Private Crypto Finance is the use of cryptography as a tool to build a monetary system and financial economy on top of that system.
In industry and academia today, we are uncovering new cryptographic tools that can be assembled for such a system to be built. Bitcoin was the first manifestation of such a new monetary system, which has been extended in two signficant ways. First, in terms of privacy by ZCash and Monero. Second, in terms of utility by Ethereum and its smart contract ecosystem.
None are perfect mature systems, and all three have made design decisions to further their missions at the cost of properties that the others offer. Bitcoin gains stability over privacy and utility. There is no free lunch. Most importantly, all three have drawbacks in terms of scalability and user-friendliness. But together they’ve demonstrated that ecosystems can self-organize to manage monetary systems, and have decentralized decision making for their evolution.
Private Crypto Finance is the potential for these systems to offer a world where individuals directly control their money (via digital bearer-assets, not intermediated by corporate payment networks), where individuals are in charge of who gets to view their financial transactions (using cryptography to hide one’s activity by default, and reveal as necessary), and where money can be programmable to develop new financial products on top of these core properties.
Finance and the monetary system are a lever for society to play with. They act as a catalyst for the core underlying economic activity of society, which are the goods produced and services rendered. Working on creating such a lever is one of the highest impact work one can do.
Crypto Finance built on cryptocurrencies is permissionless, since any developer around the world can publish a smart-contract. It is thus democratizing in offering these levers to any motivated person with access to the internet to develop financial applications. Analogous to how anyone can publish a website, or a phone app, from around the world.
Finance is often criticized for not building anything of value, and merely moving money around from one pocket to another. This is a cynical view i have come to reject. Finance, when done right, takes money from those who have it but don’t have a good use for it, to those who need it for meaningful productive uses. To do this right, Finance devises ways of managing risk (e.g. credit ratings) and ways to generate returns (e.g. creation of new financial assets) for those giving the money away. In doing so, they lower the barrier to getting this money cheaply for those who wish to pursue an economic activity .
Most of the world suffers from underdeveloped financial institutions. People are locked into their national, geography-bound financial systems. Crypto Finance may see the development of financial institutions and norms that span the globe, offering people in countries with underdeveloped finance access to the same financial institutions as those in developed countries. Analogous to how anyone can use the same WhatsApp and same Gmail around the world.
Cryptocurrencies today are transparent networks: all data and activity is public (except for the privacy-focussed currencies like ZCash or Monero, and they also have some flaws). Specifically, the transaction graph, payment amounts, and IP Addresses of users are public, by default. There are some services (like Tor) that may obscure part of this, but they don’t form a complete private system in totality.
This is bad for two reasons: utility and privacy rights.
Utility: no business wants the information about what it pays its suppliers, and what its customers pay it to be public. This hurts the business, and enables its competitors to gain an edge.
Privacy rights #1: traditional payments happen via intermediaries, which can then exercise control over any two parties transacting. Around the world, Visa intermediates most credit card payments, and in China AliPay and WeChat intermediate digital payments. Without their user’s consent, they are then able to make financial products that can be used to harm individual users (ref. social credit system in China), and buy-and-sell data on their users (e.g. Experian, and Equifax in the US). Overbearing governments can lean on these providers to censor activity of their citizens. Cryptocurrencies are bearer-assets, and smart-contracts can become autonomous products, obviating the need for intermediaries.
Privacy rights #2: Being transparent networks, non-privacy cryptocurrencies make it easy to surveil activity. This is especially true in 2019 where we have tools and knowledge (of big data collection, processing and finding insights in them) to uncover what individuals are doing from traces of their activity. This makes privacy in cryptocurrencies critical for any open, liberal society. In the absence of privacy, we become unable to assemble and coordinate freely , and evolve our society to become better . As traditional financial systems get surveilled, Private Crypto Finance offers a path to preserving the Right to Privacy in one’s financial activity.
There is also a dark underbelly of having full privacy over financial activity: terrorists and money laundering. How this should be tackled by fully private cryptocurrencies is an open area of (personal) research.
1. The Case for Electronic Cash, by Jerry Brito of Coin Center points out how the NY Governor pressured financial institutions to not work with the NRA, and how this same tactic could be similarly used to prevent Planned Parenthood from operating in Alabama or Louisiana.
2. We Should All Have Something to Hide, by Moxie Marlinspike demonstrates how gay rights could not have been advanced without people first breaking the law and engaging in gay relationships. Privacy is critical for being able to do this.
3. The Philosophy of Money and Finance, by Stanford Encyclopedia of Philosophy gives a good outline of Finance’s self-regarded role in society.