Where do you start with cryptocurrency. The cultural phenomenon (read: speculative bubble) that took off in 2017 has continuously confounded analysts and observers. How can such an unstable currency be promoted as a viable alternative to fiat currency? How are we allowing this massive operation to use so much of the world’s energy? How can something that’s overwhelmingly used for illegal activities and currency speculation be legal?
As we dive into the ethical quandaries surrounding cryptocurrency, we’ll run headlong into the most confounding thing about this world of ours: human nature.
Before we dive into the ethics of cryptocurrency, we need to define what cryptocurrency is. (And this ties into so many issues surrounding cryptocurrency – the complete lack of understanding of what it is.)
First, and foremost, cryptocurrency isn’t a physical thing. It’s entirely digital. Sure, there are cryptocurrency ATMs now, but those don’t give you crypto dollars or anything like that. They give you fiat currency (dollars, euros, yen, won, etc.) Think of cryptocurrency like the numbers that move around when you make credit card transactions. You have a physical card (and maybe not even that if you use your phone to pay) that transfer so many digital dollars to the store you’re shopping at. Eventually that has to be paid with actual money from your bank account (or maybe not if you just declare bankruptcy like Michael Scott), but during the transaction there is no physical currency exchanging hands.
So now that we understand cryptocurrency as a digital mode of transaction, what is it exactly? Well, it’s not really a currency. It’s more like a commodity with limited supply, like gold, for example. There is only so much gold in the world. We can’t magically make more gold despite the best efforts of alchemists. Gold has transactional value – some people have gold, some people want gold, and there is an associated value for the trade from gold to another commodity or currency. One ounce of gold might be worth $1,400 or it might be worth one brand new suit. (Fun fact: an ounce of gold in Babylonia circa 500 BC would buy about 350 loaves of bread, which is about the same number of loaves of decent bread you could buy today with the same amount of gold.) The price of gold is stable because the supply is naturally limited. That’s a foundational feature of cryptocurrency, except the supply is artificially, not naturally, limited.
Taking Bitcoin as an example, only 21 million Bitcoins will ever be released. (Experts expect the last Bitcoin to be mined in 2140 – if Bitcoin and cryptocurrency is even around then.) The actual release of Bitcoins takes place during an activity called, appropriately enough, mining. So what is mining? Think of it this way: person A wants to send Bitcoin to person B and they need Miner C to validate the transaction. The miner is the arbiter of the transaction. It would be like in the real world if a kid wanted to buy a toy at a toy store and the cashier asked the parent if it was okay. The parent has to give the thumbs up to the transaction.
But what Miner C does to validate the transaction is a complicated process that involves solving an extremely difficult math problem involving mind-bogglingly large prime numbers to verify that the transaction is legitimate. If Person A tries to be sneaky with their transaction and give away Bitcoins they don’t own, for example, or change the amount of Bitcoins they’re sending partway through the process, the math won’t work and the transaction will be denied. And for doing all of this work, Miner C is rewarded with, surprisingly enough, Bitcoins. (That’s where every Bitcoin in existence has come from – a miner validating a transaction.)
A few other details to keep in mind: there are several miners working on any given transaction so it’s validated multiple times over, anyone can be a miner (all they need is a machine capable of solving the problem), and finally, the amount that miners are rewarded decreases over time (the artificial limitations, again) so it becomes more costly to mine Bitcoin.
That’s the broad overview of how cryptocurrency works. It’s actually a beautiful little system. The problem is, it’s a solution in search of a problem. Nobody actually needs cryptocurrency, except for folks who want to get around the headaches of dealing with fiat currency. And therein lies the problem: most people who use cryptocurrency use it for illegal activities and speculation.
As we discussed with social networking technology leading inevitably to echo chambers, the technology of cryptocurrency leads inevitably to illegal activities on a massive scale. The supposed benefits of cryptocurrency are used by nefarious parties to accomplish all kinds of outlawed actions.
Cryptocurrency is anonymous. Great in theory, terrible in practice. When people have no fear of being tracked by their currency transactions, they feel empowered to engage in stuff like drug purchasing and human trafficking. There is almost no way to track a transaction back to its original source, especially if transactions are obfuscated by several layers of microtransactions that mix up all the sources of the coins. Eventually it becomes a completely lost cause to even try to determine who did what with what coin.
Cryptocurrency has no central oversight. Again, great in theory, terrible in practice. Cryptocurrency is the brainchild of the anarchic, libertarian sect of Silicon Valley technologists whose overarching goal is complete freedom for every individual. But the problem is that this philosophy leads to horrible humans doing horrible things. The negatives far outweigh the positives. If you don’t have centralized institutions providing at least a threat of punishment for illicit behavior, people feel empowered to do whatever they want. And the sad reality of this world is that a not insignificant number of people don’t want to use this power for good.
But are there any real positives of cryptocurrency? Or is it all just a racket to enable illegal activities? We tend towards the latter, but let’s give the devil his due.
(And as an aside while attempting to strengthen the arguments of cryptocurrency advocates, it is difficult to discuss cryptocurrency in any sort of objective fashion with these people because so many of them are so heavily invested in the success of cryptocurrency. Any cogent argument you put forward falls on deaf ears because everyone involved in this racket has much time and so many resources invested that they can’t allow themselves to believe that they might be wrong about the whole thing.)
Proponents say cryptocurrency could be a viable replacement for the banking system with its questionable history. Certainly, the banking system as it is today is a problem. Any system that can collapse the world economy through a deplorable scheme like the one that caused the housing bubble in 2008 should be looked at with a critical eye. It’s not perfect and there are a ton of bad actors. Should it be replaced with something better? Of course! Is cryptocurrency that better solution? Absolutely not!
Let’s take just two functions that traditional banking serves that cryptocurrency has absolutely no control over. First off, with traditional banking, when you do an exchange, you know who you’re working with. The bank takes your currency or commodity and provides you with dollar bills, for example. With cryptocurrency, you have absolutely no idea who’s on the other end of an exchange. If you sell cryptocurrency for dollars, you could be selling it to a retiree who’s buying cryptocurrency for fun, or you could be selling it to the Chinese mafia who’s going to use it to fuel their prostitution rings. You have absolutely no idea.
And what happens if you send money to the wrong place? Just the other day, we tried to transfer money to a checking account that was closed – we had the historical account linked instead of the updated, live account. Did our money just disappear? No, it came back a couple days later. And what happens if your grandparents fall for a scam and try to transfer money to some scam artist in Africa? The bank flags the transaction, calls them up, and asks them if they really meant to do this. Really good banks would even explain that this was a fraud scheme and save your grandparents from throwing their money away.
And that’s just two things legacy banking provides. We didn’t even talk about the fact that if you lose track of information on your cryptocurrency wallet, it’s just gone. There’s a great story out there of an early Bitcoin buyer throwing away an old computer that had his information stored. Those coins would’ve been worth hundreds of millions of dollars today, but now that computer is in a landfill somewhere with no hope of finding it. Imagine if you forgot the password to your checking account and so all the money in it was just gone. That’s how cryptocurrency wallets work.
Proponents also claim that cryptocurrency is a more democratized currency. There’s a clear claim there that the more democratized a currency, the better, but we don’t necessarily buy that at all. But even if we were to grant that assumption, is cryptocurrency even more democratized?
Certainly anyone can buy cryptocurrency, and in countries where the monetary system is collapsing like Venezuela, cryptocurrency might be a better option for the people. But are we really going to overhaul the world economy because of the currency struggles of one country? If a state can’t control its currency, isn’t that a problem with the government and not with the currency itself? Again, a solution in search of a problem.
And beyond those edge cases, it’s not even clear that cryptocurrency is more democratized. If we’re talking about the actual industry surrounding cryptocurrency, almost all of the mining is done by humongous conglomerates. Cryptocurrency advocates love to promote the story of the dad who set up a mining operation in his basement and made enough to pay the mortgage each month. What they usually don’t tell you is 1) that person got incredibly lucky to mine even a couple coins – you don’t hear about all the small mining operations that never mined a single coin just by bad luck because those operations folded and lost their owner tons of money, 2) those stories are mostly from a bygone era where the price of cryptocurrency was sky high and you got twice (or four times) as much cryptocurrency back for each validated transaction. Today the speeds of computers owned by mining operations, the size of these operations, and the increasing cost of business means only a few of these massive operations are mining practically all of the coin. Not very democratic.
And it’s not even like most people could even get involved with cryptocurrency. It’s not a super intuitive technology. A lot of people like using money, despite all of the issues with the banking system. Money provides a ton of benefits that people don’t want to part with. Outside of the technology bubble (the information bubble, not the financial bubble), most people don’t actually want cryptocurrency. That doesn’t matter to most cryptocurrency backers, but that just shows their true colors as far as the supposed democracy of cryptocurrency goes.
Now we come to the root of the problem. Because what is cryptocurrency used for? The vast, vast majority of cryptocurrency is used for two things: illegal activities and currency speculation. We’ll discuss the second half in the next section, but for now, let’s focus on arguably the biggest problem with cryptocurrency, namely, its participation in the world’s massive black market. Here’s a relevant quote from a recent study:
We find that illegal activity accounts for a substantial proportion of the users and trading activity in bitcoin. For example, approximately one-quarter of all users (25%) and close to one-half of bitcoin transactions (44%) are associated with illegal activity. The estimated 24 million bitcoin market participants that use bitcoin primarily for illegal purposes (as at April 2017) annually conduct around 36 million transactions, with a value of around $72 billion, and collectively hold around $8 billion worth of bitcoin.
And that right there should be the killing blow for cryptocurrency.
If you care at all about the negative impacts that illegal activities have on our world, you won’t want anything to do with cryptocurrency. Crypto backers will claim that fiat currency is used just as much for illegal activities, but the difference is that 44% of fiat currency transactions aren’t for illegal activities. And 25% of currency users aren’t using that money for illegal activities. The absolute amounts might be the same, but that’s just because there’s so much more fiat currency around. The fact of the matter is that cryptocurrency is used for an unconscionable amount of bad in our world.
Drugs, child pornography, human trafficking, money laundering – these are actions funded by cryptocurrency that have real-life consequences for people. Transacting with cryptocurrency is increasing the amount of misery in the world instead of decreasing it. That’s not something people should want to be involved in. And that’s the root of the debate with the ethics of cryptocurrency.
It’s not just illegal activities of course. It’s also the monetary schemes (scams?) that cryptocurrency enables. Many of which are illegal with fiat currencies, by the way, because we’ve been down these roads before. Cryptocurrency being the wild west landscape it is, doesn’t seem to really care about this kind of stuff except insofar as it erodes public trust in cryptocurrency as a whole and threatens the price of their massive coin reserves. That’s, again, why you won’t hear many cryptocurrency advocates owning up to the myriad shortcomings of cryptocurrency.
What schemes are we talking about here? There’s the oldest and best, obviously: Ponzi schemes. Consider Bitconnect, a bygone coin from 2017. The plan was a Ponzi scheme, pure and simple. You bought a Bitcoin, converted it to Bitconnect, and loaned it out to people farther down the pyramid with a maximum payout of 1% compounded interest daily (an insanely high rate, which is a sure sign of a Ponzi scheme). So your profit depended on how many people you recruited into the Bitconnect scam. Sound familiar? There was even a coin named PonziCoin for crying out loud. And people actually bought it! That’s why we have a regulatory system in place, to prevent that kind of thing.
Of course it’s not just Ponzi schemes. Another major monetary racket that’s run with cryptocurrency is the classic pump and dump. All that means is that you endlessly hype up a particular coin that you own, hoping that your phoney promotion will push the price higher so that you can sell your coins at a profit (or at a smaller loss, as is usually the case since most people bought high). This is even the stated policy of major coins. The CEO of Ripple explicitly stated that the goal of the company, since the company itself owns so many Ripple coins, is to ensure the price of the coin goes higher and higher. I’d definitely trust that guy to be honest with me about Ripple. It’s Enron executives all over again. Push that price higher and higher and then sell your stock (or coins, as the case may be) to the dupes who believe the hype.
One of the cruelest aspects of the cryptocurrency landscape is the impact it’s having on the environment. It takes an unbelievable amount of energy to mine cryptocurrency. That’s a lot of wasted resources on a speculative bubble. It’s gotten so bad that major countries like China are thinking of banning cryptocurrency entirely. Why spend so much energy producing something that has no intrinsic value outside of how it enables illegal activities?
(Another aside: there was recently an article about how almost 75% of bitcoin mined in China was done using renewable energy. It was one of those banner articles that painted cryptocurrency as all good, as doing no harm. The kind of article that can only be found when the world is deep in a speculative bubble. But the sad reality is that it didn’t take into account the fact that for all of the renewable energy that was being used by cryptocurrency mining, the non-cryptocurrency mining energy usage had no access to that renewable energy. And that energy has to come from somewhere. Guess where it comes from? Coal and other hyper-polluting sources. So much for that good news.)
Cryptocurrency mining operations move around the world looking for cheap energy to feed their addictions to this speculative bubble. As energy costs rise, as cryptocurrency prices fall, as miners get fewer coins per validation, it’s going to become very difficult financially to keep it all going. But the mining operations won’t go down without a fight, and while they’re around they’ll soak up every bit of energy they can. Energy from public utilities that are funded in part with taxpayer dollars. Energy used to produce coins that they largely pay no taxes on themselves. It’s the Silicon Valley libertarian’s dream: huge public infrastructure to support the self-obsessed, money-crazy, Randian ideal of narcissistic individualism at the expense of local communities and society at large.
We hate cryptocurrency. I think that’s fairly obvious at this point. But we hate it in practice, not in theory. In theory, it’s a fine idea to have some sort of decentralized currency that people can transact in if they want. The problem, as with so many things, arises when the rubber meets the road. The road being human nature.
People can be terrible. With no oversight or fear of repercussion, people will do awful things. The unsolvable problem of cryptocurrency is that if you give people a totally anonymous and completely untraceable mechanism for transactions, they’re going to use it for drugs and child pornography and human trafficking and money laundering and black market weapons and any number of other illegal activities. Heck, cryptocurrency has allegedly even been used as a form of payment for hired hitmen to murder people. Is that the kind of behavior we want to encourage? Is that the kind of society we want to live in?
Those aren’t questions that Silicon Valley and cryptocurrency technologists worry about. Those people worry about one thing and one thing only: money. They don’t want to build a better world. They don’t want to build strong local communities and bridge the national divisions our world suffers from. They want to make as much money as humanly possible to buy as many things as they can humanly buy with no regard to the actual effects their actions have on actual people.
So what’s the solution? We usually wrap these Tech’s Ethics essays up with potential next steps or ways to remedy the situation. In this case, we’re stumped. Short of massive governmental involvement in the entire system, which no government actually wants to do because they don’t want to throw resources at a problem that shouldn’t exist, we say ban cryptocurrency. It was an interesting thought experiment that has turned into a nightmare for the world. Ban cryptocurrency. It’s the only viable option at this point.