The Coming Econgularity: the Real Challenge to Civil Liberties

Econgularity – a shorthand for economic singularity — is an ugly word I created to describe an unfortunately approaching moment in time when our current technological snooping prowess, the ease of Big Data manipulation, and our sprint to a cashless economy will converge in such a way as to permit governments to exercise incredibly powerful control over all human behavior.    While this may sound like a paranoid doomsday scenario to some, as a real world finance professional, I believe that this scenario is not only eminently possible, but most of the technology is already available — albeit not yet fully marshalled – to make it a reality.

Technological advances have led to the creation of algorithms that can instantaneously review financial transactions, determining the nature, location, and even the appropriateness of a purchase decision. These have been freely used by credit and debit card companies.  Cardholders already encounter this technology when they receive fraud alerts after a transaction that looks out of kilter with the particular consumer’s normal behavior.  The technologies, can thus serve to protect consumers. That being said, they have already been used to control consumer behavior. In 2010, Visa and MasterCard, bowed to government pressure – not even federal or state law — and banned all online betting payments from their systems.  This made it virtually impossible for these gambling sites to continue operating regardless of their jurisdiction or legality.  It is not too far-fetched to wonder if the day might come when the health records of an overweight individual would lead to the situation in which they find that any sugary drink purchase they make through a credit or debit card is declined.

Ah, but you might respond, the person can always pay cash and remain outside the purview of these technologies.  This maybe so for the moment, but we are well on the road to becoming a cashless society.  According to a MasterCard study, 80% of US consumer transactions are electronic.  In Sweden, one observer estimates that only 3% of transactions are made with currency.  In fact, the decline in cash use has become so pronounced in Sweden that homeless beggars have been given card readers by Situation Stockholm to sell freely distributed newspapers and to receive alms, since potential donors no longer carry cash.   Governments and central banks are also subtle supporters of a cashless society, since there are indeed costs to producing currency and coins. Monetary policy could also be much more efficiently executed without currency circulating, since it would then be easy to implement negative interest-rate policies. But there is also a sinister risk to a cashless society.

It is at the point when a society goes cashless that the potential for econgularity is highest. A singularity is defined as the point at which technological advancement will “radically change human civilization, and perhaps even human nature itself.”   It is impossible to know if this will actually happen, but a cashless society would certainly give governments unprecedented access to information and power over citizens.  Currently, we have little evidence to indicate that governments will refrain from using this power. On the contrary, the US government is already using its snooping prowess and Big Data manipulation in some frightening ways.

The technological command of the NSA has been widely reported on and does not need repeating here.  Suffice it to note, that it would be no challenge for the NSA or certain other government agencies to monitor any company or consumer transaction in real time if it so wished.

SEIZE FIRST, ASK QUESTIONS LATER

To give another  example. The US government is becoming very fond of seizing money from citizens first and asking questions later via “civil forfeiture.”  Amazingly, the government is permitted by law to do this even if it is only government staff members who have a suspicion, not proof, of wrongdoing.  By seizing a citizen’s or a firm’s money, the victim/defendant has almost no choice but to settle.  A case about civil forfeiture was recently argued in front of the Supreme Court in which the government seized all the money of a tiny family-owned grocery store on the suspicion that it was laundering cash because its cash deposits were below the $10,000 level, an occurrence that triggers a report to the government.  By depriving companies and individuals of the cash to defend themselves, even innocent firms are under immense pressure to settle or to plead guilty.  To make matters worse, the dramatic consolidation of the banking system has made it easier for the government to acquire information as there are fewer access points.  For example, JP Morgan alone is the size of over 3000 smaller banks combined and the top four US banks control about 60% of the US banking deposits.

The US government has also been using less dramatic means to limit the freedom of its citizens.  In recent years, the US government has made it increasingly difficult for companies to operate or individuals to transact by adding compliance hurdles for banks wishing to deal with certain categories of clients.  By making it too expensive to deal with certain clients or sending the signal that a bank should not deal with a particular client or type of client. the government can almost assuredly keep that company or person out of the banking system.  Banks are so critically dependent on government regulatory approval for their actions that observers like Warren Buffet among many others have recognized the government’s immense power over banks.  Recently, even JP Morgan, one of America’s largest and most powerful banks, announced that it would be ending relationships with whole categories of clients that pose compliance challenges.

If current government trends continue, a cashless economy could thus very well lead to an econgularity.  Imagine a near future in which a government staff member could suspect an individual of some misconduct, or perhaps deem that person’s politics or speech unacceptable.  It would take just a few keystrokes to order all financial institutions to decline any withdrawal or payment from that individual and to transfer any deposits or payments of that person to the government, or at least freeze any access to funds. Perhaps this would need to be reviewed by a secret court that would approve 99.7% of all requests, but would provide a veneer of due process.  It is fair to think that the targeted individual might starve to death.  This could be insured by cutting off access to the payment system of anyone suspected of helping the targeted individual.

While Bitcoin, a private synthetic cyber currency, might seem like an antidote to this scenario, it too requires connectivity, which can be subject to monitoring. Further, the exchange of Bitcoin to the currency of the country in question can be regulated in ways  that could limit or even end its utility.  Testimony by regulators to the US Senate on November 18th that the government can deal with Bitcoin via  the existing currency transaction surveillance laws and  surveillance methods in place, is a pretty good indication that US agencies could also envelop Bitcoin via meta-data and behavioral analysis.

CASHLESS DYSTOPIA?

It is of course by no means certain that such a dystopian outcome will occur in a cashless society.  It could be that certain countries such as Sweden can make the leap without any adverse consequences.  But my fear is that some governments will find it irresistible to take much greater control of the everyday behaviors of their citizens simply because they can.

There are certainly positive outcomes that can be obtained by going cashless. For example, banning sale transactions of cigarettes or sugary drinks, or stopping cardholders from overeating, gambling, or whatever other vice is targeted, could lead to a decrease in these vices and their associated problems. A cashless society would probably also mean less street crime.  Yet in return for these benefits, there is an incalculable cost to our humanity: We would lose our freedom to make decisions.  It is easy to imagine a totalitarian regime using these tools to great harm.   Given current US government policies, it is also very easy to imagine even a liberal government such as our own, being sorely tempted to use the confluence of these technologies.  And once used, because they are so very, very powerful, even liberal governments will be enticed into using them until there is pretty complete monitoring and control of every transaction.

So now is the time to urge Congress to repeal civil forfeiture and to forbid government agencies from intruding on the financial payments of US citizens or companies without due process unless it is a matter of national security or imminent harm.   We can also hope that the Supreme Court will find civil forfeiture to be unconstitutional as it should be viewed.  By putting such strictures in place today we can change the trajectory of our current path.  On a day-to- day basis, we should also  decrease out debit or credit card use to preserve the market share of currency in our economy  and stop the demise of cash.  There are lots of other benefits to this, as spending real cash out of our pockets makes us consider our expenditures more carefully and increases our savings rate.

Adam Smith observed that we are all economic beings in the sense that our essence as humans stems from our ability to make fair trades for our labor or our products.   We make these transactions in the presence of the usually benevolent “Invisible Hand,” which optimizes our total production, and, by in large, fosters our freedom.  A Visible Hand monitoring  every single transaction we make could be one of the greatest and least expected threats to freedom we have ever encountered in human history.  This is threat of econgularity.

Scott A. Shay is Chairman of Signature Bank of New York and is a Partner of Ranieri Partners LLC.

See Shay discussing on CNBC the risks of digital banking here.