Episode 3: Why should money be private? Episode Transcript (website) Samantha Yap [00:03]: Hi! I’m Samantha Yap. Welcome to The Story of Money by YAP Cast where we talk about where money is heading. Join me and Will Harborne on this episode of The Story of Money by YAP Cast. Let’s explore financial privacy. What is it, and should we welcome it, or hate it? We ordinary people assume that our bank is protecting our privacy as well as it’s protecting our money, but is that always the case? Every year I need to submit my banking statements to my accountant who then shares that information with the tax authority so they can file it and share it with another country’s tax authority in case I owe taxes there too. Personally, I think it’s nice that they’re cracking down on tax evaders by sharing information, but it doesn’t necessarily work the other way. If tens of thousands of dollars of my money went missing somewhere between one bank and another, they’ll suddenly plead confidentiality before trying to coordinate with their counterparts elsewhere to track it down for me. I wouldn’t be sure how I feel about that too So, privacy is a double-edged sword and we tend to be on the pointy end of it. Privacy International, a UK based charity, that defends and promotes the right to privacy across the world, says that the pressure is coming from two directions: governments and companies. Both want the same thing: to collect enough information to build a profile of us as individuals. In other words, while we don’t often like to tell our parents how much or how little money is in our bank account, other people can find out without us knowing. So, is putting our money in a bank a good way to preserve our privacy? Well, the answer is tricky. And it requires us first to figure out what is privacy when it comes to money. And where is the balance? Is there a way to keep our privacy but share only what we need to, to get a loan, to essentially prove we’re a good credit risk, while keeping spies and marketing companies from peeping too much into our finances? Here to help me understand financial privacy is Will Harborne, Co-Founder and CEO of RhinoFi, once called DeversiFi. RhinoFi is a gateway to the whole of DeFi where people can buy, trade and invest across all blockchains from a single wallet. Let’s start with you and your background in just finance and decentralized finance, could you share a little bit about that? Will Harborne [02:46]: Yeah, I mean, well, I never thought of myself as in finance. I thought of myself as in technology, but I think now with the Cryptosphere, those areas have merged together. I got into working in finance, decentralized finance in 2017. I first worked at one of the biggest centralized exchanges which is where you can basically deposit and start buying your first cryptocurrencies; usually by making like a bank transfer and then they tend to have like pretty easy experiences to buy with. And then I got really into the whole concept of decentralized finance, which is where you don't trust someone else to look after your money but hold it yourself. And left and started my own company trying to help people access all of the opportunities in decentralized finance in 2019. I've been working on that ever since and it's a project called RhinoFi. Privacy in finance Samantha Yap [03:41]: So, you just mentioned trust and part of that is also privacy. Could you explain, you know, your interest or what interested you about privacy in finance as well? Will Harborne [03:56]: So, I think the thing that we kinda don't really think about in our day to day lives using financial products; whether you're using a bank account or Revolut on your mobile or any other application is that although you have one type of privacy, you actually don't have privacy in a lot of other ways. So, there's, there's two sort of ways that I break it down the first is privacy from our peers; i.e. from your friends, your family, you don't really want your crazy ex-girlfriend or your children to necessarily know how much money you've got. You would prefer that information is private. But the second type of privacy is around governments or companies who might know about your purchasing history, everything that you buy, however you spend your money, how much you have. In nice countries like the UK, maybe you're not too worried about your government, knowing how much money you have but there are other places in the world that are more dangerous where you may not even trust your government very much. And there are examples of you know, where it could be dangerous for even sort of corrupt people within your own government knowing what funds you have. So, privacy can be both sort of important from the kind of social perspective of just people around you but also for real safety aspects. And I think this is something that really interests me because in Web3 and in crypto, which I'm sure we'll get into, especially the first few waves of this technology had no privacy at all and that was both a, a good thing, but also came, comes with a lot of negatives which were really interesting and something that we all had to adapt. Why is privacy important to you? Samantha Yap [05:33]: Yeah. We're gonna get into that in a little bit, but most financial institutions today are required by law to take steps to protect the financial privacy of their consumers or customers. So that means, you know, my bank like from HSBC or Barclays that they're required to ensure that yeah, that our privacy is protected. However, they hold this data about us, our financial data. Personally, like going back to the importance of financial privacy, why is financial privacy important to you? Will Harborne [06:05]: So, I mean, for me personally, why I think that I really care about financial privacy is because I want everyone in the world to have access to financial services. To have access to all sorts of opportunities and it's not possible to do that in a fully transparent sort of way that involves everyone knowing and seeing all, everyone, everyone else's data. Ultimately many people will be cut out of these systems and we see that happening already with traditional banking system. Where if people have certain types of profiles or certain credit histories or transaction histories, they do get blocked out of financial system. And that can be anyone from people who come from certain countries, people who work in certain industries. And I really think that basic sort of financial inclusion is a human right. And to have that really scale to everyone on the planet, we need privacy to be part of that. The transparency of Bitcoin Samantha Yap [07:00]: It’s interesting you use the word transparency as well, right? Because you know, in response to the growing power that centralized banks and governments have over people. Bitcoin was created as a payment system that is transparent and that enables everyone to see, you know, all the transactions that happen in the efforts to build more trust in a financial system. However, there's a dilemma here because that does mean that everyone's data is open. I mean all the transactions are open for everyone to see, and therefore you can track, you know, if you're making transactions on the blockchain. Yeah. Could you explain kind how Bitcoin was created, Ethereum came into the picture but then how that has evolved? Will Harborne [07:45]: Yeah. So, I think, and by the way, like, it's interesting because I think still today, a lot of people, when they look at Bitcoin, don't think of it as a transparent currency. They think of it, I mean, and because it's always been portrayed; especially in the early days in the media as being this anonymous sort of shady currency, where you can't see what's happening and that's because it is pseudonymous. So, you can't necessarily see someone's name and address, but you can see a unique identifier that you can trace and track forever and that data is public, anyone can look at it and there are companies today that already help you do that. They can basically take an address and essentially figure out who you were and every transaction you ever did. And I think that's kind of how Bitcoin started off and Ethereum and most other cryptocurrencies that followed, also had that model where the benefit was that anyone could be part of these systems. It was very easy to monitor transactions to check when you'd receive funds and with Ethereum, not just sort of sending money, but you can build all sorts of applications on top of this, which are completely transparent. So, if you build a lending system where someone can lend funds and borrow funds, anyone can come and view who the borrowers are. The likelihood that they'll be able to potentially kinda return their assets, where their liquidation prices might be. And that allows you to build a more robust system, something that's unlike the traditional banking system, like not opaque leading to all sorts of, like, risks that could proliferate without anyone knowing about them. And so long term, we kind of believe that that that base of transparent infrastructure is really important. But I think that where we're going next is thinking more, not just about the infrastructure, but also about users. So yes, we want infrastructure to be transparent because that allowed us to build better infrastructure. So, you know, ideally, we would want the big banks in the world today to be transparent, we want to be able to see how their finances are, know that they're safe, what they're doing, but we don't want their customer's data to be transparent. We want like individual users all around the world to have privacy. So, we're kind of trying to get the best of both worlds of the transparent infrastructure, but private customer data and customer usage. And there are ways that we can achieve that technologically in DeFi , but we're not quite there yet .    What's wrong with the current system — open banking etc? Samantha Yap [10:00]: Right, okay. So, you're saying that organizations, institutions, we should be able to see where they're spending their money, but then like our individual financial data should be kept private. Kind of taking it to kind of you know, more but before we get into DeFi to what's kind of happening right now in I'd say the current financial system there's this thing called, you know, open banking and it talks about how banks can have our can hold our data and also share our data with governments and, and one another, but still protect it, but still use it to, to find information about us like whether we can afford to, you know, borrow money for a house. And you know they collect this data to like assess our credit score. What do you make of that? Right now, is that system working well, what's wrong with it? Will Harborne [10:50]: So, I mean, this is kind of the only system that's existed and it has come up, with just kind of solves this issue that does help institutions and governments know where money's moving. In this kind of legacy world where we have sort of digital money that kind of is, is tracked through, is sort of transferred through all these, all these sorts of opaque institutions. It's kind of a stop gap solution and the thing we do see is that holding all this data doesn't work. So, we, there have been throughout the history of this like constant leaks of companies accidentally if they leak huge amounts of data, often they get sort of fined, but it's too late by that point. Recently, I mean, very, very recently the largest ever leak potentially has happened from the Chinese government of over a billion people's financial data, and we can clearly see why we don't want that to be the case. We'd like there to be other ways of allowing to have the same sorts of goals of maybe keeping, you know, protecting people preventing like terrorist financing, for example, without having to centralize all this data under companies, which fundamentally don't see that as their main job, their job is to facilitate financial transactions, not to guard all this data. So, I think we can, we can find better solutions. How does DeFi work, and will it be better? Samantha Yap [12:08]: Yeah. That's a good point. Like the risks of it is data leaks and we've seen that as you pointed out. So, alright then moving into kind of solutions then could you just give a, in an easy-to-understand way, could you explain how decentralized finance came about, and how it all works? Will Harborne [12:27]: Yeah. So decentralized finance is kind of the second generation after the original cryptocurrency is like Bitcoin. And with Bitcoin, all you can do is transfer your funds to someone else. If you have a Bitcoin wallet and I have a Bitcoin wallet, I can send you my money. But in decentralized finance you can build more complex financial applications that all run on the blockchain where you can basically have programmable money. So, if I had some money and I wanted to send it to you, I could actually also put some conditions on that; and I could say, “If you send me some other assets within a certain time, then I only if you've done that, do I send you my funds.” And that basically is a decentralized exchange. And you could have similar ones around borrowing and lending and using all these building blocks you could essentially build up the entire financial system that we have today, around the world, but in a way that's completely transparent and which is robust and doesn't rely on big companies to operate this infrastructure, but all runs on the blockchain. Now we're obviously very early in that journey, but that system now exists. It was originally built on Ethereum and now exists on other blockchain. And it's gonna keep growing and getting better and better and better until it can replace the financial system that we have that we're all used to using with our banks. That's gonna take some years, cause it's still very difficult to use. It's complicated technically, it's easy to make a mistake and lose your money. You have to have your own wallet, that is where you actually hold your, your funds and if you lose access to that, your funds are stuck. So, all these are problems that need to be overcome. But DeFi has this huge potential of really building a very robust system. And so, it's worth the energy of trying to overcome these. It's only been really three or four years since DeFi first started to exist. So, we're very early, but if we look 10 years ahead, it's gonna be really transformative finance. How much visibility will users have into their financial data in DeFi? Samantha Yap [14:13]: Jumping into financial data on decentralized finance. So, right now for me, I can, you know, maybe go through the history of my transactions via my bank and they know what, where I spend my money. You could essentially do the same on DeFi, right? Like basically how much visibility does DeFi give users on their data? Will Harborne [14:34]: So, it does vary, but in 95% of cases today, as you said, kind of every transaction that you have is visible and in fact, if I found out what your Ethereum address was, I could go back and look at the history of every payment you'd made, every application you'd used, and every token you'd bought or sold. So, it's very transparent, which does have its benefits. But I think if we want to see many millions, hundreds of millions of people using this, that's not gonna, that's not gonna be sustainable. How can you ensure privacy in DeFi? Samantha Yap [15:05]: And why is that? Because I don't really want you to find out what my wallet address and I don't think you'd want me to know what your wallet address is. So, how do you see this evolving in terms of ensuring privacy is protected when using DeFi? Will Harborne [15:20]: So, there are a couple of different approaches but most of them make use of a new technology called zero-knowledge proofs. This is something which actually isn't so new in terms of theory, but in terms of applications, it's still very new. So, what zero-knowledge proofs in a very simple sense, allow you to do is to make transactions which you can't see the details of but which you can verify were valid; i.e. I've sent you some money but nobody else can see how much I’ve sent you and they actually can't see who I am or who you are, they can’t see our addresses, they can't see any other information about us, but they can verify that some valid transaction happened. Now, the first sort of blockchain actually to use that came before DeFi was called Zcash, and it was a version of Bitcoin that let you transfer funds to other people in a shielded way, which meant that no one could exactly this - no one could see what was being sent, but they knew it was valid. And now that same technology is starting to be applied in DeFi to allow you to do much more complex transactions; kind of how Bitcoin evolves to Ethereum and DeFi. Zcash evolving to like private decentralized finance. And there's a few different teams and applications now starting to use that, which are in the early stage, but actually do work in practice already. Samantha Yap [16:35]: Delving into kind of how it works, right? Is it similar, I mean, drawing parallels to kind of how it works in legacy systems today, is it kind of like I'm making a transfer to you via my HSBC bank account but then HSBC's protecting my data from you and they're not telling me, they're not like sharing my private information? Is it kind of like that or is it more detailed than that? Will Harborne [17:01]: So, there's, I mean, the fundamental technology could allow you to do exactly that. But it can allow you it's, it's very flexible. So, you could use it to make an entirely private system that nobody including banks, you know, each other can see any data at all. And some people are building that there are applications like Penumbra, which you're building entirely private, shielded DeFi systems. There are others where actually you might think that some level of transparency or the ability to prove who you are in certain circumstances is useful. So, that the team called IM3 that are building an identity system where by default your private, but you're able to prove certain things about yourself to applications you use or to people you interact with. So, maybe you want to prove that you are over 18 and you're from the UK, but nothing else, and you can do that too. And then there are applications like Aztec, which use the same technology, but to allow you to keep all your funds and activity private, but still interact the transparent infrastructure layer. So, this is kind of the rest of DeFi. So, actually it's visible that somebody made a purchase of some token, for example, on a decentralized exchange, but they can't see who it was. So, it's kind of partial privacy where the actual user information is private, but the activity itself is visible. So, all we know is that somebody did it, but not who it was. And you can basically apply it in all these different ways to build up the, the perfect mix, depending on the use case of you know, who the users are and what the applications are. Samantha Yap [18:34]: Let’s leave it here for now. We’ve learned that financial privacy is not an easy thing to have. We actually need to do some thinking about what we want to keep private and from whom? And let’s face it, not many of us think about this, myself included. This legacy system of banks that we currently have isn’t really equipped to build any nuance into our data when it comes to privacy as well. We don’t have any way to control this either. We can’t say ‘share this with x, but not with y’. But at the same time our data is being shared in ways we don’t imagine — credit scores are being built on the back of that data, Amazon and others have a huge log how much we’ve been spending on stuff. And credit card companies like American Express, know where we like to eat and travel to. Sometimes we aren’t sure what kind of privacy we want until a bank or company gets creepy by joining up the dots we don’t really want to see joined up. Is this something we should care about? Or something that doesn’t change much even if we do. Next time: we’ll find out whether the solutions that Will has been talking about are going to work — and to find out why he thinks the answer is somewhere else. Thanks for tuning in to another episode of YAP Cast. I’m Samantha Yap. For new episodes follow The Story of Money by YAP Cast.