Financial Cryptography and the Theory of International Relations

[Robert Hettinga]

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Date: Wed, 13 Nov 1996 15:32:34 -0500
From: Robert Hettinga <rah at shipwright.com>
Subject: Financial Cryptography and the Theory of International Relations
X-Sender: rah at pop.tiac.net
To: IRTHEORY_LIST <irtheory_list at unimelb.edu.au>
MIME-version: 1.0

Somebody asked me, regarding my posting here of the Digital Commerce
Society of Boston meeting announcement (DCSB: Money Laundering -- The
Headless Horseman of the Infocalypse):

>Yes, I would like you to explain.  Just what does this have to do with the
>theory of international relations?

People like the attorney "Black Unicorn" are interested in the
international application of the technology of strong cryptography; in
particular, strong financial cryptography. See <http://www.vmeng.com/rah/>,
for pointers to more information on this, which I include here by reference.

The short answer is, what happens if nation states can't fund themselves
anymore because the cheapest transaction method available (cheaper by
several orders of magnitude in lowered transaction and distribution costs)
involves anonymous digital "cash" settlement?  To quote something someone
said in a Harvard Law seminar list a couple of years ago, "What happens
when taxes become a tip?".

The strongest financial cryptography protocols (like those invented by
David Chaum of Digicash, or Mark Manasse of DEC, or Adi Shamir of RSA) use
no book-entries whatsoever, which means no audit trails, which in turn
means no book-entry taxes, like, say, those on income, or capital gains, or
sales.

In addition, what happens when we can effect the sale of financial assets
with the digital equivalent of old-fashioned bearer certificates, which use
the same cryptographic technology? The centralization of capital markets
may become a thing of the past. Centralized markets for *anything* may
become a thing of the past.  The nation-state's ability to reallocate
income, criminally, ala Amin or Mobutu, or otherwise, is severely limited
in this scenario, certainly. :-).


With anonymous voting protocols, you can have anonymous (or, more
correctly, perfectly pseudonymous) control of financial assets. Possible
damage to one's reputation (pseudonymous or not) works just fine to prevent
the non-repudiation of cash-settled transactions, so the power of nation
states aren't even necessary to regulate commerce, really. The only thing
left that nation states do is physical security, or the "rational"
application of force, which can probably be handled privately, particularly
if nation states can't command the payment of taxes for this service anyway.

Which brings me to the current discussion here about the imploding
pseudo-states of Africa. What we're witnessing right now is the
re-emergence of tribal groups as the common political denominator. Nation
states based on those groups are likely. However, I also expect that this
process of literal dis-integration will continue, but recursively, as it
becomes more and more possible for ordinary people to use information (like
asset pricing, the returns on those assets, or the technical knowlege to
profitably control those assets) once only found at the top of large
industrial hierarchies like multinatioal corporations and nation states.
That information will be applied to smaller and smaller economic units as
processor prices continue to fall.

That is, large groups of the same ethnic nationality will be created on the
rubble of the old colonial boundries, which the cold war propped up for the
last 50 years. However, those large groups will continue to factionalize as
access to western-style economic activity increases. The continuing
ubiquity of the internet can only increase this process, especially if the
promise of financial cryptography survives the test of economic reality.

I expect that as financial technology like the above is introduced, the
ability of political and business elites to hold together large
hierarchical entities, like the modern nation-state or multinational
corporation, will continue to deminish. The ability for anyone to get paid
for their work, no matter where they are, and to work where they live,
probably in a peer-to-peer economic relationship with the buyer of their
work, who may well live on the other side of the world, will create much
less reliance on geography as capital, which were the hallmarks both
agrarianism and industrialism. Both of which, by the way, created cities,
and then the nation state, in the first place.

Whew. Clear as mud. Oh, well. Besides stirring things up more than a little
bit, does that answer your question?

;-).

Cheers,
Bob Hettinga



-----------------
Robert Hettinga (rah at shipwright.com)
e$, 44 Farquhar Street, Boston, MA 02131 USA
"The cost of anything is the foregone alternative" -- Walter Johnson
The e$ Home Page: http://www.vmeng.com/rah/

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-----------------
Robert Hettinga (rah at shipwright.com)
e$, 44 Farquhar Street, Boston, MA 02131 USA
"The cost of anything is the foregone alternative" -- Walter Johnson
The e$ Home Page: http://www.vmeng.com/rah/