The Interwoven History of Money and Privacy

The history of money is fascinating and not without its bumps in the road. However, it has a very interesting relationship with privacy, which has evolved over the years. We’ll start out giving you a brief history of transactions and then apply a privacy lens, showcasing some court cases and rules that have interesting implications. We will show that privacy is essential in payments; transparency is a violation of human rights and can lead to disastrous outcomes. We did this to ourselves. As a community, blockchain developers wanted to bake in full transparency to ensure that every movement, every transaction, was fair. But by doing this, we let the government take away our 4th Amendment rights. But now, using zero knowledge, we can have the privacy that we have a right to, while ensuring transparency and validity of transactions.

Money and privacy have an interesting relationship. While the history of money dates back much further than official laws and regulations around privacy, we can see that there is a bit of a relationship between their development, especially in the last hundred years.

Notice how as privacy became a priority, transaction privacy decreased significantly. More and more parties had a view into the transactions of individuals, culminating in bitcoin showcasing everyone’s transactions on chain. While it was able to solve many problems, this is one that emerged because of it. Take a look at this Arkham dashboard screenshot of Mark Cuban’s crypto wallet history:

Mark Cuban’s crypto wallet addresses are known, so now I can look at every transaction he’s ever made. This is WILD! Your bank transfers and credit card transactions aren’t public. Why should your crypto transactions be?

The 4th Amendment in the Bill of Rights states, “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.” The government doesn’t have the right to take more than is necessary when searching for evidence of a crime, basically. This is really difficult in crypto, especially for the major public blockchains, because as you can see from Mark, if you have 1 transaction or wallet address, you have the rest.

This has huge implications in the space, and has already led to major legal debates. The DeFi Education Fund took an appeal to court, arguing that Jim Harper of the Competitive Enterprise Institute was not provided his 4th Amendment right in the case of James Harper v. Daniel Werfel and the Internal Revenue Service (Case No. 23-1565). In seizing his wallet address, they inadvertently seized every transaction that he had ever made, most of whom had no bearing on the case at hand. The question then becomes, how far can this be taken? In most financial crime cases, accounts are frozen, but only transactions relevant to the case are subpoenaed. In crypto, this is impossible.

Why is privacy in personal finances important? There have been several scholarly writings on this topic, most notably by Charles Kahn, professor of finance at the University of Illinois. His articles, particularly Payment Systems and Privacy and Money is Privacy dive into the idea that confidentiality in payments is not necessarily a bad thing. For example, many payments over the internet are passed through 3rd party services. You may trust the end recipient, but you may not trust the 3rd party services who now have access to your payment information, name, address, and more. Block, Experian, Equifax, and First American Financial are just a few massive examples of data breaches that exposed the information of over a billion users combined. Those users to this day are prone to identity theft, hacks, and phishing/spam schemes by attackers around the world. According to the FTC, this cost Americans $8.8 billion in 2022 alone, and 2023 is on track to surpass these numbers. Having privacy in your transactions would mitigate these risks and keep your identity and personal identifiable information safer from these attacks.

Another major point that Kahn argues for is the relevance of GDPR in payments. The General Data Protection Regulation, launched in the EU in 2018, outlines procedures around user data and information privacy. EU citizens have the right to ask corporations to delete their information, essentially granting them a right to be forgotten. While this right does not exist to the same extent in the US, there are still Supreme Court cases that have granted some right to privacy and anonymization. Kahn argues that this should be translated to payments as well; people don’t necessarily want some of their transactions to be shared, even if they were within the bounds of the law. In a web2 context, this is doable; in blockchain, it currently is not.

Other writers have expressed other key points in favor of privacy: privacy in transactions is important because it maintains a fair competitive state, not giving advantages to others who may be able to take advantage of pending orders, observed prices, or other pieces of information that could provide an advantage over another player. Transactions are meant to be between a buy and a seller; the fact that third parties act as intermediaries and can sell that data is a violation of that privacy as well. Money is also more efficient than credit, and less detrimental to society as we see millions falling into insurmountable debt; having a system with less credit (which is easily identifiable) and more debit purchases (private) would be better for society as a whole. These all point to strong reasonings for privacy in payments.

We have been working in the space for a long time, and we’ve found new ways to use zero knowledge technology to maintain privacy while enabling transactions and abiding by global regulations. We can use blockchain public records to ensure that individuals have not interacted with known bad actors, while leveraging zero knowledge proofs to maintain each individual’s privacy. We can enable users to generate proofs to show that they themselves are not bad actors as well, while not giving away their PII. In this way, users of the network can undergo AML checks without giving away their identity; a new approach to the traditional way of checking identities by providing identifiers to an authoritative body. We are just scratching the surface, but we are excited to continue exploring the possibilities.

To conclude, there’s a lot of reasons for transactions to be private, from a philosophical perspective as well as a practical one. There are already laws enacted around the world to preserve the right to privacy; it should apply to transactions as well. When we think about the importance of privacy in transactions, we can think back to the origin of money and what it represented. Maybe it’s time to go back to the fundamentals of that era and keep a transaction between a buyer and a seller.