0. Introduction
It's been a lucrative month, ecash-wise, what with consulting for some
anonymous Mafia don, selling those kiddieporn mpegs and killing that guy who
cut Tim May off in the parking lot at the mall. So lucrative, in fact, you
don't want those digidollars just sitting around on your hard drive -- you
want them to be earning you something.
The answer, of course, is to invest them in an anonymous corporation.
1. The structure of anonymous corporations
1.1 Outline
An anonymous corporation provides an intersection between the real [a term
used throughout purely in order to deconstruct it] and digital worlds, a
point of contact between the e-economy and the real one.
The corporation itself is known: a genuine Delaware/Bahamas/Cayman Islands
etc corporation, able to own property, to make contracts, to sue (and be
sued) in the courts and with all the normal rights (and liabilities) of the
(corporate) citizen.
But the (controlling) investors in the corporation (basically, the
stockholders) are anonymous. The investment comes in from the stockholders
in the form of ecash, and is transformed by the company into real money and
investments.
Because the investors are anonymous and (assuming) the ecash is untraceable,
truly anonymous control of real assets can be exercised.
1.2 Legal structure
The structure has two parts: a corporation and a trustee.
The corporation is just a normal corporation with directors typically
supplied by the trustee company that administers the corporation. [Note: the
trustee company will need assurance that its fees will be paid, and that its
directors are sufficiently indemnified. See below for discussion on whether
this is possible under an anonymous structure.] The corporation issues
shares to the trustee.
The trustee (typically a trustee company - but a different one to that
administering the company) holds the shares on trust for the anonymous
beneficiaries. A beneficiary is defined as a person who, for the time being,
holds an eshare in the trust. Each eshare gives the holder the right to
direct the trustee on how to vote one of the trustee's shares, the right to
receive the dividend income of one of the trustee's shares, the right to
receive any distribution due to one of the trustee's shares (eg on the
dissolution of the corporation), and the right to participate in the
enforcement of duties owed to stockholders. That is, each eshare in the
trust mirrors a share in the corporation.
The two part structure isolates the anonymity from the vagaries of corporate
law: the register of stockholders of the company will truthfully show the
Completely Legitimate Perpetual Trustee Company, Inc (or whatever). It also
deals with the classic corporate agency problem (the separation of ownership
and control) by allowing the anonymous e-stockholders to enforce their
rights against (ie sue) the corporation or its management without breaking
cover -- the trustee is bound by its deed to take the necessary action at
the (reasonable) behest of the anonymous e-stockholders.
The agency situation is not ideal. Particularly with regard to ensuring that
the *trustee* performs (including the possibility of collusion between
directors and trustee), matters of reputation (including the possibility
that an e-stockholder is a competitor or a testing agency) will be relevant.
(And, of course, there is the possibility that one or more of the
e-stockholders is in turn an anonymous corporation, with full rights to sue,
and no problem with being unmasked.)
Agency problems can be minimised by restricting the operations of the
corporation. Where the corporation merely holds units in a mutual fund, or a
piece of real estate, or perhaps even shares in another corporation, the
directors duties will be minimal -- the corporation acting as a conduit
only. When the anonymous corporation is undertaking a real business, when
management has to be hands on and day to day (ie when there is a greater
disparity of information between management and owners) the chances of
default by management is probably much greater. Structures could be
developed to manage this risk.
Note that the anonymous corporation can have any number of e-stockholders,
from one upwards.
1.3 Technical requirements
The establishment of an anonymous corporation has a number of cryptographic
requirements:
a) The ready availability of untraceable ecash able to be transformed into
real money. This could involve a scheme whereby the ebank was unable to know
which edollars had been issued to which customer, followed by anonymous
transfer of edollars (ie the bank doesn't know the identity of the
transferor or the transferee). That is, some flavor of Chaumian system where
double spending is eliminated by on-line settlement of transfers. The ebank
would redeem ecash for real dollars. [This, of course, is more of a systemic
than a cryptographic requirement.]
b) A method for the anonymous issue/subscription of eshares.
c) A method for the anonymous transfer of eshares (with protections against
'double spending'). These two requirements are essentially a variation on
the ecash scheme above.
d) A method for secondary market purchasers of eshares to verify which
company the eshare belongs to.
e) A method for the holders of eshares to vote anonymously.
f) A method for distributing dividends etc to e-stockholders. Perhaps the
trustee publicly posts an encrypted message. Each eshare acts as a key to
decrypt one part of the message, revealing ecash (or, in the case of a bonus
issue of stock, or a stock split, or even a merger, eshares etc). If an
e-stockholder has more than one share, they will be able to decrypt more
than one part (ie each part of the message corresponds to one eshare).
In the case of a widely held corporation, information (accounts, voting
forms etc) can be distributed publicly. In the case of closely held
corporations (where stockholders are more intimately concerned with
management) sensitive information could be encrypted for each e-stockholder.
In order to provide maximum flexibility, an anonymous corporation should be
able to issue many millions of eshares. Similarly, an e-stockholder should
ideally be able to hold many millions of eshares.
2. Implications
2.1 Implications for the structure
The key (no pun intended) feature of anonymous corporations is, of course,
that the stockholders (in the beneficial/equitable sense, ie the
e-stockholders) are not known, and cannot be sued. In so far as corporations
generally provide limited liability to stockholders anyway, this is not too
radical a change (and may deflect some criticism). However, it does have
some repercussions.
a) The anonymity of stockholders will deter creditors.
One of the protections that creditors of a corporation have is that if the
corporation is unable to pay them, but it has made a payment to the
stockholders, the creditors can recover the money paid to the stockholders
as a fraudulent conveyance (or similar). With an anonymous corporation, once
a payment has been made to stockholders, it is unrecoverable.
In order to encourage lenders to extend credit, the corporation could offer
to secure the loan (with traceable property [ie if the corporation doesn't
pay, and deals with the property, the lender can find the property, take it,
and sell it to cover the unpaid debt], or by pledge [the corporation leaves
the property with the lender, so if the debt isn't paid the lender can sell
the property without having to trace it first]). Alternatively, the income
stream of the company could be encumbered in such a way that creditors had
to be paid out before stockholders. In general, many of the techniques of
project financing will be relevant to attracting debt finance.
Trade creditors, especially the directors and the trustee, will also require
comfort that their bills will be paid and any liability covered. Some
combination of up front payments, insurance and recourse to the assets of
the corporation may be enough.
b) The anonymity of stockholders will affect other stockholders
Stockholders sometimes owe duties to other stockholders. In so far as these
duties extend to e-stockholders (who hold the equitable, but not the legal
title to the shares) they will be effectively unenforceable [except for the
possibility of injunctive relief...]. Thus majorities may have more freedom
in dealing with minorities [in some situations], possibly leading to a
higher premium for control, and insider trading will be undetectable,
leading to a more accurate market price for the e-stock (and all other stock).
c) The anonymity of shareholders may be prejudicial
A number of regulatory tests depend upon the identity of (beneficial)
shareholders, for example tests of foreign control in investment and tax
laws. Anonymous companies may find that the onus is on them to prove that
they do not fall into an undesirable category. This will, typically, be
impossible.
d) The complexity of the structure has a significant cost
As compared with directly owning an asset, owning an asset via an anonymous
corporation is incredibly costly. There are two layers of fees (to directors
and to the trustee) and possibly even two layers of tax (at corporation and
trust levels) to pay on any income, quite apart from the set up costs and
the administration of the technical/cryptographic structure. Then there is
the cost in time and effort of monitoring the structure to see that nothing
is going wrong (the agency cost). And, of course, e-shares are also likely
to be significantly less liquid than ecash or the assets held by the
corporation.
And the risk of holding assets via such a structure (default by directors or
trustee, discovery by traffic analysis, government confiscation of all
anonymous corporations) must be weighed against the risk/return involved in,
on the one hand, transforming the ecash into real cash oneself, and, on the
other, burying a [heavily encrypted] floppy disk in a coffee tin in the back
yard.
2.2 Implications for the e-economy
a) Eregistries
Some elements of the anonymous corporation could be shared across instances,
such as directors, trustee and technical/cryptographic structure. This would
help to reduce costs (including set-up costs) somewhat. And by separating
the cypherpunkish element (crypto-struct) from the more general, and already
existing, elements (ie trust companies), it may assist in selling the idea
to those pre-existing elements and the investing public [private?].
In other words, just as some corporations use outside services to administer
their share registers, eregistries would handle the mechanics of eshares.
Eregistries would make the investment in equipment and bandwidth, and charge
the issuers of eshares (the trustee) a fee for handling the issue, the
online settlement of transfers, the distribution of dividends etc. Not only
does this spread the cost of equipment among corporations, but, if standard
service packages are offered by the eregistries, greatly simplifies the
drafting of trust deeds [there is only a need to refer to "the services of
Cypherpunk eRegistry No1 BV", rather than scary maths].
Such eregistries would need a reputation for reliability, honesty and
(perhaps) regulatory inaccessibility. [They might also provide an extra
layer of anonymity, acting as a sort of mixer for transactions -- was that
message a subscription to that corporation, a transfer of an eshare in this
one, or a vote on some matter for the other?] And they need not, of course,
be limited to eshares -- eregistries could provide clearing for edebt and ecash.
b) Secured lending -- extending credit to anonyms
Because eshares represent something real, they have real value. A creditor,
therefore, should be prepared to lend emoney even to a digital pseudonym on
the security of a pledge of eshares [ie eshares transferred to lender on
condition that they be transferred back on repayment of loan].
(Another way of leveraging the value of your eportfolio is simply to have
your anonymous corporation borrow the money: capitalise up a corporation,
have the corporation buy an asset, and have the corporation borrow real
money secured on that asset -- the corporation can spend the money or pay it
to the e-stockholder (you) as a dividend...)
Enabling anonymous credit unlocks more of the value of ecash.
c) Why not edebt -- ecash by another name
As you will have noticed, I have made certain assumptions about how ecash
works [although these assumptions are probably not necessary for the
functioning of anonymous corporations]. It is time to make those assumptions
more explicit.
I see a system whereby the average person buys ecash over the net (or even
off the street), say using their credit card. In return for a (cleared)
payment the ebank issues a bucket-o-bits, representing that cash (minus a
fee?). The ebank (via its eregistry) does not know which digital-dollars go
to which non-anonymous customer. Transfers of ecash take place anonymously
on line (old buckets revoked, new buckets issued).
What gives the ecash value is the ebank's promise to turn each edollar into
a real dollar (minus a fee?) when presented for payment. This promise is
made credible by the ebank's credit rating -- either because it is a
bank/financial institution itself, or because it invests the original
payments in some very secure instrument (eg t-bills).
Ecash, in other words, is just an AA(A) rated no interest debt security
issued at face value. [Of course corporations, anonymous and otherwise,
could issue other types of edebt -- zero coupon, interest bearing, even
convertible into eshares...]
This, unfortunately, raises expensive regulatory hurdles for ebanks. Offers
of securities to the public of the US (whether by a domestic or foreign
ebank) would seem to require compliance with the Securities Act 1933, the
Securities Exchange Act 1934, the various requirements of the SEC, and
probably state investment laws. As well as the costs of mandated ongoing
disclosure, and the setup costs of such a scheme (accountants, investment
banks, Wall St lawyers), there are the problems of having to appoint a US
indenture trustee (yet another body to convince of the merits of the
scheme...) and produce an SEC approved prospectus (anyone for wading through
300 Web pages?).
But, of course, these hurdles must be overcome (or bypassed, or even,
perhaps, simply ignored) for an anonymous e-economy that is fully integrated
into the real economy to develop.
Quite apart from the regulations, ebanks structured in this way must face
certain facts of economic life. A stand-alone ebank (ie one which is not
already a bank or other financial institution) will face not only regulatory
costs and technical costs (eg eregistries) but also the cost of dealing with
the real financial system -- it will cost money to get money from investors
(transfer from their account to yours), and to return money to investors
(transfer from your account to theirs). To offset these costs, ebanks will
receive interest income and fee income.
The interest income will be minimal. By definition the assets of the bank
will be low risk, and therefore low return. It is also likely that the bulk
of the ecash will be outstanding for a relatively short time (see the mpeg
you want, buy the ecash, buy the mpeg; the seller receives the ecash and
converts it, or invests it in an anonymous corporation who converts it),
perhaps only overnight.
And fees will discourage the use of ecash. The higher the fees, the less the
prospect of anonymity will appeal to the person on the street (or is that
the person on the information superhighway?). A certain amount of legitimate
use would do wonders to smooth the path of the crypteconomy. It is just too
easy to ban (or anathematise) the whole system if *every* edollar comes from
the four horsemen of the cryptocalypse.
2.3 Implications for the real economy
a) Response of regulatory authorities
The wholesale interpenetration of the real and digital economies that
anonymous corporations (and similar structures) allow provides a mechanism
whereby the ability of the state to control individuals is lessened. As
edollars control real assets, edollars too become real, and the anonymous
e-economy and the real economy merge. [Or, perhaps, since the real economy
will be bigger than the e-economy, the former *absorbs* the latter.] And
once this merger has taken place, it will be too late for the state to act.
The state then, will tend to fear loss of control, and, as a distinct subset
of that, loss of revenue through wholesale tax avoidance.
The tax problem is probably the easiest to solve. Instead of taxing the
recipients of income, the sources of that income can be taxed (eg
withholding taxes on dividends and e-dividends), and the ultimate
expenditure of that income can be taxed (consumption taxes). This may seem
like a big change, but in the history of taxation (which is just the history
of bullying) a universal income tax is very recent. And the change is, after
all, just one of emphasis.
The general response of the state (egged on by the establishment) to the
prospect of waning control has been discussed at length by this group, as
has the difficulty of operating in the financial products marketplace. I
merely mention the possibility that the SEC will refuse any scheme that
seeks to issue readily convertible anonymous securities, on the grounds that
it will make the detection of securities offences (such as insider trading
and stock parking and a million other technical evils) too difficult.
3 Where to from here?
Cypherpunks write code. It would be nice to develop the bank-in-a-box that
led to a thousand guerilla ebanks springing up around the world (like so
many points of light in a presidential speech). It may not be that easy.
But the legal and financial systems are still systems, and they can be
hacked (although they tend to fight back -- forensic black ice...).
Demonstrate the structures that make ecash a useful tool for solving real
world problems (like having to pay tax, or signalling one's moves to the
market), and the crypto-meme could spread to the arch-hackers of Wall St.
And evolving a modest ebank/anon-corp structure ('International Postage,
Inc'?) might be a way to sneak under the wire of the regulators: no need to
look too hard at some hobby project of a bunch of propellor heads, after
all. Some home cooked legal documents, a bit of form filling and Hey Presto
-- real money to keep remailers and start data havens really going. And when
we launch the first CyP anonMutual Fund...
<vbg>
Anyway, I'll wait for the feedback and see if it's worth (in the
moral/political sense) looking at this stuff further. The box the bank comes
in might be filled with forms.
[BTW -- TINLA]
