wanted and in whatever color.
]]>My initial instinct was to use Bear, the venerable and beautiful Mac and iOS note-taking application, as the tool for implementing a zettelkasten system. I quickly abandoned that idea since there are so many new apps like Roam and Obsidian that seem custom-built for the method.
It’s not clear to me if the explosion in interest in Luhmann’s method led to the surge of new applications that make the method practical digitally, or if it’s the rediscovery by app developers of wiki-style bi-directional linking that has led to interest in Luhmann’s method. Whatever the case, there is a wave of new such tools, and as Jeremy Wagstaff has observed, this looks like a Christensen-style disruption of traditional notes apps. While some incumbents see these new entrants as merely more note-taking apps, what’s actually happening is a shift from “productivity” tools to tools for “personal knowledge management.”
So I tried them all. While both Roam and Obsidian (and some others that I tried) have a powerful new class of features, including not just automatic bi-directional linking, but also transclusion and graph views, at the end of the day I found these apps to be heavy, complex, and fiddly. Also perhaps by virtue of being so new, they felt unrefined if not unfinished. I was destined for on one of my patented searches-for-the-perfect-app.
Then I stumbled across this video from Andy Matuschak, a “tools for thought” expert who’s talked frequently about his own take on Luhmann’s method. A couple months ago he live-streamed one of his morning writing sessions employing a very zettelkasteny system, and lo and behold he was using Bear.
Bear is even the backend for his remarkable “working notes” site, which is an experiment in making public his writing-for-thinking.
This sparked an epiphany. The only thing an app really needs to make it a fit for Luhmann’s method is bi-directional linking. That really is 80 percent of Roam and Obsidian’s value.
Bear has long had wiki-style linking. You can type [[
and it will begin to autocomplete the title of another note in the database that you want to link to; you can even link to a particular header in a note. As of version 1.7 (from September 2019, before Roam’s launch I believe), such links are auto-updating. That means that if I change the title of a note, the title will also change on every page from which it’s linked and preserves the connection to the linked page.
What Bear is missing is automatic bi-directional linking. This means that if I link to Note A from Note B, there is link to Note B added automatically to Note A; if I want that I have to go into Note A and do it manually. It obviously also doesn’t have an “unliked references” feature like Roam.
There are open-source scripts that will scan your notes and add backlinks, but this seems unnecessary to me. After all, Luhmann himself didn’t have automatic backlinking. He had to manually add the cross-references to his analog notecards, and yet the system allowed him to write dozens of books and papers. Indeed, as Christian from Zettelkasten.de has said, automation might actually be an impediment to the cogitation and deep understanding the method seeks to engender. Maybe it’s better to have to deliberately choose, and not worry about the FOMO of missing connections. We still have search, which Luhmann did not.
So, if you’re considering using Bear as the tool for a zettelkasten, don’t be dissuaded. Give it a try. And if you haven’t considered Bear, you should. In my research for apps that would accommodate Luhmann’s method I found only fleeting references to Bear, and yet it’s probably a perfect fit. I hope this helps folks consider a tool that might already be in the in their toolkit.
]]>Here’s their conclusion:
Classifications can be a powerful tool to organize and communicate ideas. The main allure of distinguishing between account-based and token-based is to highlight a defining feature of certain new, emerging forms of digital currency. [Read CBDCs.] But if a digital currency can be both token-based and account-based, then the classification loses its power to meaningfully distinguish between new and existing methods of digital payments. Furthermore, it may slow down progress in understanding intrinsic differences between the growing set of digital payment options and technologies. Future classifications could modify the definitions of the terms account-based and token-based to more clearly distinguish them. In the meantime, perhaps these terms should be retired to avoid further confusion.
To prove their point, they argue that a distinguishing feature of an account-based digital payments system is that they employ “a process for verifying the identity of the would-be payer” and, given that, the quintessential token-based digital currency, Bitcoin, is also account-based.
Bitcoin fits the definition of an account-based system. The account is a Bitcoin address, and the private key is the proof of identity needed to transact from that account. Every time a Bitcoin user wants to spend Bitcoin, that user must verify their identity by using their private key. It is not relevant whether the system requires users to reveal their true identity. Rather, what matters is whether a user must follow a process the system has developed for verifying the identity that they established within the system, whatever that may be. Analogously, a bank that wants to move funds through the Fedwire Funds Service has to comply with the Reserve Banks’ security procedures, which includes a set of access control features.
This is, by definition, a semantic argument, but probably one worth having. I don’t share the authors’ concern that use of the terms is “problematic” or confusing, though I agree that the language used to talk about CBDC can probably be sharpened, so let me offer an alternative set of terms.
As I’ve noted before, when using the account-based and token-based terminology, the distinction that’s usually being communicated is between permissioned and permissionless systems. In a token-based system like Bitcoin, identity verification (if it can be called that) is achieved via public-key cryptography (i.e. math) which is available to everyone. Anyone can create a Bitcoin address at will and receive payment without first seeking anyone’s permission. In contrast, account-based systems employ a third-party (or parties) to conduct the identity verification, thus creating a point of permissioning. Use of such a system is at the pleasure of the identity-verifying third party.
I don’t think it matters much that commentators say “account-based” and “token-based” when what they more specifically mean is “permissioned” and “permissionless,” but to the extent one wants to be more precise, those are the words I would suggest.
]]>Man is least himself when he talks in his own person. Give him a mask, and he will tell you the truth. —Oscar Wilde
For fun over the past few weeks I’ve been working on a little project that I’m launching today. It’s called Club P. and it’s an anonymous and ephemeral discussion board like 4chan, but membership-based. So why did I make this?
Like many people, I’m increasingly frustrated with social media. Speech policing and growing pressure to conformity are leading me and many others to retreat to what Venkatesh Rao calls the cozyweb:
Unlike the main public internet, which runs on the (human) protocol of “users” clicking on links on public pages/apps maintained by “publishers”, the cozyweb works on the (human) protocol of everybody cutting-and-pasting bits of text, images, URLs, and screenshots across live streams. Much of this content is poorly addressable, poorly searchable, and very vulnerable to bitrot. It lives in a high-gatekeeping slum-like space comprising slacks, messaging apps, private groups, storage services like dropbox, and of course, email.
Kickstarter founder Yancey Strickler talks about a “dark forest theory of the internet”:
In response to the ads, the tracking, the trolling, the hype, and other predatory behaviors, we’re retreating to our dark forests of the internet, and away from the mainstream.
This very piece is an example of this. This theory was first shared on a private channel sent to 500 people who I know or who have explicitly chosen to receive it. This is the online environment in which I feel most secure. Where I can be my most “real self.”
…
Dark forests like newsletters and podcasts are growing areas of activity. As are other dark forests, like Slack channels, private Instagrams, invite-only message boards, text groups, Snapchat, WeChat, and on and on. This is where Facebook is pivoting with Groups (and trying to redefine what the word “privacy” means in the process).These are all spaces where depressurized conversation is possible because of their non-indexed, non-optimized, and non-gamified environments. The cultures of those spaces have more in common with the physical world than the internet.
Why the reaction? There are many reasons, but here’s what I think about.
On social media platforms like Twitter, users have a persistent identity (even if, rarely, it is a pseudonym). This fosters completely natural incentives for status competition, but those incentives are unnaturally exacerbated by the gamification inherent in likes, retweets, and follower counts. Additionally, your view on the world is limited by the set of people you have chosen to follow, as well as how a platform’s algorithm has chosen to present their messages. The result is conversation that is often performative and susceptible to groupthink and tribalism.
Show me a writer's audience, and I'll show you their opinions.
— Antonio García Martínez (@antoniogm) July 28, 2020
An interesting alternative mode of online conversation that is still public, and not cloistered, is that of anonymous “imageboards” made (in)famous by 4chan. They are web discussion forums with no user registration and no identities tied to posts. Postings are also ephemeral and are erased after a short time. Thanks to this architecture, imageboards foster a very different kind of conversation. Because there are no usernames, no follower counts, and no likes or retweets, there is no ego or status-seeking tied to users’ expressions. Because user content is presented chronologically, and neither you nor an algorithm curate what you see, you’re exposed to a greater set of expressions. Without identity everyone’s expression is on equal footing and can be judged on its own merits regardless of its authorship.
Such a peculiar arrangement can engender unreserved contributions to group creativity, which is why the origins of so much of what we take for granted as “internet culture” today—from lolcats to rickrolling—can be traced back to 4chan. As Hao Li has put it,
Anonymity frees individuals from the burden of the ego, which is afraid of judgment, wants recognition, and acts defensively towards disagreements from others. In a collaborative environment, it blocks creativity and distorts incentives. When the ego is removed, unfiltered and raw truth comes out. … Once the ego is gone, anonymous individuals identify with an amorphous entity that transcends individuality. It’s not that online anonymity leads to groupthink; it actually encourages creativity and non-conformity. Instead, anonymity brings individuals closer through cutting the personal prejudices and allegiances that divide them apart in real life.
Of course, as 4chan itself shows, anonymity can have a very dark side. Without identity there is no accountability, and without account registration there is no way to screen out trolls and troublemakers. So, I’ve been doing a lot of thinking about how we might be able to get the good of an anonymous discussion forum without so much of the bad. What I’ve come up with is Club P. and I’m launching it today.
Club P. is essentially an anonymous discussion forum but with important differences compared to traditional imageboards. Most significantly, you have to be a member to post, and membership costs $2 per month. That’s a modest amount that after hosting and service fees should leave me no profit, but it will be a barrier to entry that I hope will screen in earnest folks. Membership means that, unlike completely anonymous forums, users do have to create an account, which will help with moderation. No identifying information will ever be presented on the site—no username, nor email address, nothing. On the backend, however, users are assigned a unique alphanumeric ID (like 5f20bwcd1f516020410b8e9) and their posts are associated with that ID so that, if I had to do it, I could ban the author of a particular post without ever knowing their name.
The functionality of the site is very simple. On the homepage is a listing of all threads posted in the last 48 hours. After 48 hours threads are deleted, so all conversations are ephemeral. (I would like to eventually bring that down to 24 hours or less.) Anyone can read the threads, but only logged-in members can start new threads and post replies to existing threads. Search engines are directed not to index the site, so posts should not show up in search results.
The design of the site is heavily influenced by Joel Spolsky and Jeff Atwood’s thinking on forum architecture. Threads are flat rather than presented in a tree structure. If a link to a thread is blue on the homepage, then either you haven’t visited it or there is a new reply post you haven’t seen. Once you’re logged in, posting new threads and replying to existing ones is effortless. Messages (both initial posts and replies) are limited to 2,020 characters in honor of this exceptional year.
I also plan to crib from Spolsky’s moderating philosophy, which means I don’t have to post a list of content rules because we all have a good sense of what’s clearly in-bounds and what’s not. As Spolsky says, “posting rules is just a way to insult the majority of the law-abiding citizens and it doesn’t deter the morons who think their own poo smells delicious and nothing they post could possibly be against the rules.” Things will get deleted when they have to be and users will be kicked out when necessary, but I hope we can avoid that, and I think the fact we’ll all be members of a club will help.
One frequent question from beta testers was, “How is this anonymous if you have my email and credit card info?” The answer is that it’s not. It’s an anonymous discussion forum in the sense that users posting in the forum will be anonymous to everyone reading those posts. But yes, unlike 4chan, you do have to create an account with personal info to use the site, so in that way it’s not completely anonymous … which is kinda the point! In the end, though, I will have no more info about you than Jack does if you have a pseudonymous Twitter account. In fact, I will have less info because I do not collect your name, only the email address you use at sign-up (feel free to use a throwaway), and your credit card info stays with Stripe and I never see it.
Finally, let me say this is just an experiment to see if we can get the benefits of anonymous forums with less of the downsides. It’s a fun hobby project for me and that’s it. I reserve the right to change the variables described above and to shut the whole thing down if it doesn’t work out, but I hope it does. And I welcome you to join me in this experiment. Sign up now.
]]>Let me stipulate at the outset where Nic and I agree, which is a lot. The Twitter hack highlights the fact that centralized or intermediated identity is bankrupt. What we should want are decentralized systems that allow individuals to have sovereign control over their own identity. I could write a long paper explaining all the ways such systems would be superior to what we have now, but luckily I don’t have to since Peter Van Valkenburgh already has. So, I agree with Nic on the most important thing, which is where we want to get to: a world where you own your own identity credentials (whether that’s a social media handle or your ride-hailing profile or whatever else) and you can take your data with you wherever you want, to whatever service or system will read it.
What I disagree with is Nic’s view (which he outlines in his recent column but more fully articulates in another column from June 9) that
…Facebook, Twitter, et al, did not really create all the content on their platforms, nor do they really own it. Instead, they define a namespace that users occupy, build upon, and in some cases commercialize. The users, not the administrators, create the vast majority of the value, and as such are the rightful owners of their digital property.
Such “digital property,” I gather, includes one’s handle and social graph and users are their “real“ or “rightful” owners. This is incorrect. One doesn’t have a reasonable claim to any such “digital property.”
In support of his argument, Nic cites writings by Balaji Srinivasan, Allen Farrington, and Elaine Ou. On closer inspection, though, we can see that in the linked pieces neither Srinivasan nor Farrington argue that one has a rightful claim to one’s social media identity because one created a lot of value on a social media platform. Instead, their arguments are basically what I stipulated above, that we should build systems that allow for self-sovereign control of one’s identity, like Urbit. Ou, on the other hand, does indeed make a case for an individual to be able to make a claim (against the wishes of a social media company) for the continued use of a service. She cites the property law concepts of “squatter’s rights” and easements, as well as John Locke’s labor theory of property, and these are the arguments that Nic marshals in his opeds.[1] I will address these in turn.
Let’s start with Locke. Putting aside that Locke’s theory is not universally accepted, it’s not applicable here on its own terms. The point of the theory is to morally justify the concept of property by, in turn, justifying initial acquisition through labor. That is, in a “state of nature” in which all resources are unowned, Locke argued, it would be just to acquire property and exclude others from it by virtue of one’s mixing of one’s labor with it. It’s a theory meant to justify legitimacy of property as a concept (as part of the natural law) by making the case that initial acquisition in a state of nature (that never really existed) can be seen to be just.
Arguing for the moral legitimacy of property rights is not the same thing as saying that if, with or without your permission, I put on a comedy show every Saturday at 1 at your theatre, that now that slot rightly belongs to me as my property. Locke’s theory might matter to a discussion of whether digital property is justified as a concept, but it is just plain inapplicable to the question of whether you “own” your Twitter handle because you’ve been tweeting on the platform for ten years and Twitter hasn’t kicked you off.
I’ll pause here and say that I think the root of the confusion at issue is thinking about Twitter use in terms of property rather than contract. Twitter is a company that owns certain physical and intellectual property and it lets people use these subject to a contract that users voluntarily agree to when they sign up for the service. Now, you may (as Nic seems to) believe that the contract is not enforceable because it is poorly specified and capriciously enforced, but if that’s the case then you have to make a contract law argument about why the contract is void, not a property law argument, and that brings me to the “squatter’s rights” and easement arguments.
“Squatter’s rights” is what’s known in property law as adverse possession. As the name implies, the concept applies when the claimant has taken possession of one’s property without one’s permission, usually because one isn’t aware of it. If this goes on for a long enough time, when you go to eject the squatter, a court might find that you have forfeited the property to the squatter, and there’s a long and interesting history about how and why this rule emerged at common law. But here’s the thing: one of the required elements of adverse possession is that “[t]he occupation must be hostile and adverse to the interests of the true owner.” If you have permission to use the property, say by the terms of a contract, then you can’t bring a claim of adverse possession. Again, the concept is just plain inapplicable to the question of whether you “own” your Twitter handle because you’ve long used it to create value. Not only does Twitter know you’re using it, they are giving you permission to use it under the terms of a contract that you agreed to.
It’s a similar story with easements, but let me first point out that even if one accepted that an easement could be enforced against Twitter, what that would get you is not a property right over your Twitter handle and social graph, but a right to continue to use the Twitter service as it exists, which is kinda what we’re trying to avoid in the first place. But again, easements are a property law concept and they’re inapplicable in what is a contract law context. Courts find implied easements precisely when there is no contract between the parties enumerating their rights and obligations, and again use of the property by the claimant must be “hostile”—i.e. without permission, which is definitely not the case with Twitter.
So, it’s just plain wrong to say that one has a property claim over one’s social media handle or social graph or the like. There is no “digital property” at issue here. Instead what we have here is a contract between Twitter and the user, and if you want to argue that the user should have rights that are not contained in the written contract, then you need make contract law arguments like unconscionability, but even then all you may get is the right to get out of the contract.
That all said, it may still be good public policy to force social media companies like Twitter and Facebook to let users download their social graphs and other data. As Farrington says in the article Nic cited, “We could and probably should mandate portability of personal data under the auspices of providing fairness to consumers and encouraging competition among web services.” This is something for which my friends at Union Square Ventures have long been advocating: the law should let users take their data (tweets, followers, likes, everything) and port it to a competing service, including a decentralized one. But while that may be good public policy, such a “right” would be created by and justified by democratic legislation; it could not be justified by appeals to Lockean natural law or the emergent common law of property or contract—indeed it would be an abrogation of these.
[1] I’m an avid follower of Elaine Ou’s blog and Bloomberg column and have come to the conclusion that her work is meant for a Straussian reading. For this post, though, I’ll take her piece at face value.
]]>Yesterday Mike Solana listed Signal, Bitcoin, and Substack under the heading “anti-authoritarian tech stack,” and asked what else belonged. I said that while I love what Substack is doing right now, I’m afraid it could end in tears. Why? When something ends in tears it’s almost always due to unmet expectations, and right now the expectations being put on Substack are pretty high.
Substack has built a fantastic platform for independent writers to not only reach their audiences directly, but to support themselves financially while doing so without having to depend on increasingly stultifying media institutions. As a result, Substack is not incorrectly seen as a great option for heterodox writers who might otherwise find themselves homeless. So. not seconds after Andrew Sullivan and Bari Weiss announced they were leaving their respective perches, the predictions and encouragements that they would or should go to Substack came rolling in.
And Substack has encouraged the perception of itself as an open platform for heterodox expression. The day after Weiss’s and Sullivan’s announcements, Substack announced a new “legal support program for independent writers” pledging to “use our financial and legal resources to vigorously oppose any bad-faith efforts to dissuade Substack writers from doing their work.” That is truly wonderful, and I am very glad to see many writers begin to realize that there are viable alternatives available to them. Not surprisingly, Sullivan announced yesterday that he would be starting a Substack newsletter and podcast.
The possible letdown, however, is that there is nothing in Substack’s technical or legal design that guarantees that it will remain a tolerant home for heterodox writers. I have no reason to think it won’t, and I hope it does, but there’s no guarantee, and more than once in the past I’ve seen corporations change their attitudes contra expectations. Tears ensued.
From a technical perspective, Substack does not belong on Solana’s list next to Bitcoin and Signal. Signal is a company, but they have almost no information about their users—no names, no messages. Bitcoin is not a company, but instead a permissionless decentralized network, and “it” can’t decide who can use it or for what. Substack, on the other hand, is a centralized service that permissions who’s allowed on and what they can do, and it is subject to official and market pressures.
From a legal perspective, Substack is no different from YouTube or Twitter. You can create an account with the service at their pleasure, and you must agree to its terms of service to do so. Those terms are not very different from other platforms and include prohibitions on hate speech, as well as content that promotes “harmful” activities. How these terms are interpreted is essentially up to Substack, though I have no doubt that today they would interpret them very liberally. Things can change, though. Substack has 18 employees listed on LinkedIn. I imagine it will be a different company when it grows large enough to need an HR department, or if it were to get acquired by some behemoth.
That’s why some (like Balaji Srinivasan) have been suggesting Substack alternatives like Ghost, which can be installed on one’s own server so that a writer can have a direct relationship with their readers. Ultimately a service like Substack (or Medium or YouTube or Twitter) is an intermediary between you and your readers for both content distribution and payments processing. That can be great for folks who want to focus on their research and writing and want to outsource the rest of their business, but this is were expectations come in: you have to understand the risk. Having ownership and control over my own content is a big part of why I blog on my own platform, and I’m willing to make certain tradeoffs for that.
As some responses to Solana made clear, though, even I am at the mercy of my hosting provider and other miscellaneous intermediaries. To be truly independent and censorship-resistant, we’ll want platforms that are fully decentralized, and I don’t think we’re too far off from these being viable options for mainstream writers. If you’re curious, check our IPFS and Urbit.
In the meantime, subscribe to my Substack newsletter here. You won’t regret it.
]]>How hard would it be to track these funds and mark them as fully taxable at any point they are redeemed for dollars (or any other currency) at an exchange? https://t.co/T1VqFGs0X7
— David Andolfatto (@dandolfa) July 1, 2020
That is, would it be possible to mark a particular bitcoin as having been paid in ransom so that such tainted coins could not be exchanged for dollars at regulated exchanges without first paying a tax? Putting aside whether that would be good policy, the threshold question is whether it’s technically possible to trace individual bitcoins in this way. In a later tweet he elaborated,
Can one not simply treat each satoshi as the basic unit? Don't care how they're combined into larger units -- I just follow the individual satoshis and threaten to confiscate them (and them alone) whenever I detect one being part of an exchange for electronic USD on an exchange.
— David Andolfatto (@dandolfa) July 1, 2020
My shorthand answer to this question is, no because there are actually no such things as “a bitcoin” that can be traced. Twitter did not prove to be an auspicious medium to convey what I meant by that shorthand, so here’s a stab at explaining the concept in detail.
Many people who generally understand how Bitcoin and its blockchain system works are nevertheless under the erroneous impression that there are such things as atomic units of bitcoin that are moved from address to address and can therefore be tracked on the public chain. I think this mistake has its roots in language and analogy.
Bitcoin is a digital currency, “coin” is in its name, the White Paper describes it as electronic cash and mentions “wallets.” As a result we talk about it like we talk about physical currency; like we talk about paper bills or coins. We say things like, “She gave me a bitcoin.” As a result, people tend to quite justifiably envision bitcoins as atomic units that are passed around. Even if they understand that bitcoins are sub-divisible to eight decimal places, and that those units are called satoshis, they may still think that those are the atomic units.
This leads people to conceptualize bitcoins like dollar bills with serial numbers.
I mean, I don't understand this. Replace "satoshi" with $ bills, each with unique serial number. I don't care about the order in which they move in and out of a bar. If I catch the stolen $, I remove it from the bar, same as I would if I caught a counterfeit.
— David Andolfatto (@dandolfa) July 1, 2020
And since people know that the blockchain keeps a public record of all transactions, they imagine that this means that individual bitcoins can be traced by their “serial numbers” moving from address to address, from wallet to wallet.
But the coins and wallets analogy is just that: an analogy. This is not at all how Bitcoin works.
So how does it work? Suppose Alice wants to send some Bitcoins to Bob. What she does is compose a new transaction message to be broadcast on the network for validation and inclusion in the blockchain by a miner. In the transaction message she must reference one or more previous transactions on the blockchain of which she was a recipient.1 Those referenced transactions are called inputs; they are in essence the funds with which she’s transacting. The sum of the inputs must total to exactly or (almost invariably) more than the amount she wants to send to Bob. She must also, of course, note the address or addresses to which she wants to send funds. These are called outputs. She signs the transaction message with the private keys corresponding to the input addresses and broadcasts it on the peer-to-peer network. If all goes well, a miner will include the transaction in the next block after verifying that the inputs and signatures are valid. The transaction is now complete and Bob can now reference this completed transaction as an input into a future transaction when he wants to move the funds.
In the simplest case, there is only one input and only one output. Alice references a transactions in which someone sent her exactly one bitcoin and she sends exactly one bitcoin to Bob’s address. In such a case, it might not be unreasonable to say that we can track the movement of one particular bitcoin, just as if it was one particular $100 bill. However, such a transaction is not only improbable, I’m not sure there have ever been any like it.
First, miners don’t typically work for free. In addition to block rewards, miners are incentivized by fees they can collect from each transaction they include in a block that they add to the blockchain. These fees are voluntary, but miners will almost always ignore transactions that don’t have fees (or have fees below the current market rate). So, if Alice wants to send one bitcoin to Bob, it’s likely she will have inputs to the transaction that total, say, 1.01 bitcoins. Whatever is the balance between the inputs and the outputs in a transaction message is understood to be the fee and the miner gets to keep it.
Second, users typically don’t have exact change. It’s unlikely that Alice will have a single prior transaction that she can use as an input to pay Bob (i.e. 1.01 BTC, exactly one bitcoin for bob plus the appropriate mining fee). More likely she will have many different possible inputs to choose from—for example, one for 87 bitcoins, one for .51, one for .7365, one for 14.98, etc. As a result, the number of inputs and/or outputs in her transaction will increase. For example, if she wants to send Bob one bitcoin, and wants to also include a .01 bitcoin mining fee, she has to find inputs equal to 1.01 bitcoins or more. So, she can use one big input (like the one for 87 bitcoins) and get change of 85.99 bitcoins back by including a second output for that amount to an address that she controls. The transaction would now have one input and two outputs. Alternatively she could use two small inputs (like the ones for .51 and .7365) but still want change (i.e. 0.2365) for which she would provide a change address. That transaction would therefore have two inputs and two outputs.
One last wrinkle I’ll add is that when Alice composes a transaction message to pay Bob, she can also take the opportunity to pay Charlie as well. She can send up to the total of her inputs to as many addresses as she wants, so the number of transaction outputs can be very large. So, a not uncommon bitcoin transaction will look like this:
The key thing to realize is that there are no individual, atomic units of bitcoin that are transferred among addresses. Indeed, there are no such things as bitcoins that one can point to, much less track. What individuals “own” are not bitcoins per se, but unspent transaction outputs (UTXOs) that can serve as inputs for new transactions. When a new transaction is added to the blockchain, the transactions that served as inputs are of course still visible on the ledger, but they can no longer be spent,2 and new unspent transaction outputs are available in the newly created transaction. The input and new transactions are certainly linked in a chain, but in no way can we identify in the new UTXO a particular satoshi that was present in the input UTXO—again, because individual satoshis don’t really exist.3
Let’s now bring it back to Andolfatto’s proposal to tax blacklisted bitcoins when they are presented to a regulated exchange. We can now see that in Bitcoin it makes no sense to say that a particular bitcoin was paid in ransom and is now being brought to an exchange. One can nevertheless trace the movement of funds on the blockchain and show that a particular UTXO has somewhere in its chain an illicit transaction, but that’s not the same thing as saying that a particular bitcoin was part of an illicit transaction.
In the figure above, suppose the UTXO with 87 bitcoins are the proceeds of crime, while the rest are not. When Alice sends bitcoins to Bob and Charlie (and pays a mining fee to do so), there is no meaningful way in which we can say that Bob, Charlie, or the miner received some of the 87 ill-gotten bitcoins. And it’s just as meaningless to say that either Bob’s or Charlie’s or the miner’s coins came from the legitimate UTXOs. It’s not just that we can’t be sure, it’s that the concept of particular coins changing hands makes no sense because individual coins don’t exist.
At this point, I hope I have answered the initial question, is it possible to track individual units of bitcoin? It’s not.
What someone might then say is, why not simply treat each of the new UTXOs as containing a share of the illicit input coins in proportion to the value of the outputs illicit coins? Couldn’t you then tax that proportion of Bob or Charlie’s coins? The answer is sure, I guess you could do that, but that would be a policy choice external to the mechanics of Bitcoin, and I imagine it would be seen as a pretty inequitable policy. There’s a reason the currency rule emerged.
As a result, what’s developed in practice by industry, regulators, and law enforcement is to focus on addresses and not individual bitcoins. You can know with certainty that a particular address received a ransom payment, and you can know which other addresses have been sent funds from that ransom address and on and on. They also look at what proportion of each transaction comes from previous illicit transactions and how many suspect transactions an individual may be tied to. This information can be used by exchanges to require more information from customers with addresses in close proximity to known illicit transactions, and law enforcement can use all this to prosecute crimes. Using solely the information available on-chain, however, it’s not really possible to automate justice in any sensible way.
Finally, I’d like to say that I wrote this post because I couldn’t find any publication explaining the above in detail. After writing the preceding 2,000 words, however, I came across this article by Northern Illinois University philosopher Craig Warmke, which although it doesn’t address exactly the same issue, would have worked as a reference for the proposition that you can’t track individual bitcoins. It’s very interesting and worth reading.
Thank you to Tom Robinson of Elliptic for reviewing a draft of this post.
[1] By this I mean that the transactions in question were sent to a public address for which she controls the corresponding private key. More specifically she would reference UTXOs, which will be explained momentarily
[2] That’s because also visible on the ledger is the fact that they have been used as inputs in another transaction.
[3] UTXOs are the closest analogy we have to discrete coins, but they are “destroyed” when they are used in transactions, and new UTXOs created with the same aggregate value.
]]>One objection that was raised by several persons was that indeed there are AML obligations on cash. After all you have to declare cash over $10,000 when you cross the border, and transactions over this amount must be reported by financial institutions (as defined in law) to the authorities.
This is something I specifically acknowledge in the original post when I wrote, “Sure, financial institutions that deal with cash have obligations, like collecting customer identification and reporting transactions over $10,000, but those are not obligations on cash itself.” Perhaps this was too subtle, so let me spell it out.
In the U.S., and I suspect in other OECD countries, AML laws do not regulate the central bank; they regulate private parties like banks, payments companies, casinos, estate agents, car dealerships, etc. When you withdraw more than $10,000 in cash from your bank to buy a car, for example, the bank and the car dealer you pay in cash both have an obligation to report the transaction to the government, but the central bank that issued the cash has no obligations. When you cross a border with more than $10,000, it is your obligation to report it, not the central bank’s. This is what I mean when I say that there are no AML obligations on cash itself, only on certain parties to cash transactions.
That is not merely a pedantic point. It matters because it means that although we have all kinds of AML regulations, there is no law that precludes the central bank from creating and maintaining a system of completely anonymous and untraceable payments (i.e. cash). And yet, in describing how they might design a CBDC, we’re seeing central banks cite “AML obligations” to justify why any new digital version of cash cannot be as anonymous and untraceable as physical cash. I’m not aware of any such restrictions on central banks and that is what I was pointing out.
In the post I was not advocating for CBDCs to be anonymous and untraceable, as some seemed to assume. I was only arguing that if a central bank decides that its CBDC should not be anonymous, then it should explain why it reached that conclusion and engage in a policy discussion with the public about it. It should not simply justify the choice by gesturing to non-existent “AML obligations.” If nothing else, it should have to reconcile why it’s fine that its physical cash is anonymous and untraceable (and the Bank of England sings the praises of physical cash in its CBDC paper), but electronic cash cannot be.
As I pointed out to the IMF’s John Kiff on Twitter, if we had an open and transparent policy debate about the tradeoffs of anonymity in CBDC design, I think what would happen is that a broad consensus would emerge: it should be built so that individuals can enjoy the privacy and autonomy that anonymity affords up to a certain “reasonable” level (and part of the debate would be what constitutes that level), but that it would be proper for a central bank to build the system in such a way that it can surveil larger transactions (or balances, that would be part of the debate, too). The problem with this, however, is that I haven’t seen a way that this could be accomplished technically. How do you have a system where transactions or individual holdings below a certain threshold are as anonymous as cash, but above that threshold they are traceable?
So it doesn’t get lost, let me now highlight the clause “as anonymous as cash” in the last sentence. “As anonymous as cash” means anonymous. Not “nearly-anonymous” and not merely “private,” but anonymous and untraceable. If it’s not anonymous for at least certain transactions, then one can’t really call a CBDC “cash-like,” merely P2P. I don’t see how such a tiered system is technically feasible, but I would love it if anyone can point me to references that explain how it can be done.
Kiff pointed me to the Bank of Canada, which in a couple of staff notes discusses the concept of a “universal access device” that apparently aims to do this. But I have not been able to find the technical details about the device and the way the staff notes discuss it, it does not seem to me that they contemplate it to offer CBDC payments that are as anonymous as cash. I would appreciate any light anyone might be able to shed on this scheme.
Finally, if it is indeed the case that a CBDC cannot be engineered to be as anonymous as cash for certain transactions but not for others, then what central banks will have is a choice between a CBDC that is completely anonymous or not. One that is electronic cash and one that is not. One that presents the same kinds of risks as physical cash does today, and one that tries to avoid them by curtailing the privacy and autonomy of individuals. Choosing between these is a conversation that should be had out in the open.
]]>A CBDC payment system would need to be compliant with AML and CFT regulations and requirements. This means the identity of CBDC users would need to be known to at least some authority or institution in the wider CBDC network who can validate the legitimacy of their transaction.
And here is the Bank of Canada a few days ago:
A CBDC system is required to comply with regulations (e.g., KYC and AML). This can dictate the level of privacy and the selection of privacy techniques. KYC may require entities to store personal data with proper classification. Generally, achieving high levels of privacy while complying with regulations is complicated. A designer, however, could build a system with hybrid privacy levels. In this, unregulated holdings and transactions (offering maximum privacy to users) would be permitted within limits (e.g., a maximum amount) alongside regulated ones without limits.
It makes no sense to say that a CBDC that does not yet exist must be designed to comply with AML obligations for the simple reason that no such obligations have been promulgated for CBDC—reasonably since, after all, the thing doesn’t exist.
A CBDC could be designed in such a way that it has all the same properties as physical cash and there are no AML obligations on cash. Sure, financial institutions that deal with cash have obligations, like collecting customer identification and reporting transactions over $10,000, but those are not obligations on cash itself. As private citizen I could have $1 million of cash in my house and use it as I see fit and neither I nor the cash itself nor the Fed have any AML obligations. A CBDC could be designed in such a way that financial institutions could easily meet their existing obligations related to cash and cash substitutes, but would create no new obligations.
So, it’s inaccurate for central banks to say that the design of a CBDC is constrained by AML obligations. Central banks may want there to be financial surveillance built in to CBDCs, but they are not obligated to do so and should not pretend otherwise. They should either build a new kind of central bank money that is digital but preserves the privacy and ‘bearer’ features of physical cash, or they should be clear that they are choosing not to do so.
]]>That the dollar has maintained this stature for so long is a historic anomaly, particularly in the context of a rising China. The Chinese renminbi (RMB) has by far the greatest potential to assume a role rivaling that of the dollar. China’s economic size, prospects for future growth, integration into the global economy, and accelerated efforts to internationalize the RMB all favor an expanded role for the Chinese currency. But by themselves, these conditions are insufficient. And China’s much-touted successes in the realm of fintech—including its rapid deployment of mobile payment systems and the recent pilot project by the People’s Bank of China to test a digital RMB—will not change that. A central bank–backed digital currency does not alter the fundamental nature of the RMB.
These facts regularly lead pundits to opine that Chinese fintech dominance could soon jeopardize the dollar’s global status. That is not a serious concern—nor is it clear that the United States is actually falling behind in matters of fintech.
This is almost verbatim from my January post:
Although the Chinese central bank could launch a digital currency as early as this year, the headlines exaggerate how transformational it will actually be. Those who worry that this development might herald the end of U.S. dollar primacy misunderstand that while the form of money may be changing, its nature has not.
A digital RMB would still be a Chinese RMB. No one is reinventing money. The token used for transactions may be different, but China’s prospects for reserve currency status depend on the same set of factors that apply to the issuer of that currency. And although the Chinese government has promoted use of the RMB to settle trade transactions as part of an effort to internationalize its currency, oil and other major commodities are still priced in U.S. dollars.
What would China have to do to challenge the dollar?
Still, that the RMB can join the U.S. dollar as a primary reserve currency is not a foregone conclusion. To achieve such a status, China will need to reform its economy and develop its capital markets in ways which are difficult and involve complex domestic political considerations. Recent Chinese ambitions that required similar transformations—such as establishing Shanghai as a full-fledged global financial hub by 2020—have so far been deferred: a financial hub simply is not viable when capital controls are in place and the currency is not market determined. The same holds true for the RMB’s prospects as a major reserve currency.
Although a Beijing-backed digital currency in and of itself is unlikely to undermine the dollar’s supremacy, it could certainly facilitate China’s efforts to internationalize the RMB. In countries with unstable currencies, such as Venezuela, a digital RMB is an attractive alternative to the local currency. Chinese firms such as Tencent, which already have a sizable presence in developing countries in Africa and Latin America, could scale up their presence there, leading a future digital RMB to gain market share. This could help enhance the RMB’s global status and become part of a broader strategy to project Chinese economic and political influence abroad.
On the Venezuela point, I think Paulson is overlooking stablecoins. Venezuela will dollarize via stablecoins before it yuanifies. On this, though, he is spot on:
To be sure, the United States needs to take China seriously as a formidable economic competitor. But when it comes to the primacy of the dollar, the main risk stems not from Beijing but from Washington itself. The United States must maintain an economy that inspires global credibility and confidence. Failure to do so will, over time, put the U.S. dollar’s position in peril.
]]>Washington should also be mindful that unilateral sanctions—made possible by the primacy of the dollar—are not free of cost. Weaponizing the dollar in this way can energize both U.S. allies and foes to develop alternative reserve currencies—and maybe even to join forces to do so. That is precisely why the European Union has been pushing to further promote [https://www.reuters.com/article/us-eu-euro/eu-pushes-for-broader-global-use-of-euro- to-challenge-dollar-idUSKBN1O41CU] the euro in international transactions.
Fundamentally, there are two main types of payment systems or transfer mechanisms: token-based and accountbased systems (Kahn et al, 2018, pp.8-11). Both are record keeping arrangements, but they are distinguished by their identification requirements.
The primary example of a token-based payments system is cash, where what really matters is the identification of the payment instrument: making sure that the note or coin is not counterfeit. It also constitutes a decentralised payment system, as the clearing process occurs bilaterally when the money instrument is transferred between the transacting parties. In this case, the cash itself is the record, acting “as a device that summarizes past production, trade and consumption decisions” (Kocherlakota, 1998, in ibid. p. 8).
The most important account-based payment systems in most modern economies are commercial bank deposits and central bank reserves (CBRs). What is crucial for account-based systems is the identification of the accounts of the transacting parties so the transfer of funds can happen and the transaction to be cleared. This record keeping is done by a single trusted party (such as the central bank when banks transact using central bank reserves) or by third parties (for example, when transactions happen between two people who have accounts at different banks), usually for a fee.
An account-based CBDC requires a centralised payment system to clear transactions (controlled by a trusted party or trusted third parties), whereas a token based system could be decentralised, with clearing happening between those conducting any given exchange.
Crypto folks will recognize these approaches under the names permissioned and permissionless. Two quick points:
After rehearsing the litany of stagnation with which we’re all acquainted, Andreessen provocatively fingers the cause:
We could have these things but we chose not to — specifically we chose not to have the mechanisms, the factories, the systems to make these things. We chose not to build.
“Who do you mean we, kemo sabe?” is what I immediately thought, and I imagine many others had a similar allergic reaction. But I think the we in his formulation means society, acting collectively through its democratic institutions. In which case, yes, “we” chose this path.
So why did we choose not to build?
The problem is desire. We need to want these things. The problem is inertia. We need to want these things more than we want to prevent these things. The problem is regulatory capture. We need to want new companies to build these things, even if incumbents don’t like it, even if only to force the incumbents to build these things. And the problem is will. We need to build these things.
Again, if you read the “we” in that passage as “society, acting collectively through its democratic institutions,” then it makes perfect sense. Our collective will, expressed through our democratic institutions, has decidedly been to slow or prevent innovation and building in all the areas Andreessen singles out: housing, education, transportation, medicine, finance, energy. Those are all regulated sectors of the economy, and as Andreessen hints, the regulatory apparatus has been captured by incumbents who will use it to keep out innovation that threatens their position.
But here’s the important point: those small interest groups, acting through democratic institutions, to prop up their interests at the expense of the greater public’s is not some subversion of the system; it is the democratic expression of society’s will. Entrenched incumbents are not just people who look like the Monopoly Man, incumbents are also public school teachers, coal miners, doctors and hospital administrators, flight attendants, and truckers.
Mancur Olson, one of the greatest thinkers of our time, explained our predicament decades ago in two important books: The Logic of Collective Action and The Rise and Decline of Nations. He showed that, on a given question, small groups (like energy incumbents) are easier to organize than large groups (all Americans who would benefit from nuclear energy) because their direct incentives are greater. Benefits are concentrated and costs are diffused, so acting openly and legitimately through democratic channels interests groups will secure protection even at the expense of the greater public. The result is that “society, acting collectively through its democratic institutions” sends a clear message: “We don’t want these things.”
A stable democracy with the rule of law is a perfect environment for groups to form, grow, and attach themselves to the body politic. Over time interest groups and rules accrete, and after a certain point nations burdened by so much accumulated regulation will become sclerotic and fall into economic decline. And that’s where we are today. That’s why we’re not building.
And this is why I felt vexed by Andreessen’s essay. Because he does not give even a hint of how we might solve that problem, and that left me cold. Yes, “we” don’t want these things, but how do we get ourselves to want them? It’s not that you or I or entrepreneurs need to want it (which is what I’ve seen some interpret him to mean), but that we need to overcome the logic of collective action, which is inherently biased in favor of small groups who want to “prevent these things” rather than “to want them.” Until you solve that, it doesn’t matter what you want to build or that it would be a clear net positive for society. Andreessen, however, doesn’t say how that’s to be done, and understandably so because it may well be impossible within the bounds of our present institutions.
Olson saw one way out of the trap. As Jonathan Rauch explains in his indispensable book Government’s End:
Occasionally some cataclysmic event—foreign occupation, for example, or revolution—might might shake a society, sweep away an existing government, and shatter the society’s network of interest groups. The old order would be scuttled, and the barnacles would sink with the ship. In the aftermath, the restored economy would be freed from its accumulated burden of protective perks and anticompetitive deals.
Now the theory’s darkest implications come into view. “If the argument so far is correct,” Olson wrote, “it follows that countries whose distributional coalitions have been emasculated or abolished by totalitarian government or foreign occupation should grow relatively quickly after a free and stable legal order is established.” And that is just what happened in Japan and West Germany after the war. … Sometimes a slashing fire can rejuvenate a forest by clearing away clots of undergrowth and deadwood. Olson was suggesting that something analogous had happened to Germany and Japan. The fires of cataclysm had cleared away the detritus of stability.
His hypothesis suggested a social cycle. A country emerges from a period of political repression or upheaval into a period of stability and freedom. The country is, at first, relatively unencumbered by interest groups and their anticompetitive deals. If other conditions are favorable, rapid growth ensues.
Maybe a pandemic can be such a cleansing fire.
I’m not holding my breath, though. We’ve already seen all kinds of regulation suspended in the name of emergency action, and there’s the promise of much more. But it’s happening half-heartedly and within the bounds of our existing institutions, so you can already see the reaction springing into action.
Here’s an example from the front page of the New York Times on Monday under the headlines, “Antibody Test, Seen as Key to Reopening Country, Does Not Yet Deliver; The tests, many made in China without F.D.A. approval, are often inaccurate. Some doctors are misusing them. The rollout is nowhere close to the demand.”:
Officials fear the effort may prove as problematic as the earlier launch of diagnostic tests that failed to monitor which Americans, and how many, had been infected or developed the disease the virus causes. Criticized for a tragically slow and rigid oversight of those tests months ago, the federal government is now faulted by public health officials and scientists for greenlighting the antibody tests too quickly and without adequate scrutiny.
The Food and Drug Administration has allowed about 90 companies, many based in China, to sell tests that have not gotten government vetting, saying the pandemic warrants an urgent response. But the agency has since warned that some of those businesses are making false claims about their products; health officials, like their counterparts overseas, have found others deeply flawed.
Tests of “frankly dubious quality” have flooded the American market, said Scott Becker, executive director of the Association of Public Health Laboratories. Many of them, akin to home pregnancy tests, are easy to take and promise rapid results.
So who’s going to win this in the long term? The public’s access to rapid at-home tests, or the laboratory interest group?
And no doubt FAA regulators read the Times. What are their incentives when urged to lift restrictions on delivery drones? It’s what you’d expect:
[T]here wasn’t any indication that the FAA was prepared to change its regulations for any wide-ranging drone use because of the pandemic.
“We” just don’t want it, if “we” is embodied by the FAA.
The always interesting Elaine Ou has a modest proposal:
What if we built "illegal" buildings without regard for zoning laws, like they do in India?
— Elaine 🦉🇮🇨 (@eiaine) April 19, 2020
What if we did CRISPR research w/out regard for medical laws, like in China?
What if we built "illegal" underground railways like in Mexico, or "illegal" bridges like they do in Russia?
“We” didn’t want Uber or Airbnb, but we got them anyway because they were built in spite of regulation, and now “we” can’t live without them. I’m not sure a strategy of civil disobedience scales for other sectors, but a during a pandemic may well be an appropriate time to ask for forgiveness rather than seek permission.
]]>If one was set on digitizing the dollar, you could do worse than this proposal. In fact, it’s definitely on the right track. First, it directs the Fed, along with the Post Office(!), to create public option bank accounts in which consumers can hold digital dollars. More importantly, though, it recognizes the importance of retaining a digital cash option and directs the Treasury to issue digital dollars that are bearer, “privacy and anonymity-respecting,” and censorship resistant, and which can be held in software wallets on one’s own computer. All the things that are on my checklist of what makes cash cash and necessary for an open society.
So far, so good, but the problem is that the legislative language that would accomplish this is too broad and poorly drafted.
Too broad because almost all the language about the digital dollar’s cash-like features comes not in a directive to the Treasury, but in the establishment of a “Digital Financial Privacy Board.” It is to be “established by the Secretary,” but the bill says nothing about the board’s composition or independence. The Board’s job is “to oversee, monitor, and report on the design and implementation of the Digital Dollar Cash Wallet System,” but that has no teeth—i.e. all the board can do is “oversee,” “monitor,” and “report” (although the bill doesn’t say to whom).
It seems that the Board is meant to ensure that the digital dollar is “designed in such a way as to replicate the privacy and anonymity-respecting features of physical currency transactions as closely as possible, including prohibition of surveillance or censorship-enabling backdoor features.” That bolded bit, of course, is a hole the sanctions and money laundering policy folks at Treasury will drive a train through.
Finally (and pedantically, I know), I say poorly drafted because, if you read Section 3(i)(3)(c)(iii) literally (as laws are mean to be) it says that it is the Digital Financial Privacy Board, not the digital dollar, that is meant to be designed to be cash-like. Also, the parts of the bill I like the most have “shall” language directing the Treasury to do this and that, but that language weirdly comes under section preambles about the “sense of Congress,” which is language usually reserved for non-binding resolutions. Weird.
Given that this bill also directs the Treasury Secretary to “mint and issue two $1 trillion platinum coins,” and further mint as many trillion-dollar coins as needed to fund the relief program that’s the main part of the bill, I’m not holding my breath that it’s going anywhere. But I’m glad to see Reps. Tlaib and Jayapal taking seriously the need for digital cash to be a part of any digital dollar that’s established.
]]>I think this idea is wishcasting.
The EU is a completely different beast. First, unlike the United States, the EU has no fiscal union. That is at the heart of the euro’s structural problems, but it’s also the root of the fissures the pandemic is exposing. Germany is balking at the idea of issuing coronabonds to help bail out hard-hit countries like Italy and Spain, which is what’s making those countries ask themselves, what’s the point of union?
Compare that to the U.S., where the federal government borrowed $3 trillion to send to all Americans. Let’s put a finer point on it, though. As much as fair-weather “California nationalists” may like to flatter themselves about the state being the world’s fifth largest economy and the country’s engine of growth, it also happens to have a debt of over $1.5 trillion, making its debt-to-GDP comparable to peripheral eurozone countries like Italy. If (and when) California goes bankrupt, it knows the federal government will bail it out, so it’s not facing the same incentives as Italy or Spain.
Then there’s the blindingly obvious fact that EU countries have national identities, which makes a breakup easier; states don’t. To the contrary. It was just last week that Gov. Newsome was taking a victory lap for sharing 500 ventilators with fellow Americans in other states and territories. Contrast that with EU countries who have been restricting medical exports to each other. Californians and New Yorkers, for all their regional peculiarities, think of themselves as Americans. And while the EU has an explicit provision in its “constitution” for countries exiting, the United States fought a civil war to settle the question of whether exit was an option. While the Median EU citizen remembers a time before the Treaty of Rome, there are no Americans whose grandparents lived before the Union.
What we’re witnessing with the governors is actually pretty predictable, and it’s in fact our federalist Constitution working essentially as designed. Indeed, it’s not the first time we’ve seen the President being defied by governors of the opposite party. Some pre-2016 headlines from the New York Times:
Gavin Newsome’s ambition, I hazard to guess, is not to be president of the California Republic, but to be President of the United States. Ditto for Andrew Cuomo. What they’re doing now is exercising legitimate state authority within a federalist framework, which is healthy especially in the absence of competent federal leadership. And hey, it aligns with their constituents’ interests and their political ambitions to boot.
Not only will there be no break up of the Union, if this all leads to greater subsidiarity, it may indeed make the Union stronger.
]]>That’s a good question, but I don’t think there’s any contradiction. It’s easy to fixate on the differences between “property” and “foreign currency,” but I think it’s more fruitful to focus on the similarity of the problem Congress is seeking to fix here and the one it fixed in foreign currency.
In the case of foreign currencies, before the exemption was enacted, you had a situation in which large numbers average citizens were frequently engaging in small, personal foreign currency transactions (such as when they went on vacation abroad) but they where not reporting these, and indeed maybe didn’t even know they had to. Of course, this was an unintended consequence of the law, and Congress properly sought to give relief to otherwise law-abiding taxpayers who paid for stuff with foreign currency. It did so by giving them an exemption if those transactions were small and personal in nature.
The case with crypto is exactly the same. Otherwise law-abiding citizens are using crypto in small, personal transactions and they’re facing the exact same unintended consequence as foreign currency users did. Therefore, cryptocurrency users today aren’t asking for special treatment relative to foreign currency, they are just asking for the same kind of reasonable, limited relief that Congress saw proper to give foreign currency users when they were in the same situation.
If Congress wanted to be completely consistent, it could classify cryptocurrency as foreign currency. But since that is likely not in the cards, there’s nothing inconsistent or preferential about giving crypto transactions the same de minis exemption it gave foreign currency transactions.
]]>The Iranian government has long had an interest in using cryptocurrencies to support international trade outside of the traditional banking system. In July 2018, President Hassan Rouhani’s administration declared its intention of launching a national cryptocurrency; one month later, a news agency affiliated with the Central Bank of Iran outlined multiple features of the national cryptocurrency, stating that it would be backed by the rial—Iran’s national currency.
The second article, The Greenback Needs a Digital Makeover by Tim Morrison, sounds the same alarm but focused on China (emphasis added):
Almost immediately after [Xi’s] statement, the National People’s Congress dutifully enacted a new cryptocurrency law to establish the framework for a regulatory regime for a Chinese national digital currency. This Chinese digital currency, a so-called “digital yuan,” is now ready for trial, according to the People’s Bank of China. While Washington focuses on whether to allow digital currency in the U.S. financial system, in other words, China is moving ahead in earnest. The prospect of the Chinese Communist Party (CCP) dominating this emerging financial technology should be alarming.
The upshot of Morrison’s article is that, given the interest in digital currency by adversary nations, the U.S. should embrace rather than stifle digital currencies. That’s great, but as the article’s title implies, national security thinking about digital currency seems to be stuck in a state-focused box—on both sides.
On the side of the dollar-competitors, digitizing one’s existing currency will do little if anything to create more global demand for it. I’ve explained this at length about the digital yuan, and it’s evident in Venezuela’s issuance of the Petro. Sure, Venezuela can issue a “national digital currency,” but it’s digitalness does nothing about the fact that there is no demand for currency backed by the Maduro regime. I suspect the same will be the case of a digital rial.
So if digitizing one’s national currency won’t do much to challenge the dollar’s global reserve status, will it nonetheless facilitate evading sanctions? I don’t see why it would do so any better than existing alternatives. We already have cryptocurrency networks that anyone can use for permissionless transfers of value. If exchange rate risk is the issue, then a dollar-backed stablecoin would be a better design for sanctions evaders to pursue.
On the U.S. side, I’m afraid Americans concerned about national security seem to be making the same mistake as adversary regimes by seemingly ignoring or rejecting the inherent stateless quality of cryptocurrencies. Rep. Mike Gallagher, one of the smarter members of Congress, tweeted out Morrison’s article and here’s the lesson he took from it:
Just like we cannot let the CCP build the world's telecommunications networks, we cannot let the CCP build the digital currency of the future either. We need all hands on deck to ensure American cryptocurrencies become the global standard. https://t.co/6XLaKVg3yK
— Rep. Mike Gallagher (@RepGallagher) January 24, 2020
What the heck is an American cryptocurrency?
Both Gallagher and Morrison have the right instinct: the U.S. should welcome innovation and open its financial sector to cryptocurrencies. But the way the U.S. wins is not by imitating its state-focused adversaries like China, Venezula, and Iran, but by running its own tried-and-true playbook: embracing open and permissionless networks, just like it did with the Internet. Given its culture, political system, and legal tradition, there is no country better positioned to benefit from an “Internet of value” just as it did from an open data network. Such open systems are a threat not to liberal open societies, but to authoritarian regimes.
]]>Businesses such as importers and exporters of goods ranging from baby products to furniture in Asia and Europe are using so-called stablecoins including Tether and USD Coin, according to payment processors and over-the-counter trading desks.
Transactions with suppliers and vendors already reach up to $10 million a day at Singapore-based QCP Capital, which caters to such clients. At payment-services provider B2BinPay, transactions already account for millions of dollars a month, and are increasing daily, said the Moscow-based company.
Makes total sense, especially for gray market businesses with tenuous connections to the dollar financial system. Given that most trade is denominated in dollars, cryptocurrencies like Bitcoin may not have previously caught on because of the currency risk, but USD stablecoins fit. Tether makes up most of the market, but
In other nations such as Indonesia, businesses often prefer more regulated stablecoins, such as USD Coin, which are issued by U.S.-regulated financial institutions and audited every month, Sit said.
I imagine that Centre and USDC issuers welcome this growing use. I wonder, though, if this catches on, what their reaction might be if there’s an explosion in growth driven by active avoidance of the US-dominated financial system, and not just small firms seeking efficiencies.
Somewhat related, adult entertainment website Pornhub has added Tether to the payment options available to performers after PayPal cut off the site. Again, makes sense. These performers want to avoid the payments networks that will derisk them, but they’re not interested in the currency risk of accepting Bitcoin. I’m sure they’d also welcome the additional safety that would come from regulatory oversight of stablecoin issuers as long as their use remains permissionless.
Again, I wonder what issuer reaction will be if this kind of gray market use really takes off. I can imagine that if stablecoins like USDC had been around when Backpage lost its payments options whether it wouldn’t have turned to it rather than Bitcoin. If it had, there’s no doubt the issuers would have gotten the same treatment from politicians as did the payments services that ultimately dropped Backpage. The key difference is that as (typically) ERC-20 tokens, it’s not clear to me issuers can do much to single out and prohibit use by particular parties.
]]>With this in mind, the FBI’s request for Apple’s help is puzzling. If the government takes Apple to court, as it did in the San Bernardino case, the judiciary can’t compel Apple to provide any meaningful assistance—because there is no more meaningful assistance Apple can provide. San Bernardino was about Apple not wanting to assist the FBI. This is about Apple being incapable of assisting the FBI.
So even if the case winds up in court, real help from Apple is not going to come out of a judicial battle. The meaningful fight is in the court of public opinion.
In my recent post on this, I also noted the curious difference that while DoJ was sought a court order in the San Bernardino case, they weren’t now. I mused that Apple’s compelled speech First Amendment defense had put off DOJ from seeking such orders. I concluded, “That’s a fight that the DOJ doesn’t seem inclined to pick again, so they seem to now be limiting themselves to trying to influence public opinion; not go to court.”
One way to figure out what DoJ is up to is to add in that, as I wrote yesterday, it seems Stefan Savage’s key escrow paper has been making the rounds on Capitol Hill. DoJ and the president’s behavior makes more sense if what they are agitating for is legislation creating a requirement for device manufacturers to be able to decrypt user data for law enforcement. I’m not aware of any such legislation being seriously considered in Congress, though there is certainly a lot of talk. Not a prediction, but I will note that the State of the Union address will take place in two weeks. I’ll be watching closely.
]]>Forgive me for being cynical, but I suspect that the argument that accompanies circulation of such a paper is, “See, despite what tech companies and cryptographers say, it is possible to design an encryption system that allows law enforcement to decrypt a device with a court order.” The problem with that argument is that it’s a straw man. As far as I can tell technologists don’t claim that it can’t be done, only that it can’t be done without compromising collective security.
Here is Facebook in 2018: “We have yet to hear of a technical solution to this challenge that would not risk weakening security for all users.” And here’s Apple:
Proposals that involve giving the keys to customers’ device data to anyone but the customer inject new and dangerous weaknesses into product security. Weakening security makes no sense when you consider that customers rely on our products to keep their personal information safe, run their businesses or even manage vital infrastructure like power grids and transportation systems.
“You can do it, sure, but it would create an unacceptable risk for users,” technologists say. And then I think they engage in a little strawmaning themselves sometimes by adding that the government claims there is no trade-off. I’ve read a bunch of official statements and speeches on the topic recently and I haven’t seen any that deny a trade-off outright, though they do come close. Whatever the case, Attorney General Barr addressed the issue of a trade-off head on in his speech last year on encryption:
Some [claim] that it is technologically impossible to provide lawful access without weakening security against unlawful access. But, in the world of cybersecurity, we do not deal in absolute guarantees but in relative risks. All systems fall short of optimality and have some residual risk of vulnerability a point which the tech community acknowledges when they propose that law enforcement can satisfy its requirements by exploiting vulnerabilities in their products. The real question is whether the residual risk of vulnerability resulting from incorporating a lawful access mechanism is materially greater than those already in the unmodified product. The Department does not believe this can be demonstrated.
Moreover, even if there was, in theory, a slight risk differential, its significance should not be judged solely by the extent to which it falls short of theoretical optimality. Particularly with respect to encryption marketed to consumers, the significance of the risk should be assessed based on its practical effect on consumer cybersecurity, as well as its relation to the net risks that offering the product poses for society. After all, we are not talking about protecting the Nation’s nuclear launch codes. Nor are we necessarily talking about the customized encryption used by large business enterprises to protect their operations. We are talking about consumer products and services such as messaging, smart phones, e-mail, and voice and data applications.
That’s a pretty condescending way to talk about citizens’ intimate private information, but at least he’s acknowledging the trade off. Key escrow can be done, sure, but doing it necessarily introduces some amount of risk to all users of a technology. If we can all agree on that proposition, then the relevant questions become:
The first question is mostly a technical one. Is there really just “a slight risk differential” as Barr suggests? I’m not a cryptographer, so on that score I’d recommend Matthew Green’s critique of key escrow systems like Clear and the one outlined in Savage’s paper, as well as Robert Graham’s take.
The second question is about what policy maximizes social welfare. Do benefits outweigh costs? To my mind there is one big item on the cost side of the ledger that will be hard to overcome: If device manufacturers set up such a system to comply with lawful orders from Western liberal states, they will end up complying if orders from illiberal states as well. As Apple and other tech firms are fond of saying, they comply with the law of the jurisdictions in which they operate. That means China and Russia and certainly our friendly NATO ally Turkey.
People around the world rely on encryption for their safety and freedom. Journalists, activists, persecuted minorities, and average citizens have legitimate reasons to keep secrets from their governments. The costs that one considers in evaluating a key-escrow program has to encompass the inevitable abuse by governments that rule over billions of people.
Another question is, How should we decide if the benefits outweigh the costs? Here’s Alan Z. Rozenshtein at Lawfare:
Even more importantly, this question implicates policy tradeoffs and value judgments that neither technology companies nor the information-security community have the necessary democratic legitimacy to make on their own. It’s neither up to Apple nor the Electronic Frontier Foundation (nor, for that matter, the FBI) to unilaterally decide how much information security is worth sacrificing to save a life or stop a crime; that’s a decision for the public, acting through its elected government, to make for itself. (Hence the ultimate need for a legislative solution to settle this debate one way or another.)
I agree, this is a question that should be answered by “the public,” but I don’t see why representative democracy is the only way it can speak. Indeed, it seems the public has been speaking pretty clearly on how it feels about encryption. From former Deputy Attorney General Rod Rosenstein’s big speech on encryption:
Technology companies operate in a highly competitive environment. Even companies that really want to help must consider the consequences. Competitors will always try to attract customers by promising stronger encryption.
That explains why the government’s efforts to engage with technology giants on encryption generally do not bear fruit. Company leaders may be willing to meet, but often they respond by criticizing the government and promising stronger encryption.
Of course they do. They are in the business of selling products and making money. …
Technology companies almost certainly will not develop responsible encryption if left to their own devices. Competition will fuel a mindset that leads them to produce products that are more and more impregnable.
He means all that to be an indictment, but it’s quite the opposite. He’s explaining that the public demands strong encryption and device manufacturers have every incentive to meet it.
This all betrays a gap between elites and the public. The public clearly wants unalloyed encryption, yet the elite response seems to be, “We know better and we’ll get to the right outcome with ‘democratic legitimacy’ even if we have to propose the same plan a dozen times. After all, we’re not talking about ‘the customized encryption used by large business enterprises to protect their operations,’ we’re merely talking about ‘consumer products and services.’”
]]>That said, I think advocates for a digital dollar have a steep hill to climb because the Fed seems distinctly disinclined to pursue the idea. You can get a sense of what the Fed is thinking through speeches by its officials, and here are some of the remarks they’ve made on the idea of issuing a central bank digital currency.
Speech by Vice Chairman for Supervision Quarles on November 30, 2017:
As a practical matter, I believe that consideration of a central-bank-issued digital currency to the general public would require extensive reviews and consultations about legal issues, as well as a long list of risk issues, including the potential deployment of unproven technology, money laundering, cybersecurity, and privacy to name a few. I am particularly concerned that a central-bank-issued digital currency that’s held widely around the globe could be the subject of serious cyberattacks and could be widely used in money laundering and terrorist financing. The effect of all this would significantly divert our focus from work to improve or establish new private-sector retail payment systems based on existing institutions. The prospect of a government-sponsored digital currency might even derail private-sector plans to enhance the payment services provided to their customers, thereby significantly disrupting the financial networks that exist today in ways that could create instability. For example, if payment activity radically shifted from using deposits at financial institutions to using central-bank-issued digital currency, deposits could significantly shrink and potentially disrupt financial institutions’ ability to make loans that spur economic activity.
Speech by Governor Brainard on May 15, 2018
[T]here are serious technical and operational challenges that would need to be overcome, such as the risk of creating a global target for cyberattacks or a ready means of money laundering. For starters, with regard to money laundering risks, unless there is the technological capability for effective identity authentication, a central bank digital currency would provide no improvement over physical notes and could be worse than current noncash funds transfer systems, especially for a digital currency that could circulate worldwide. In addition, putting a central bank currency in digital form could make it a very attractive target for cyberattacks by giving threat actors a prominent platform on which to focus their efforts. Any implementation would need to adequately deal with a variety of cyber threats–especially for a reserve currency like the U.S. dollar. …
If a successful central bank digital currency were to become widely used, it could become a substitute for retail banking deposits. This could restrict banks’ ability to make loans for productive economic activities and have broader macroeconomic consequences. Moreover, the parallel coexistence of central bank digital currency with retail banking deposits could raise the risk of runs on the banking system in times of stress and so have adverse implications for financial stability.
Finally, there is no compelling demonstrated need for a Fed-issued digital currency. Most consumers and businesses in the U.S. already make retail payments electronically using debit and credit cards, payment applications, and the automated clearinghouse network. … As such, it is not obvious what additional value a Fed-issued digital currency would provide over and above these options.
Speech by Governor Brainard on October 16,2019:
In the United States, there are compelling advantages to the current system. First, physical cash in circulation for the U.S. dollar continues to rise, suggesting robust demand. Second, the dollar is an important reserve currency globally, and maintaining public trust in the sovereign currency is paramount. Third, we have a robust banking system that meets the needs of consumers: our banks are many in number, diverse in size, and geographically dispersed. Finally, we have a widely available and expanding variety of digital payment options that build on the existing institutional framework and the applicable safeguards.
Financial stability considerations are also important. The ability to convert commercial bank deposits into central bank digital currency with a simple swipe surely has the potential to be a run accelerant. Here, too, the role of banks in providing financial intermediation services could be fundamentally altered.
Seems to me that all boils down to:
Those are the questions any effort to digitize the dollar will have to answer, and it’s the last question that most concerns me. In my view, a digital dollar that is meant to be a digital version of physical cash must have all the attributes of cash, which, as I have explained in much detail, includes censorship resistance and anonymity. To the extent such a design is not an option for the Fed, what’s the alternative? Governor Brainard addressed that in her October 2019 speech:
If it is designed to be financially transparent and provide safeguards against illicit activity, a central bank digital currency for consumer use could conceivably require the central bank to keep a running record of all payment data using the digital currency—a stark difference from cash, for instance. A system in which individual payments information would be recorded by a government entity would mark a dramatic shift.
It sure would. Centralized surveillance of that kind is not compatible with American values.
That’s all to say I look forward to the conversation but remain a little skeptical given little if any public demand, little threat from competing currencies, and, depending on the particular design, potential opposition from banks and civil liberties advocates. It’s going to be a tough row to hoe.
]]>The bill would create a de minimis exemption for personal cryptocurrency transactions that result in gains under $200. This would match how we treat foreign currencies.
The way the problem for crypto is typically framed is that if last week you bought a bitcoin for $8,000 and today, when bitcoin is trading for around $8,800, you used some of it to buy an $3 cup of coffee, then you have experienced about 25¢ of capital gains and you are technically on the hook for keeping a record of that, reporting it to the IRS, and paying tax on it.
That much pointless friction, the story goes, would render crypto not very useful for retail payments, or create a vast class of technically non-compliant taxpayers. That’s absolutely true, but there’s another reason why I think it’s so important to fix this nonsense corner-case of the law.
Continuous disposition of very small amounts of crypto is integral to crypto itself. I’m of course talking about transaction fees or gas. Every time you move some crypto, or run a smart contract, you are probably spending a few pennies on fees to validators, and technically those are all taxable events subject to capital gains tax.
People may not be buying coffee with bitcoin today, but they sure are buying space in blocks with it.
For crypto users, it’s like the world before Congress created the foreign currency exemption: almost everyone who used foreign currency on vacation was technically noncompliant. Having laws on the books that no one follows does not inspire much respect for the law. It also creates a pretext for enforcement that applies to an entire class of people—in this case crypto users. Congress fixed it for foreign currencies in 1997 and it should do the same thing for crypto today.
]]>A good example of that are the policy questions around encryption and encrypted messaging. Because cryptocurrency uses encryption, it bears pretty directly on it obviously. But it’s more than that. If law enforcement get what they want, which is the ability to legally-mandate backdoors into encrypted systems, that would easily include not just backdoors for private cryptocurrencies, but also perhaps the ability to stop or reverse transactions.
It seems that we’re on the right track, unfortunately. Lo and behold yesterday the Department of Justice called on Apple to help it break into an iPhone that belonged to the Pensacola Air Station shooter. Here’s the relevant part of Attorney General Barr’s statement yesterday:
The shooter possessed two Apple iPhones, seen on posters here.
Within one day of the shooting, the FBI sought and received court authorization based on probable cause to search both phones in an effort to run down all leads and figure out with whom the shooter was communicating. …
However, both phones are engineered to make it virtually impossible to unlock them without the password. It is very important to know with whom and about what the shooter was communicating before he died.
We have asked Apple for their help in unlocking the shooter’s iPhones. So far Apple has not given us any substantive assistance. This situation perfectly illustrates why it is critical that investigators be able to get access to digital evidence once they have obtained a court order based on probable cause. We call on Apple and other technology companies to help us find a solution so that we can better protect the lives of Americans and prevent future attacks.
The media has noted the similarities between this and the dispute between Apple and the FBI over the San Bernardino shooters’ iPhones. But what I find interesting here is the difference.
In the San Bernardino case, Apple was served with a court order directing it to write software to break its own phones:
As a result, the FBI asked Apple Inc. to create a new version of the phone’s iOS operating system that could be installed and run in the phone’s random access memory to disable certain security features that Apple refers to as “GovtOS”. Apple declined due to its policy which required it to never undermine the security features of its products. The FBI responded by successfully applying to a United States magistrate judge, Sheri Pym, to issue a court order, mandating Apple to create and provide the requested software.
Apple defied the court order and refused to write the software. Eventually the FBI backed down and the conventional narrative is that it did so because it found a security firm that helped it circumvent the phone’s security. This is how the New York Times characterized it just yesterday:
The San Bernardino dispute was resolved when the F.B.I. found a private company to bypass the iPhone’s encryption. Tensions between the two sides, however, remained, and Apple worked to ensure that neither the government nor private contractors could open its phones.
I think there was more to the FBI/DOJ’s decision than that. It is that shortly before they backed down Apple made it clear that if they went to court they would be employing a First Amendment defense:
A famous encryption case known as Bernstein v. US Department of Justice established long ago that code is speech and is protected by the First Amendment. Compelling Apple to write code would be the equivalent of the government compelling Apple’s speech. But that’s not the most important argument in this case. Instead, it’s the digital signature that Apple would use to sign that code that is the key to Apple’s First Amendment argument, say legal experts who spoke with WIRED.
“The human equivalent of the company signing code is basically saying, ‘We believe that this code is safe for you to run,’” says Jennifer Granick, director of civil liberties for the Center for Internet and Society at Stanford Law School. “So I think that when you force Apple to cryptographically sign the software, it has a communicative aspect to it that I think is compelled speech to force them to do it.”
That’s a fight that the DOJ doesn’t seem inclined to pick again, so they seem to now be limiting themselves to trying to influence public opinion; not go to court. But it’s a fight we have to be prepared to fight in court. If a developer can be forced to write code they don’t want to write (i.e. can be compelled to speak things they don’t want to speak), then it’s only a matter of time before cryptocurrency devs get court orders to build in backdoors. I think we probably have the upper hand at the moment, but we have to be prepared to make the case not just for privacy, but perhaps more importantly for free speech.
]]>So what’s the threat? Last year two members of Congress wrote to Fed Chair Jay Powell, “We are concerned that the primacy of the U.S. Dollar could be in long-term jeopardy from wide adoption of digital fiat currencies,” namely China’s. In a Wall Street Journal oped, former CFTC Chair Christopher Giancarlo and Dan Gorfine wrote that like the Soviets launching into space threatened U.S. technological dominance, “recent developments in digital currencies similarly threaten the dollar’s dominance” and that “a network of Beijing-dependent states trading a digital yuan … could end the delicate world economic order Americans have long taken for granted.”
Maybe I’m not clear on what threat exactly folks see from the digitization of the yuan, but it certainly isn’t going to affect the dollar’s status as the dominant global reserve currency. That’s because the yuan’s fundamentals make it unsuited to be a major global reserve currency. Indeed it accounts for less than 2 percent of global reserves, compared to the dollar’s 60 percent. If central banks wanted to hold the yuan today, they would, but they don’t. That it will soon have a digital version available won’t change its fundamentals or central bank demand for it. It will still be the yuan.
Global reserve currencies like the dollar, euro, yen, and pound sterling have certain essential characteristics that the yuan lacks. There are many, but just a couple of important ones are a freely floating exchange rate, as well as backing by a country with macroeconomic stability, a good regulatory regime, a commitment to the rule of law, and deep, liquid, and transparent markets. China and the yuan score poorly on these counts. George Magnus summarizes it succinctly in Red Flags: Why Xi’s China Is in Jeopardy:
”First, and foremost, there is only one way to have a significant global currency, which is to allow foreigners to acquire and accumulate claims on you. In other words, just as the US has allowed foreigners to build up holdings of US bonds and other US assets (which are America’s liabilities), so China would have to as well. There are, though, only two ways this can happen. One is by running current account deficits, so that foreigners receive more of your currency than they pay for goods and services. The other is by having an open capital account, so that capital flows freely abroad. China runs a current account surplus, smaller than it used to be, but structurally entrenched for the time being. To balance this surplus, capital has to flow out but it is subject to controls that keep it locked up at home. The likelihood of China running current account deficits or allowing a meaningful liberalisation of capital account transactions any time soon is negligible. If anything, the surplus is likely to increase again as growth slows in the future. Consequently, the Renminbi is strongly handicapped when it comes to becoming a more serious global reserve currency. It is still possible for businesses and commercial organisations to use the Renminbi more for transactions in the future but that is quite different from becoming a more important global reserve currency.
And that doesn’t even mention China’s weak institutions, the state’s track record of intervening in markets, and most importantly “the fragility of the Chinese economy and especially the tremendous systemic risk, bad debt and other problems that plague China’s financial sector.” On that I recommend China’s Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans, and the End of the Chinese Miracle by Dinny McMahon.
Given all this, it’s clear the yuan is at the very least decades away from challenging the dollar as a global currency, and again, a digital yuan is still the yuan. (Of course, like the pound sterling before it, the U.S. dollar could decline for its own reasons and open itself to challenge from the yuan and other currencies, but that’s separate from what China can do today proactively to challenge the dollar.)
So if the digital yuan is not a threat to the dollar’s global reserve currency status, could it instead threaten the dollar’s dominance in international payments and replace SWIFT? Perhaps marginally the yuan’s digitization would make it easier to use in global trade, but such use is still tied to reserve currency status. China’s efforts to internationalize the yuan, including launching its own Cross-Border Interbank Payment System in 2015 as an alternative to SWIFT, have so far borne little fruit.
When I make this point I’m often told that China, especially through its Belt and Road Initiative, has power over many emerging economies in Africa, Asia, and Latin America, and it could essentially require them to adopt the yuan. But as the FT points out, that’s just not the case:
When China first unveiled its plans to connect more than 65 countries along a modern Silk Road in 2013, the project was met with great fanfare. The Belt and Road Initiative (BRI), as it was later renamed, was initially hailed as “the most ambitious economic and diplomatic program since the founding of the People’s Republic”. Beyond the pledge that it would help to turn China into a high-income economic powerhouse, Chinese officials also touted the BRI as a vehicle for transforming the country’s currency into a global one.
Five years on, the renminbi hasn’t made much headway as an internationally-recognised unit of account, medium of exchange or store of value — the three functions a global currency must fulfill. In fact, the majority of BRI projects are not even funded this way. Like most global transactions, the dollar dominates, putting a natural cap on just how revolutionary the BRI can be. …
In August 2015, the renminbi stood as the world’s fifth most-active currency for domestic and international payments, with a 2.8 per cent share according to SWIFT. By 2016, it had slipped a slot to 1.67 per cent. As of October, it remains in sixth place, with a 1.70 per cent share. The dollar, on the other hand, has maintained its commanding share of domestic and international payments at roughly 40 per cent: Even in China, the use of the renminbi to settle trade has declined. Today, just 13 per cent is renminbi-denominated. Three years ago, it was about double that.
So if the digitization of the yuan will likely have only a small marginal effect on its internationalization, why is the Chinese government doing it? As naive as it might seem, one place to start in answering this question is to listen to what China says is its motivation.
Here is Mu Changchun, the head of the People’s Bank of China’s digital currency initiative quoted in September: “Why is the central bank still doing such a digital currency today when electronic payment methods are so developed? It is to protect our monetary sovereignty and legal currency status. We need to plan ahead for a rainy day.” What rainy day? Here is Mu quoted in October: “If Libra is accepted by everyone and becomes a widely used payment tool, then after some time, it is entirely possible that it will develop into a global, super-sovereign currency. We need to plan ahead to protect our monetary sovereignty.”
So in reality, the digital yuan may be a mostly defensive, and not offensive, move. (And I don’t mean about Libra specifically, but about monetary sovereignty generally.)
Of course, there are other reasons why the initiative would be attractive to the state. For one thing, it fits in with China’s continuing efforts to limit the use of physical cash. As described by officials, the digital yuan will only replace cash (M0) not bank deposits (M1 or M2). That in turn will allow the government to stop counterfeiting (a big problem in China) and better surveil and have control over financial transactions. Again, I look forward to seeing how the “controllable anonymity” planned for the digital yuan will work technically.
Finally, for what it’s worth, Kenneth Rogoff thinks that while the digital yuan won’t supplant the dollar, it could compete in the market for illicit transactions:
Control over the underground economy, however, is another matter entirely. The global underground economy, consisting mainly of tax evasion and criminal activities, but also terrorism, is much smaller than the legal economy (perhaps one-fifth the size), but it is still highly consequential. The issue here is not so much whose currency is dominant, but how to minimize adverse effects. And a widely used, state-backed Chinese digital currency could certainly have an impact, especially in areas where China’s interests do not coincide with those of the West.
A US-regulated digital currency could in principle be required to be traceable by US authorities, so that if North Korea were to use it to hire Russian nuclear scientists, or Iran were to use it to finance terrorist activity, they would run a high risk of being caught, and potentially even blocked. If, however, the digital currency were run out of China, the US would have far fewer levers to pull. Western regulators could ultimately ban the use of China’s digital currency, but that wouldn’t stop it from being used in large parts of Africa, Latin America, and Asia, which in turn could engender some underground demand even in the US and Europe.
While China’s new digital currency doesn’t really pose a threat to the dollar, it’s not going to be boring either. I look forward to its launch.
]]>This is supposed to avoid results where most voters don’t like the winning candidate. Usually this happens when two or more ideologically similar candidates split the vote. For example:
In an IRV system, Al Gore could have won Florida (and with it, the presidential election) in 2000 when Ralph Nader voters might have picked Gore over George W. Bush as their second choice[.]
That’s from this interesting article from City Journal delving into IRV and how it helped the radical Chesa Boudin win the San Francisco DA election. But here’s what I learned that’s really interesting:
[I]n 2016, Donald Trump would have won the popular vote (and a few states that he barely lost, like Minnesota) when Gary Johnson and Evan McMullin voters could have chosen him as their second choice over Hillary Clinton.
It’s a little too subtle or he would have already banged on about this.
Here’s something else that amused me. According to this provocatively titled article, global AML harmonization—vital for the U.S.’s sanctions regime today—has a sneaky origin. Essentially,the industrialized powers “bypassed” having to reach global consensus through a multilateral treaty process. How? In 1989 the G7 simply created a“task force” to address drug trafficking, and it later expanded its remit to include money laundering. You may have heard of it; it’s called the Financial Action Task Force (FATF).
After a sluggish start, with few nations signing up to its compliance model, FATF made an offer governments couldn’t refuse … FATF rated countries’ anti-money laundering regimes and issued “black lists” and “grey lists” publicly naming those not meeting its “recommendations”. Banks did the rest. Treating the ratings and lists as a proxy for risk, access to the financial system became difficult for many countries. FATF’s intention (in its own words) was to “pressure” countries to comply, “to maintain their position in the global economy”.
Risking exclusion from financial markets, 205 countries and jurisdictions “voluntarily” joined the anti-money laundering movement.
The FATF’s legitimacy is solid, though. Democracy and sovereignty are, of course, secondary to fighting money laundering.
]]>In the wider crypto community and the crypto press, there’s a tendency to treat all bills and all members of Congress as equivalent. They’re not. It’s one thing if the chairman of the Senate Banking Committee introduced a bill co-sponsored by the ranking member of that committee, and it’s another thing if it’s a freshman minority House member on the Veterans’ Affairs and Small Business committees who introduces a bill. So how do you know what’s high priority and what’s not? There’s not a single formula, but here’s the quick analysis I’d do on this particular bill.
First, has this bill been introduced? Or is it just an idea that may never be? Although the crypto press has reported that this bill has been introduced, it has not. A simple search of congress.gov will tell you that.
Then we look at who is the sponsor of the bill. In this case it seems to be Rep. Paul Gosar. We ask, is he on any of the committees to which this bill would be referred? I.e. House Financial Services Committee and the Committee on Agriculture (which oversees the CFTC)? The answer is no; he serves on the Natural Resources Committee and the Committee on Oversight and Reform. It’s difficult for a member to move a bill in a committee of which he’s not a member, doubly so if he’s in the minority as is Gosar. Here’s a pretty good summary of the process.
Last, you might ask, who is the member? Is he especially senior in some other way that might make one pay special attention to the bill? In this case I am familiar with Rep. Gosar, but not because of any seniority. Here’s a New York Times article about him from this week, one from his last election, and one that gives a sense of how his colleagues might perceive him. Here’s a bonus one. By this point I’m not putting too much stock in the bill, even before I look at the text, which is a whole other analysis.
So why is Rep. Gosar working on this? I don’t know, but oftentimes members come to work on crypto driven by their staff’s interest, which by looking at Twitter seems to be the case here. Who is he relying on for advice? I don’t know, but I’ll note that he sponsored a panel discussion with “teenage Bitcoin millionaire” Erik Finman last year. As I said in yesterday’s post, a definite relevant trend in our work is the increasing number of voices in DC lobbying on crypto issues.
]]>Again, some of these deserve blog posts of their own, so stay tuned.
]]>In writing down this list I had to resist the temptation to write a blog post about each item, so maybe I will. I’m looking forward to seeing what other trends the team has flagged and what ideas will spring forth from putting them together.
]]>The web interface of any given public Substack is basically that of a blog. You can even set up comments. And there are subscription apps like Stoop that organize newsletters’ content as RSS readers did for blogs.
I hadn’t heard of Stoop, but I use a similar feature inside the wonderful RSS reader Feedbin. The service assigns you an email address that you can use to subscribe to newsletters and issues will appear in your feed. So I also basically treat newsletters as blogs.
But they aren’t the same. From a writer’s perspective I think newsletters feel more formal given their push nature. Because when you hit publish you’re about to insert yourself into the inboxes of maybe hundreds or thousands of people, it better be good. That has certain virtues, like imposing discipline on the writer, which as a reader I appreciate. But the flip side is, of course, that you lose the informality and frequency that made blogs so conducive to free-thinking and experimentation. Joanne goes on:
It’s been long enough now that people look back on blogging fondly, but the next generation of blogs will be shaped around the habits and conventions of today’s internet. Internet users are savvier about things like context collapse and control (or lack thereof) over who gets to view their shared content. Decentralization and privacy are other factors. At this moment, while so much communication takes place backstage, in group chats and on Slack, I’d expect new blogs to step in the same ambiguous territory as newsletters have — a venue for material where not everyone is looking, but privacy is neither airtight nor expected.
I think we will see something of a blog renaissance as a reaction to the current state of social media, which Saku Panditharatne recently and aptly described this way:
Twitter has been a mix of both [decline in relevance and quality], riding the technology wave for the first half of the decade, but by 2019 the /#discourse became not only, as they say, toxic, but intellectually bankrupt as well. Overrun with shallow moralizing and self-help gurus, there really isn’t much left on Twitter outside of the snark, but we’re all stuck there because it’s such a great networking tool.
I have a hunch that people who want to have more serious conversations will turn away from social media and toward slower and longer form media like blogs and podcasts. This blog is certainly an example of that. After more than one bad experience on Twitter last year I’ve more or less given it up and I can certainly say my mental health is better for it. As Saku says, though, the network effects are too good to pass up.
Something I do to try to have my cake and eat it too: I use another feature of Feedbin that lets me subscribe to individual Twitter feeds and, again, see updates in my feed along with blog and newsletter posts. I don’t see any replies, etc., and if there’s a linked article in a tweet it gets expanded so I see the full text. At the moment I have subscribed to only five people whose updates I find interesting and high signal to noise and I intend to keep that set pretty small. We’ll see if I dip my toe back in and tweet again this new year, but if I do I suspect it will be to broadcast new posts here and and engage with thoughtful commenters.
]]>Blogging is also my way of quietly rejecting social media and its pernicious incentive structure. Here is the first sentence of a recent article that rang very true to me:
I remember the exact moment when the internet turned sour for me. It was July 1, 2013: the day Google Reader was put down by its corporate masters. The death of an RSS reader might not seem like the greatest tragedy to befall the internet over the past decade—it wasn’t—but it had a profound impact on my professional, and thus intellectual, life.
The article is full of inferences that are plain wrong, but the yielding of blogging in the face of social media is real and it can be traced pretty directly back to the death of Reader as much as any other moment. As much as readers, indie writers depended on it to be aggregated and consumed in a (yes) personalized news feed. There were also community feeds like Digg, Hacker News, Slashdot, and Metafilter that are shadows of their former selves. They were “entry points to the network” and it was a network of independents writing on their own homesteads. Today the networks to which Twitter, Facebook, and Instagram are entrypoints are proprietary, standardized, and gamified, and we are at best renting our little plots and at worst we’re serfs.
Before I get mail, let me say that I grok all the virtues of these platforms. Indeed I was an early evangelist. But I’m still allowed to be nostalgic for what’s been lost. Perhaps as more people grow disenchanted with the new medium’s limitations, at least some will try to go back to indie and make social media work as an entrypoint for better or worse. Again, if Tyler and Fred can do it, why can’t I?
A final and related inspiration is This Page is Designed to Last: A Manifesto for Preserving Content on the Web by Jeff Huang who laments the scurge of link rot. As he puts it, “the increasing complexity of keeping alive indie content on the web, leading to a reliance on platforms” and he admits he’s as guilty as anyone:
I’ve recommended my students to push websites to Heroku, and publish portfolios on Wix. Yet every platform with irreplaceable content dies off some day. Geocities, LiveJournal, what.cd, now Yahoo Groups. One day, Medium, Twitter, and even hosting services like GitHub Pages will be plundered then discarded when they can no longer grow or cannot find a working business model.
To counteract this he’s developed a list of rules for indie web development, many of which I’m adopting here. Again, following Tony Finch, this one really speaks to me:
Prefer one page over several – several pages are hard to maintain. You can lose track of which pages link to what, and it also leads to some system of page templates to reduce redundancy. How many pages can one person really maintain? Having one file, probably just an index.html, is simple and unforgettable. Make use of that infinite vertical scroll. You never have to dig around your files or grep to see where some content lies.
So I’ve built this little site as one big page. It is actually made of individual Markdown files, one for each day, but there’s only one index.php. I hope you like it.
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