America needs to see payments privacy as a comparative advantage.
Do we really want anonymity in payment systems or not? I used to think yes, but now I think no. The fact is that it’s a really complicated subject. If anyone tells me that they think payments should be completely anonymous, or completely not anonymous, I know that they haven’t thought the subject through. Even those who are tasked with thinking about this sort of thing are not sure. A few years ago, the US Government Accountability Office published a report on “Emerging Regulatory, Law Enforcement, and Consumer Protection Challenges” (May 2014) and the very first of its conclusions was that virtual currency systems “may” provide greater anonymity than traditional payment systems.
They “may”, or they may not. It’s a question of design, of course. The design I want is pseudonymity, but that’s just one way of doing things. I am always interested in learning more about the issues around anonymity in payments and I try hard to understand a wide variety of use cases so that I can test proposals for new payment systems to examine their behaviour in very different circumstances. While I was mulling over some issues to do with different kinds of pseudonymity and who might be responsible for delivering them into the marketplace, and writing a piece here about assassination lotteries, I came across a very interesting use case to add to the canon: lottery winnings.
First, the basic economics of American lotteries (other countries are, I’m sure, no different). Around half of all Americans buy at least one lottery ticket every month, but there’s the usual 80/20 rule in the distribution. In other words, most tickets are purchased by the same small group of people. These people tend to be poorer and less well-educated, which is why many people call lotteries a form of regressive taxation that falls mainly on the mathematically-challenged. One study found that US households that make less than $12,400 per annum spend 5% of their income on lotteries, another found that households earning under $13,000 per annum spend 9%. In a survey a few years ago, a third of players who had not completed high school identified buying lottery tickets as a “wealth building” strategy (which it is, but only for the people running the lotteries).
So why was I thinking about non-assassination lotteries? Well, because they are an interesting locus for a discussion of anonymity with a central use case that I hadn’t thought about before. I was alerted to this by Don Thibeau a couple of years go. He pointed me in the direction of a story about the winner of a HALF A BILLION DOLLAR lottery prize in the United States who was involved in a court case (as Jane Doe) to remain anonymous because she didn’t want everyone to know about it.
Now for me this wouldn’t be a problem. If I won half a billion dollars on the lottery I would collect the money, give $50 million to Woking FC to sign Sergio Aguero and then very publicly donate the rest of it to the Monster Raving Loony Party in return for becoming their leader. I could then dedicate the rest of my life to getting more MPs than the Greens (i.e., one) so that I could get on to the BBC’s Question Time programme.
Other people, however, might decide to keep the money, and this can lead to problems. Very serious problems actually, such as when in November 2015, Craigory Burch Jr. matched all five numbers in the Georgia Fantasy 5 drawing and won a $434,272 jackpot only to be murdered in his home by seven masked men who kicked in his front door.
Anonymity is Hard
You can see why, apart from trying to avoid home invasion, a lottery winner might like to keep her good fortune to herself. Would she really be anonymous though? After all, the money would have to go into a bank account, so not only would lottery officials know who she is but people at the bank would know who she is, and so on. Being anonymous is really difficult in an infrastructure that has no anonymity (whereas adding non-anonymity to an anonymous infrastructure is easy).
Which leads on to an interesting question: if we are designing the identity system of the future, should it allow for this kind of anonymity? It turns out that New Hampshire actually allows people to form anonymous trusts and these trusts can buy lottery tickets. Again, though, would the trust members really be anonymous? The money would have to go somewhere…
You could of course construct the lottery to be completely anonymous from the beginning by using a variant of the cryptographic blinding invented by David Chaum for Digicash. That is, you buy a lottery ticket, fill out the numbers and add your ZCash, Monero or whatever address and then submit it. The lottery signs the ticket to confirm your numbers and sends it back in return for your stake. If that ticket wins the lottery, the money can be sent to the cryptocurrency address in the ticket without the lottery owner or anyone else having the slightest idea to whom it belongs.
It’s a lottery.
Helen Holmes © 2021.
NFT available direct from the artist at TheOfficeMuse (CC-BY-ND 4.0)
So is this a use case for anonymous cryptocurrency then? Well, no. Here’s the thing: would you want lottery winnings to go to anonymous people? How would you know that the lottery is fair? How would you know that the lottery operator isn’t rigging it and sending all of the winnings to their family? How do you know that the lottery organiser didn’t win and send the money to themselves? There must be a way to audit, and this of course again points away from anonymity.
Once again, I am forced to conclude that, no matter how appealing it might seem at first glance, there is no case for electronic money, and central bank digital currency in particular, to be anonymous.
Private, yes. I agree with Michael Casey’s argument in the Cato Journal that a privacy-enhancing digital Dollar would be very appealing on a global scale in contrast to digital currencies subject to continual state surveillance. He says that if the United States were to treat money “less as a means of controlling everyone and more as a field of opportunity for creative startups” then it would bring substantial benefits, and I am sure he is correct.
If central banks think (as I suspect they do) that one of the main drivers for a digital currency is not as a payment mechanism but as a platform for new products and services, privacy (but not anonymity) will strengthen the digital dollar’s comparative advantage.