Money Reimagined: No, Secretary Summers, Money Privacy Is a Vital Freedom

It was a provocative way to start the biggest cryptocurrency and blockchain event of the year.

President Clinton’s former Treasury secretary, now President Emeritus at Harvard, referenced the 500-euro note, which bore the nickname “The Bin Laden,” to argue the un-traceability of cash empowers wealthy criminals to finance themselves. “Of all the important freedoms,” he continued, “the ability to possess, transfer and do business with multi-million dollar sums of money anonymously seems to me to be one of the least important.” Summers ended the segment by saying that “if I have provoked others, I will have served my purpose.”

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That he did. Among the more than 20,000 registered for the weeklong virtual experience was a large contingent of libertarian-minded folks who see state-backed monitoring of their money as an affront to their property rights. 

But with due respect to a man who has had prodigious influence on international economic policymaking, it’s not wealthy bitcoiners for whom privacy matters. It matters for all humanity and, most importantly, for the poor. 

Now, as the world grapples with how to collect and disseminate public health information in a way that both saves lives and preserves civil liberties, the principle of privacy deserves to be elevated in importance. 

Digital currencies will only worsen this situation. If they are added to this comprehensive surveillance infrastructure, it could well spell the end of the civil liberties that underpin Western civilization. 

Yes, freedom matters

Please don’t read this, Secretary Summers, as some privileged anti-taxation take or a self-interested what’s-mine-is-mine demand that “the government stay away from my money.” 

Money is just the instrument here. What matters is whether our transactions, our exchanges of goods and services and the source of our economic and social value, should be monitored and manipulated by government and corporate owners of centralized databases. It’s why critics of China’s digital currency plans rightly worry about a “panopticon” and why, in the wake of the Cambridge Analytica scandal, there was an initial backlash against Facebook launching its libra currency. 

Writers such as Shoshana Zuboff and Jared Lanier have passionately argued that our subservience to the hidden algorithms of what I like to call “GoogAzonBook” is diminishing our free will. Resisting that is important, not just to preserve the ideal of “the self” but also to protect the very functioning of society. 

Markets, for one, are pointless without free will. In optimizing resource allocation, they presume autonomy among those who make up the market. Free will, which I’ll define as the ability to lawfully transact on my own terms without knowingly or unknowingly acting in someone else’s interests to my detriment, is a bedrock of market democracies. Without a sufficient right to privacy, it disintegrates – and in the digital age, that can happen very rapidly.

Also, as I’ve argued elsewhere, losing privacy undermines the fungibility of money. Each digital dollar should be substitutable for another. If our transactions carry a history and authorities can target specific notes or tokens for seizure because of their past involvement in illicit activity, then some dollars become less valuable than other dollars. 

The excluded

But to fully comprehend the harm done by encroachments into financial privacy, look to the world’s poor. 

An estimated 1.7 billion adults are denied a bank account because they can’t furnish the information that banks’ anti-money laundering (AML) officers need, either because their government’s identity infrastructure is untrusted or because of the danger to them of furnishing such information to kleptocratic regimes. Unable to let banks monitor them, they’re excluded from the global economy’s dominant payment and savings system – victims of a system that prioritizes surveillance over privacy.  

Misplaced priorities also contribute to the “derisking” problem faced by Caribbean and Latin American countries, where investment inflows have slowed and financial costs have risen in the past decade. America’s gatekeeping correspondent banks, fearful of heavy fines like the one imposed on HSBC for its involvement in a money laundering scandal, have raised the bar on the kind of personal information that regional banks must obtain from their local clients. 

And where’s the payoff? Despite this surveillance system, the U.N. Office on Drugs and Crime estimates that between $800 billion and $2 trillion, or 2%-5% of global gross domestic product, is laundered annually worldwide. The Panama Papers case shows how the rich and powerful easily use lawyers, shell companies, tax havens and transaction obfuscation to get around surveillance. The poor are just excluded from the system.

Caring about privacy

Solutions are coming that wouldn’t require abandoning law enforcement efforts. Self-sovereign identity models and zero-knowledge proofs, for example, grant control over data to the individuals who generate it, allowing them to provide sufficient proof of a clean record without revealing sensitive personal information. But such innovations aren’t getting nearly enough attention. 

Few officials inside developed country regulatory agencies seem to acknowledge the cost of cutting off 1.7 billion poor from the financial system. Yet, their actions foster poverty and create fertile conditions for terrorism and drug-running, the very crimes they seek to contain. The reaction to evidence of persistent money laundering is nearly always to make bank secrecy laws even more demanding. Exhibit A: Europe’s new AML 5 directive.

To be sure,  in the Consensus discussion that followed the Summers interview, it was pleasing to hear another former U.S. official take a more accommodative view of privacy. Former Commodities and Futures Trading Commission Chairman Christopher Giancarlo said that “getting the privacy balance right” is a “design imperative” for the digital dollar concept he is actively promoting. 

But to hold both governments and corporations to account on that design, we need an aware, informed public that recognizes the risks of ceding their civil liberties to governments or to GoogAzonBook.

Let’s talk about this, people.

A missing asterisk

Control for all variables. At the end of the day, the dollar’s standing as the world’s reserve currency ultimately comes down to how much the rest of the world trusts the United States to continue its de facto leadership of the world economy. In the past, that assessment was based on how well the U.S. militarily or otherwise dealt with human- and state-led threats to international commerce such as Soviet expansionism or terrorism. But in the COVID-19 era only one thing matters: how well it is leading the fight against the pandemic. 

So if you’ve already seen the charts below and you’re wondering what they’re doing in a newsletter about the battle for the future of money, that’s why. They were inspired by a staged White House lawn photo-op Tuesday, where President Trump was flanked by a huge banner that dealt quite literally with a question of American leadership. It read, “America Leads the World in Testing.” That’s a claim that’s technically correct, but one that surely demands a big red asterisk. When you’re the third-largest country by population – not to mention the richest – having the highest number of tests is not itself much of an achievement. The claim demands a per capita adjustment. Here’s how things look, first in absolute terms, then adjusted for tests per million inhabitants.

American leadership? You decide.

Global town hall

We’re grateful to the gods of randomness. Those who set the time for each quadrennial bitcoin halving decided to bestow on CoinDesk the opportunity to “host” the most recent one on Monday, May 11, the first day of Consensus: Distributed. (Even better, they put the change in the miners’ block reward – from 12.5 BTC to 6.25 BTC – in the New York afternoon, right in the middle of a session moderated by the best people to discuss it: our research team, who’ve been all over why this event matters.)

That fortuitous occurrence left me with this question: Why were we all so excited about this supposedly predictable, expected event? I don’t think it’s entirely because the halving has historically been accompanied by price gains (in apparent defiance of the “efficient market hypothesis”), though the “number go up” force is strong within the crypto community. 

To me, the halving is a powerful reminder that despite its (relatively) predictable timing, no one can stop this pre-programmed event from happening. The halving is a demonstration of the decentralized nature of blockchain technology. At a time when the economic lives of seven billion people hinge, to no small degree, on the decisions of the 12 human beings who occupy the U.S. Federal Reserve’s Open Market Committee, the mathematical unstoppableness of bitcoin is kind of appealing, no? 

“Negative rates.”  Expect those two words to become a talking point, both in traditional financial and in crypto circles. In comments during a Peterson Institute online interview Thursday, Federal Reserve Chairman Jerome Powell played down the prospect of the Fed taking its target rate below zero. The stock market fell in disappointment that Powell was putting a limit on future monetary stimulus. But bitcoin markets read things differently, seemingly getting a bump from the very fact that the topic was even discussed. Perhaps, as a market, the latter is less mature than the former. Maybe crypto traders wake up to an idea long after it’s already priced into traditional markets. 

But the diametrically opposed responses might also reflect completely different investment narratives and contexts. Undoubtedly, the stock market views negative rates as a big, unprecedented event. Yet, if equity traders are wishing for them, it’s not because they see them an existential challenge to the entire financial system – to think that way would be to bet against themselves. Many bitcoin investors, by contrast, are betting on the upending of everything. To them, negative interests could imply the U.S. is abandoning its “strong dollar” role as global monetary backstop, which could in turn deplete faith in fiat generally and move money into bitcoin. I have no idea whose perspective is right, but I’m quite certain we haven’t heard the end of the debate on the Fed going negative.

The blockchain-based identity model has a shot at legitimacy in the global financial system. The Global Legal Entity Identifier Foundation (GLEIF), a standardizing body for legal financial entity identifiers created by the Group of 20 nation’s Financial Stability Board  is launching a pilot with Evernym, which uses the Sovrin protocol and blockchain technology to build self-sovereign credentialing systems. It’s a radical shift for GLEIF, which was founded by the central bank-led FSB to bring consistency to proofs of identity in the fast-moving global financial system to reduce the risk of fraud and boost efficiency. The idea of a decentralized identity management system is potentially quite important. Where goes identity, so too goes money.

Is bitcoin the answer for a global monetary system not longer served by the dollar standard? Airing Friday, May 15, episode 3 of The Breakdown: Money Reimagined examines bitcoin and permissionless stablecoins – both of which are forcing the global monetary system to examine deeply ingrained beliefs. 

The Breakdown: Money Reimagined is a podcast crossover micro series exploring the battle for the future of money in the context of a post COVID-19 world. The four-part podcast features over a dozen voices including Consensus: Distributed speakers Niall Ferguson, Nic Carter and Michael Casey. New episodes air Fridays on the CoinDesk Podcast Network. Subscribe here.