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Bitcoin: Is it an Economic Equalizer or a Tool for Conflict and Crime?

02/17/2015 11:13 am ET | Updated Apr 19, 2015

Ross Ulbricht was just convicted on charges stemming from his role as the founder and operator of the Silk Road. He used Bitcoin to facilitate payment for his alleged criminal activities. This is a very good occasion to shed some light on Bitcoin, its uses and disuses. No doubt, the digital currency is the most innovative invention of our time with immense potential for good. To understand the socio-economic forces behind the invention of Bitcoin as an exchange medium we need to go back and reflect a little on the history of money.

For the last 4,000 years, charging interest on money (usury) has "been repeatedly condemned, prohibited, scorned and restricted, mainly on moral, ethical, religious and legal grounds." It is only post Adam Smith and Jeremy Bentham in the 1700s that it has been gradually accepted. And ever since then our economy has suffered from cycles of speculative booms and busts. Devastating depressions and recessions have rocked our society. Interest-bearing money has brought us a parasitic banking class that makes money on money while producing little of value. Nowadays, many of our brightest minds expend vast amounts of energy creating abstract financial instruments, such as derivatives, to enrich themselves while syphoning the productivity and wealth of our nation. Newsweek recently reported that 36 percent of Princeton's class of 2011 went into finance and half of Harvard's class of 2010 gravitated towards finance and consulting. According to French economist, Thomas Pikkety, author of the best selling book, Capital in the 21st Century, the current inequality of labor income in the U.S. is "is probably higher than in any other society at any time in the past, anywhere in the world, including societies in which skill disparities were extremely large."

If given the opportunity, Bitcoin could change all that. It could become an equalizing force so that the people who actually produce goods and services could exchange them with others like themselves. Bitcoin is special. Unlike the "real money" we currently use, Bitcoin disallows intermediation charges. It portends an evolutionary leap for mankind by closing the door on middlemen and those who do nothing but wait for their interest-accruing investments to reap more profits. The general acceptance of Bitcoin could have profound consequences, leading to a more egalitarian distribution of wealth and a more stable society. But in order for that to happen, there are two important things we must do.

First, we must not allow Bitcoin to be appropriated as a medium for free speech. We need to protect Bitcoin's legitimacy by restricting its domain to the buying and selling of goods and services. In a recent, erudite article by Sarah Jeong in Slate, Is Bitcoin Free Speech?, she discusses the pitfalls of confusing Bitcoin's economic utility with its political applications. The issue she points to is governmental backlash. After Wikileaks exposed diplomatic cables in 2010 that embarrassed the Obama administration, the U.S. retaliated by convincing payment processors such as Visa and Mastercard to block donations to the site. Wikileaks has since managed to subsist by primarily relying on funding from Bitcoin and other crypto-currencies because they allow for an anonymous exchange of real money.

Not to diminish the need for transparency and free speech, the problem however, is that when Bitcoin and other similar iterations of it become enablers of such advocacy they inevitably become subject to scrutiny and regulation. It is not hard to see why in such cases the government would be uneasy with Bitcoin. Besides its ease of use for the funding of questionable political activities through the exchange of real money, it can also enable unprecedented illegal activities. Because the digital currency is encrypted, it may be used to shield the identity of users and its easy convertibility to real money makes it a desirable conduit for all kinds of criminal activities.

Jeong suggests that we need look no further than such recent high-profiles cases as United States of America v. Robert M. Faiella, a/k/a "BTCKing"and Charlie Shrem and the aforementioned US vs. Ullbricht (otherwise known as the Dread Pirate Roberts case) to see this occurrence. In both instances, the justice department stepped in to crack down on criminality, such as money laundering on the Silk Road, a Tor-hidden online marketplace for drugs and other illicit goods that was shut down last year. As a result, the government has ample reason to see Bitcoin not as a harmless tool for more egalitarian commerce, but as a threat to social stability.

This leads us to the second thing we must do to safeguard Bitcoin's legitimacy so that it may lead to a fairer society. A user agreement must be put into place by the developers to prevent Bitcoins from being exchangeable with real money. For the moment it is exchangeable with money, Bitcoin loses its independent utility by becoming yet another tradable commodity that contributes to the unequal interest-based money system. Let Bitcoins be redeemable only for their value as electronic bits of currency for the mutually beneficial exchange of goods and services.

One way to ensure Bitcoins are not swallowed up into the cesspool of real money is to strengthen the user agreement by enforcing it with a computerized firewall. But even these protective measures are not inviolate. No amount of security will stand up against those who are committed to gaming Bitcoin. But rather than spend the time and energy policing such individuals, might it not be more effective to encourage an honor-based system of responsibility? Admirable behavior when conducting Bitcoin commerce could become a social meme, part of the mores of Internet culture. A well-functioning digital currency exchange will benefit us all because of its low cost and ease of use. It opens the door to more economical trade of goods and services as middlemen surcharges are eliminated. Because it is cheaper it will gradually be used more broadly than money. If users can be made aware of how their own magnanimous conduct and cooperation will actually serve their own best interests they will have no need to break the rules. Especially since they would only be hurting themselves.

The ultimate takeaway is that a self-policed, non-political Bitcoin exchange offers an enormously advantageous replacement to the money system in use today. When scaled back for the simple exchange of good and services, Bitcoin has the opportunity to become a stabilizing force for the entire human community. All that is compromised, however, when the digital currency becomes a tool for free speech or when it is appropriated as a means to earn interest-based notes. If instead, it is given the space and time to grow, Bitcoin could gradually become the holy grail of our economic system, an alternative to the current financial system that has perpetuated such destabilizing income disparity. If and when that happens, Bitcoin's immense contribution will ripple throughout society, fostering a more balanced social order in which mankind can efficiently and happily thrive.