Mohandas Gandhi famously noted in the context of revolution, “First they ignore you. Then they laugh at you. Then they fight you. Then you win.”
In late 2013, Bitcoin has entered the “…Then they fight you…” phase of its existence, and the modus of many detractors takes the form of a barrage of rhetorical ‘what if’ scenarios accompanied by unsubstantiated assertions offered as if they were tested and proven conclusions and prophesies for which the pundit has nothing to lose if his or her prescience is astigmatic.
One typical example of this is Ari Zoldan’s “Bitcoin: Society’s Boon or Bane?” on the Huffington Post website.
According to Betteridge’s Law of Headlines, when a headline ends in a question mark, the answer is, “No.” With a total value in circulation that is less than 2% of Carlos Slim’s personal portfolio, or ¼th of the World Trade Center’s reconstruction cost, Bitcoin poses no threat to the US dollar, fiat currency in general, gold as a reserve asset, or the nation-state. Similarly, Bitcoin will not free the oppressed any time soon, neuter military adventurers, democratize despotic regimes, or make all of your wildest dreams come true. (You have to vote for Pedro for that to happen.)
Bitcoin is a protocol. It is not a revolution, a philosophy, or a political movement.
To ascribe motives to Bitcoin is to heed the public statements of vocal activists to a degree in excess of their importance. My experience over the past few years is that, among Bitcoin users, for every anarcho-libertarian fanboy motivated to bring Sauron crushing to his knees, there is an apolitical yuppie out to make a quick buck and a social democrat out to help the poor of the world gain access to the global marketplace. When one adjusts for the value one’s Bitcoin holdings, I suspect that the apolitical yuppies are in the lead with the social democrats not too far behind and the fanboys in their mothers’ basements.
In spite of this, some individuals take the time to write “J’accuse…!” screeds that, left unchallenged, might confuse the naive and those unfamiliar with Bitcoin (much as the authors themselves seem to be). To wit:
“Bitcoin would have an extremely deleterious effect on our society if its broader economic role were to increase to substantial levels.”
This prophesy of doom is based on the premise that people are predominantly evil and that ubiquitous surveillance of their transactions is all that stands between the status quo and chaos. Given that ‘our society’ is dominated by corporatist governments and firms, this statement is technically true. Widespread use of Bitcoin among the global middle class just might—one day in the unknowable future—erode the influence and power of ‘Quantitative Easing’ (aka inflation), large multinational banks, the World Bank and IMF, and OECD finance ministers among the 83% of humanity that lives in the Middle Income countries.
Whether this is ‘good’ or ‘bad’ is a matter of personal taste and beyond the scope of this essay.
However, this would be relevant only if Bitcoin’s “broader economic role were to increase to substantial levels,” and hedge fund managers, investment bankers, NGO executives, etc. did not adapt to the new reality, which is exceptionally unlikely.
“Bitcoin is a completely anonymous, decentralized currency. It runs on and is monitored by its massive online public network.”
<double-take /> Either Bitcoin is completely anonymous, or it is not. Given that it “is monitored by its massive online public network,” then by definition it is not, as anyone who actually understands how it works can illustrate with a piece of chalk on a sidewalk (pavement). (In the meantime, refer to The Big Book of Bitcoin, which isn’t really all that big.)
Every Bitcoin transaction that has ever been confirmed is recorded for anyone, including law enforcement professionals, to review and analyze. Granted, the identifiers are strings of random characters that begin with the digit ’1′, but each uniquely identifies a Bitcoin account. Should investigators’ Big Data software tie a particular Bitcoin account to, e.g., an exchange or an individual, then all other accounts that transact with that account can be traced. While this might be tedious, it easily can be automated, and it does not require the securing of warrants, jurisdiction-by-jurisdiction across the globe, as is the case with tracing payments through the international banking system.
“Bitcoin could potentially harm our society in three particular ways: by significantly increasing crime, by causing a drastic decrease in social development investment, and by destabilizing economies due to lack of government control and regulation.”
Such scattershot assertions should not be ignored, lest those who are unfamiliar with Bitcoin assume that they have any merit. Let’s take each in its turn.
Significantly Increasing Crime
Several categories of crime exist, including violent crime, political corruption, property crime, financial fraud, administrative crime (e.g., tax evasion), and victimless crime. (Money laundering, like conspiracy, is a derivative meta-crime that requires an underlying crime. Without an underlying crime, neither money laundering nor conspiracy exists.)
“Bitcoin could readily serve as an easily accessible global network for drug dealing, gambling, bribery, insider trading, and money laundering. In the words of Timothy B. Lee, a Forbes contributor, Bitcoin could very well become ‘the new Swiss bank accounts’.”
Notwithstanding how easy it is for investigators to trace the flow of Bitcoin transactions, Zoldan’s tacit assumption seems to be that defending oneself from confiscatory taxes, political oppression, and the threat of violence when corrupt local bankers identify large account holders to organized criminals (a problem in many parts of Eastern Europe and Latin America) is a bad thing, and that the Swiss respect for personal privacy is thus also bad.
However, those who live in glass houses should not throw stones, as the USA is the world’s biggest tax haven for non-US residents. To castigate Switzerland in this context is hypocritical, unless one is prepared to repudiate direct foreign investment into the USA.
Furthermore, Timothy B. Lee is generally supportive of Bitcoin, and to cite this statement out of context is disingenuous. The full passage from his Forbes article dated 1 April 2013, “Bitcoin Is a Bad Currency but It Might Be a Good Platform for Financial Innovation” reads:
So far, Bitcoin innovation has largely focused on legally dubious activities like gambling and drug sales. Bitcoin is ideal for this because its lack of intermediaries makes it hard to regulate. In the long run, Bitcoin may become the new Swiss bank accounts, letting people park wealth offshore where the authorities can’t get their hands on it.
But while legally questionable activities are the lowest-hanging fruit for Bitcoin, there’s no reason to think those are the only possible applications. I’ve pointed to international money transfers as one promising application for the technology. There are doubtless others I haven’t thought of.”
So, yes, criminals can transact in US dollars, euros, and laundry detergent. And the point is…?
[I address this red herring in more detail in a separate post, "Bitcoin Reduces Crime".]
Causing a Drastic Decrease in Social Development Investment
“Bitcoin is virtually impossible to tax. There is no way for governments to know who owns what, who is paying whom, what is being sold, who is buying what, and how much income a Bitcoin owner has… This could mean the end of programs like Medicare, Medicaid[,] and social security [sic].”
I address this red herring, as well, in “Bitcoin Reduces Crime.” The problem of taxing what is easily hidden is not a problem with Bitcoin, but a problem with applying policy designed for a 19th Century capital/labor economy based on large, centralized organizations and physical plant seated in nation-states to the 21st Century knowledge/service economy based on ever-changing, headless, transnational networks.
Rather than cling to outmoded tax codes, like a monkey with its fist caught in a hollowed-out coconut, policy makers should shift their focus to things that are very difficult to hide, like roads, land, buildings, physical imports, and cars.
And, with that, I just saved Medicare, Medicaid, and Social Security. Send your donations to:
Destabilizing Economies Due to a Lack of Government Control and Regulation
“Because Bitcoin’s currency is completely decentralized with no particular individual or body in control, governments would no longer regulate and control the economy.”
Never mind the Panic of 1907, the Great Depression in the 1930s, the end of the gold standard in 1971, the OPEC oil price shocks in 1973 and 1979, the gold bubble in 1980, Black Monday in 1987, the Savings and Loan Crisis in the early 1990s, the Long Term Capital Management bailout in 1998, the Dot.Com Crash in 2000, and the Crash of 2008, and seemingly countless financial crises worldwide in the 20th Century.
If anything, financial crises have been worse and come at higher frequencies as government control of the economy has increased.
“Although the economy is currently not doing particularly well and currency issues certainly do exist, there still remains the possibility of governmental regulation and control of the economy to try to improve the circumstances.”
Granted, and although public health is a major concern worldwide, the unexpected discovery of a cure for cancer, the eradication of cholera, malaria, and tuberculosis, and the successful cloning of a strain of mammoths that tolerate the heat could lead to improved living conditions and something fun to look at. However, passing off hypotheticals as foregone conclusions is not the same thing as analysis.
“Bitcoin has no central authority or controlling governing body to monitor and regulate the currency according to the economic climate.”
And yet, Bitcoin community members rose to the occasion during the February 2013 Fork, and interest has continued to grow, in spite of two breathtaking bubbles, endless fearmongering, and soul-crushing regulatory uncertainty.
To promote central authority as a financial panacea so soon after the Crash of 2008, three rounds of Quantitative Easing, the PIGS Euro Crisis, and the Cyprus Bank Holiday wouldn’t have been my first rhetorical choice in this context.
“For many people, Bitcoin has a negative image due to its being a hotbed for criminal activity. It is popularly perceived by many to be a crime-ridden market for illegal dealing. Also, the sheer oddity and innovative design of Bitcoin can easily frighten a more traditional and conservative investor.”
Then again, a more traditional and conservative investor would not have bought an Apple ][, trusted PayPal in its early days, or used a credit card in the 1950s. By their nature, traditional and conservative investors wait until early adopters have tested the waters before they jump in. Considering that Bitcoin really hit the mainstream only six months ago (early 2013)—although I was lecturing on Bitcoin internationally two-and-a-half years ago in early 2011—these are still early days. Give us another six months before you completely write us moneypunks off.
"The very idea that it is literally 'backed by nothing and not regulated by anybody' will certainly scare off many people."
Granted, but in a world of 7 billion humans, 'many people' are scared off by many things. Believe it or not, some people outside of Arizona, Florida, and Texas are scared of certain types of Constitutionally protected personal and home security devices.
"Felix Salmon, a financial journalist, also agrees that Bitcoin is a bubble. He writes that 'Bitcoin is less a currency and more a highly volatile commodity.' The extreme change and fluctuation in market value could cause high rates of inflation and deflation, which would adversely affect the economy."
Felix Salmon also has written:
[B]itcoin is a combination of two things: it’s a very interesting payment mechanism, and it’s also a highly stupid and speculative store of value… This is an asset that senators want to ban, an asset which is probably illegal under US law, and an asset that is mainly known for its ease of facilitating money laundering, tax evasion, and the purchase of contraband material.“
For the record, over the seven weeks between when Salmon wrote those words, and I wrote these, the Reserve Bank of India has taken a hands-off approach to Bitcoin, the German Finance Ministry has declared Bitcoin to be ‘private money’, and the USD price of Bitcoin has increased by about 33%. [For more on Bitcoin regulatory issues, click here.]
“As Salmon poignantly notes, Bitcoin is fundamentally based on mistrust, as it was designed to evade governments and central banks. This is a significant obstacle in Bitcoin’s growth, as economies, and in particular currencies, revolve around trust.”
That unbacked fiat currency requires a great deal of trust, in order for users not to lose faith in it, is a fact that holders of US dollars, which have lost 98% of their value in terms of gold since 1971, euroskepctics, and Cypriot bank depositors can attest to, although many of them come to rather different conclusions from Salmon’s and Zoldan’s.
But, just in case these prophesies fail to come true, Zoldan fires off a quick hedge: “Nevertheless, if Bitcoin ultimately does become a global economic force, it would then possess the power to significantly disrupt and deleteriously affect our society.”
So, there we have it: Bitcoin cannot work, but if it does, then it is evil. Let’s check back sometime in early 2014 and see how all this worked out. Who knows? Maybe Salmon and Zoldan are right.