Posted on January 27, 2020
Identification? Thanks, but no thanks!
Financial transactions today are inseparably linked to identity. This has not always been the case. When humans ceased living in tribal communities and clan structures, the world became ever more shaped by loose and anonymous societies. During this societal evolution over the past two thousand years, financial transactions have been conducted in various ways using bearer instruments. Intra- but especially intercontinental trade was carried out using gold and silver. Monetary metals are nobody’s liabilities, which is why there is no central ledger recording all transactions.
With increasing digitalization the picture changed. Payment transactions within the “Open/Great society” – according to Popper and Hayek – were increasingly processed via third-party providers such as banks and other financial institutions for the purpose of efficient scaling. Then, around the 1970s, the view began to prevail that every financial transaction must be visible to the government and every participant in the payment network must be known to payment providers.
Bitcoin is different
This is not the way Bitcoin is working. Its use requires no identification whatsoever. Users can use Bitcoin however and for whatever purpose they want. Bitcoin cannot and does not want to know anything about it. All that is needed to make a Bitcoin payment is a valid digital signature. You don’t have to prove what your name is or who you are, but what you have: a digital signature with which to move a UTXO (Unspent Transaction Output). Bitcoin truly abhors identification.
So if you execute a Bitcoin transaction, you do not have to trust your transacting counterparty. You solely trust in the Bitcoin protocol and its rules, not in other people who also use Bitcoin. As long as the cryptographic and economic conditions, which Bitcoin is built on, hold, the cryptoasset can be used without interference. Without any ifs and buts and no dos and don’ts.
Accordingly, Bitcoin is a new manifestation of today’s market-based approach to bring order to the world. Markets are integral to contemporary societies – our “Open/Great society”, to quote Popper and Hayek once again. As already mentioned, this sort of market-based approach is a relatively new phenomenon. Most of the time, people lived in tribal communities and realities in which status and thus identity played a major role. Even today, imprints of such a prevalent past are still embedded in people’s intuitions and are particularly evident where basic human instincts permeate, for example in politics or in the realm of (un)social media.
Circumstances of social status are closer to us humans since status systems are actually to be interpreted as more natural due to our history and thus the human psyche. Status driven circumstances are more static and therefore more stable. For a long time, status was the most important capital instrument to excel for human beings. With the emergence of markets and their growing relevance, this spell has been increasingly broken. In essence, the great societal transformation from “tribal community” to “loose society” can be identified and marked as a development away from status to contract. With a market-based order, contractual relations instead of status conditions have become the dominant way to develop and advance human capacities.
Today, contracts are the decisive element of our economic system. Without them, there is no interaction. Bitcoin is taking this to the next level. While contracts in “capitalism” before Satoshi were still supervised and enforced by a legal system orchestrated by third parties, after 2008 a new paradigm was born: Algorithmic, self-executing protocol-based applications make worldwide interaction between people possible.
Connecting friend and foe
This very interaction is enhanced by the new world of Bitcoin. Since on a fundamental level the human element is reduced to a new minimum, the extent of human interaction is paradoxically greater due to increased social scalability.
After all, markets are the ultimate means to facilitate all kinds of business interactions among strangers. Market economy conditions often result in people cooperating with each other via market structures, who on a personal level would most likely not get along at all. Markets bring opponents of any type together because market participants only have to agree on the means and not the ends. This runs contrary to human intuition, which is shaped by clan thinking. As a consequence, repulse is a normal human reaction. In today’s times of complete transparency, third parties upholding the inner plumbing of markets are therefore increasingly being asked to exclude certain actors from interaction. Transactions are censored and bank accounts closed.
The ones falling prey to such censorship naturally oppose. Many of these people take the easy way out by blaming it on sinister government powers that conspire against their citizens. But much more plausible seems to be the observation that humans are still status-driven beings who are fundamentally opposed to identity-free, unconstraint interaction among humans (especially strangers). This would also explain, why so many people don’t see it as a problem, to have financial transactions supervised and controlled. All the more important then, that Bitcoin has entered the picture, doe not give a damn about identification and has no practical way of censoring transactions in any meaningful way.