Balancing Privacy with the Need to Limit Bad Activity

The hardest problem to solve when implementing money is striking proper balance between a person’s need for privacy with society’s need to limit bad activity.

I have chosen my words very carefully here. A person has a fundamental interest in maintaining their privacy. In liberal democracies, privacy can rise to the level of a human right.

I also say LIMIT bad activity, not BLOCK it because the only way to block all bad activity is to shut the system down altogether.

I also seek to limit bad ACTIVITY, not limit bad ACTORS because limiting an actor implies identity, imposing a solution. Maybe you limit bad activity by limiting bad actors, but maybe you do it another way.

These two polls seem diametrically opposed — you want both privacy and limited bad activity but you must choose a balance of the two. Cryptography enables extreme nuance here.

With digital money, specifically with transactions that settle online in realtime, your options are myriad, although not well understood at all!

Let’s look at the balance struck by digital dollars in a traditional bank account. To open an account at a bank you must provide your personal information in a process known as KYC.

All transactions in which you are a party cary your personal information. The limit to bad activity is done by tracking the bad identities at the expense of privacy.

When the system was designed in the 1970’s, this was likely the only way to go but the available options have drastically changed in the intervening 50 years.

Conversely, cash strikes a different balance. There is KYC when you withdraw and deposit cash, but the rest of the time the limit to bad activity is the size and weight of the highest denomination.

A $100 bill weighs 1 gram. That means if I’m going to take out a $10M hit on someone using cash, I have to deal with 240 pounds of paper currency.

This would be roughly akin to lugging around a bag with a dead body in it — somebody is going to notice!

Cash’s solution to limit bad activity is literally the size and weight of the highest denomination. It is impractical and obvious to…