Privacy cryptocurrency among “greatest national security threats” Secret Service says

The world is coming closer to the pointy end of the inevitable privacy coin debate.

Privacy focused cryptocurrencies and authorities have been on a collision course for a while, and crunch time seems to be drawing near. Japan's financial service authority recently declared all anonymity coins to be illegal, and now there are signs that US lawmakers want to head in the same direction.

In a 15 June Subcommittee on Terrorism and Illicit Finance (Committee on Financial Services) Hearing, titled Illicit Use of Virtual Currency and the Law Enforcement Response, Robert Novy of the secret service Office of Investigations said "one of the greatest emerging threats to U.S. national security is illicit use of virtual or cryptocurrencies".

He specifically mentioned Monero and Zcash by name, prompting the latter to say:

"We believe it is in the best interest of the citizens of the United States, the US Secret Service, and other governmental organizations to advocate for privacy rights and protect its citizens and businesses from harm."

This national security vs privacy rights argument is the state of the debate in a nutshell.

An underblown threat

"We should... consider additional legislative or regulatory actions to address potential challenges related to anonymity-enhanced cryptocurrencies, services intended to obscure transactions on blockchains (i.e. cryptocurrency tumblers or mixers) and cryptocurrency mining pools," Novy says.

"While some digital currencies have operated lawfully, others have been used extensively for illicit activity… The growing illicit use of digital currencies risks undermining the effectiveness of existing U.S. laws and regulations, especially those intended to limit the ability of criminals to profit from their illicit activities … One of the greatest emerging threats to U.S. national security is illicit use of virtual or cryptocurrencies," Novy said.

Novy's probably right that cryptocurrency is a threat to US national security, but he seems to be picturing anonymous terrorism financing and easy money laundering, rather than the real threat of decentralised currencies as an economic weapon for rival nations. Cryptocurrency can erode US economic dominance by unseating the US dollar outside the USA, and erode US economic influence by limiting the effectiveness of US-originating sanctions. North Korea, Russia, Iran, Venezuela and other sanctioned nations are eyeing a cryptocurrency future for these exact reasons.

Whether individuals should necessarily have any stake in this kind of international flexing and whether it's fair for the occupants of a weaker country to pay the price of loss, such as Venezuela's residents are, is a purely philosophical question.

Either way, the USA has officially remained unconcerned about the potential risks of loss of economic dominance while instead speaking out on money laundering.

An overblown threat

Privacy-focused cryptocurrencies can undoubtedly make money laundering and terrorism financing easier, but whether this will have any impact on public safety is debatable. Money laundering always has been and always will be a constant facet of the global economy, and cryptocurrencies are so far still only a tiny portion of the whole. Interpol estimates that cryptocurrencies of any kind currently account for about 3-4% of the global money laundering volume, tops.

This might be because the traditional money laundering methods are still extremely effective, and some industries even seem to gear themselves towards money laundering as a profitable revenue stream.

For example, card companies have successfully lobbied against even the most basic anti-money laundering measures, such as needing to declare more than $10,000 worth of anonymous prepaid cards as a cash equivalent. And even the most mathematically improbable casinos can still keep running in plain sight for years. And even banks themselves only pick up a tiny fraction of the billions of dollars of dirty money that flows through them.

When cryptocurrency entered the money laundering world, it entered as just one product among many in a highly competitive industry. It's extremely difficult to get worked up about just one more entrant in the market, especially to the extent that words like "terrorism" and "national security" would suggest.

And unlike other currently-available ways of cracking down on money laundering, reflexive opposition to private transactions could cause real long term damage, and might mean missing out on the potential benefits of a more privacy-centric society.

The cost

Even if anonymous cryptocurrencies could be eliminated at the push of a button, it wouldn't necessarily be in anyone's best interests to push it.

Cryptocurrency makes up a negligible part of the money laundering pie and alternatives will keep profitably ticking along even if crypto disappears. Even if killing privacy coins was easy, the benefits are hard to see while the downsides are fairly apparent.

Firstly there's the difficulty and cost of actually enforcing the "no privacy coins" laws. The nature of the technology means it will be inherently difficult to catch perpetrators, while the "if privacy is illegal, only criminals will be private" effect means you might not want to. It stands to accentuate the current situation where the most experienced and dangerous criminals avoid getting arrested, and the least dangerous one-off criminals (and innocents) are arrested in larger numbers simply because they are easier to catch, before emerging with a lot more experience and no opportunities except a return to crime.

By some measures, it's irresponsible and counter-productive to criminalise any new non-dangerous activities as long as the underlying system is so ineffective, and it will only cause more problems than it solves. In a similar but more controversial vein, it might be a good thing for society as a whole if transactional privacy made it more difficult to catch and prosecute non-violent drug offenders. It would save people from that self-sustaining prison cycle while presenting a guilt-free (so to speak) way to divert resources away from non-violent crimes and into more useful activities.

But even without criminalisation, everyday privacy in transactions can still deliver a lot of benefits for the everyday person. For example, by reducing identity theft and preventing credit card numbers from being such easy pickings, or simply being an ethical step in the right direction.

Privacy holds a lot of benefits as does its sibling, transparency. The goal should be to embrace the benefits of both where they are most useful as fully as possible. Mindlessly declaring one of them to be the evil twin is not only ineffective, but seriously counterproductive.

Watch the hearing

Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VET, XLM, BTC, NANO

Picture: Shutterstock