Know-Your-Customer

Wendy McElroy: Free-Market Law Enforcement for Crypto

11/08/2018 by Idelto Editor

The Satoshi Revolution: A Revolution of Rising Expectations.
Section 4: State Versus Society
Chapter 9, Part 6

Government is a law factory. It passes laws in the same manner that another type of factory extrudes metal molding…But, whereas a factory which extrudes metal molding is providing a product which is useful to the citizens generally, and which certain citizens will purchase voluntarily; the government factory extrudes compulsion which is useful principally to the government, itself, but is purchased [through taxes and other ‘fees’] in advance by the people, who are never in a position to refuse to buy.

-Robert LeFevre, The Nature of Man and His Government

A key difference between state and society: the latter does not force people to buy products or services they do not want. Society does not require them to use central banks, to purchase law enforcement, or to finance military protection against foreign nations. People can decline that type of product altogether, or they can use a competing private supplier.

By contrast, the state compels the purchase of such products on the grounds that they are essential to the social good. Not only that, government claims that monopolies are needed to act as trusted third parties (TTPs).

At the core of the conflict between state and society lies antithetical views of TTPs. The state insists on a neutral or benevolent definition; that is, a TTP is an entity that facilitates the quality or honesty of interactions between people who invest it with trust. The description can be accurate. People can use a lawyer, for example, as an intermediary in a business deal. But a TTP is neutral or benevolent only if no one is forced to use or to finance it.

Both groups, like the cypherpunks, and individuals, like Satoshi Nakamoto highlighted a bitter irony in what the word “trusted” had come to mean in TTPs. The word was a mockery of itself. A state TTP could not be trusted to act on behalf of those forced to consume its products and services; it always acted in its own interests. The world badly needed alternate systems and approaches for which no trust was necessary because transactions could be verified independently.

The blockchain was designed to be a law unto itself, with transfers that anyone can verify. That’s why it is transparent, immutable, and decentralized. It is “trustless,” in the best sense of the word. The blockchain was also designed to prevent occasional acts of personal fraud by making payments irreversible and using time stamps that avoid double spending.

But fighting occasional bad actors, like people who do not deliver paid-for goods, is not the blockchain’s primary purpose. Nor should it be. Whenever human beings exchange, some fraud will occur because human nature contains a streak of dishonesty. One might say this is unfortunate, but then, one might ask: compared to what? Peer-to-peer crypto and decentralized exchanges should not be judged against a standard of perfection. They should be judged by how effectively they accomplish their primary purpose: to fight the pervasive institutionalized crimes committed by the state against society—that is, against individuals—especially through central banking and fiat currency.

The strategic genius of making TTPs obsolete by replacing and ignoring them is underestimated because it is usually confined to the digital realm. In fact, the strategy has application across society, and crypto is part of a long political tradition of what has been called prevention. Viewing crypto through this lens offers different perspectives and insights, which are entirely compatible with personal freedom.

Crypto as Part of Prevention Tradition

Crypto protects individuals from the devastating institutionalized crimes of the state by allowing them to avoid central banks and to retain the private data that constitutes power over their lives.

The libertarian Robert LeFevre was one of the best theorists on how to prevent crime, especially those committed by the state against society. He asked, “how can a society best ensure private justice?” He answered: pre-emptive defenses that avoid crime before it happens. This contrasted sharply with how most libertarian theorists approached the question of private justice; they almost entirely focused on issues such as restitution versus retribution or on how justice enforcement agencies should be structured. All of these issues became dynamic, however, only after a rights violation had occurred. Like Satoshi, LeFevre wanted a system that prevented the institutionalized crimes of the state from happening in the first place.

There are striking parallels between LeFevre and Satoshi. LeFevre was trying to avoid and replace a TTP: traditional law enforcement, including the court system, which were government monopolies. The two men’s motivations were similar. LeFevre saw law enforcement as a massive failure, or far worse. Under the guise of providing justice, it oppressed individuals by regulating almost every activity short of breathing itself. Equally, Satoshi knew that central banks and fiat were massive failures, or far worse. Under the guise of providing financial stability and protection, they looted the wealth of individuals through mechanisms such as inflation and transferred it to those in authority.

Both men advocated private institutions that did not confront their state counterparts in a civil-rights context, but which prevented a need for them. LeFevre wrote, “Is government the only device we know of self-protection? No, it is not. Voluntary insurance is another device. So are private policemen, private organizations such as the American Legion, night watchmen, merchant police, the Triple A and perhaps a score of others…” (The foregoing is a very simplistic description of his approach.)

Practical advantages adhere to LeFevre’s and Satoshi’s prevention systems. For one thing, after a crime has occurred, it can be almost impossible to make a victim whole, even in non-criminal cases of contract or straightforward torts. A broken vase may be a family heirloom, for example, but it will be replaced at its market value, not at its sentimental worth. With violent crimes such as rape, assault, or murder, the harm is much more difficult to erase. Bodies can heal, medical bills can be paid, but the emotional suffering can be permanent. The problem of remedying criminal cases has long been recognized. In Ethics of Liberty, even the great advocate of restitution Murray Rothbard argued, “In the question of bodily assault, where restitution does not even apply, we can…employ…proportionate punishment; so that if A has beaten up B in a certain way, then B has the right to beat up A…to rather more than the same extent.” The prospect of public beatings seems unpalatable as a solution in civil society.

Equally, to lose one’s life savings through inflation, confiscation, mismanagement, and other criminal acts by central banks can be devastating. Restitution may be more easily made—after all, a dollar is a dollar is a dollar—but the return of funds is often unlikely. Even if it occurs, the process can take years and involve heavy legal expenses. Prevention is preferable, by far.

Government does not want prevention, of course, because the strategy breaks its monopoly over TTPs such as law enforcement and the banking system. It does not matter that law enforcement offers no real customer service; the courts in many countries have ruled that the police have no obligation to protect individuals. But, as long as people are convinced that the police are there “to serve and protect,” then they accept the loss of freedom in the name of security. It does not matter that central banks function as arms of the state. As long as people are convinced of a need for “guarantees” such as Federal Deposit Insurance Corporation protection, they will surrender freedom for a promise of safety.

The secret to maintaining the state’s control over society is for it to create fear and then to stoke it. This process is at work in crypto whenever the state appeals to the two forms of law that are its bailiwick: vice laws, such as anti-drug measures; and, regulations, such as Know Your Customer. The two forms of law that are natural to society cannot be used effectively against crypto: laws to protect person and property; and contract law. Again, state and society are incompatible. Society’s main weapon of self-defense is to demonstrate that the state’s protection and “services” are unnecessary.

A Haunting Question

The stress on prevention also captures a schism in attitude within the crypto community. Prevention and avoidance are natural companions. Confrontation is an uncomfortable one. Which approach is more effective? Or can a blanket statement be made? Satoshi seemed to think it could be.

The two attitudes are epitomized by Julian Assange and Satoshi, both whom fully understand the freedom value of crypto. Assange expressed his style in an October 2017 tweet: “My deepest thanks to the U.S. government, Senator McCain, and Senator Lieberman for pushing Visa, MasterCad [sic], Paypal, AmEx, Moneybookers, et al, into erecting an illegal banking blockade against @WikiLeaks starting in 2010. It caused us to invest in Bitcoin—with > 50,000% returns.”

Satoshi’s attitude was contained in his response to an earlier 2010 tweet from Assange. “Bring it [bitcoin] on,” the latter man crowed. Satoshi objected. “No, don’t ‘bring it on.’ The project needs to grow gradually so the software can be strengthened along the way. I make this appeal to WikiLeaks not to try to use Bitcoin. Bitcoin is a small beta community in its infancy.” Less than a week later, on 12 December 2010, Satoshi vanished from the Bitcoin community after posting the message: “WikiLeaks has kicked the hornet’s nest, and the swarm is headed towards us.” The swarm was government and, perhaps, those users who cared nothing about bitcoin as a vehicle of freedom.

It is tantalizing to speculate on which software would have been strengthened or added to the beta software: protections against bad actors? Some form of decentralized exchange for trading and cashing out? It is disturbing to realize that bitcoin may have been hindered badly by being popularized too soon.

Another interesting question is whether Satoshi’s attitude of prevention and avoidance is the most effective attack on the criminal institutions of the state. If so, then those who confront the state with taunts and challenges may be harming a primary benefit of crypto: freedom through prevention, rather than confrontation. They may be handing an advantage back to the state and away from society. Theories of non-violent resistance have a great deal to tell us about how the state and its laws react to aggressive challenges.

[To be continued next week.]

Reprints of this article should credit bitcoin.com and include a link back to the original links to all previous chapters

Wendy McElroy has agreed to ”live-publish” her new book The Satoshi Revolution exclusively with Bitcoin.com. Every Saturday you’ll find another installment in a series of posts planned to conclude after about 18 months. Altogether they’ll make up her new book ”The Satoshi Revolution”. Read it here first.

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Wendy McElroy: The Centralization of Crypto and the Banality of Evil

26/05/2018 by Idelto Editor

The Satoshi Revolution: A Revolution of Rising Expectations
Section 3: Decentralization
Chapter 8, Part 3
The Centralization of Crypto and the Banality of Evil

First we must realize that all actions are performed by individuals… If we scrutinize the meaning of the various actions performed by individuals we must necessarily learn everything about the actions of the collective whole. For a social collective has no existence and reality outside of the individual members’ actions.

–Ludwig von Mises

In 1963, the political philosopher Hannah Arendt wrote a book Eichmann in Jerusalem, about “the banality of evil,” which redefined that concept forever. Evil is not usually committed by sadistic monsters, she argued, but by ordinary people who relinquish personal responsibility for their actions and obey the orders or rules of a corrupt system. (Here, evil is defined as deliberately and callously inflicting great harm on innocent people.)

Arendt reached this conclusion while reporting for The New Yorker on the trial of high-ranking Nazi Adolf Eichmann, which occurred in Israel. As a German Jew who fled the rise of Hitler, she should have been appalled to be in the same room with Eichmann. Instead, Arendt was fascinated by him. There was no guilt, no rage, no sense of responsibility, nothing exceptional. As her book explained, Eichmann kept repeating that, “He did his duty…; he not only obeyed orders, he also obeyed the law.” He was also assisted by a vast network of average people—clerks, railroad workers, low-ranking soldiers—who sent innocent others off to prison or worse fates, without a second thought. It was the law.

Cryptocurrency confronts the banality of an economic system for which the word “evil” is not too strong a word. Opening with Arendt may seem like hyperbole, but it captures something important. The central banking system and the other economic controls imposed by government seem benign because they are so familiar; people grew up with them. And bank clerks can be very pleasant as they demand Know Your Customer data; if the customer objects, they answer “I am doing my job, and it is the law.” Nothing benign occurs in the system. Hard-working people are robbed of their wealth through measures like inflation and the monopoly of fiat currency; food is taken from the mouths of children; innovators who could produce a better world are shackled; in some nations, people die for want of nourishment or medical care.

Venezuela is an extreme example of economic evil, as well as an example of the remedy. When the economy collapsed in 2014, many people’s lives were ruined while many others survived by using the only alternative they had to worthless fiat: cryptocurrency. President Nicolas Maduro was well aware of the dynamic. That’s why he issued the first-official state crypto—the Petro—which was announced last December (2017). The Petro is doomed, of course. When centralized in Maduro’s hands, it will become just another form of fiat. But the Petro indicates one of the main ways the economic system will try to defuse the threat of crypto—namely, centralize crypto by either issuing coins or regulating a few institutions approved to handle it, such as exchanges.

Two main factors in how long the Petro will last are the centralization of power, and how many average people will accept the official status quo because it is (or will become) the law. These are the people who will work in the financial system, or turn in a neighbor for mining, or vote to ask for regulation. They are the banality of economic evil, without which the system could not exist.

Methodological Individualism

The harm done to freedom by those who act against decentralized-market crypto is more than just a denial of financial independence to others. Free-market crypto fortifies some of the most important concepts of liberty. One of them is “methodological individualism,” which is the exact opposite of what Arendt called “the banality of evil.” Instead of individuals relinquishing their responsibility for actions to an institution, like central banking or the military, individuals are entirely accountable for their own behavior.

The Austrian economist Ludwig von Mises rested much of his philosophy on methodological individualism. He declared that, ultimately, only individuals exist; only individuals act. Even within the dynamics of a collective, such as the state or society, it is individuals who comprise the structure and carry out all actions. Mises famously stated, “The Hangman, not the state, executes a criminal.” Individuals who look at the hangman [and] see the state in action do so only because they have created an abstraction known as ‘the state’ in order to provide a context. The hangman may be pressured to perform his job, but the performance is ultimately his choice. Equally, people never truly see or hear a group conversation. All they see or hear are individuals speaking, and then they label the sum of the exchange as ‘a group conversation’.”

Mises argued that collectives-such as family or society–were valuable abstractions that people used to describe their interactions with others within a specific context. He did not deny the worth of many collectives. Quite the contrary. He explained, “Methodological individualism, far from contesting the significance of such collective wholes, considers it as one of its main tasks to describe and to analyze their becoming and their disappearing, their changing structures, and their operation. And it chooses the only method fitted to solve this problem satisfactorily.” Individualism was the key to understanding collectives.

What does this have to do with cryptocurrency?

The most difficult area in which to implement methodological individualism is finance, which is one of the most powerful collectives in existence. Central banks, tax agencies, and reporting forms are ubiquitous types of evil. Governments do not produce any wealth. And, yet, they need vast amounts of it to finance bureaucracy, the military, and the other centralized trappings of power. This means governments need to steal vast amounts of wealth. But to do so directly would cause resistance. So they issue fiat and bonds, and force all finance to go through institutions they control. For a long time, for most people, there was no viable path around the centralization.

And, Then: Cryptocurrency

Free-market crypto is methodological individualism writ large in an essential area of life. Methodological individualism is an incredibly powerful challenge to the centralized control of economics. It was designed to be so.

The concept arose in response to the theory of social holism that became popular in the early twentieth century. Social holism claims that systems must be viewed as wholes rather than as collections of their parts. It maintains that a collective has a dynamic that differs from the sum of its parts. In short, the collective is greater than the individuals who comprise it.

Marxists often accuse those who espouse methodological individualism of being atomistic, or unable to bow to the greater social good. Some go so far as to assert that the individual, and not society, is the true abstraction. That is, individuals do not exist without society. As Mises observed, “The notion of an individual, say the critics, is an empty abstraction. Real man is necessarily always a member of a social whole.”

Karl Marx argued this point by using a Robinson Crusoe example. An individual who had been born and immediately abandoned on a desert island, he contended, would not be a human being at all. His point was that human beings are social organisms-social constructs, if you will-who cannot be lifted from their defining context and still remain human. Reversing Misesian logic, Marx claimed that society created its individual members. To create the “right” type of people, all social institutions had to be thoroughly regulated for the social good, however that was defined. The brutal conformity of communism is an example of centralization. So is the expression, “I was only following orders.”

Classical liberals argued that a person raised in utter isolation would still be a human being with human characteristics. For example, he would have a scale of preferences, and he would act to achieve the highest one first. Without social interaction, of course, huge parts of the person’s humanity would never develop. But this would not make the individual less human. Collectives do not define humanity. Human beings define collectives.

Conclusion

Coerced centralization is so inculcated into the culture that it is considered to be normal and healthy. Public schools, central banks, public works, tariffs, …many people cannot envision society through any other lens. But coerced centralization demands that people surrender their moral compass to a collective authority. It is the source of Arendt’s banality of evil.

Methodological individualism is the cure, especially through the dynamics of a free crypto, which is implemented through decentralization. But how does a decentralized society create the free-market institutions valued by Mises? The answer is another key concept of liberty: spontaneous order.

[To be continued next week.]

Reprints of this article should credit bitcoin.com and include a link back to the original links to all previous chapters

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The Peer-to-Peer Cryptocurrency Exchange Hodl Hodl Doesn’t Require KYC

20/04/2018 by Idelto Editor

This week as people hear about the peer-to-peer exchange Localbitcoins requiring identification for traders who deal in “significant” trade volumes, many of them are scouring the internet in search of decentralized exchanges that don’t require Know-Your-Customer (KYC) verification. One such trading platform called ‘Hodl Hodl’ launched its beta version this past February allowing traders to swap cryptocurrencies without the need for regulatory compliance protocols.

Also read: Bitcoin in Brief Thursday: ICO Scares Investors with Ghost Prank

The Peer-to-Peer Multi-Sig Escrow Exchange ‘Hodl Hodl’ Doesn’t Require KYC Verification

There’s a new peer-to-peer cryptocurrency exchange called ‘Hodl Hodl,’ a platform that launched this past February, allowing traders to trade digital assets without the need for a third party. The trading platform creates a multi-signature escrow system that sets a predetermined trading time for both participants. At the moment Hodl Hodl is in its beta form and only has two cryptocurrencies available for trade at the moment which include BTC, and LTC. The creators of the exchange state more features will be launched when the platform comes out of beta in the summer of 2018.

Hodl Hodl is very similar to Localbitcoins and the platform Bitquick as it allows deals between buyers and sellers. The trading platform does not require users to verify their identities. Moreover, there are many options available for payments such as Moneygram, Skrill, various credit cards, Venmo, Western Union, Alipay, and many more. In order to sell BTC or LTC, a user simply fills out the trade requirements which include location, the amount they want to sell, a payment window, and the payment type. On the buyer side, users choose which cryptocurrency trades and the specific requirements look enticing to them. For instance, certain payment options for purchasing BTC on Hodl Hodl are higher than other options available. Credit card purchases show a price of over $9,000 per BTC while other options are still a few hundred dollars more than the current spot price.

Peer-to-Peer Review and Reputation System to Curb Counterparty Risk

Because the platform is still in beta users can experiment with the Hodl Hodl testnet exchange first. When the peer-to-peer platform comes out of beta, the exchange will be charging a maximum of 0.6 percent per trade. However, right now up until the beginning of July 2018 the exchange is waiving fees for users. Hodl Hodl claims they do not hold funds and basically provide traders with “secure multi-signature (P2SH) contracts, and you control the key to the funds in escrow.”

Additionally, the platform offers two-factor authentication (2FA), and a dispute resolution system as well. Hodl Hodl does not require KYC verifications but does have a trader review and reputation system. The exchange explains the rating system is used so counterparties can be trusted among other traders.

“It shows whether he is fulfilling his obligations to other parties, whether he makes the payment fast, and whether he is responsive,” explains Hodl Hodl. “The Rating system is a useful tool for traders — it is information about how the trader behaved in the past and a reason/incentive to continue to act properly in the future.”

Hodl Hodl Doesn’t Leave Beta Until the Summer of 2018

Overall the Hodl Hodl system’s cryptocurrency trades function similarly to peer-to-peer ‘escrow-like’ trading platforms. Much like Bisq, Barterdex, and the other exchanges that facilitate trading activities without KYC in a decentralized manner — the Hodl Hodl platform doesn’t have a ton of action as far as volume. At the moment there are users selling BTC in various increments up to $10,000 USD, but some have caps between $300-1,500. The development team has explained that more cryptocurrencies will be added in the future alongside improving its mobile interface.

Have you tried the peer-to-peer exchange Hodl Hodl? Let us know what you think about this platform in the comments below.

Disclaimer: Bitcoin.com does not endorse this product/service. Readers should always do their own due diligence before taking any actions related to the mentioned company or any of its affiliates or services. Bitcoin.com and the author are not responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.

Images via Shutterstock, Jamie Redman, and Hodl Hodl.

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Significant Trade Volume Triggers Localbitcoins KYC Requirement

18/04/2018 by Idelto Editor

According to a recent thread on Reddit, Localbitcoins traders allegedly have to verify their identity if they are trading “significant” volume using the peer-to-peer platform.

Also Read: Meet Memo: An On-Chain Social Network Built on Bitcoin Cash

Localbitcoins ‘Error’ Involves Know-Your-Customer Verification

Bitcoin users are frantically searching other exchanges today that don’t require Know-Your-Customer (KYC) verification. A post on the Reddit forum /r/bitcoin on April 17 showed a picture that stated a Localbitcoins user’s trade volume was “significant” this past year, and the trader had to verify their identity in order to keep trading. The picture reads:

Error! Your trade volume has been significant in the last twelve months. Please verify your identity to continue trading.

Localbitcoins does use a verification process but it’s never really been enforced, although some believe more traders will trade with you if you are verified. Much like the rest of the exchanges out there that do require immediate verification, Localbitcoins uses an ID service called ‘Netverify,’ created by a company called Jumio. Basically, the user uploads a picture of both sides of their license or state ID and in a few minutes, the platform reveals if the identification is a legitimate or not.

The Long-Lasting Bastion of Freedom Fell

The post on Reddit submitted on Tuesday is not the first time this news has spread among the cryptocurrency campfire. Back in January of 2018, there are posts on Reddit and Bitcointalk that show another trader required to use their ID to trade on Localbitcoins. Immediately the discussion among bitcoiners turned to decentralized exchanges like Bisq, Hodl Hodl, and Barterdex. The Reddit user /u/yellowcuda who created the post has an account that is three years old, and further down the thread he states:

To clarify: me and many of my peers who use Localbitcoins started getting this notification upon signing in, requiring them to submit their ID. Without it, you cannot continue trading. This is it, folks — The long-lasting bastion of freedom fell.

Many of the decentralized exchanges (DEX) today do have operational platforms, but liquidity on exchanges like Hodl Hodl, Bisq, Openledger, Bartdex, Idex, and Waves is not that much compared to centralized exchanges (CEX). Further, some of the platforms are in the very early stages and don’t have the functionality and features found on large VC-funded trading platforms.

Lastly, a few decentralized exchanges do offer fiat pairs, but a lot of them don’t have access to fiat and most platforms offer cryptocurrency-to-cryptocurrency swaps. It’s safe to say that much of the issues tethered to Localbitcoins users being arrested and the company itself requiring verification is likely because people are swapping for fiat and nation-states like the U.S. don’t appreciate that kind of business without permission. There have been no statements made by the owners of Localbitcoins yet about this issue and there are no official updates on the main page.

What do you think about Localbitcoins requiring users who trade “significant” volume to verify themselves? Let us know in the comments below.

Images via Shutterstock, Localbitcoins, and Twitter.

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Wendy McElroy: How Centralized Exchanges Intend to Devastate You

31/03/2018 by Idelto Editor

The Satoshi Revolution: A Revolution of Rising Expectations
Section 2: The Moral Imperative of Privacy
Chapter 6: Privacy is a Prerequisite for Human Rights

How Centralized Exchanges Intend to Devastate You. Chapter 6, Part 6.

The root problem with conventional currency is all the trust that’s required to make it work…We have to trust them [third parties] with our privacy, trust them not to let identity thieves [including government] drain our accounts.
– Satoshi Nakamoto

Satoshi never envisioned centralized exchanges. The spectacle would have appalled him. Bitcoin was forged to avoid centralized third parties, such as banks and centralized exchanges, that require users to trust them with wealth and privacy. Peer-to-peer transfers based on cryptographic proof were supposed to replace the need for a middleman who demanded trust. They were designed to give financial power back to the individual.

The problem: there is a market demand to speculate, to trade in currencies, and to perform sophisticated financial transactions for which peer-to-peer (as it currently exists) can be ill-equipped. There is also a demand for convenience and access that does not require technical knowledge or effort. Centralized exchanges may be the polar opposite of what Satoshi envisioned, but centralized exchanges fill a niche, or else they would not be popular. They currently dominate much of the crypto world, with a majority of users entrusting exchanges with their wealth and privacy.

The niche of centralized exchanges comes from blending the functions of a stock market and a bank. A centralized exchange is a marketplace for trading or converting assets through a single location or service. In many ways, it is similar to the New York Stock Exchange. Currencies can be traded and shorted, for example; margin trading, stop loss, and lending are also available. Satoshi did not address the stock-market functions of crypto, which he probably did not foresee. In fairness, Satoshi explicitly referred to Bitcoin as a developing and evolving technology, which was in its infancy.

In other ways, centralized exchanges resemble banks. After purchasing crypto from an exchange, many customers choose to leave their coins in an account rather than transfer them to a private wallet on their own hard drive. The reasons vary: convenience, the comforting similarity to a bank, the ease of converting to fiat, quick trading, and discomfort with the technology required to set up a private wallet. Whatever the reason, centralized exchanges become trusted third parties that endanger the wealth and well-being of individuals. Consider one aspect of the problem. Private keys are the crypto. The coins have no physical presence, only algorithmic ones. When an exchange controls the keys, it owns the coins; the customer has nothing more than a promise of access to them upon demand.

Reality often breaks promises. Hackers use software vulnerabilities and human error to loot accounts that are advertised as secure. High volume causes downtime, during which traders lose opportunities and prices can plummet. Then, there are calculated denials of access. Outstanding orders may be canceled, especially if rates disadvantage the exchange; withdrawals and deposits can be halted without notice; exchanges vanish, along with accounts; owners commit fraud or steal from accounts. This returns people to the pre-Bitcoin days, in which trust and betrayal are defining factors of wealth management.

Recently, the risks associated with centralized exchanges have increased exponentially, and for one reason.

A Forbes article (Feb. 28, 2018) announced the inevitable.

“It’s finally happening: The much-ballyhooed turnover of documents in the battle between the Internal Revenue Service (IRS) and Coinbase, a company which facilitates transactions of digital currencies like Bitcoin and Ethereum, is moving ahead. Coinbase has announced that it has notified affected customers that it will comply with a court order regarding the release of specific data.”

2018 is the year in which tax agencies get serious about cryptocurrency profits and holdings. Governments around the world are watching as Coinbase turns in data on its customers, which will almost certainly lead to audits and high-profile prosecutions. Specifically, Coinbase is reporting all customers with transactions of $20,000 or more in a single year between 2013 and 2015. Taxpayer IDs, real names, dates of birth, street addresses, and all transaction records from whichever period is in question will be delivered. The wealth of data is available because Coinbase, like every other licensed centralized exchange, complies with Know Your Customer and Anti-Money Laundering laws, which destroy financial privacy.

Beyond such requirements, Coinbase is extremely aggressive about gathering information and verifying identities. The exchange uses facial-recognition technology, for example, to compare a real-time face shot from a webcam or smart phone with whatever ID an applicant submits. Coinbase UK adds, “we may collect personal information disclosed by you on our message boards, chat features, blogs and our other services to which you are able to post information and materials.”

Expect such intrusion to become the norm for centralized exchanges that prize their licenses and relationships with government. Expect them to act as data-gathering arms of government. The danger is not only the freezing and confiscation of accounts, but also legal proceedings against and imprisonment of account holders. The IRS states that “anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Anyone convicted of filing a false return is subject to a prison term of up to three years and a fine of up to $250,000.”

Fortunately, the market demand for stock market and banking functions can be satisfied (or soon will be) without sacrificing the privacy and safety.

Decentralize for Privacy

A decentralized exchange is a marketplace that does not rely on third party services. Trades are peer-to-peer; they are direct transfers between people who use an automated process to facilitate the exchange. They are trustless. They are transparent, with software and transactions being open source. They are Satoshi. A decentralized exchange allows individuals to hold their own private keys, which makes it a less attractive target for hackers. It also requires a minimal amount of personal or financial data to establish an account and to conduct commerce. Often, only an email address is requested, and it can be one that is generated specifically to register, with no connection to a real identity, to a True Name.

Decentralized exchanges employ a wide variety of strategies to facilitate peer-to-peer transfers. Some create proxy tokens; others employ a multi-signature escrow. Peer-to-peer banking uses an auction-type dynamic to facilitate loans between members of a specific amount and at an agreed-upon rate. Smart contracts can assume the traditional functions of banks. Technology Review (Dec. 7, 2017) explained,

“Switching back and forth between fiat money and cryptocurrency will require a traditional point of exchange for the foreseeable future. But some technologists say an alternative model for trading cryptocurrencies that would give people more control over their wealth is possible. It’s meta: exchanges can be decentralized, they say, using a blockchain. The idea hinges specifically on so-called smart contracts, software code that can be stored in a blockchain and set up to programmatically govern transactions. Imagine, for example, you want to send your friend some cryptocurrency automatically at a specific date and time. You could use a smart contract to do that.”

The point here is not to advocate a particular decentralizing strategy. It is to offer a sense of the rich and evolving alternatives to centralized exchanges.

Many people will still choose a centralized exchange because the platforms are easy to access and use; they are sanctioned by government; and they offer familiar, advanced functions of a stock market. For those who prize privacy, however, this is a poor choice. An analogy illustrates the stark difference in how privacy fares under a decentralized and a centralized system.

The Cautionary Tale of Social Media

“’Want To Freak Yourself Out?’ Here Is All The Personal Data That Facebook/Google Collect.” That was a headline in Zero Hedge on March 28, 2018. The types of data collected are too extensive to enumerate. An indication: Android cellphone users who downloaded specific Facebook apps have had data on their personal calls logged by Facebook, sometimes for years.

A relatively undiscussed cause of social media’s privacy hemorrhage, along with its abridgment of free speech, is the centralization of information and discussion that accompany corporate behemoths, like Facebook and Google. An intriguing article in The Federalist (March 28, 2018) asked, “Was Social Media A Mistake?” The author, Robert Tracinski, harkened back to the 2000s-the golden age of blogs, when everyone and their grandmothers expressed themselves through blogging.

Tracinski wrote, “It felt like liberation. The era of blogging offered the promise of a decentralized media. Anybody could publish and comment on the news and find an audience. …We were bypassing the old media gatekeepers. And we had control over it! We posted on our own sites. We had good discussions in our own comment fields, which we moderated.” It was a whirlwind of free speech, but it was also a bastion of privacy because individuals retained control.

Then social media arrived like a juggernaut, and the mom-and-pop blogs migrated their insights and information to Facebook, Google, Twitter and other trusted third parties. Like centralized exchanges, the social media giants were relatively easy to access and use; they offered sophisticated software and functions that individual bloggers lacked the technical knowledge or money to implement; social media also slid seamlessly onto cell phones via apps that seemed to open up the world.

Tracinski noted the result. “A few of the best and most interesting blogs became full-fledged online publications, but a lot of the small, quirky, one-person amateur bloggers moved onto social media. That turned out to be a big mistake, because the era of social media has recentralized the media. Instead of a million blogs—what Glenn Reynolds of Instapundit fame called an “Army of Davids” — we now have a social media economy mostly controlled by three big companies: Twitter, Facebook, and Google.”

Lately, the price tag of centralizing insights and information has become apparent. The left-leaning politics of social media meant they purged (suspended) or punished (throttled) the “wrong” views; this is akin to banks and other financial institutions refusing to deal with porn, pot, or gun industries due to political pressure from government. “The old media gatekeepers” were replaced by the equally intrusive Silicon Valley Puritans. Although both are preferable to direct government intervention, their quasi-monopolies are bolstered by tax privileges, by favorable regulation, and, sometimes, by direct tax funding. Individuals lost control. Perhaps it is more accurate to say they relinquished it.

Nowhere is this more apparent than with personal data. In return for offering convenience, all social media wanted was to know and to market every detail of customers’ lives. The role of centralization in this rape of privacy should not be ignored. It was key to the effectiveness. This is equally true of the centralization of financial data-only with an important difference. The destination of the financial information is a government file, especially a tax one. Social media cooperates with government, to be sure, but its ultimate purpose was and is making a profit.

Conclusion

Privacy is a front-line defense of individual freedom and well-being. Decentralization is the social condition under which privacy thrives. No one can or should tell individuals which strategy to use. But, if you value privacy and safety, decentralize.

[To be continued next week.]

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