From: Robert Hettinga <rah@shipwright.com>
Date: Mon, 11 Aug 1997 01:01:39 +0800
To: cryptography@c2.net
Subject: e$: Carts, horses, other dromedaries, and the needle's eye of economics...
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Date: Sun, 10 Aug 1997 11:05:54 -0400
To: e$@thumper.vmeng.com
From: Robert Hettinga <rah@shipwright.com>
Subject: e$: Carts, horses, other dromedaries, and the needle's eye of
 economics...
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At 5:51 pm -0400 on 8/9/97, Somebody wrote:


> I couldn't imagine more depressing news.  The linking of
> internet + banking + fraud + organized-crime + offshore is precisely the kind
> of negative publicity which will set back e$ <...> horribly.  I
> desperately wanna cry "Say it ain't so, Joe!"  Oh, well.  We move on.  All
> the more reason to find some topflight Swiss, Belgian, Brit or German bankers
> to play.  But, this will make _them_ doubly shy, too.

Agreed, but this Russia/Antigua thing is *really* not a big deal.
Expatriation of assets is a completely orthogonal issue to the adoption of
digital commerce and financial cryptography.

That's because financial cryptography is about vastly improving the
financial system, and not at all about killing the nation state to save our
freedom.

(I knew I'd get your attention with that one... :-))

Personally, I believe that the use of strong financial cryptography is the
way that the internet will bring about the death of the nation-state, and
I'll be extremely happy when that happens, just like a lot of
industrialists rejoiced in the decline and fall of the aristocracy.

However, the nation state will adopt financial cryptography and digital
bearer settlement because it *has* to, economically, the same way that
aristocracy adopted industrialism of its own economic necessity, an act
which ushered in the nation-state and their own political demise. Like all
technological progress, strong financial cryptography should enable you to
do better transactions much cheaper. Technological progress cannot be
commanded or stopped with a political decision, as any student of the
Spanish inquisition, or Stalin, or Mao, will attest.


Clearly, politics may be why you try to invent things in the first place.
Diffie invented public key cryptography and Chaum invented blind signatures
for political reasons, obviously, but their technologies themselves are
value neutral. They're just facts, not political opinions. Remember what
happened to government mandated technologies of the past, like synthetic
fuel subsidies and the 'alternative' energy debacle -- or Lysenko.

Paradoxically, even though people may invent things because of their
politics, the unpredictablity of invention's outcome is such that it is in
fact science -- reality -- that creates politics, and not the other way
around. The political cart cannot be put before the economic and
technological horse.


So, at the risk of using a "utilitarian" argument ;-), discussions about
the "politics" -- even the constitutionality -- of technology is a waste of
time. This is particularly the case in discussions about the politics of
financial cryptography, and, I daresay, all cryptography. It's the
economics of the technology that matters, and since financial cryptography
is by its very definition an economic technology, appeals to politics are
even more irrelevant in discussing it. Cypherpunks knew this a long time
ago, by resisting attempts to herd them into some kind of political action
committee or another. "Cypherpunks write code", and all that.  Of course,
it doesn't keep us all from political kibbitzing -- or writing the
occasional screed. :-).

Just like any successful technology, if a politician gets in the way of
financial cryptography, economic progress should eventually make so much
money that it simply buys him out of the way. If it can't afford to to do
that, then financial cryptography on public networks won't be adopted.
Cynical it may be, it's still that simple.


So, to my mind, the whole question of going offshore is now pretty much
immaterial. We understand now how to do the trustee/boundry-layer work at
any institional trustee bank. We're pretty much at the stage where we can
walk right into the front door as a customer of giant institutional banks
like State Street, or Banker's Trust, or Morgan Guarantee -- or even the
Fed itself. Any bank who wants to hold reserve accounts in trust and to
handle the funds transfer work on behalf of digital bearer cash users on
the net, which any of these kinds of banks will do now already for clients
like investment banks and mutual funds. We understand things well enough
now to plug the net right into the existing financial system, on simple
terms that it understands completely, without any legal problems
whatsoever. And, because of this, we can also turn right around and do all
the things we want to do on the net completely legally: blind signatures,
anonymous transactions, and all. And, frankly, we'll be cheered by the
financial and business community when we do, because we'll probably reduce
the cost of cash transactions by 3 or 4 orders of magnitude, or more, not
to mention creating *profitable* transaction sizes, from picodollar to
teradollar, never before seen in the financial community.

That's because the reason for adopting blind signature technology is not
that you will pay extra to use anonymous bearer certificates, absolutely
not. It's that because of their very anonymity, which enables you to trust
someone who you can never know, digital bearer certificates will probably
be much cheaper to use than non-anonymous digital cash or book-entry
settlement methods, just like cash would be cheaper to handle if it weren't
physical.  Which is, of course, the point of blind signatures in the first
place.


So, if people who sell pornography, or have illegal businesses, want to get
their money onto the net under newer bearer certificate market models like
trustee/underwriter, they should be able to use their own banks to do so,
like everyone else would. All criminals of any real stature have banks who
know them and love having them as customers anyway.

In addition, people will figure out other non-bank ways to get money onto
the net if they want to, especially if there's something to do with it when
the money gets there. I expect that there will be lots of net.smurfs who
will continually find new and better ways to convert meatcash into digital
cash, and law enforcement will have to use the same methods they use now,
probably at the same success rates they now have, to stop that activity.

Frankly, there's no difference between all that and the status quo anyway,
so I really don't anticpate the market for forensic accountants to crash
anytime soon.

It doesn't matter anyway.


All of this concern for potential illegal uses of e$ is in fact peripheral
to the main chance, the central economic fact that strong financial
cryptography on geodesic public networks, anonymity and all, is going to
revolutionize finance and it thus *will* end up legal in its own right,
whether it is or not today in your particular jurisdiction. The potential
for criminal use of financial cryptography is simply noise compared to the
techtonic economic benefit derived from having a ubiquitous geodesic
economy, and frankly, most people in the central bank and economic strategy
business know this. Ironically, these denizens of large central
bureaucracies are turning into some of the biggest behind the scenes
cheerleaders of the technology of financial cryptography.

They understand that a nation state which makes the mistake of
criminalizing or even controlling financial cryptography (and thus any
strong cryptography at all) will go the way of all the nations which
ignored the very industrialism which made them the powers they are now.
Just like the inquisition killed Spain as a world power when it killed
science (and thus literacy) in the name of religeon, effectively exiling
it's entire intellegencia to Amsterdam and London and Geneva, so too will
any nation state kill itself if it ignores internet bearer settlement.
Except that the "country" the money goes to will not be someplace like
Antigua, but the very net itself, which is everywhere and nowhere, all at
once.



Fortunately, we don't even have waste our breath making that argument. We
just need to develop the technology on the critical path, which means that
our business as developers and sellers of financial cryptography products
is to create the ability for people to spend money on the net with as
little concern as possible for who they are, biometrically. The cheapest
way to do that right now is to use a certificate purchaser's existing bank
to authenticate them, coupled with some combination of back-channel, and
eventually internet-tunneled, automatic teller network and ACH/Fedwire
transactions, all of which gets meatspace money in and out of a trustee's
reserve account.

This will solve all our authentication issues and make the user's money
convertable into digital bearer certificates, all with no great mental
leaps from the banking -- or regulatory -- communities.  All the
underwriter sees is an authorization from the trustee to issue
certificates, and then anonymous certificate exchanges after that. All the
trustee sees is authorization and a promise from the purchaser's bank to
wire funds to cover what for all intents and purposes is an ATM withdrawl.
All the purchaser's bank sees is a request from an account holder
equivalent to an ATM withdrawl or deposit. All the buyers and sellers see
is money and goods. :-). Nobody knows who does what to whom, anymore than
they do with handling and accounting for cash in meatspace, and every's
happy. And, ironically, everyone's accountable enough to the regulatory
authorities for the time being.


If we let the existing banking system handle the authentication at the
meat/net boundry layer in this fashion, all the feared jurisdictional and
regulatory problems for digital cash and digital bearer certificate finance
are instantly defined out of existance.

Even FinCEN itself knows it can't police cyberspace if book entries are
economically impossible there. They also know that they can do their jobs
just fine for the time being by tracing money up to the net, and watching
for it to come out somewhere else. Detective work will never go out of
style.


Fortunately for cryptoanarchists everywhere, financial assets will someday
just stay on the net, because the net is where the information that feeds
markets for financial assets will be in the first place, just like
industrial assets ended up in cities because that's where the information
to manuplate them was. The millenium will have arrived.


To continue in the millenial vein, we can continue to render unto Caesar
all the financial information he can force out of us in meatspace, because
the "kingdom" of net is where all the real money will eventually be, and he
can never go there. To beat our aforementioned and, only-apparently-defunct
wagon-pulling dromedary anology with a rather large ironic stick, it will
be easier to get a camel through the eye of a needle than it will be
maintain a nation-state in a net economy.

Even more fun, economic necessity dictates that the camel, or whatever
other, say asinine, dromedary you have in mind, will have to build the
needle's eye the rest of us will walk through, or they'll go out of
business.

Cheers,
Bob



-----------------
Robert Hettinga (rah@shipwright.com), Philodox
e$, 44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'
The e$ Home Page: http://www.shipwright.com/




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-----------------
Robert Hettinga (rah@shipwright.com), Philodox
e$, 44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'
The e$ Home Page: http://www.shipwright.com/