Encryption, Finance, Freedom, and You

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I hear freedom minded individuals mourning the demise of our God-given
rights in the eyes of the state, I am tempted occasionally to join
them. New usurpations are piled on top of old, and our far-flung
masters in the statehouses seem to spend hours each day devising
more ingenious methods for stealing our liberties. Perhaps the greatest
lament is that so many of our countrymen and fellow world citizens
seem blind to the dangers that the world faces from the evil and
misguided ideologies that taint most of the individuals in power
today. To all those who doubt, I say to you Rejoice! We won, and
nobody seems to have realized it yet.

Freedom, says Ayn Rand, is the fundamental requirement of man’s
mind. If that statement is true, then all of humanity is striving
in some way to increase freedom. Although many individuals and almost
all governments, especially western liberals, tend to promote ideas
and policies that are anti-freedom, almost everyone on the planet
wants more freedom. Socialist intellectuals routinely disguise their
poisonous ideas in freedom's language. The empirical evidence supporting
property rights, free markets, and intellectual liberty is unassailable.
Despite the heavy-handed tactics of the state, freedom seems to
be ascendant everywhere on the globe. This may not seem obvious,
or even prima facie absurd, but I assure you it is not.

Why we won.

Besides the fact that we are on the right side of history, we are
also on the cusp of the greatest transformation of human society
ever. The Network Age is upon us, and just as the industrial revolution
allowed freedom (and tyranny) to spread across the world, the Network
Age will continue both trends at a rapidly increasing velocity.
Unfortunately for tyranny, the balance of power has now shifted
to the Networked man. As the ability to transfer vast amounts of
data anywhere in the world at nominal cost increases for each individual,
it will begin to further alter the way that individual deals with
information, including what he can do with that all important piece
of information – money. The value of money comes from its perceived
value – someone who did not know what a dollar was would not
trade you gold for it. Today, however, we value worthless bits of
paper because they convey a very specific amount of information,
and most of the world values them for the same reason. When that
information is released into cyberspace it begins to take on some
very wonderful qualities.

Before going further, it is important that the nature of these technologies
are understood, specifically encryption and ‘bots. Encryption allows
a user to safely, anonymously, and invisibly transmit data from
one place to another. Even simple encryption makes it almost impossible
for someone to decipher the contents of a transmission, even if
they have access to the most powerful decryption systems on the
planet. As privacy and security become more serious concerns for
those involved in ‘net transactions, encryption will become stronger
and far more prevalent. According to Richard Rahn in his groundbreaking

The End of Money
, the use of encryption to secure financial
transactions is the only outcome compatible with a free society.
Allowing a government unlimited access to the financial activities
of its citizens will inevitably lead to tyranny. Even though the
US strictly limits the use of cryptography, it is readily available
today from such companies as PGP (Pretty Good Privacy), and efforts
to put the genie back into the bottle will fail spectacularly. Although
governments worldwide are trying to thwart the use of encryption,
far too many people are already using it here and abroad to effectively
eradicate it.

are simple programs that allow a user to more effectively use information.
The ‘bots specific to this article are enabled by their user to
perform various financial transactions, thousands per minute if
necessary. Users authorize the ‘bots to engage in certain transactions
such as transferring money from one account to another, purchasing
items at their lowest cost, and investing the users money in mutual
funds that meet the users requirements regarding risk possibilities
and return potential. All of these transactions can be encrypted
and executed in a few nanoseconds. The user does not even have to
be active in most of these transactions, and later generation versions
of these programs will be so simple and user friendly that even
the most techno-illiterate person will be able to use them with

As noted by Frank Shostak, chief economist at Ord-Minnett, Australia,
in his recent article on digital money, it will be linked at first
to government fiat money, and thus subject to the pitfalls of any
fiat currency. What Mr. Shostak does not point out is that in a
highly networked world, weakness in one currency does not mean similar
weakness in other currencies. People using digital currency will
be able to program their ‘bots to seek out the best and most stable
currencies, and exchange them for dollars (or whatever currency
– say, shares of Microsoft – the seller wishes) when purchases
are made. Furthermore, since millions of transactions will be taking
place somewhere at any given second, no regulatory body in the world
has sufficient resources to monitor and decrypt even a small percentage
of them. These technologies are nascent today, but rapid maturity
is natural on the net.

The limits are only on our imagination.

Illustrating the possible outcomes of this technological transformation
is limited by the fact that dozens of companies are working on competing
versions of these high-tech money systems. PayPal will allow any
two or more users to exchange funds via infrared transmitters on
Palm Pilots or over the internet. E-gold offers a similar service,
but uses privately held gold reserves as the medium of exchange.
As these technologies are refined and integrated, new iterations
of the exchange market will appear. Although barter is a relatively
inefficient means of trade today, the ability of the internet to
put everyone in instant contact with everyone else means that barter
exchanges could quickly become a significant portion of our economy.
What follows are two simple scenario's that hint at the shape our
near future will take.

Bob is a 20 year old computer whiz in Tennessee. His day begins
with a quick check of his liquid assets. At his age, the majority
of his assets are in medium and high risk mutual funds, with only
a quarter or so in truly stable companies. He runs a small business
from his apartment, writing patch scripts for a couple of big clients.
As soon as he transmits a patch to his client a deposit of $100
is transferred into his mutual fund account. His "bots"
immediately exchange the dollars for shares, purchasing $55 in high
risk, $20 in medium risk, and $25 in low risk bonds or gold. The
high risk ‘bot has located a one-man company in India who has put
out a credit call, and invests $2. Later this week, the Indian man
will offer up a $7 buyback on his shares, but the ‘bot will retain
$1, selling only $1 back to the company – which is about to
release a video killer app, making that $1 share worth $20. Meanwhile,
Bob has decided to go to lunch. One of his ‘bots has been entrusted
with watching the market and making the payment to the restaurant
at his next mutual fund high point. An unusual spike triggers a
sell-off because he had programmed a ‘bot to buy a certain bicycle
if his wealth reached a certain amount.

is a 35 year old lawyer in San Francisco. When a client wishes to
pay, the dollars are immediately transferred to a bank in Vanuatu,
where they are used to purchase shares of her personal mutual fund.
When Liz receives a bill from her landlord for her office rent,
her ‘bot requisitions money from her account and pays the landlord,
creating an entry in her books showing taxable income. The same
goes for such physical expenditures as property taxes and difficult
to conceal purchases such as a car or home. However, for most of
her nominal purchases she uses a blind credit card that draws funds
from the bank in Vanuatu but leaves no trace of who the actual owner
of the credit card is. Although Liz stills pays sales taxes on these
purchases, no readily available information exists to allow authorities
to track the origin of these funds for the purpose of income taxation.
Better yet, she conducts a majority of her purchases online, making
it possible for her to avoid sales taxes as well.

it all means.

Why does this mean that free minds and free markets have won when
it seems most of the world is aligned against them? People who would
never cheat in their personal business dealings feel few if any
pangs of guilt at skirting tax laws by hiding wealth or not reporting
cash transactions. The ability of a state to control its citizens
lies solely in its ability to collect taxes. As more and more citizens
opt out of the traditional structures – and once it is quick,
easy, and virtually impossible to get caught, they will by the millions
– the state will be forced to try and restrict more and more
freedoms in a vain attempt to stop the scofflaws. Once a small minority
begin to use this power to protect their wealth from government
parasites, the tax burden on those who remain inside the system
will begin to rise. The fact that the top 10% of wage-earners pay
over half of the taxes means that only a small number of the super-wealthy
would have to start protecting their money in this fashion for it
to have a significant impact on the governments yearly haul of loot.
Even those who believe wholeheartedly in the power of the socialist
state and happily pay their taxes will begin to protect their assets
from intrusion once they see their friends and neighbors reaping
the benefits that a unilateral tax cut brings. History shows us
what happens to totalitarian regimes that don't have enough money
to survive – a vampire cannot feed on a target that won't let
him bite.

13, 2000

Dale Fitzgerald II
is a network consultant in Tennessee.

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