Monthly Archives: August 2011

Bitcoin and ethics

Recently I have been following and participating in some political discussions on IRC and the Bitcoin forums. What has impressed me is the diversity of political opinions expressed in relation to Bitcoin. In one discussion you can find a person defending libertarian islands, while in another someone else is espousing the virtues of socialism. Although it would be fair to say that the majority of those who express their opinions on these fora are skeptical of the state and critical of the status quo, you also find quite a few who support traditional parties, their platforms, and representational politics as conducted in North America and Europe.

What seems abundantly clear to me is that Bitcoin is not a political movement. Oh, I already hear my critics raising their voices at me! People are accustomed to think these days that everything is political. If the feminist movement of the late 1960s taught that “the personal is political”, then the culture wars of the 1980s, and the environmental movement have just reinforced the idea that whatever you do not only reflects on your political commitments but itself has political repercussions. Unfortunately, however, this is a false view of things.

Long ago anthropologists noticed that there was a big difference between what people say about what they do and what people actually do (the classic reference here is Malinowski, but I would also cite a much more recent discussion in Ferguson). If there is such a thing as a human universal, this might be one of them. I want to elaborate on this observation by distinguishing between politics and ethics. Politics, in this case, is how people frame some of their actions. Ethics refers to the actual codes of conduct and infrastructure that structure relationships between people. What might throw some people off is that I am including infrastructure in my definition of ethics. The infrastructure that I am referring to is that which determines or shapes social relationships. Since the type of buildings, neighborhoods, the type of transportation systems we choose to build, the technologies we use, all impact the relationships that we have with others, then in as much as we choose these things, these choices are ethical.

When you ask someone why they use Bitcoin, for example, they will likely give you an explanation that will tell you about their political views or personal values. The fact that two separate people, an anarcho-capitalist and a socialist, will give you two very different arguments for using Bitcoins suggests that you are learning more about their political beliefs than about Bitcoin itself. Bitcoin is in fact enabling new types of exchange and human relationships that have never been seen before. The political discussions, however, don’t tell us much about these in concrete terms because they are subsuming the novelty of Bitcoin to a political framework that was elaborated before Bitcoin came into existence.

By simply using Bitcoins in a way that conforms to the standards and technologies of the Bitcoin community and market, a person implicitly buys into a new way of interacting with others. This way of interacting couldn’t have been described in detail before the technology was invented and adopted. This is what I am calling the new ethics of Bitcoin. An anarchist and a socialist may vehemently disagree about the role of the state, for example, but in as much as they both use Bitcoin they implicitly subscribe to the same ethic. By using Bitcoin they are choosing for themselves specific technologies (infrastructure) and certain codes of conduct that shape their interactions with others in similar ways. They may disagree politically, but agree ethically.

So what is the Bitcoin ethic? Bitcoin structures relationships between individuals and computers by putting them into a relatively distributed network. Bitcoin is the most successful attempt to date of a peer-to-peer currency. The ethic of Bitcoin: 1) is universalist (potentially everyone with an Internet-enabled computer or handheld digital device could use Bitcoins); 2) diminishes the need for mediation (one individual can send another person on the other side of the globe Bitcoins without the mediation of a bank, a middle-person, or institution); 3) privileges transparency (the code is open-source and the process and rate of minting coins is known in advance); and 4) is immanent (the value of Bitcoin is restricted to the actions of those who participate directly in the market and does not depend on a central bank, government, or other external institution). These are the basic features that structure relationships between Bitcoin users no matter what their political persuasion might be.

These features, and others that I have not mentioned, form the ethics of Bitcoin. They are the codes of trade and human interaction built into the Bitcoin software system and supported by the network and community of Bitcoin users. It does not matter how conscious a Bitcoin user is of the fact, but by merely participating in the Bitcoin market he or she is implicitly subscribing to a Bitcoin ethic, that is a Bitcoin way of exchanging value and relating to others. If you ask users why they use Bitcoins, you could really get as many answers as people you ask. But if you pay attention instead to what people are actually doing with Bitcoins, whether mining, exchanging, making payments, or speculating with them, they are engaged in a distributed (relatively non-hierarchical) network of individuals unlike any that we have seen before. They are participating in a new mode of transacting. I call this new mode of transacting an ethic. And even though many Bitcoin users would be able to tell you why the Bitcoin ethic fits well into this or that political ideology, the ethic is something that we should understand as being common to all Bitcoin users no matter how they choose to frame their actions.

Bitcoin competing against the US dollar

The comparisons that are being made between the United States dollar and Bitcoin, the new crypto-currency, are not really legitimate. The first is issued by the United States government, and is used for almost all transactions in the world’s largest economy. The latter, on the other hand, is a peer-to-peer software system, created in 2009 for transferring value through the Internet. It is traded for other currencies on a growing number of online exchanges, but as of yet is only accepted for payment by a limited number of merchants. These two currencies are not providing the same features. The dollar and Bitcoin compete in different market niches.

The NPR Planet Money team, for their podcast on Bitcoin a few weeks back, interviewed the Harvard economist Benjamin Friedman. As another economist that I recently wrote about, in arguing that Bitcoin will ultimately fail, he appealed to the role the government plays in bolstering and securing the widespread adoption and use of the US dollar. According to the argument, Bitcoin will fail because it does not have a powerful government behind it to support its value and enforce its use. Friedman asked his listeners to consider the inscription on US dollar bills: “This note is legal tender for all debts public and private.” The US government has made it illegal for anyone under its jurisdiction to not accept US dollars in payment. They have, through their authority, secured a monopoly for the dollar among currencies circulating in the US economy. Bitcoin, by comparison, does not have a powerful agency behind it to oblige people to accept it. It is for this reason, suggests Friedman, that it will never be able to compete with the US dollar.

What Friedman and those who make this sort of argument ignore is that there is another basis for a currency’s strength, the strength of the economy in which it circulates. In the case of the US dollar, it is easy to conflate the power of the United States government with the strength of the US economy. However, it is not difficult to come up with counter examples, where relatively strong economies are associated with governments that are relatively weak. When it comes to currencies, the economy itself can be its own autonomous basis for power and legitimacy. In ignoring this, Friedman does not adequately address Bitcoin. It would be better to consider each currency as offering a distinct set of features, and then to consider how those features might give it relative advantages for different types of transactions. The future of Bitcoin depends on whether the features it provides as a currency will prove to satisfy emerging needs and desires in an increasingly interconnected and Internet-based world of commerce.

It is clear from the arguments being made that one of the features that the dollar provides is that it is backed by the US government. In the niche that Bitcoin competes, however, this does not confer on the dollar much of an advantage. What seems to be commonly ignored is that Bitcoin is designed to reduce the level of mediation necessary in long-distance and international transactions, as well as the associated costs. If I want to transfer money over a long distance, assuming that I am not willing to send cash through the mail, I will need to use the services of a bank, credit card company, or some other mediating institution. Bitcoin eliminates that need.

Bitcoins can be sent directly from one private individual to another via the Internet. US dollars bills, no matter how fiercely the US government supports them, cannot. Furthermore, if I send some funds, say through my bank or PayPal, to someone across the globe who wishes to draw on those fund in another national currency, this will entail a series of transaction costs. As it is now, I could use Bitcoin to do the same transfer for a fraction of the cost. I would change my dollars into Bitcoins, send the Bitcoins over the Internet free of charge, and the person would change those Bitcoins into his or her local currency. The expense of exchanging Bitcoins in and out of national currencies on online exchanges is but a fraction of the expense for exchanging one national currency into another and making a transfer from one bank to another across international lines. 

This, however, only represents the beginning of the possibilities. If the Bitcoin market develops more fully, if more merchants begin to accept the currency, then we can imagine a situation where the need to change into other currencies is reduced, lowering transaction costs even further. Even now it is possible for someone in Beijing to send a single Bitcoin to someone in New York, without paying any transaction costs whatsoever, and for that person to go out and use the Bitcoin to buy a felafel sandwich. It would be ridiculous to do this with national currencies alone because one would spend more in transaction fees than the amount of value that ends up being transferred. The dollar cannot compete with Bitcoin in the niche of long-distance micro-transfers, and even in larger transfers, why would individuals choose to pay high transaction costs when they could do it for less with Bitcoin?

Some proponents of Bitcoin lament that there are not more brick-and-mortar merchants who accept the currency. If we adopt the market model I am suggesting, however, we would expect Bitcoin to first develop in those areas where it has the greatest market advantage. This explains in part the proliferation of online exchanges (see here and here). The exchanges provide not only the opportunity for speculation, but perhaps even more importantly (in the long run) the ability to exchange Bitcoin for national currencies thereby facilitating international transactions. This is one market niche in which Bitcoin is much more competitive than the US dollar.