Voima Weekly #51 – Money and the Right to Step Outside the Digital Chain

A blockchain preserves the history of every transfer. Gold can continue its journey without carrying its past with it.

In this piece, I return to the theme of financial privacy explored in Weekly #20. One concrete question¹ concerns cash and the forms of physical money we want to preserve.

As we know, money loses purchasing power over time, even though the face value printed on a banknote stays the same. In the euro area, the range of banknote denominations has moved in the opposite direction: issuance of the €500 note was discontinued in 2019. The ECB said it was concerned that the €500 note could facilitate illicit activity. Its press release did not estimate what proportion of the notes were actually linked to criminal use. The EU’s own risk assessment said there was little reliable information about how cash was used, either legally or illegally. In any case, the €500 note remains legal tender, but no new notes are being issued.

This raises the question: if we want to preserve the option of using physical money, why not develop the range of banknotes in line with changes in purchasing power? In my view, denominations should naturally increase, not shrink. The euro area should already have a €1,000 note, perhaps even a €5,000 note.

Criminal misuse alone should not be enough to justify restricting access to a legal means of payment. We do not ban knives because someone uses one to commit a crime, or close beaches because people sometimes drown. The same principle should apply to cash: we should address misuse while preserving people’s ability to use legal, physical money.

Cash is the only “risk-free” form of money at face value. A banknote is directly in its holder’s possession. The balance in a bank account, by contrast, is a claim against the bank: you are the creditor and the bank is the debtor. Deposit protection can limit the risk of a bank failure, but it does not turn a bank deposit into cash. Cash is therefore the only way to hold euros directly without lending them to a bank and taking on the risk of that bank’s ability to pay. Of course, cash has risks of its own, including loss and theft. But its value does not depend on whether a private bank can repay what it owes you.

At the same time, cash can be used without an account, electricity or a digital payment system, and a payment does not automatically leave a digital transaction record. Cash does not protect against the erosion of purchasing power, but it allows people to own and use money outside the banking system and digital surveillance.

Bitcoin is a different kind of “cash.” It allows value to be transferred without a traditional intermediary, but those transfers are recorded in a public ledger. Bitcoin.org describes it this way: “All Bitcoin transactions are public, traceable, and permanently stored in the Bitcoin network.”

A Bitcoin address does not, by itself, reveal the user’s name. But when an address is linked to an identity, for example through a service provider, its transaction history can be examined as part of the public ledger. In 2019, the U.S. Department of Justice’s Journal of Federal Law and Practice wrote that the blockchain “provides law enforcement with an exceptional tracing tool: the blockchain.”

The ledger shows the amounts, times and values of transactions. When this information is combined with data from other sources, it can reveal connections between addresses and the movement of funds. In the age of AI, analysing large volumes of data is becoming easier. A single transaction does not reveal everything, but it can provide a starting point for broader analysis. Once a connection is recorded on the blockchain, it cannot be removed. A cold wallet can protect access to funds, but it cannot erase their public transaction history.

Layer 2 solutions such as the Lightning Network add another dimension. Payments can take place in channels outside the base layer, so not every individual payment is recorded on the public blockchain. However, opening and closing channels are connected to the blockchain, and Layer 2 does not guarantee complete invisibility.

This is Bitcoin’s paradox. It is often seen as a way to decentralise power and resist big government control. At the same time, a public and permanent ledger can provide an effective way to analyse financial connections.

Imagine that a few satoshis² had reached your wallet years ago from someone later linked to a sanctioned individual. The transfer may have been entirely innocent, but its origin could still affect how your funds or financial connections are interpreted later. A service provider might, for example, refuse to process the funds. A past event that once seemed insignificant could acquire new political or legal meaning.

Traceability can help solve crimes and recover funds. At the same time, it can diminish privacy and turn every transaction into a permanent data point. The question is not whether this feature is simply good or bad, but who can see the data and what they can infer from it.

The details of an ordinary bank transfer are not openly visible to everyone, although the bank and, in certain circumstances, the authorities may access them. Bitcoin’s transaction history, by contrast, is public, even though addresses do not automatically reveal names. These are different models of privacy, and their differences deserve an honest examination.

Gold deserves more than a passing mention here. It is one of the world’s longest-standing stores of value, used by people and societies for thousands of years. Perhaps for that reason, gold is one of the world’s most widely distributed systems of value: it has no single issuer, and it is owned by governments, institutions and individuals around the world.

Gold can be represented digitally and transferred over a digital network. When the arrangement is properly structured, digital ownership can also be converted back into physical gold. This two-way convertibility is one of gold’s distinctive strengths: it can be part of a digital system without having to remain in one. Gold’s physical form can change; it can be melted down and refined again. Its existence does not depend on a digital ledger or a single issuer.

When a gold object is melted down, its shape and identifiable history disappear, even as the metal itself continues on. Denmark’s Golden Horns³ were stolen and melted down in 1802. Their gold was made into coins, buckles and earrings, and some of it was later melted down again to make state coins. A few earrings remained identifiable because their connection to the horns was known.

This raises the question of how long gold’s history can remain attached to the metal itself. How can we know that your ring contains no gold that once belonged to Solomon’s Temple? According to the Old Testament, some of the Temple’s gold objects were taken to Babylon, and King Cyrus later returned Temple vessels to Jerusalem.⁴ We have no unbroken record of what happened to them after that. Over thousands of years, gold may have been melted down, mixed with other gold and made into new objects again and again. The metal survives, but the story of where it has been may not.

Banknotes can sometimes be traced through their serial numbers, and the purchase, sale or refining of gold may also be documented. Gold is therefore not automatically untraceable. But it offers the option of stepping outside the digital chain, and returning to it later, if one chooses.

Is this a good thing or a bad thing? Neither, necessarily. But it may be useful for people and societies to retain the ability to own and transfer wealth without every step becoming part of a digital system.

This also raises a question about how we understand privacy. Should everything that can technically be seen also be visible to everyone?

What remains of Bitcoin’s promise of freedom from centralized power if, at the same time, we build a global, permanent transaction database that AI can read, connect and interpret ever more effectively?

If every transfer can become another data point in the bigger picture, how much can ultimately escape notice?

Do central banks and other institutions want to operate in a system where the movement of assets is permanently visible and increasingly easy to analyze? Or is that very transparency part of what makes the system appealing to them?

And what about us, ordinary people and businesses? Do we want every transfer recorded on the chain to become part of a shared history that can be analyzed indefinitely? The future of privacy will not be determined by technology alone, but also by what we accept as normal.

–Marko Viinikka
Founder, CEO
Voima Gold Oy

Disclaimer: Voima Weeklies are the personal writings of the undersigned. They do not necessarily represent the official view of Voima Gold Oy or any other company, nor do they constitute investment advice or a recommendation to purchase securities.