From the dream of Nakamoto's "electronic cash", what is Libra's biggest problem?

The author, Michael J. Casey, is chairman of the CoinDesk Advisory Board and a senior consultant for blockchain research at the Massachusetts Institute of Technology (MIT) Digital Currency Initiative.


Image source: pixabay

Last week, in a tiring commentary on the Capitol Hill Libra hearing, a short tweet from lawyer Marco Santori summed up the core issues facing Facebook's cryptocurrency project. At the same time, this also covers any other problems encountered by companies leading such efforts.


Marco Santori summed up the core issues facing Facebook's Libra in a tweet, saying that it must be sufficiently centralized to prevent illegal activities by freezing funds; but at the same time it needs to be decentralized and not discriminate against participants based on the use of funds.

To understand why Facebook and its 27 Libra partners are in this dilemma, let us return to the core issue of Bitcoin, the core of Satoshi Nakamoto. The problem is in the text of the famous white paper subtitle: "electronic cash."

Nakamoto has been pursuing a dream of a password punk. He/she or they want to bring privacy to digital payments and turn the offline experience of cash transactions into online transactions. The idea is that users can execute transactions with anyone on the Internet without having to prove their identity. It's like I don't need to show proof that I am Michael Casey every time I give the money to someone else.

This is important not because all people who use cash or bitcoin are money launderers who evade law enforcement, but because identity authentication poses a real obstacle to business. If society is interested in identifying others – as financial law enforcement agencies will argue, then we must realize that this will cost a huge price to abandon economic activity.

Privacy is important

Think about the 2 billion “bankless” adults from developing countries, Libra seems to want to serve them. Lack of education, bad credit records and untrusted national ID cards mean that these people are not eligible to open an account with a local bank (mainly because these local banks themselves must comply with the strict international “know your customer” process to avoid being Foreign bank peers cut off contact). For many adults in the world, identity is a very real obstacle to business.

But you can also think about the billionaires who manage Wall Street hedge funds, or the large banks and brokerage firms that trade on their behalf. These people don't want to expose themselves when buying stocks, bonds, or commodities, because they can adversely affect their transactions.

Identity also limits substitutability. As I said before, if you don't know the past record of money, then this money is the most useful. Any dollar or single bitcoin must be the same value as any other dollar or bitcoin. But if I receive $1 or Bitcoin, because it is involved in a previous transaction, it may be subject to legal or law enforcement claims, and the resulting uncertainty will inevitably reduce its effectiveness. This leads to the exhaustion of currency substitutability. As for why there is such a problem, just ask those who have an account with a brokerage firm or other entity to know that their assets are frozen because of criminal or civil actions that they did not participate in.

Therefore privacy is very important. If we are to bring digital, borderless businesses to the widest possible user base and expand the global economy, we must strive to ensure privacy.

Privacy technology encounters growing surveillance

Unfortunately, Bitcoin failed to get enough privacy, at least in its original form. why? Because its public account book is open.

When combined with the "Know Your Customer (KYC)" process of a cryptographic currency exchange that complies with the law, its traceability means that users can connect with past transactions relatively easily, as long as they are in any of them. The trading point is marked.

It is this problem that has spawned more cryptocurrencies such as Zcash and Monero, as well as a bitcoin mixer and a potential sidechain solution for fuzzy trading tracks such as Mimblewimble.

It is worth noting that, at the same time, regulators are expanding the range of cryptocurrencies monitored. For example, the new rules of the Financial Action Task Force (FATF) require users to disclose more and more information, and cryptocurrency developers are pushing them to move in the opposite direction: more privacy, more self-hosting, more needless Trusted transaction solutions, user autonomy. They are working hard to achieve the goal of electronic cash.


The problem here is that if you are not building on a completely decentralized, unlicensed system, then it is impossible to guarantee the privacy of the user. If the node maintaining the ledger is identified as belonging to a specific list of authorized verifiers, such as 28 members of the Libra Association – when they wish or they will review or revoke the transaction, the authorities can and will require the identity of the user . They do this in order to achieve the goal of anti-money laundering or counter-terrorism financing, or, more ironically, they will make such a request simply to control the people.

David Calicus, the head of Facebook Calibra, certainly has no choice but to swear that Facebook's Libra app Calibra will comply with KYC requirements and cooperate with anti-money laundering operations. This is legally obvious. However, this is not important, because law enforcement agencies can make the Libra Association members keep their promises with a little cross-border cooperation.

This is the paradox that Santori mentioned, “Don’t worry, we are central.” This is a guarantee that tells you "you know where to find me."

The problem is that the American people — and their legislators — are somewhat schizophrenic on these issues. This is because privacy issues are getting more and more attention in the data collection of technology companies, especially on Facebook. Surprisingly – in fact, what is satisfying – how many questions the legislators raised when addressing these concerns, they asked to ensure that Calibra does not use people's personal data.

In fact, Marcus's answer is: "Don't worry, we are decentralized." His idea is that Libra's structure does not allow any member to invade the user's privacy.

So, this is a contradiction, but by definition, this contradiction does not appear in bitcoin or other decentralized cryptocurrencies, or more accurately, "you don't know where to find me." (In fact, There is no "I" in this case.)

What do we want?

In many ways, this contradiction is not the result of Facebook's participation in the project, nor the structure of Libra itself, but the competition of the public interest. We can't have both fish and bear's paw. We can't insist on absolute privacy at the same time, and get the intervention to seize the power of the bad guys to launder money.

I think the answer lies in the combination of technology, institutional design and a more creative approach to regulation. Unfortunately, this approach does not currently exist.

Hope lies in tools such as zero-knowledge proof, as well as the emerging concept of “self-sovereignty” identity, and the existence of a more open model of curbing crime, which does not disclose people's personally identifiable information.

But there is still a long way to go, and user adoption needs to be improved; to a large extent, policy makers still believe in them.

Now, David Marcus and his companions have no choice but to constantly persuade the parties with their mouths.

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