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The front of Max Verstappen and Sergio Perez's Formula 1 Red Bull car on display at the Mobile World ... [+] Congress 2024 in Barcelona. (Photo by Joan Cros/NurPhoto via Getty Images)
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North Korean hackers have successfully cashed out the first $300 million of the proceeds from their record-breaking $1.5 billion crypto theft from the ByBit Exchange. They are getting good at exploiting anonymous payments: crooks linked to North Korea have stolen more than $6 billion in cryptoassets since 2017 (with the proceeds reportedly spent on the country’s ballistic missile program). Elliptic says the incident is almost certainly the single largest known theft of any kind in all time, a record previously held by Saddam Hussein, who stole $1 billion from the Iraqi Central Bank on the eve of the 2003 Iraq War.
Dark Anonymous Payments
That’s the thing about anonymous, untraceable digital assets: the bad guys have them too. This incident nudges the crypto community between the Scylla of crime and Charybdis of censorship. Do you accept anonymity, and accept the societal harms that results on the basis that overall it is better for citizens going about their everyday lives to avoid surveillance or do you accept censorship and accept that not all transactions should be allowed? Privacy is an emotive topic, anonymity even more so, and when it comes to money and payments it is important to understand the nuances!
The privacy-first and anonymity-first views seem diametrically opposed. But there may well be a way to support both positions in such a way as to enhance net welfare. At the moment, the middle-ground perspective focuses on Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations for centralized exchanges and custodial services, while maintaining some degree of anonymity for peer-to-peer transactions. We will return to what this means in practice shortly, but first let us detour into an economic, rather than technological, perspective.
I remember reading J.P. Koning’s excellent paper on central bank digital currency (CDBC) for Brazil and coming across his reference to Narayana Kocherlakota, former CEO of the Federal Reserve Bank of Minneapolis, who wrote (in 2016) that economists do not know very much about the topic of anonymity and that the profession "model it more systematically”. Well, I have a couple of new data points to feed into that modelling.
CBDC Privacy Premium
If we focus first on the specific issue case of CBDC, I have argued before that central banks are better positioned than banks or other intermediaries when it comes to safeguarding data because a central bank has no profit motive to exploit payments data. We might take this argument further and say that if the central bank were to place transaction data into some form of data trust that would facilitate data sharing to the benefit of citizens, then personal data could be pooled to the benefit of all.
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