Security Notes: Accounting for the 21st Century

When Luca Pacioli some 500 years ago pioneered the transition from single-entry to double-entry bookkeeping, the craft of accounting was jolted into new horizons. Industrial practice became so much smoother and better organized.

We are looking today at a similar jolt emanating from the emerging technology of digital money.

Computerized accounting today keeps track of numerical values, stating account owner Alice has an amount of money, $1,000, available for payment. When Alice pays Bob $300, the number in that account is adjusted to $700, while Bob’s account is increased by $300. Payment is expressed through a note that passes from Alice to Bob, initiating an adjustment to both accounts.

Bob’s account now lists an amount of money, $4,700, which includes the recent $300 adjustment. If Bob pays Carla $1,250, there is no indication whether or not this payment includes the $300 that originated with Alice. Merging money into a larger account cuts off traceability.

Similarly, dividing large sums into many small payments, which in turn are redivided again and again, creates dark accounting zones. As Elon Musk has shown, accountants today have a great deal of power to route money to serve hidden agendas.

This poor accounting visibility hinges on the fact that money is represented in our computers as a number only. To cure this temptation to fraud and abuse, it is necessary to represent cyber money as a value attached to a cyber identity. So, in the above example, the $1,250 Bob pays to Carla will show whether that sum contains the $300 given to Bob by Alice. If Alice tells Bob that the money she paid him should not be paid to Carla, then this condition will be visible to anyone Carla wishes to pay with that money, and the money will be regarded as contaminated and will be refused.

Similarly for division. No matter how many times a sum of money is divided, it holds its original identity through these divisions.

Cyber identity can keep track of the history of a given sum of money— its chain of owners. Blockchain and similar technologies ensure that accounting data are kept in a large number of distributed copies, making it virtually impossible to make changes to a single central accounting book.

Think of the impact on street crime thanks to CCTV cameras in public places. Crime itself is down by one-third, and the conviction rate doubled.  Expect a similar impact on accounting abuse.

As the global economy gets more integrated, accounting becomes more complicated. The need for identity-bearing digital money increases. As long as we handle global money with digitization devoid of identity, we build a bigger temptation for large-scale fraud and abuse.

Regrettably, there are powerful forces standing in the way. Mainly, value stability and privacy. As exemplified by the most prominent digital coin, Bitcoin, value is whimsical, hardly a basis for a well- founded world trade and universal payment system. The solution to this value instability is rather simple. Non-digital money should be traded against digital-money claim checks that, when returned, claim the amount paid for them. No algorithmic balance, not very stable, but not  a guaranteed stablecoin, a simple one-on-one. As to privacy, this is a challenge that has been properly resolved by cryptography to ensure the equivalent of the Fourth Amendment. Only a court order can pierce holder privacy.

The road is clear. The obstacles are not technology, not rationality. They are unfounded fear, ignorance, greed, and criminal interests. There is no shortage of well-studied digital-money solutions (BitMint is one example) waiting for inspired financial leadership.

—Gideon Samid gideon@bitmint.com