CryptoDad, CryptoCats and CryptoCash: show me the identity

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I heard the interesting “Money rethought” Consensus 2022 panel discussion from Austin, Texas with Chris Giancarlo, Neha Narula and Emily Parker when I was surprised to hear the Honorable J. Christopher Giancarlo (who appears to be known as “CryptoDad” and served as the 13th Chairman of the United States Commodity Futures Trading Commission, CFTC) say: “We can send a photo worldwide instantly and for free, why does it cost so much money to move money?”

This reminded me of Mark Zuckerberg telling the crowd at Facebook’s F8 developer event in 2019 Sending money should be as easy as sending a photo. I was surprised to read that at the time too, because sending money just isn’t as easy as sending photos. It just isn’t. No matter how many times someone says it should be, it isn’t.

It’s a category mistake to compare money and pictures of cats. If I send you a picture of my cat, I still have the picture. You have a copy of a picture of my cat. There could be millions of copies of my cat’s picture and none of them are my cat’s picture. They are all copies. There could be a hundred of them, or a million, or a billion of them, and whatnot? The cost of replication is so close to zero that it doesn’t make a difference, and the existence of unlimited copies doesn’t change the use I get from my copy.

Well, I’m sure it’s obvious to most people that unlimited copies made at near-zero cost is an acceptable state of affairs when it comes to pictures of cats, but it’s not really how money works. If I send you some money, the net result from now on should be that you have the money and I don’t. If I send you a copy of the money but keep a copy for myself then there will be no end of trouble! Apart from anything else, if you’re using the money to buy something, how does the person you’re paying know if you gave them the money or a copy of it? This is known in money and crypto circles as the “double spending problem”.

Double or quit

The double-spending problem is quite a problem. It’s a common problem, not just related to money, and fundamental to digital property. You must go to an inordinate amount of trouble to ensure that when I send you some data over the internet, the data now belongs to you and not to me. It’s a very difficult problem, much more complicated than sending cat pictures, but the good news is that it’s a solved problem. Let’s refer to the baskets of data (money or whatever) that we wish to transfer from one owner to another as “tokens”. There are four main ways to implement these transfers…

First, you could just have a huge database listing all tokens and recording all the owners of those tokens. This is undeniably cheap and easy, but it creates something of a single point of failure. It’s also something of a Big Brother solution that many people won’t be comfortable with at all, for all the usual reasons that don’t need to be repeated here. You could use cryptographic techniques to make the tokens private, but you still need a central database to record which of them have been issued. This is how David Chaum’s innovative “e cash“System actually worked, back in the 1980s.

Second, you could store the tokens in some form of secure hardware. You can copy software, but you cannot copy hardware. That’s why cell phone SIMs and chip and PIN cards work. You cannot clone these cards as you cannot copy the hardware. You can’t copy all of the software either, as the chips are programmed not to reveal certain data (e.g. private cryptographic keys) that you would need to create a device capable of replicating the specific properties. This is how NatWest Bank’s “Mondex” actually worked in the 1990s (the reason we celebrate the 4th of July in England).

Third, and that’s how cryptocurrency works, you could implement the tokens in software using some sort of clever consensus mechanism to ensure the right tokens are assigned to the right owners and can’t be misused by bad actors (or at least not through manipulation) . the transaction record, the ledger). The technology to do this has been around for a while, but Mr. Satoshi’s big breakthrough was finding a way to balance the economic incentives of forming a secure consensus with the work required to do so.

Finally, and it could very well happen in the future, you could use the basic principles of quantum mechanics to create electronic money by using the physical properties of nature. The Swedish Central Bank published an interesting paper about it a few years ago, which, while noting that such an implementation might be a long way off, suggested that it could be a very good way to instantly transfer electronic money across the universe.

(Quantum money exploits the fact that it is not possible to clone an unknown quantum state. This means that a counterfeiter, even with access to unlimited resources, will still not be able to duplicate a quantum coin. Why their research was not called “Schrödinger’s cash register“I’ll never know, but I’m guessing they’re not marketing people.)

So double-spending cats isn’t a problem, but double-spending cash is a problem and luckily we know how to solve it. That’s why I find tokens (and the world of decentralized finance in general) so interesting. If I send you a token, whether it’s a coin, or a link to a picture of a chimpanzee in sunglasses, or a digital dollar, or a claim on a barrel of oil, or whatever, you have the token and I don’t. This results in a very inexpensive infrastructure for transactions, which is why the financial world is particularly interested in it.

The Missing Piece

In summary, sending values ​​online is a lot more complicated than sending cat pictures online, but we know a few different ways to do it. And if we know how to do it, then Mr. Zuckerberg knows how to do it. So how come I can’t send values ​​from my Instagram account to your WhatsApp account instantly and for free anywhere in the world as Crypto Dad asked? It would undoubtedly be a useful service and boon to people and businesses worldwide. Where is it?

Well, it’s important to understand that payments are not that difficult. In practice, payments are simply changing a few numbers in a spreadsheet or sending a message from here to there. They really aren’t that difficult. Or, to be more precise, they really aren’t that difficult, as long as you know who everyone is.

It turns out, as I have already written herethat knowing who everyone is is the really complicated and expensive part of the equation. The cost of moving the photons is not the issue. Spotify’s electrons are no cheaper than Santander’s electrons. The WhatsApp cables are the same as Wells Fargo
WFC
wires. The costs are not caused by payments, but by identity.

No responsible government would allow Facebook or anyone else to instantly transfer arbitrary amounts of money, whatever their denomination, to an unknown person or persons around the world. That would be social suicide: With Bitcoin, we see the problem in the bud
Bitcoin
and ransomware. Universally available anonymous electronic assets would exponentially exacerbate the problem of corruption, crime, and general lawlessness, to the point where ties with society would be severed.

So the way forward is to tokenize dollars or oil or future use of Apple
AAPL
Subscription services or the time and attention of well-known fintech influencers operate in a regulated environment where transactions are private but not anonymous. Secure against unreasonable search and seizure, but subject to reasonable search and seizure.

For that, we need advances in digital identity, not cryptocurrency. It is the lack of global digital identity frameworks and systems operated by regulated institutions that is the root cause of Mr. Giancarlo’s frustration and the key to radical improvements in the global payments infrastructure in the not too distant future.

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