Workarounds: Politicians will not pay their doxies with CBDCs.

I wrote yesterday about our increasing lack of privacy due to governments’ intrusive surveillance. Crypto central bank digital currencies – CBDCs – will be one of the most intrusive measures. It will make our entire financial lives transparent.

I would like to posit three things.

1. Central bank digital currencies will be imposed by politicians.

2. Politicians will not use traceable central bank digital currencies to accept bribes or to pay their mistresses. Therefore,

3. There will be workarounds.

Implementing workaround schemes will offer new opportunities for making money. They will be necessary to know if you want to avoid scrutiny yourself.

An understanding of the alternatives involves an understanding of cryptography. Cryptography is not involved in everything, but it is essential background knowledge.

Public-key cryptography works. You or I or anybody can encrypt a file such that neither the government nor anybody else can decrypt it. This is essential to know.

This fact is the key to Bitcoin. If Bitcoin could be decrypted it would not exist. The same public-key cryptography that works for Bitcoin is available in something you can download called PGP – pretty good privacy.  Keys in Bitcoin consist of 32 hex characters which afford a total of 340,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000 combinations.  Enough to discourage guessing.

In public-key cryptography the key is managing the keys. The difficult thing, which is to share the key with your opposite party, is done via public-key cryptography. This paper’s paint-mixing analogy shows how it is done. The key insight is that just like you cannot un-mix paint, it is very hard to un-multiply very large numbers to determine their factors.

The question then becomes who holds the keys.

If you are depending on the telephone company or Apple to hold the keys, the government can make them an offer they can't refuse.  They cough up the key. If your iPhone gets confiscated by the feds, they can compel Apple to decrypt the message messages stored on it. You never knew the key in the first place. It's been in Apple’s hands as a convenience to you.

Telephone conversations now travel by voice over internet protocol - VOIP. That's digitized packets traveling over the Internet. Once again, you have no idea what the key is to these encrypted packets. They are provided by the telephone company or somebody else. Since you don't manage them, you don't have end-to-end control. If the government holds a gun to the telephone company’s head – or an empty water pistol in some cases – they will betray the contents of your conversations. And, of course, the conversations being digital are very likely being stored someplace where they remain to be decrypted later. It's a good idea to assume that every telephone conversation that you and your opposite party don't explicitly encrypt end-to-end is going to be overheard.

If you want to send a secure voice message, which you recorded on your machine, use PGP and send the whole thing as an encrypted file to your trusted opposite number. This involves some work on your part. It's inconvenient not to have a two-way conversation, besides which it requires a little bit technical skill by both parties. Generally, it is not worth it.

Moreover, as you have surely noticed, Microsoft, Google, Amazon and other big companies do their utmost to push your content up onto their cloud servers.  If they happen to have grabbed a draft of your file before you encrypted it, you are out of luck.  You need to make a practice of employing an “air gap,” totally sanitizing whatever machine you use for your confidential compositions, turning off the camera and microphone and disconnecting it from the Internet, and deleting temporary files when you are done.

The best that you as a private citizen can easily do is to use a service such as Proton Mail, which is designed to provide end-to-end encryption of email. The mechanics are a little bit complex.  They are happy to do it for you but you have to trust them. Trust is the essential factor. Proton charges for their service. They are situated in Switzerland, which has pretty strong privacy laws. You have to have faith that they cannot be compelled to disclose your content or keys. So far it seems to work.

If you hold your Bitcoin through a broker, the broker has the keys. There have been a number of scandals in which the brokers lost their keys and their funds were stolen. This happened to Mount Gox, and recently Greyscale, among many others.

The Bitcoin design is almost failsafe but hard to use. The early adopters were computer literate people who had a technical bent to understand the ins and outs of encryption. That is not most of us. Besides which Windows computers were easily infected by key-stealing viruses that could capture a private key as you typed it in.  Very few ordinary Bitcoin users still use the PC-based public domain Bitcoin Core.  It is resource-intensive, cumbersome and vulnerable to viruses.

If you do not want to trust a Bitcoin broker, which is probably a pretty good instinct, the alternative is to use a hardware wallet in which the key is stored in a hardware device that you control. More than just being held in said device, access to that device is controlled by a password or a key that you also control. This is two factor identification. You need the physical device and you also need the passkey to enter that physical device. The most widely used is made by Trezor.

The physical device holds the 32+ character private key to your Bitcoins. The advice that most Bitcoin aficionados offer is that you should not keep your Bitcoin in a brokerage account such as Coinbase but move them to your own device. You have to trust somebody, but better a one-time commitment to a hardware vendor than ongoing trust of an online broker.  Though you generally have to trade your fiat currency for Bitcoin in a brokerage account, you do not have to hold them there.

Bitcoin is anonymous. The there is no name associated with an account. However, by its design, every transaction in bitcoin is public – visible to the whole world. This means that it is not terribly difficult to associate transactions with a given party if you know the timing and the amount of the transactions. The US government, for instance, wound up holding fair amounts of Bitcoin when they shut down Pirate Bay and Silk Road. The amounts and the timing were known. And now, as the government is selling those coins, the people who follow Bitcoin are able to notice that the Bitcoins that were acquired by a party nine or 10 years ago are now being transacted by that party. It can be none other than the United States government. This is the same applies to companies such as MicroStrategy and Elon Musk. When a large player acquires a large amount of Bitcoin, it doesn't take too much work to put two and two together and figure out which accounts are held by which players.

What does this mean for you? If you bought crypto through a broker, it is probably a good idea to pay tax on the capital gains, because the broker will have reported the transaction to the feds and they will be able to put the pieces together to collect their pound of flesh. If you want to remain totally anonymous, you will need to acquire your coins privately and not convert them to cash through brokers.

For these reasons, likewise, is probably not a good idea for politicians to receive their bribes or pay their mistresses in CBDCs or Bitcoin. It is too easily compromised. The next installment of this blog will be to address alternatives for totally circumventing digital currencies. This will be of increasing interest as governments become ever more intrusive. Facilitating this type of transaction will be a way for entrepreneurs to make money along the way, provided of course they don't contravene the law as happened with Silk Road and Pirate Bay.  I’ll be following up on the Bartercoin notion that I put forward in April and tying it back to precious metals investing in the here and now.

That’s the thoughts from Lake WeBeGone, where the strong man is rereading “Conciliance,” by E.O. Wilson, father of sociobiology a generation ago. His chapter on ethics contends that most of us, religious or not, either have a transcendental belief in universal moral imperatives or a nihilistic belief in moral relativism. No. Our ethics are a product of genetic, epigenetic and cultural co-evolution. As such they are as particular as every product of evolution, including our bodies and brains, fitted to the peoples among whom they evolved, and not to be lightly discarded. Going from the general to the particular, part of why Ukraine works may be because the different aspects of our evolutionary history are all of a piece. A thought to chew on.

Graham