The identity, fungibility, and anonymity of money
This version 7 November 2019
Abstract: The fungibility of money is a characteristic which contributes to the quality of
money. Fungibleness is itself related to the technical ability to associate a unit of currency
with its past instances of exchange. This history is analogous to the identity of money.
The identity of an individual unit of exchange is increasingly important as cash becomes
less common, and banks require more information about the provenance of money.
Private currencies, including Bitcoin and Libra, are themselves subject to tracking. The
prior financial—and potentially political—activities of a user determine the fungibility of
the currency they hold. Different money technologies provide varied levels of privacy,
while cryptocurrencies offer users the potential to choose the level of information they
Keywords: bitcoin, cryptocurrency, economics of identity, Facebook, privacy
Identity is a crucial component of any economic exchange (Berg et al., 2017; 2018).
The participants in an exchange have identities, the good and services being exchanged have
identities, and the medium of exchange they use to affect a transaction has an identity (or
identities). This paper looks at the identity of money in its various technological guises,
examining fiat cash and privately created currencies, including cryptocurrencies with privacy
features. That money might have an ‘identity’—where identity relates to the history of an
individual unit of a currency—suggests a degree of heterogeneity within asset classes used
for the purposes of exchange. In this respect, I discuss contemporary frictions related to the
use of money, and how they impact on the fungibility, or homogeneity (in the manner of
Menger, 1892), of different media of exchange. The question of identity, and hence
fungibility, of money is an important one as it is a characteristic which contributes to the
quality of money (see Bagus, 2009). I also claim that the identity, and hence the level of
fungibility associated with the type of money used in exchange, is closely related to the
anonymity it provides; a highly fungible form of currency provides a high level of privacy to
the user, and vice versa.
Indeed, that a commodity will be adopted as a widely-accepted medium of exchange owes
much to its relative fungibleness. However human behavioural practices, as well as
regulatory impositions, sees the fungibility—substitution of individual units—of money
becoming increasingly imperfect. While the relative anonymity of cash suggests it is largely
interchangeable with other units of the same nominal value, money of all types which interact
with regulated industries are increasingly examined for their use in criminal and other
undesirable activity. This increased examination and regulatory imposition results in
circumstances where money believed ‘tainted’ by criminal enterprise is not accepted by the
receiver—regardless of any actual criminality or malfeasance. More recent innovations in
money technologies, such as the cryptocurrency bitcoin, have characteristics of fungibility
and hence anonymity, but units are not completely interchangeable, nor do they allow for
completely anonymous transactions. In addition, newly announced private currencies such as
1 Alastair Berg is with the RMIT Blockchain Innovation Hub, RMIT University, Melbourne. Correspondence:
Libra from Facebook raise concerns as to how money ‘tainted’ by political speech might not
be accepted in certain instances of exchange. These regulatory impositions, along with
privately created—but publically auditable—currencies, have potential implications for the
fungibility, and hence quality, of money. The development of ‘privacy coins’, which aim to
allow users to transact with more complete anonymity, may be some of the first truly
fungible modern currencies.
This paper proceeds as follows. Section 2 examines some of the economics of money
identities, including the historical legal precedent for the general fungibility of physical cash.
Section 3 describes how fungibility is a characteristic of good quality money. Section 4
shows how human behaviour and regulation shape the fungibility of money. Section 5
describes the fungibility of various types of private currencies, and how technology can
provide privacy protections for users. Section 6 concludes the paper.
2. The economics of money identities
Understanding the identity of the counterparty to a transaction, that which is traded, as
well as the medium of exchange used to settle that transaction is a prerequisite to most
exchange. Working in the transaction cost school (in the manner of Coase, 1937; 1960;
Williamson, 1979; 1985), a transaction cost theory of identity has been developed (see Berg
et al., 2017; 2018). This theory determines that for commercial—and often regulatory—
reasons, parties to an exchange can incur significant identity costs. This follows on from a
general rejection of standard models of spot market transactions which assume homogenous
counterparties with perfect information (Demsetz, 1988; Williamson, 1985; see also Carr and
Landa, 1983). Quite simply, the identity of counterparties to exchange matters, whether this
information is transmitted by reputation (see for instance Klein, 1997; Origgi, 2017),
membership in a kinship group (see for instance Carr and Landa, 1983; Kinnan and
Townsend, 2012; Posner, 1980), or otherwise (see also Berg et al., 2018; Berg, 2019).
Commercially derived identity costs can be exemplified by the need for financial institutions
to understand a borrower’s willingness and ability to repay according to a loan schedule:
these commercial reasons demand that firms understand a borrower’s income, wealth, credit
history and other identity attributes to ration credit. Similarly, regulatory derived identity
costs manifest in Know Your Customer (KYC) requirements, which can themselves be
significant: these regulatory requirements mandate financial institutions establish the identity
of their customers—and monitor their activity on an ongoing basis—often at great expense.
The existence of firms such as financial institutions can in part be explained through identity
cost economising (see Berg et al., 2018).
Berg et al. (2018) examined the identity of counterparties to exchange, as well as the identity
of the good or service being exchanged. The identity of the medium of exchange used as part
of a transaction was not examined, in part due to the characteristic of fungibility which is
generally associated with fiat currency. Individual units of fiat currency—and particularly
banknotes as I shall determine—are often assumed to be fungible. The legal fungibility of
banknotes—their homogeneity, or the characteristic of being interchangeable with others of
equal denomination—was determined through common law in 18th century Scotland (see
Reid, 2013). In 1749, a court considered the case of two £20 notes which had gone missing in
the post, and examined the ownership of one of those notes which had subsequently turned
up at a branch of the Royal Bank of Scotland—identified courtesy of the serial number
recorded by the sender. The case determined that one who took possession of a banknote in
normal and legal exchange was free from the “infirmities of title which affected those from
whom it had been acquired” (Reid, 2013, p.2; see also Silver, 2018). In general, this means
that the history of an individual banknote—which I analogise to its identity—has been
determined to be irrelevant according to this 18th century case law. However contemporary
legislative and regulatory requirements have challenged this precedent. Global anti-money
laundering efforts, as well as efforts by taxation authorities to maintain revenue bases, have
seen that the history of fiat currency—its identity—is relevant to legal exchange, hence the
precedent of fungibility established in 1749 has been challenged. As I determine, this in turn
comes with consequences for the quality of money used in commercial exchange (see Section
Coming to a level of assurance over the identity of the medium of exchange incurs identity
costs, as the recipient has a commercial imperative to ensure that he or she can subsequently
use those same units of currency in future transactions, while being confident that the value
associated with them can be maintained.2 Regulatory obligations can also provide an
imperative for recipients of all forms of currency to have an understanding of the history of
those units of currency they receive—where they must take steps to ensure that it has not
been associated with criminal activity and so forth.
Merchants have an overriding desire to ensure that they can derive future value from what
they receive in commerce; the currency they receive as revenue must be able to be used to
pay expenses, as well as be drawn down in the form of profits. A transaction using some form
of currency consists of an ex ante promise that a nominal amount of currency might be
realised ex post in some future transaction by the merchant or other recipient. This is
analogous to fungibility. Fungibility in this sense has a temporal quality, where what is
received in exchange for goods or services rendered might be subsequently used to purchase
goods and services without regulatory or other hindrance. Put another way, merchants and
other economic actors prefer clean liquidity which provides for “complete freedom in
resource allocation” (Masciandaro, 1998, p.49). To this end, these individuals will take steps
to ‘screen’ currency and detect counterfeit money, and potentially discover past instances of
illicit activity associated with it; this screening aims to reduce the information asymmetry
between the two parties, and can be aided by security features that are present on modern
bank notes, as well as by examining the publically auditable and distributed ledger upon
which some currencies are transacted (see Section 5). I now examine the characteristic of
fungibility in more detail, and how it more generally relates to the quality of money.
3. Fungibility criteria and the quality theory of money
Fungibility is a characteristic long associated with forms of money. For clarity, I first
present some simple criteria for fungibility which borrow from the work of John Davis
(2003; 2010). As he describes it, the genuineness of an individual person rests on ‘identity
criteria’, comprised of ‘individuation’ and ‘reidentification’. The former is an Aristotelian
concept which sees an individual as a “distinct and independent being” (Davis, 2010, p.5). To
satisfy the latter requires an individual—if they are indeed an individual—to “be reidentified
as enduringly distinct individuals” (Davis, 2010, p.10; see also Noonan, 1991). Modifying
this slightly, I can develop some criteria for fungibility as it relates to money. Quite simply,
to satisfy fungibility, money will have to fail these ‘identity criteria’. Put another way, if units
of currency are to be considered as homogenous they need to satisfy what I describe as
2 To be sure, the rate of inflation will have an impact on the future purchasing power of the unit of currency in
question. However, this is not something considered in this paper.
‘fungibility criteria’. These can be denoted as the inverse of each of the ‘identity criteria’.
The first of these is ‘anti-individuation’, which states that each unit of a currency, or any
commodity used in a money function, should be indistinguishable from others of the same
denomination. The second of these is ‘anti-reidentification’, which states that an individual
unit of said currency should not be reidentifiable throughout time and change. The changes I
refer to here are the historical instances of exchange which that currency might have been
used in. For ‘anti-reidentification’ to be satisfied, any unit of currency within some set should
be indistinguishable from any other member of that set, at any future time, regardless of the
transactions they have been used for.3 It is for this reason that fungible goods are those that
are typically denoted by weight, or some other measure of quantity (de Soto, 2006). So,
having determined that fungibility requires both ‘anti-individuation’ and ‘anti-
reidentification’, I now turn to the importance of fungibility as a general characteristic of
The adoption of different commodities as widely accepted media of exchange has in part
been attributed to their relative ‘homogeneity’ (Menger, 1892). This fungibility, along with
“low storage and transportation costs, easy handling, durability, divisibility, resistance to
tarnish…and recognizability”, is a characteristic which contributes to the quality of money
(Bagus, 2009, p.32; see also Bagus, 2015; Carver, 1934). Likewise, that the fungibility of
money reduces the costs of exchange is well explored (Brunner and Meltzer, 1971; see also
Banerjee and Maskin, 1996, p.958; Menger, 1892), while monetary exchange also aids in the
expansion of human cooperation beyond the kin group (see Horwitz, 2008; Leeson, 2005).
This function of transaction cost economising can in part explain the existence of fiat
currency, “an otherwise useless asset” (Kiyotaki and Wright, 1991, p.215). In this respect,
fiat currency derives its usefulness from the likelihood that it will be acceptable in some
future exchange, rather than having any intrinsic value or secondary uses. To be sure, that fiat
currency is in widespread usage is not due to its inherent competitive advantage over private
forms of currency (White, 1989). The quality of fiat currency is effectively subsidised by
governments owing to its use as legal-tender, and the general requirement that it be used to
discharge taxation obligations (Carver, 1934; see also Selgin and White, 1996).
As described by Menger (2002 ), any propensity for acceptance in exchange is related
to the ‘generalization’ of its use by others. Consider a tempering fear of anyone who receives
monetary payment for goods or services rendered; that they will not be able to use that same
unit of currency in a subsequent transaction (Dembinski and Perritaz, 2000). This fear might
be derived from any “infirmities of title” (Reid, 2013, p.5) which would be a detriment to
commerce. Consider the impediment to exchange should every user need to trace the
provenance of every unit of currency they receive. Verifying the presence, or otherwise, of
legal claims on that unit by a third party would be a significant impost to commerce (Silver,
2018). In this sense, fungible money is a transaction cost economising device, as it not
capable of being ‘tainted’ with illegal or nefarious activity. Money is useful, and hence
adopted by users, owing to the likelihood that it will maintain its ‘purchasing power’
(Friedman, 1968, p.186), regardless of its past uses. This purchasing power is related to the
ability of one to profitably dispose of that money, and to discharge debts both public and
3 To elaborate, if these fungibility criteria are satisfied, the nature of the past transactions that a unit of currency
has been associated with should be indeterminable. That is, a dollar used to pay for illicit drugs will be, by
necessity, treated in the same manner as one which has been used to pay for groceries. This is not due to
indifference or any moral neutrality over said criminal activity. Rather, it is due to a technical inability to associate
currency with their past uses.
private (Carver, 1934). Quite simply, money in its various guises derives its usefulness from
the fact that one can be relatively certain that a dollar received is a dollar able to be spent
without friction or uncertainty. A well-functioning monetary system, like a well-functioning
credit-system (see for instance Commons, 1924), requires that money be “detachable from
the transaction that gave birth to it so that it can be used as a form of money for further
transactions” (Atiyah, 1979, p.135). Likewise, this usefulness is further buttressed by the
confidence that users have in the homogeneity of the units of currency they use in commerce.
Money is useful precisely because it satisfies the fungibility criteria. As such, after the
adoption of some commodity as a medium of exchange, the observation of fungibility, and
hence saleability (in the manner of Menger, 1892), leads to further saleability (Horwitz,
1992). That is, there are network externalities associated with fungibility and the use of a
commodity which is used as a medium of exchange (Alvarez, 2004; Bagus, 2009).
Notwithstanding the propensity for a more fungible item to be adopted as a medium of
exchange, this characteristic also provides a form of insurance from the perspective of
depositors. As de Soto (2006) points out, a deposit of fungible goods is an ‘irregular deposit’.
The nature of an irregular deposit dictates that a depositor is entitled only to the same
quantum, rather than the specific units of the goods originally deposited. The only
responsibility from the perspective of a financial institution is to have the same quantity of
that item available for the depositor at call. This is in stark contrast to the deposit of a specific
item, for instance a painting or some article with sentimental value. The loss or destruction of
a regular—specific—deposit by a custodian is not recoverable. To be sure, it might be
insured and in turn some financial value recovered, however the item itself will remain lost.
In contrast, the homogenous nature of fungible items means that an “irregular deposit acts as
a type of insurance against the possibility of loss due to inevitable accidents” (de Soto, 2006,
As a related aside, the issue of fungibility is also relevant to any examination of a fractional-
reserve banking system. Consider an individual who has an irregular deposit at a financial
institution. In the regular course of business that individual might be satisfied that his deposit
is safe, even as they understand fully the implication that considerably less than their deposit
is held in reserve (Selgin and White, 1996). However, consider the event of a bank run. If
there are no government deposit guarantees, a depositor is only likely to withdraw a fraction
of their money, unless they were lucky enough to be at the front of the line of anxious
depositors. For instance, a bank with 20 per cent reserves offers their depositors something
like a 20 per cent chance of successful withdrawal in the event of a run (Block, 1988; Barnett
and Block, 2005; cf. Selgin and White, 1996). In simple terms, this means that irregular
deposits are not strictly fungible, as the likelihood that they are accessible by the depositor in
the future is not absolute. If indeed the likelihood of retrieving a deposit from a financial
institution with 20 per cent reserves is something like 20 per cent (cf. Selgin and White,
1996), each unit of that currency cannot be considered as homogenous from the perspective
of the depositor.
It must be noted however, that this characteristic of fungibility must also be reconciled with
the requirement for users to perceive the scarcity of a medium of exchange. The importance
of this comes from the value of any economic good—and here must be included money—
being dependent in part on its scarcity (Mises, 2013 ). This raises an interesting
question as to how perceived scarcity can be reconciled with the characteristic of fungibility
as it relates to some defined class of currency in widespread use. For if units of that currency
are indistinguishable from one another, what is the mechanism by which users are certain that
some individual or organisation is not creating them ‘out of thin air’? Counterfeit instances of
that currency would be, by definition, undetectable. In this respect markings—such as the
serial numbers on banknotes—as well as publically auditable ledgers in the case of some
cryptocurrencies, serve the purpose of reassuring the user of the scarcity of that currency.
This perhaps suggests that rather than absolute fungibility being a characteristic which
contributes to the quality of money, there is an inherent trade-off between this and the
perceived scarcity from the perspective of users. That is, there is sure to be some interaction
between qualitative and quantitative aspects of monetary theory. For reasons discussed later
in this section, this paper focuses on the former.
As this paper seeks to introduce, any emphasis on the history of a unit of exchange is
significant, in so far as it has the potential to impact on the ability of money to perform a
monetary function. That is, this emphasis on the identity of money—synonymous with
historical instances of exchange—regardless of the motivation, might well reduce the
fungibility, and hence the quality of money. Any changes to the quality of money are likely
to materially affect the purchasing power of that money and therefore future macroeconomic
performance (Bagus, 2009). Likewise, the quality of money in its various guises is directly
relevant to any comparative examination of monetary institutions. In this respect, discussions
around privatised monetary institutions are not a recent phenomenon (see Hayek, 1976;
Selgin, 1988; White, 1999), while more recent technological innovations add extra impetus to
this question of competition with fiat currency (Berg et al, forthcoming). This is a neglected
topic, as much of the literature concerning the theory of money focuses on quantitative, rather
than qualitative aspects (see Bagus, 2009; 2015). In this respect, I explicitly juxtapose those
theories of money in which its value is derived exclusively from its quantity (Bagus, 2009;
Rist, 1996). This is not to say that the quantity of money is not an important variable in the
determination of its value. Rather, an overemphasis on quantitative matters runs the risk that
we overinflate the importance of scarcity as it relates to monetary institutions. That is,
quantitative analysis which ignores qualitative aspects is “merely to say that what is true of
other goods is true of money also” (Hazlitt, 1978, p.74). Qualitative aspects, and the
‘subjective valuations’ (Hazlitt, 1978) of individuals must also play some part. I shall now set
out some of the behavioural and regulatory imposts which cause units of currency to have an
identity, and hence challenge the assumption of fungibility in monetary theory.
4. Human behaviour and regulatory action
Fungibility is the property of being practicably interchangeable. Money is frequently
described as fungible as in principle one $10 note is perfectly substitutable for another $10
note; rational individuals offered the (costless) exchange of one note for another of equal
nominal value should be indifferent as to whether to make the exchange. Fungibility is a key
assumption behind much economic analysis that seeks to analyse utilities and disutilities.
However, sociologists have drawn attention to a variety of human practices that reduce the
fungibility of money. For example, using money for gift giving is seen as impersonal, and
gift-givers often ‘earmark’ money by converting it into a gift certificate for a particular store
or category of good (Carruthers, 2010). Households frequently collect income into ‘buckets’,
depending on its source, dedicated for certain categories of expenditure (Zelizer, 1997).
Organisations also categorise and earmark funds to pay particular creditors and to finance
particular projects. In a university environment grant money is cordoned off for the duration
of a project. Governments frequently earmark funds. Behavioural economists have likewise
emphasised how economic agents have mental accounts and use heuristics about income and
wealth that reduce fungibility (Sahm et al., 2012; Thaler, 1990).
Leiser and Shemesh (2018, p.108) argue that money “implicates a nexus of attitudes,
emotions and confused knowledge”, attributable to the origins of money and the medium in
which it is held. Strategic and behavioural approaches deployed give otherwise fungible
money an identity. The purposes and implications of that identification can vary. Dividing
money at the household level is a strategy for self-control and budgeting (see for instance
Pape, 2016). Regulatory requirements and other conditions placed on income and financial
institutions may demand earmarking for constrained purposes. Human sociability (in the case
of gift cards) also gives money an identity that reduces its fungibility. Converting money into
non-money ‘scrip’ encourages spending—the psychological distance between (for instance)
casino chips and ‘real’ money seems to encourage gamblers to spend more on gambling
(Raghubir and Srivastava, 2008). Fungibility is not a binary attribute. Even relatively
anonymous cash is not perfectly fungible: serial numbers, markings, and other distinct
physical features of individual notes give those notes an identity. Commemorative coins are
often put into circulation. Earmarked funds kept in one account can be switched with funds
kept in another.
Apart from these strategic and behavioural practices, efforts by financial and other authorities
also effect the fungibility of money. Since the 1970s global authorities have introduced
compliance measures to combat money laundering, as well as counter the funding of terror
organisations. The 1970 Bank Secrecy Act in the United States focused on stamping out
domestic money laundering, while in the 1980s concern about international drug trafficking
led to the creation of the international Financial Action Task Force (FATF) to combat the
misuse of the financial system on a global scale. Following the September 11 attacks in 2001,
FATF further expanded its remit to provide recommendations to combat terror financing
(Stanley and Buckley, 2016). Several FATF recommendations have been incorporated into
the Australian Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Stanley
and Buckley, 2016). This legislation imposes compliance requirements, including for
regulated organisations to monitor and keep records of transactions, as well as notify
authorities of ‘threshold transactions’ (Department of Home Affairs, n.d.-a). Such legislation
creates a regulatory requirement for entities such as financial institutions to report
transactions considered suspicious from the perspective of money laundering or terrorism
Such efforts mean that the identity—analogous to the history—of money which is transacted
as part of exchange is now part of the regulatory system of those jurisdictions like Australia
which maintain Anti-Money Laundering (AML) regimes. For instance, advice given to
Australian entities explicitly asks financial institutions to review sources of income in
determining whether or not to report a customer to the Australian Transaction Reports and
Analysis Centre (AUSTRAC) (Department of Home Affairs, n.d.-b). This has even seen
financial institutions exit entire markets which they see as too risky, and where they feel they
are unable to adequately evaluate the provenance of the money which their customers wish to
transact. For instance, large sections of international payment corridors have been closed due
to concerns about complying with AML standards (Durner and Shetret, 2015). In addition to
AML requirements, efforts to maintain taxation revenue have seen the fungibility of fiat
The use of physical cash in transactions has been criticised as a means of enabling activities
including illegal drug sales, the facilitation of bribery, as well as tax avoidance. Such
sentiments have resulted in a challenge to the fungibility of money. Rogoff (2016) argues that
there are few legitimate reasons for the use of physical cash, particularly large denomination
bills. Governments around the world have taken a similar stance, with the European
Commission opening public debate on the use of physical cash as a medium of exchange for
reasons which mirror Rogoff (see Passas, 2018). Such sentiment has been echoed by the
Australian government, where the 2018-19 Federal Budget was used to announce a
prohibition on the use of cash for payments to businesses over $10,000 from 1 July 2019
(Commonwealth of Australia, 2018). Such a prohibition fundamentally alters the fungibility
of cash from the perspective of those who hold it (or wish to receive it); the 10,001st dollar is
not equivalent to the 10,000th.
As an aside, these requirements come at a time when new data regulations such as the
European Union General Data Protection Regulation (GDPR) seek to impose greater
restrictions on the ways companies collect and use personal data. (see for instance Allen et al,
2019). These restrictions are buttressed by extensive notification requirements which
companies must commence in the event of a data breach (O’Brien, 2016). This highlights the
attempted private enforcement, and indeed the juxtaposition, of various state aims. In the first
instance, much regulation dictates that financial institutions have an in-depth understanding
of their customers to weed out criminal activity. In the second instance, companies outside
the financial sector are faced with sanctions in the event they use or collect data in prescribed
Thus, while fungibility is still associated with cash and indeed money in general, the way in
which it is truly interchangeable is reduced by both human behavioural traits as well as
regulatory action. Behaviours of ‘earmarking’, and the collection of income into various
‘buckets’, means that individuals do not treat their units of liquid wealth as interchangeable
and therefore homogenous. Similarly, regulatory action demands regulated industries
increasingly understand the provenance of the money they interact with, reducing its
fungibility for those industries, as well as their customers.
5. Fungibility, privacy, and private currencies
Cryptocurrencies, including bitcoin, have been described as a tool which may enable
illegal activity, as they offer a “venue for individuals to generate, transfer, launder and steal
illicit funds with some anonymity” (Federal Bureau of Investigation, 2012, p.2). Several
studies have examined the role of cryptocurrencies in criminal activities, including in; money
laundering and tax evasion (Gruber, 2013); child pornography, assassination markets and the
international drug trade (Trautman, 2014); as well as terror financing (Cockfield, 2016). The
perceived anonymity of cryptocurrencies is what these studies cite as an enabling factor in
facilitating crime (Cockfield, 2016; Gruber, 2013; Trautman, 2014). Such studies echo
Rogoff (2016) and his criticism of cash—the anonymity of physical cash and the difficulty in
tracing its provenance enable criminal enterprise.
Bitcoin, the first and still the most popular of this new class of cryptocurrencies, was
announced in late 2008 as a “peer-to-peer version of electronic cash” (Nakamoto, 2008, p.1).
It allows for the transfer of value across the internet without the use of a financial
intermediary or central bank. Having since inspired upwards of 1,600 other cryptocurrencies
at the time of writing (see CoinMarketCap, 2018), bitcoin introduced the technology known
as ‘blockchain’, itself the consolidation and application of numerous other technologies and
techniques including peer-to-peer networking, asymmetric (public-key) cryptography,
consensus algorithms and game theory. In general, bitcoin solved the ‘double-spend’ problem
by creating a publically auditable, immutable ledger which is maintained by a network of
users and across which bitcoin are transacted (see Antonopoulos, 2017; Narayanan et al.,
2016; Swan, 2015). This peer-to-peer network is a protocol which prevents users from double
spending—where a user might spend the same coin in multiple transactions—without the
need for a centralised body to maintain records of users’ balances. However, the very nature
of this new form of decentralised currency, and the way in which it solves the double-spend
problem, provides a record of every bitcoin ever created and transacted, their history, and by
extension the address which holds them.
The nature of public blockchains like bitcoin mean that transactions are public; transactions
can be viewed by anyone with an internet connection. Bitcoin uses asymmetric (public-key)
cryptography to allow users to generate transactions and receive payments. A private key
allows a user to prove ownership, and transact, bitcoin that a user owns, and the public key,
mathematically related to the private key, generates a ‘pseudonymous’ address into which a
user can receive payments (Antonopoulos, 2017). These addresses provide some level of
anonymity, as they consist of a (usually) 34-alphanumeric string in Base58 notation.4 Users
are also able to create multiple addresses as they transact, which may aid in user anonymity
(Antonopoulos, 2017). These addresses are considered pseudonymous as they can provide a
non-absolute level of anonymity for the user due to their non-human readable format. For
instance, the address below dates from January 3, 2009, and it is this address that received the
‘coinbase’ transaction of the so-called Genesis block5—the very first transaction on the
These pseudonymous addresses, such as the one above, do not in fact provide an absolute
level of anonymity, and there are several techniques that can be used to identify the owner of
such an address. Web (HTTP) cookies (Goldfeder et al., 2018), IP addresses (Koshy et al.,
2014), clustering techniques—where several bitcoin addresses can be identified as being
controlled by one user (Meiklejohn et al., 2016)—, information provided by users to
cryptocurrency exchanges when they sign up (Reynolds and Irwin, 2017), as well as the
public disclosure of addresses on social media (Reid and Harrigan, 2013), are all ways in
which these pseudonymous addresses can be traced back to their owner. For instance, law
enforcement agencies have been able to trace transactions as part of investigations into illicit
activity; during investigations into the Silk Road Marketplace—the online marketplace where
users could purchase illicit drugs and other goods using bitcoin—the FBI were able to track
the provenance of over 700,000 bitcoin and connect individuals to illegal activities
(Greenberg, 2015). And while there are several techniques available which can make it more
difficult to trace an individual back to an address (see Goldfeder et al., 2018; Narayanan et
al., 2016; Reynolds and Irwin, 2017), the publically auditable nature of blockchains such as
the bitcoin ledger provide an opportunity to trace transactions back to individuals. Indeed, the
use of bitcoin in illegal transactions has been observed to fluctuate since its inception. The
4 Base58 notation consists of almost all upper-case letters, lower-case letters and numeric digits. To prevent
confusion, upper-case ‘I’, lower-case ‘l’, upper-case ‘O’ and the digit ‘0’ are excluded due to their similarity to
the human eye (see Narayanan et al., 2016).
5 The ‘coinbase’ transaction is a special type of transaction on the bitcoin network, and consists of new bitcoin
created as part of the mining (block creation) process. When the software was released in 2009 the coinbase
transaction consisted of 50 bitcoin, while this amount halves approximately every 4 years (Antonopoulos, 2017).
The Genesis block was the first block mined in 2009, and this block received the very first coinbase transaction
(see Narayanan et al., 2016).
suggestion here is that as newer ‘privacy’ coins emerge which in turn better protect user
privacy, illegal transactions using bitcoin might decrease (Foley et al., 2019). In this respect,
the use of privacy coins is further discussed later in this section.
The public, and therefore traceable, nature of these transactions has resulted in some
instances where these new digital currencies are not treated as fungible; based on their
history, individual ‘coins’ may not be accepted as part of a transaction. Instances of
discrimination towards bitcoin which have been associated with illicit activity indicates that
individual units of the digital currency are not treated equally. Coinbase, one of the largest
cryptocurrency exchanges, has reportedly refused to accept bitcoin which are known to be
stolen, or have been involved in illegal activity (Vorick, 2016). Similarly, the sale of seized
cryptocurrency by law enforcement agencies (see Aitken, 2018) raises the prospect for
bitcoin sold in such a manner to be ‘cleaned’, and given a stamp of legitimacy. Indeed
144,000 seized bitcoins auctioned off by the FBI received a higher price than those trading on
cryptocurrency exchanges, suggesting that users were in fact placing a higher value on units
which had been cleaned by such a process (Casey and Vigna, 2018). To be sure, the sheer
number of bitcoin the FBI sold might have had an upward impact on the price, as even larger
exchanges would have had difficulty with such volumes (see Cawrey, 2013). However, there
is some anecdotal evidence that larger institutional purchasers take steps to ensure the
legitimacy of their holdings and place commensurate value on holdings they deem
‘legitimate’ (Hill, 2014).
While only recently announced, the Libra currency from Facebook (see Libra Association,
2019) provides for a way in which unpalatable political speech associated with a user might
result in their currency being ‘tainted’, therefore reducing its fungibility. The Libra currency
is governed by an ‘association’ of payment providers, telecommunication companies and
venture capital firms, although—at least initially—the project will be largely overseen by
Facebook (Gerard, 2019). At the same time, recent instances of censorship on social media
websites, including Facebook, Twitter, and Instagram have been well documented. These
platforms have ‘quasi-governmental’ characteristics, in that they moderate “user content by
exercising legislative authority through the issuance of community guidelines and executive
authority through censorship” (Everett, 2018, p.123). And while this has largely been
restricted to the flow of non-financial information (see also Heins, 2014), the introduction of
a currency controlled by Facebook raises questions as to whether this censorship will extend
to financial transactions.
ration services based on a wide range of criteria (Kim and Telman, 2015). Yet the censorship
decisions of large internet organisations are increasingly opaque, while “very little is known
about how or why these platforms curate user content” (Klonick, 2018, p.1669). And while
large internet companies like Facebook and Google have responded to public sentiment in
recent years and changed their privacy policies (Berg and Davidson, 2019), concerns over
their quasi-governmental authority, as well as monopoly power, persist (Kim and Telman,
2015). To be sure, the market might develop competing ‘rule sets’ which allow users to
choose providers based on their preferences for varying levels of speech regulation (Post,
1995; cf. Lessig, 1996). The usefulness of ‘exit’ (in the manner of Hirschman, 1970) will of
course depend on the role which these large internet companies occupy in the future of social
networking and digital commerce, and the existence of alternatives from which users might
choose. As such it remains to be seen if the political speech of Facebook users will have any
effect on their ability to access the financial system.
These characteristics, in which the history of a unit of some (non-fungible) currency are
known to some extent, have led to the development of new types of ‘privacy coins’. Privacy
coins are one such attempt to create cryptocurrencies which eliminate the ability for other
users to associate transactions with individuals and their activities. For instance, the Zcash
cryptocurrency, a ‘fork’ of bitcoin,6 can be used to create ‘shielded’ transactions. These
shielded transactions aim to dissociate the sender and the receiver in an exchange (Kappos et
al., 2018), as well as obfuscate the amount being sent, using zero-knowledge-proofs
(Quesnelle, 2017). Zcash achieves this level of anonymity by a technique known as zero-
knowledge succinct non-interactive arguments of knowledge (zk-SNARKS), a type of zero-
knowledge proof (Quesnelle, 2017). Such a technique, of a type first developed by
Goldwasser et al. (1989), allows a user to prove that they know something, X, without
revealing anything else apart from the fact that they know X. In the context of exchange, this
allows users to prove they are the rightful owner of an amount of Zcash—and hence eligible
to spend it—without revealing other information such as where that money came from, or
how much of the currency they hold. This allows users the ability, when they choose to use a
shielded transaction, to disentangle the ‘coins’ they transact with any previous transactions
they may have been associated with. This has the effect of ‘wiping’ the history of that unit of
To be sure, the use of these shielded transaction is rare (Kappos et al., 2018; Quesnelle,
2017). That is, users tend to use Zcash in a manner which is transparent to all other users of
the protocol, where their addresses are visible on the publically auditable blockchain. This is
likely derived from the relative difficulty in using shielded transactions as compared to those
which are transparent. Shielded transactions not only require additional computing power
which might present difficulties to many users (Kappos et al., 2018), but there is is also a lack
of wallet and exchange infrastructure to support them. Indeed as recently as 2017 no
cryptocurrency exchanges allowed for shielded transactions (Quesnelle, 2017).
6. Discussion and conclusion
This paper has developed the notion that the characteristic of fungibility is one which
contributes to the quality of money. Indeed, the origin of money in its various guises is
indebted, in part, to its fungibility. Perfectly interchangeable units of currency, whereby
association with past instances of exchange are completely unknown, satisfy the fungibility
criteria of ‘anti-individuation’ and ‘anti-reidentification’. The satisfaction of these criteria are
themselves transaction cost economising, as they enable users of a currency to enter into an
exchange without fear that third parties might have legal claim to what they send or receive.
The development of private cryptocurrencies has also revealed that fungibility and anonymity
are effectively synonymous. This argument has implications for regulatory and economic
processes that seek to earmark income or wealth for particular purposes. The implications of
6 Bitcoin, and many other cryptocurrency and blockchain protocols are open-source software. This enables users
to copy the software on which these cryptocurrencies run, change some aspect of it, and release it as what is in
some cases called an ‘alt-coin’. In the case of bitcoin, different ‘forks’ of the protocol have changed the block size
and hence increased transaction speeds, changed the maximum number of coins, or in the cash of Zcash, provided
a way in which details of transactions can be kept private (see Berg and Berg, 2017).
anonymous cash are well explored in Rogoff (2016). Privacy focused cryptocurrencies add a
significant extra dimension to these arguments. The fungibility of privacy-centric
cryptocurrencies such as Zcash is analogous to the role that physical cash has played in
transactions up until more recent regulatory interventions. The use of cash has always played
a role in obfuscating the types of transactions individuals engage in. Paying for goods and
services using cash can hide information which individuals might otherwise prefer to keep
secret; sensitive information related to legal matters and taxations records, medical issues,
sexual activity and personal political preferences can all be deduced given access to enough
data. Paying for goods or services with a form of currency which has a high degree of
fungibility provides a level of anonymity to the user. However, the anonymity cash provides
is diminished due to regulatory requirements. These see banks and other financial institutions
forced to undertake expensive anti-money laundering operations (see for instance Thomson
Reuters, 2017) to assist governments restrict the financing of criminal activities.
The use of shielded transactions, having the effect of dissassociating a unit of Zcash from
previous transactions in which it has been used, is the equivalent of laundering that unit. The
use of the word ‘launder’ in describing the deliberate obfuscation of a unit of currency’s past
uses disguises a spectrum of possible motivations. As Berg (2018) describes it, privacy is
both a ‘subjective experience’ and ‘subjectively desirable’. Revealing financial activity can
reveal sexual, health and other matters which one might prefer to be absent from the public
sphere. As such, a veil of privacy as it relates to past instances of exchange overcomes a
negative externality; the ‘concealment of facts’ about ones personal life assists in the
cultivation of a ‘good’ reputation (Posner, 1979).
Yet this process of laundering invokes costs to the user which necessarily vary according to
the type of currency in question. In the case of Zcash, these costs are readily apparent, being
derived from the required computing power, as well as the difficulty in accessing necessary
trading infrastructure. The costs of laundering—really the act of homogenising that currency,
or allowing that unit of currency to satisfy the fungibility criteria—different forms of money
should be considered as being situated along a spectrum. As described by Masciandaro
(1998; 1999), turning a unit of currency into ‘clean liquidity’ is a function of both the
regulatory costs, and the technical costs of homogenisation. The former are derived from the
difficulty in avoiding legal detection and sanction, while the latter are derived from the
technology upon which a currency is based. In this respect, a technical cost associated with
homogenising gold artefacts would be that of accessing a sufficient source of heat, while a
technical cost associated with homogenising Zcash is the acquisition of the requisite
computer skills required to execute a shielded transaction.
Costs associated with melting down gold artefacts into bullion, those associated with more
traditional money laundering such as via casinos and ‘front’ businesses, as well as those
incurred when transacting via privacy coins might be compared in order to evaluate the
privacy features of these new technologies. The difficulty in quantifying these sorts of costs
in any meaningful way is difficult, owing to the small number of data points available for
study. However the market for money laundering would appear to bear a price of up to 10 per
cent of the amount laundered, while there is evidence to suggest some money laundering
services operate under a flat management fee structure (Reuter and Truman, 2004). It is clear
that the costs associated with homogenising different forms of money will vary based on their
underlying technology. This is an area of study which would benefit from empirical analysis.
Finally, any discussion of entrepreneurial discovery which challenge domains traditionally
managed by the state (in the manner of Berg et al, forthcoming) should fully account for
competing motivations. Fungible currencies are attractive to individual economic actors,
owing both to their certainty in future use, as well as the privacy protections they offer. That
is, any ‘infirmities of title’ (Reid, 2012) over that currency are likely to restrict commercial
activity, while the obfuscation of sensitive information is of (subjective) importance to the
individual. From the perspective of the individual user, achieving this commercial certainty,
and achieving a degree of privacy are derived from the ability to homogenise the currency in
use. The technical skills and resources required to do so vary. Melting down gold such that
any markings are wiped presents a very different proposition compared to accessing
computer power, and the requisite technical skills to execute a shielded transaction using
Zcash. These individual concerns are in stark contrast to that which is desired by state actors,
who increasingly place greater importance on the ‘legibility’ (in the manner of Scott, 1998)
of financial transactions.
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