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]