You may have noticed that when Whatsapp starts a new chat, it displays a message that “end-to-end encryption” is being used. This means that the content of the messages cannot be read by anyone other than the people in the chat (though some question the extent of this). Facebook, the owner of Whatsapp, knows something about who you were in contact with and when, but not (necessarily) what it was about.
Encryption is used in countless places in our daily lives to prevent our data from being stolen or our communication from being eavesdropped upon. Your wifi connection, files in the cloud, account details in your password keeper and much of the internet traffic.
This was not a matter of course. Until the 1990s, many countries still prohibited citizens from using “strong” encryption. It had to be so weak that secret services could easily crack it. Some countries forbade the export of encryption algorithms. The United States had classified strong cryptography as ammunition, equating it with chemical and biological weapons, missiles and tanks. The penalty for exporting was in the order of a million dollar fine or years in prison.
Cypherpunk movement and privacy
Since the late 1980s, the cypherpunk movement has actively sought to use cryptography to provide each individual with better privacy and digital security. For example, they printed program code on a T-shirt that enabled RSA encryption, a so-called asymmetric encryption algorithm” (see photo below). The T-shirt was therefore subject to export restrictions: passing through customs with it was punishable.
In 1993, Eric Hughes wrote A Cypherpunk’s Manifesto, which summarises the most important convictions. It begins: “Privacy is necessary for an open society in the electronic age. Privacy is not a secret. A private matter is something you don’t want the whole world to know, but a secret matter is something you don’t want anyone to know. Privacy is the power to reveal oneself selectively to the world.”
They foresaw even then that increasing automation would give large parties a lot of power, and that they would not offer privacy of their own accord: “We cannot expect governments, corporations or other large, faceless organisations to give us privacy … We must defend our own privacy if we expect to have it.”
In the years that followed, they lived up to this. The cypherpunks were at the forefront of technologies such as PGP for encrypted emails, OTR for encrypted chat, TOR for encrypted web traffic and Bittorrent for uncensored file transfer.
Digital central bank money
Central banks worldwide are developing digital central bank money (CBDCs). The official reasons are noble. The decline in the share of cash in payment transactions could become a systemic risk, so a digital variant of cash is needed. And we don’t want Facebook’s diem or the digital renminbi to call the shots here, so we’d better launch a digital euro ourselves.
With utopian glasses on, this could work out quite well. A benign government can code solid property rights and ample privacy into this digital money. Add to that a solid monetary policy and you have good money that retains its value and is very useful in the digital 21st century.
But if you make your glasses slightly less pink, then such a government would be able to watch over every payment. Slightly higher taxes if you buy unhealthy food. A little less privilege if you support the wrong charities. A low interest rate if you save too much. A benefit can be programmed so that you can only spend the money on food and clothing. And if the current government does not do this, then perhaps the next one can take a very different view and change the behaviour and properties of money at the push of a button.
It is quite conceivable that a period is approaching in which the neutrality of money systems will come under pressure. Governments and central banks will have insight into your payments and can determine how you can spend your money and how long it retains its value. Agustín Carstens, head of the bank for international settlements, put it this way on 19 October 2020: “Central banks will have absolute control over the rules that determine how you can use the money, and the technology to enforce them.”
So wouldn’t it make sense to have - as a back-up - a neutral, independent currency? A currency that is designed so that no one can take it away or unilaterally change the rules afterwards? Neutral money where no one is favoured or censored?
A neutral yardstick
Something else emerged from the cypherpunk community in 2009: Bitcoin. A global, digital, neutral money system where no one can change the rules on their own. Not perfect privacy, but still pretty much in order.
No country, culture, religion, ideology, or political movement has an advantage. Bitcoin, like gravity or chess, makes no distinction between rich and poor, young and old, east and west. The rules are clear and the same for everyone, without regard to gender.
Bitcoin is still small and immature today - comparable to the Internet in 1997: slow, expensive and clunky. But in the next decade, it could become a neutral and universal benchmark against which any other financial system or service can be measured.
- It will keep governments on their toes as to how much financial surveillance they are conducting; after all, there is an alternative where you have quite a bit of privacy.
- It keeps central banks on their toes as to how extreme they decide to make monetary policy - after all, there is an alternative where nobody can print unlimited amounts of money.
- It keeps the major world powers on their toes in terms of how strongly they impose their will on small countries; after all, there is an alternative to the dollar as a trading currency.
- It keeps commercial banks, insurance companies and pension funds on their toes when it comes to the quality of their services; after all, there is an alternative with which savings, payments, loans, trade and insurance may be faster, cheaper or safer.
- It is understandable that those in power who have an interest in surveillance, censorship and coercion would like to stop such a neutral yardstick. For them, digital central bank money is a gift from heaven. More insight and more control.
On the other side are the countries that value privacy and freedom of citizens. They could share this achievement with the rest of the world by accepting and promoting bitcoin as a neutral global money system. Privacy and freedom as an export product!
Bert and Peter Slagter are founders of the knowledge platform LekkerCryptisch. They write for FN/Institutional about major system changes, which have far-reaching consequences for investors in general and pension funds in particular.
This article was published in the fourth edition of FN Institutional (in Dutch)this year, which was sent to registrants on Thursday 2 September 2021. You can subscribe via this link.