Guest Column: Crypto vs. Fiat

The mainstream media has primarily portrayed cryptocurrencies as the gold nuggets of cyberspace’s lawless Wild West. Bitcoin, for instance, often brings to mind pyramid schemes and tax evasion, the Silk Road and the Dark Web, hacktivists and terrorists. But then again, government-issued, government-backed fiat money can be used for the same illicit activities that cryptocurrencies are notorious for encouraging. It is only through use that money acquires an ethical dimension – cryptocurrencies can, in many ways, act as a worthy alternative to fiat money. At the same time, they can also facilitate and conceal illegal activity. Despite most governments’ hostile attitude towards decentralised cryptocurrencies, they are unlikely to disappear, and if they are ever to emerge as a viable and mainstream alternative to fiat money, their ethical implications must be explored.

What is Bitcoin & how does it work?

Bitcoin, the first functioning, decentralised cryptocurrency, was introduced in 2009, just a few months after the stock market crash. Satoshi Nakamoto (Bitcoin’s pseudonymous creator) describes Bitcoin as a peer-to-peer electronic cash system, a system for electronic transactions without relying on trust. For him, Bitcoin was a necessary alternative to fiat money because it allowed users to bypass financial institutions – in his eyes, irresponsible and untrustworthy third-party middlemen. The only trust required by Bitcoin is in an algorithm, which will only function according to its programming, which minimises the risk of unethical money management by minimising the scope for human error and corruptibility.

Transactions in the Bitcoin network are peer-to-peer and cryptographically verified. All transactions are recorded on a blockchain, a non-editable and cryptographically secure public ledger that verifies and documents transactions whilst keeping them anonymous. Bitcoins are created by a process called ‘mining’, in which a computer solves a series of complex and random maths problems, called ‘blocks’, which constitutes ‘proof-of-work’. Upon successfully solving a block, the miners, who legitimate the mining process by time-stamping each transaction in order to verify that the money has not been double-spent, are rewarded with bitcoins.

Why the bad rep?

The founding principle of Bitcoin is that money should not be controlled by any centralised entity. It was designed to offer financial freedom, individual autonomy and privacy to its users. The right to anonymity is key to the functioning of an open and participatory democracy as it defends the fundamental rights to privacy and freedom of expression and helps safeguard against surveillance and censorship. However, anonymity becomes unethical when the human liberty it enables threatens human welfare – when used as a mask to hide behind in order to harm and deceive others without being held accountable.

From a law-enforcement perspective, Bitcoin cryptography acts as an obstruction of justice, and the anonymity provided by the network acts as a means of aiding and abetting criminals. However, getting rid of Bitcoin to stop ransomware would be like the US government getting rid of $100 bills to try and stop drug dealers from laundering their dirty money. Bitcoin, $100 bills and the now-discontinued €500 notes, are all notorious for their association with criminal activity, though cash still remains the medium of choice for most underground dealings. The point that cryptocurrencies are unethical because they have the capacity to be used for unethical transactions is therefore not only moot, it verges on sophistry. More than anything, banks are threatened by the emergence of cryptocurrencies simply because power is taken away from the central authority and placed in the hands of users – because movement of money goes unlogged, taxes go undeclared, and wallets cannot be seized, frozen or audited.

Cryptocurrencies in the developing world

People who lack access to banking services can’t withdraw cash, apply for loans, buy homes, securely store their savings, do business online or get paid by anything other than cash or cheque. The unbanked use cash only, do not have any credit history and do not have access to any financial services. They are also often confined to transactions with people within their physical reach. A South-East Asia-based company called MicroMoney offers banking services and loans to the unbanked using blockchain technology to send Ethereum. Kenyan mobile phone-based money transferring, branchless banking service M’Pesa recently joined forces with BitPesa, a digital currency exchange. Using BitPesa, an individual can send bitcoins from the UK to a recipient’s M’Pesa wallet in Kenya, which upon arrival would be converted to Kenyan Shillings. Systems like BitPesa allow for money to be sent directly to people in developing nations without the risk of it falling into the hands of corrupt officials. They also help avoid steep international transfer fees, as the majority of banks charge between 10-19% on any transfers to, from and within African countries.

Using cryptocurrencies instead of local fiat currencies also has benefits if local currencies suffer from hyperinflation. The combination of cryptocurrencies and mobile phones constitutes a cheap and secure way of offering the rural poor, the unbanked and the undocumented access to the global economy. The ease, efficiency and transparency of blockchain technology could also lead to a significant increase in donations, as their peer-to-peer nature ensures that they are received in full by the recipient, and equally make a significant contribution to international development by promoting self-sufficiency, bridging the poverty gap and hindering corruption.

In the developing world, cryptocurrencies can help people achieve what fiat money cannot – more transparent and more secure distribution of aid, financial opportunities for the unbanked, a way around steep money-transfer fees, a viable alternative to local currencies suffering from hyperinflation, and a degree of freedom and autonomy under authoritarian regimes. Their promotion ought to be treated with a degree of scepticism, however, because although cryptocurrencies provide an ethical alternative to fiat money in many cases, the emphasis is on ‘alternative’, as they have proven most useful when existing infrastructure and institutions are weak, corrupt or failing. The emergence of this technology threatens to detract attention away from the very problems that necessitated its application.

Going mainstream?

Cryptocurrency use in the developed world calls for a similar dose of ethical pluralism as they do in third world countries. Both cryptocurrencies and fiat money function like vehicles for the drug and illegal pornography trade, for funding terrorist activity, money-laundering and other types of fraud. The fact that cryptocurrencies facilitate and anonymise these activities encourages the argument that they are less ethical than fiat money. However, anonymity can also be used to defend the ethical advantages of cryptocurrencies, for the privacy it lends users encourages financial freedom and autonomy, and also safeguards against an increasingly panoptic society.

Cryptocurrencies will not be able to ‘overthrow’ fiat money in the foreseeable future – they are too volatile, too impractical and, most importantly, they do not have the capacity to function as a reserve currency. Their perceived legitimacy is damaged by the fact that they offer a way of getting around the system, avoiding civic responsibilities and destabilising bank and state power. Although regulating or centralising Bitcoin would be a necessary step in paving the way for government-approved, trustworthy, legitimate, mainstream use, this would violate the core principles of Bitcoin and would run the risk of cryptocurrencies becoming little more than an alternative way of doing business as usual.

Image Courtesy of Pexels 

Key Sources:

‘The Ethics of Payments: Paper, Plastic, or Bitcoin?’; J. J. Angel and D. McCabe

The Evolution of Money; D. Orrell and R. Chlupaty

‘Bitcoin: A Peer-to-Peer Electronic Cash System’; S. Nakamoto

‘Bitcoin Open-Source Implementation of P2P Currency’; S. Nakamoto

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