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I wrote the following paper discussing the market morals of Bitcoin and cryptocurrencies. Reading it will help you learn more about Bitcoin and may help you to decide to make payments using this revolutionary new currency!
The Market Morals of Cryptocurrencies
Cryptocurrencies, like Bitcoin, are a new and revolutionary phenomenon that have challenged the orthodox view of fiat currencies and introduced a framework that can be utilized to achieve a more fair and efficient financial system. The functions that the Bitcoin network provides allow for a money transmitting system that will help bring the free market to its apex, while leaving plenty of room for desired regulations that can flourish in a fully transparent environment. Through the use of a public transaction ledger, decentralization, and a limited supply of currency, Bitcoin can usher in an unprecedented era of market morality that cannot exist under current, traditional financial systems.
For better understanding, a summary of how Bitcoin works will be given before the concept is related to market morality.
Introduced in 2009 by an anonymous programmer using the alias ‘Satoshi Nakamoto’, Bitcoin was the first cryptocurrency to gain mainstream media attention. The term ‘cryptocurrency’ refers to the underlying cryptographic computer code that governs the Bitcoin network. It uses cryptography to secure transactions, protect the accounts that contain Bitcoins (wallets), and provide a proof-of-work algorithm that Bitcoin miners can solve to mint new coins. The network is founded on the principal that the underlying code (open-source) comprising the technology is decentralized. In other words, no controlling entity can govern, regulate, or change the Bitcoin network itself.
The Bitcoin network exists as a peer-to-peer network; many computers operated by many different users share transaction data. Advanced mathematical cryptography is used to verify and secure transactions that occur on the peer-to-peer network through the process of Bitcoin mining. The Bitcoin miners are rewarded with newly minted Bitcoins in exchange for supplying the computational power to the network that is necessary for the authenticity verification of transactions. The Bitcoin algorithm adjusts the Bitcoin mining difficulty every two weeks to maintain an average rate of one ‘block’ being mined/solved every ten minutes. The reward for solving a block started at 50 Bitcoins per block, but that amount halves every four years (the current block reward is 25 Bitcoins). This process will continue until 21 million Bitcoins have been mined, which is estimated to occur near the year 2045. Past that point, no new Bitcoins will be created, but miners will still be rewarded by collecting the transaction fees that are sent to the network when a transaction occurs. That way, an incentive will always exist for computational power to be made available by miners.
Bitcoin transactions are transmitted instantaneously at little or no fee, and then verified every ten minutes (when a block is solved by a miner). A transaction consists of Bitcoins being sent from one public address to another, and this transaction is logged and verified by the network. Once the transaction is logged, it will be visible to all users of the Bitcoin network, essentially making it fully transparent as it resides on a public ledger. This system makes hidden transactions impossible and allows for all Bitcoins to be traced to their origin. On the other hand, the parties involved in the transaction can only be identified by the public addresses (keys) that are associated with the Bitcoin accounts involved. This means that although the transactions themselves are publicly available for scrutiny, the parties involved can remain fully anonymous if they choose, provided they are not linked to their public key. For parties wishing to make themselves known, they can provide their public Bitcoin address and users can browse the account’s history of all transactions.
A fully transparent, public transaction ledger juxtaposed with optional anonymity, allows for many improvements in the morality of markets. For instance, consider a theoretical country that uses Bitcoin as its national currency. The government could provide the public address(es) of where its Bitcoins reside to the general population. This would allow any citizen (or foreigner) to see exactly where their tax money was being spent. Even if the government did not provide the public address(es) of where the tax money was being kept, it could be easily deduced by tracing the trail of transactions originating from the initial tax payment to the government. A government operating under a financial system that is this transparent would be forced to be honest with the citizens.
In an article by Leif Wenar titled “Property Rights and the Resource Curse”, he addresses the issue of the ‘Resource Curse’. The curse is a phenomenon that occurs in less developed countries where a strongman, dictator, or other empowered group takes complete control over the countries natural resource wealth. The money is used to fund wars, violence, and make the perpetrators rich, while the general population remains poor as their country’s wealth is essentially stolen from them. As part of his proposed plan to put an end to the resource curse, Wenar developed a set of three conditions that could be required for a transfer of resource wealth to legally take place. If these conditions were enacted, it would help prevent resources from being ‘stolen’ from the citizens of a country (the rightful owners) by a strongman.
The first condition states: “An owner who cannot know about sales or their terms cannot authorize those sales. Citizens who cannot find out about resource sales cannot approve these sales even tacitly. At the very least, citizens should be able to obtain reliable general information about which resources the regime is selling for how much, and who is getting the proceeds.” (Wenar, Property Rights and the Resource Curse, 19). This condition can be easily met by utilizing Bitcoin, as opposed to current financial systems. If the government (or strongman) in question was conducting transactions on a known public Bitcoin address, the citizens of the country would be able to “obtain reliable general information about which resources the regime is selling for how much, and who is getting the proceeds”. In our current system, the transactions could be kept secret from the public very easily, as most transactions between banking systems are private information. If the government/strongman was unwilling to disclose the Bitcoin public addresses being used for the transactions, the citizens of the country could easily retrieve that information from the purchasing party on the receiving end of the resource sale.
The second condition states: “In order to acquiesce to resource sales an owner must have the ability and opportunity to stop these sales without incurring severe costs. Any regime claiming that it has the authority of the people to sell must put some effective mechanisms in place through with it acknowledges that the people can dissent to the sales. Citizens must also be able to peacefully express their dissent inside or outside of these formal mechanisms without fearing exile, imprisonment, torture, or death” (Wenar, Property Rights and the Resource Curse, 19-20). Bitcoin can also help satisfy Wenar’s second condition. The Bitcoin network contains a feature that allows for multiple private keys to be required for the authorization of any transaction out of a specific wallet. In other words, a wallet can be setup so more than one ‘password’ is required to allow for any outgoing transactions (spending). If the proceeds from all resource sales were deposited into a single wallet and a system were put in place where citizen-elected leaders or supervisors had possession of one of the required private keys, their consent would be required for any outgoing transfers to occur. Using this system, a strongman or totalitarian regime would have to gain the approval of its people to be able to spend any of the resource money. Otherwise, the money would be stuck in limbo without the required private keys. An organization like the United Nations could enforce resource buyers to only send payments to that specific wallet, under threat of sanctions. Cooperation among buyers coupled with this use of the Bitcoin system would help satisfy Wenar’s second condition for preventing the resource curse.
Bitcoin easily satisfies Wenar’s first two conditions of stopping the resource curse. Putting an end to the systematic theft of the wealth of a country’s people is unarguably a moral undertaking. Bitcoin’s public transaction ledger can also improve morals in other ways. For instance, money laundering would become much harder under a cryptocurrency system. Contrary to popular belief (many believe that one of Bitcoin’s main functions is money laundering due to its anonymity ), using the Bitcoin network to launder money would be very challenging. Algorithms can trace the entire history of a Bitcoin (or fraction thereof) to find where it originated and what addresses it passed through on the way. Throughout the process, the Bitcoin addresses are anonymous, but when the Bitcoins are exchanged for fiat currencies, or spent on online goods, identifying information is revealed in the form of a shipping address or bank account. The only way to get around this would be purchasing or selling Bitcoins person-to-person as a cash transaction, but in that case the money laundering may as well have occurred via paper cash. Paper money is still, by far, the best way to anonymize and launder funds.
By utilizing Bitcoin as a system of money transmission, increased morality can be achieved compared to current methods for sending money. Consider a migrant worker, working for minimum wage or less, that has family back home. Currently, their options for getting money home to their family include sending paper cash through the mail, or using a money transmitting service like Western Union or MoneyGram. If they send cash through the mail, they risk losing all of it from either theft or random loss. If they use MoneyGram or Western Union, they are forced to pay steep fees including the time and money it costs to complete the transaction, like driving to the required location and spending the time to fill out paperwork. When trying to support a family at such a low wage, it would be beneficial for them to send the funds via Bitcoin and avoid the time, hassle, and steep transaction fees. Clearly it would be immoral to deny them this capability, now that the option exists.
Bitcoin can also benefit lower-income individuals and families by offering a better store-of-value. For the portion of the population that lives “paycheck to paycheck”, at best, they may have a savings account. While the rich can afford to put money into stocks, bonds, commodities, and other stores-of-value that appreciate over time, the poor generally do not have this opportunity. Any money that they happen to have in a savings account, if they have one, receives such a low interest rate that it is negligible at best. In most cases, inflation will easily outpace the interest rate and the value of their holdings will decrease with time. Since the supply of Bitcoins is limited to a finite amount, 21 million, Bitcoin is a deflationary currency. Generally, storing earnings in Bitcoin will increase in value over time, rather than decreasing due to inflation. Overall, it offers more opportunities and fairness to the poor, thus again increasing market morality.
Lastly, Bitcoin greatly increases the morality of the markets through decentralization. Being a peer-to-peer network rather than a centrally controlled system, no governing body or authority can change Bitcoin in any way without 51% network consent. Politicians, bankers, and the leaders of Wall Street are unable to ‘play’ with Bitcoin like they do with the current financial system, oftentimes causing destabilization. The actions of the few end up harming many ordinary citizens. Decentralization allows for the true apex of the free market to be reached, while protecting the money supply that the general public depends on to live healthy, fulfilling lives.
By adopting Bitcoin as a major currency system, greater morality in the markets of mankind can be attained. The public transaction ledger allows for greater transparency with government and organizational spending. It also prevents money laundering and makes other criminal financial activity more traceable. Two of the conditions laid out by Leif Wenar’s framework for combating the ‘resource curse’ can be easily met by the capabilities of the Bitcoin network and can result in the improvement of human life worldwide. Instantaneous transactions that can be sent easily with little or no fee allow for more liquidity and movement of money, which can especially benefit the lower class. Through decentralization, Bitcoin creates a more stable and fair financial system. The concept of cryptocurrency can be applied to a free market society, yet it leaves room for fair and monitored regulation. Overall, Bitcoin is a superior alternative to the current financial system. Its implementation can be used to advance morality among the markets and make our world a better place.