Regulatory questions of privacy on small-value electronic payments

I am reading an interesting 1997 paper from Maurer School of Law. It is so interesting to see legal opinions from the pre-crypto days.

We need millennial lawyers to have these conversations and inherit the keys of legislature. I have no doubt: millennial lawyers are one of the most influential people today. If they don’t understand and advocate for cryptocurrencies then we are living a pipe dream thinking what a great thing crypto is. It might be great, we’ll see.

Sifers, Randall W. (1997) “Regulating Electronic Money in Small-Value Payment Systems: Telecommunications Law as a Regulatory Model,” Federal Communications Law Journal: Vol. 49: Iss. 3, Article 7.

This is an interesting segment in the paper, which is basically the idea of payment channels like Lightning network and Raiden network:

…For example, transmitting information electronically also permits parties to track individual transactions and later compile them into aggregated figures. These compilations can then be settled periodically according to business needs. As a result, there is no need to follow each transaction by complex settlement procedures.47

Blockchain as a settlement layer with small value transactions being off-chain for scalability. This is basically where Bitcoin (BTC) is at currently. And for the record, i think it is a great plan, and technically very solid. Sorry for the FUD though but, if this idea (Lightning) is not workable and adopted, then BTC does not really have an alternative course of action. If Lighting Network fails, then scalability is not solved and Bitcoin (BTC) starts to tumble down.

Now this next part of the paper is my area of concern and where Lighting Network starts to depart from easy regulatory compliance:

Electronic money does not have to be designed to faithfully emulate all the properties of paper cash. It can be implemented to preclude some features of paper cash, such as complete anonymity, while including other desirable attributes of paper cash, such as full divisibility, assignment of limits and constraints, and links to the current owner.

It can preclude anonymity since now it is easily traceable, with links to current owner? Hmm, sounds like some people might take issue with that. Not all is lost in this paper though… the ‘visionary’ author of this paper (just kidding) brings up the topic of smart cards (which are mobile wallets today), saying:

…it (smart card) avoids the need to identify the user and access the user’s bank account or credit card in order to verify funds availability because the only funds available are those that are on the card. … Proposed systems allow card value to be transferred to other persons without involving an intermediary in what has been termed “peer-to-peer transactions. Those who object to visions of a cashless economy often stress the continuing need for currency. The advent of smart cards makes this argument less tenable. Indeed, low-value, frequent transactions are those for which stored value cards are ideally suited.49

Wow, seems like the vision of Bitcoin right there, in 1997. With hard wallets that can transact p2p, anonymously. Good stuff so far.

Already, a group of cross-industry participants have become engaged to develop uniform standards. MasterCard, Visa, American Express, and Mondex- all major competitors-are committed to a single transaction device.” A truly interoperable electronic payment infrastructure would facilitate private transactions, reducing the need for intermediaries

Ahem.. did i read… private transactions on a single global ledger system? Sign me up. Except, then the 9/11 happened, and lo and behold, every transaction is now ripe to be.. well, not private. See how easy it is to change legal sentiment? I am sure that legal teams were fully ready to advocate for digital privacy pre 21st century. But at the turn of the millennium this changed. Until Bitcoin came along, spurring a chain of innovation.

The promise of digital cash again came to exist as a concept. Now i’m no lawyer of monetary policy off course, i am really a peasant on all this. But it seems to me that there is no single legal question more important today than the question of digital cash, and it’s regulation. For so many reasons. But if you need just one for illustration then take China’s social credit score. Some of us will fight vehemently to preserve the idea of digital cash.

Therefore, under a close statutory reading, any business that accepts smart cards for payment and desires to transmit it into traditionally recognized currency could be construed to be a money transmitting business and therefore be required to register with the Secretary of Treasury. Although this requirement is a nuisance to businesses, it should not inherently raise privacy concerns for individuals involved in the transactions. The statute does not explicitly require businesses to disclose the names of transacting parties or information about an individual transaction.

The above segment coarsely outlines how Lighting payment channels might get put into a category of a money transmitting business. This is what i mean by ‘Lighting Network fails to comply’.

There are great minds dealing with this issue right now in the Lighting Network community and it is one of the primary areas of crypto (BTC) adoption and concern. People don’t seem to realize that on-chain is not really a big issue; it is traceable today with law enforcement mechanisms applied.

Lighting Network however, with it’s ring signature scheme and distributed payment channel nodes is a pest in the basement of monetary legal policy, if ever i saw one. My problem and stake in all this is;

I am a contingency planner; I cannot go about my life advising people to invest in Bitcoin knowing that some of these issues are not even discussed as the lawmakers aren’t being informed on what the implications of Schnorr signatures are. We must preemptively open dialogue fast, before some law maker hears from his colleagues that Lighting Channels mean Onion routing in basements of Anarchist tax dissidents. I have a different narrative to suggest to legislature.

It’s okay if BTC fails, really; the train of digital cash cannot be stopped. The revolution is unfolding and it is omnipresent. And if you ask me Monero is the true digital cash by technical design and it’s market valuation and cultural presence.

Being a systems thinker (Spiral dynamics tier yellow) i cannot entertain untethered hype and exuberance about crypto. I need to see things unfold in the real world before i design systems for the future. And it is not merely for my sake that i lose sleep and hair over this, but for the sake of children whom i swear i hear nobody mentioning in the crypto world.

So it’s time for crypto to grow up. I don’t mean any offence, it’s just that we need to seriously discuss things like law and regulation. Hiding our Ledger Nano S under our bed will not cut it going forward. There are forces in this world that technology cannot control.

Proposals still upcoming.

-Indekay