The Unlikely Solution to Crypto’s Privacy Failures: Government

JThe past few weeks have highlighted how difficult it is to achieve absolute privacy in our digital lives, including in crypto.

Perhaps it is time to recognize that we cannot rely on technology alone to protect this important right. It is time to tackle the difficult task of convincing governments to install legal protections as well.

Consider this recent news: the founders of the Bored Ape Yacht Club (BAYC) have doxed; a New York couple arrested for conspiring to launder profits from the Bitfinex hack; co-founder of notorious failed exchange QuadrigaX found out he was pseudonymous co-founder of money market Avalanche Wonderland; the seizure of crypto funds given to protesting truckers in Canada; and the apparent unveiling of the mastermind behind the 2016 attack on the DAO.

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All of these incidents demonstrate that it is extremely difficult, if not impossible, to escape from someone who is determined to find you. Know Your Customer (KYC) rules, multiple passwords and data tracking systems, with countless stores of information about our online and offline lives kept on company-owned servers around the world whole, are all campaigning against our privacy online.

(I will say this, though: Satoshi Nakamoto was a master at OpSec.)

In each case, with more or less popular support, the people who revealed these identities justified their actions in the public interest. On the other side: crypto advocates who have often been infuriated by these privacy breaches, especially in the BAYC and trucker cases.

Read more: CoinDesk Privacy Week

I do not wish to revisit the trade-off between the right to privacy and the public interest in transparency that I explored two weeks ago. However, I will say that the industry’s condemnation of such actions can also be seen as a mark of its failure. I mean, if coin mixers, pseudonymous IDs, and self-custody wallets got what they’re supposed to achieve, crypto proponents wouldn’t have anything to complain about.

After reading about journalist Laura Shin’s bombshell on The DAO hacker, for which she worked with blockchain forensics firm Chainalysis to trace the movement of the 3.6 million ether drained in the 2016 attack and named Austrian programmer Toby Hoenisch as the likely culprit, I am inclined to agree with blockchain developer Nelson Galeman. He tweeted“The lesson here is: DON’T STEAL THE CRYPTO…the data is public. The question is not IF you’re going to get caught, but WHEN. (Hoenisch denied the accusation, but still.)

The bad guys aren’t the only ones caught off guard

This idea that there is nowhere to hide might be all good if the only people looking for privacy in their crypto transactions were thieves. In fact, you could say that the threat of being traced adds a whole new layer of security to the crypto ecosystem. It is a deterrent for hackers.

It could offer a model of freedom commensurate with its Constitution and more attractive than the Chinese panopticon

But the thieves are not alone. Activists fighting for good causes such as Afghan women in Taliban-controlled Afghanistan, or Myanmar’s government-in-exile, or protesters in Nigeria, are increasingly using crypto to circumvent official censors and fund their operations. At the other end of the spectrum, companies need privacy, lest their competitors find out about their operations and take them to heart. Keeping money flows in the shadows is vital to the functioning of democracy and markets.

“There are no other substantive constitutional rights without freedom of transaction,” said pseudonymous commentator Punk 6529 – who will speak at Consensus in June – in a recent tweet thread.”

He’s right: there’s no freedom of speech if people can’t afford the computer equipment needed to spread their subversive ideas or if they don’t have a salary to support themselves. And, in turn, this freedom of transaction depends on the lack of ability to monitor the movement of funds by third parties such as governments. Privacy and freedom of transaction are intrinsic to each other.

The freedoms to which 6529 refers are truly threatened. Governments and Big Tech are more empowered than ever to track transactions.

This is the case in traditional finance as well as in crypto, where institutions are now adding increasingly sophisticated blockchain analytics to their existing surveillance capabilities for traditional know-your-customer banking data and to access information. personal information accumulated by Internet platforms.

Perhaps a purely cryptographic circular economy, where funds never enter or leave the fiat banking system, would leave our identities better protected.

But crypto is populated by subpoensible entities, such as centralized exchanges, hosted wallets, and stablecoin managers. Even decentralized exchanges are open to scrutiny by the foundations that maintain their codebases.

The sheer number of breaches and rug pulls in decentralized finance since that infamous DAO hack continues to make DeFi a fringe area where the benefits of privacy are, for the average person, outweighed by volatility, complexity of use and security risks.

Indeed, the biggest problem with all of these breaches isn’t cryptography per se – we know that zero-proof inventions like zk-Snarks actually protect privacy. It is the low points of human failure that make the crypto community’s privacy utopia so difficult to achieve. This is what we have to settle.

It’s time to commit

Because of these pervasive weak human ties, I now believe we have no choice but to engage with governments. The crypto community, as well as human rights organizations and others with an interest in financial inclusion, as well as media companies and others invested in non-fungible tokens (NFTs) and DeFi projects, should lobby policymakers to ensure that the next wave of digital currency rollouts come with a legal framework that enshrines privacy in our money,

I understand why this may seem naive. This week’s news from Ukraine reminds us that nation states are used to wielding power and loath to give it up. On the contrary, governments have expanded their financial oversight, not reduced it. And the push for a tough sanctions regime against Russia will reinforce the hawks’ clamor for even more intervention.

Yet this reminder also provides a gut check on some of the more utopian aspirations of “sovereign individuals” in crypto.

Read more: Haseeb Qureshi – 4 Reasons Why Privacy Coins Didn’t Take Off

The key, I think, is to use the fundamental problems of the instability of the international system to our advantage. I believe this moment actually presents an opportunity for Western governments such as the United States to use new technologies to advance the influence of liberal democratic ideals. The challenge is that they will have to wean themselves off the intoxicating but mostly illusory sense of power that comes from financial surveillance.

Given the current geopolitical turmoil and some emerging questions regarding the longevity of the dollar’s international reserve currency status, the United States may, for the first time in a century, be forced to compete with the currencies of other countries, such as that of China.

Once national currencies go digital and can bypass the banking gatekeepers of Wall Street, the battle will begin. And one way for the United States to prevail will be to take a more privacy-friendly approach. It could offer a model of freedom commensurate with its Constitution and more attractive than the Chinese “panopticon”.

If this system is well designed, it need not result in more criminals trafficking drugs, weapons or human beings. In the name of freedom and equal access, authorities could deregulate peer-to-peer cryptocurrency payments and revoke KYC identification. At the same time, they could use zero-knowledge evidence to limit traceable data to non-identifying information while using blockchain forensics and cluster analysis to gain leads on suspicious activity.

In other words, there is a way to catch the bad guys without subjecting the world to surveillance or denying the freedom to transact.

What we need is a risk-based approach. If we give people control of their assets, there will be less incentive for criminals to spend time and effort attacking these relatively small nodes or, by extension, for governments to monitor them. The value derived from both criminal activity and the deployment of surveillance only really increases when the amounts involved are high. The trick is to change the economics of crime.

Now go ahead. Convince your local MP that there is another way.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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