Note: This is the first of two articles inspired by Detlev Schlicter’s Paper Money Collapse. Part two will be released tomorrow.
Since Bitcoin exploded into the mainstream consciousness in 2013, there have been many startups built around the world’s first major cryptocurrency. In the past, Bitcoin evangelists have touted the cryptocurrency’s ability to do everything from replacing credit cards to becoming the major currency used in online video games. Three years later, it’s clear that Bitcoin is not going to solve as many problems as previously thought — at least not anytime soon.
While useful in some situations, Bitcoin has generally been overhyped as the perfect solution for any developer who wants to build some sort of app that accepts payments via the Internet. The reality is that Bitcoin is still not a very useful payment system for the general public.
If you build an app that requires payments for some feature or service, you’re usually going to be better off accepting something like PayPal where there are already hundreds of millions of people who are connected to the payment rail with a currency they’re used to seeing. Of course, there are some exceptions, and these are the cases where Bitcoin makes sense.
When is Bitcoin Useful?
To figure out why Bitcoin is useful, all you need to do is look at the situations where Bitcoin is the only practical payment option for a specific good or service. In general, Bitcoin is mostly useful for avoiding financial censorship or high transaction costs, which are usually a result of government regulations.
Let’s look at some examples of where Bitcoin has become the necessary form of payment over the years:
- Silk Road and darknet markets – While legal goods and services are also sold on darknet markets, Bitcoin is what enables transactions of illicit goods to be practically uncensorable. These goods could be anything from stolen credit card information to an inhaler without a prescription requirement. It should be noted that these sorts of markets have their own policies on what is or isn’t allowed to be sold.
- Donating to an unpopular cause – Wikileaks donations are often lumped in with Silk Road as one of the first use cases of Bitcoin. The cryptocurrency was used to get around a financial blockade placed on the journalistic outfit back in 2012.
- Online gambling – Erik Voorhees’s Satoshi Dice was one of the first major applications built on top of the Bitcoin network, and it once accounted for roughly half of all Bitcoin transactions. More recently, traditional online casinos have been turning to Bitcoin for customer deposits and affiliate payouts. Knowing that payments will not be blocked and access to your funds in a bank account will not be cut off can be valuable when operating in a legal grey area.
- Ransomware – Ransomware existed long before Bitcoin, but hackers have turned to the cryptocurrency as a more efficient alternative to past options. This is a sort of malware that, when activated on an individual’s computer, encrypts documents and demands a ransom for the decryption key.
- The adult industry – Backpage is a classifieds website where escorts are allowed to advertise their services. Bitcoin can be used to purchase upgraded advertisements from Backpage because payment processors have decided to stop offering their merchant services to the website. Cam girls and adult websites have also taken a liking to Bitcoin payments.
- Encrypted cloud storage services – Multiple encrypted cloud storage provders, such as Mega and Seafile, have enabled Bitcoin payments after having issues with PayPal.
- Others – There are obviously other areas where Bitcoin has become popular. The intent of this list was just to give a few examples to make a point in regard to the value of censorship-resistant payments. As Tesla and SpaceX Founder Elon Musk said back in 2014, “I think [Bitcoin] is primarily going to be a means for doing illegal transactions. But that’s not necessarily entirely bad. You know, some things maybe shouldn’t be illegal.”
Although governments seem to be creating more Bitcoin use cases than anyone else right now, it’s also possible for other actors to create reasons for people to use this relatively new financial technology. The key point is Bitcoin protects its users from aggressors who wish to censor transactions, steal funds, or prevent any form of voluntary commerce to take place. To this point, cypherpunk Nick Szabo has noted bitcoin is safer than gold.
Limits on Cryptoanarchy
The idea of cryptoanarchy has been around for decades. In general, cryptoanarchy is the concept that governments will lose more and more control and power as individuals are able to communicate anonymously through the Internet by way of various cryptographic tools. Timothy May described cryptoanarchy in a post on the cypherpunks mailing list back in 1992:
“Computer technology is on the verge of providing the ability for individuals and groups to communicate and interact with each other in a totally anonymous manner. Two persons may exchange messages, conduct business, and negotiate electronic contracts without ever knowing the True Name, or legal identity, of the other. Interactions over networks will be untraceable, via extensive re- routing of encrypted packets and tamper-proof boxes which implement cryptographic protocols with nearly perfect assurance against any tampering. Reputations will be of central importance, far more important in dealings than even the credit ratings of today. These developments will alter completely the nature of government regulation, the ability to tax and control economic interactions, the ability to keep information secret, and will even alter the nature of trust and reputation.”
Whether they know it or not, Bitcoin users are supporters of this cryptoanarchist philosophy. While some believe Bitcoin will usher in a new order of governance based on voluntary participation, it appears to be more of a tool to avoid the government than anything else. In other words, the state isn’t going anywhere anytime soon.
As a tool for cryptoanarchists, Bitcoin is able to level the playing field a bit. While users of Bitcoin can still be prosecuted for doing illegal things, it’s undeniable that Bitcoin has been helpful in enhancing and popularizing digital black markets. While nowhere near perfect, Bitcoin is a step in the direction of cryptographic law and away from traditional legal systems. It could be said that cryptographic law is an attempt to establish an order of private law on the Internet.
“I’m a proponent of a private law society, and a private law society is a society where the same laws apply to every individual and every institution — not just separate groups of individuals (government officials on the one hand and private citizens on the other to whom different laws apply).”
It’s important to remember that the men with guns still exist, so this order of cryptographic or private law is not without its limits. The state can also adapt to new technologies that are adopted by these digital private law societies. For example, the inability to reliably collect income taxes from everyone can be countered by collecting more property or sales taxes.
Bitcoin leading to an anarcho-capitalist society is likely an utopian vision, but that does not mean that it is not beneficial to those who wish to avoid government regulations. Advocates of less government who would like to see the world molded into a society that matches their view of the world will also need to convince others of their philosophical beliefs.
Does Every Use Case Involve Regulatory Arbitrage?
Having said that, regulations also affect these sorts of apps. When asked why Purse needs Bitcoin and cannot use any of the traditional payment options, CEO Andrew Lee pointed me to what he considers to be the closest thing to an irreversible version of a traditional payment system, Visa’s Original Credit Transaction (OCT). Lee also shared a document containing Visa’s international operating regulations, which is 1171 pages long and can change at any time.
“If you read that operating agreement and consider the regulatory influences of its dependencies (banks, ACH, etc.), I think you’ll conclude legacy systems won’t be able to catch up,” said Lee. “Facebook Messenger, Square Cash, and other payment apps run on Visa OCT. Despite all the capital and resources in the world, they’re currently US only, reversible, and not widely used.”
OKPay is is an online money transfer platform known for irreversible payments, but those payments are only irreversible until the company or government decides they are reversible. OKPay is also unable to offer their services to citizens of the United States.
Early bitcoin adopters may remember that Dwolla was also an irreversible payment platform at one point — until it wasn’t. Tradehill, an early bitcoin exchange, eventually filed a suit over the matter.
While most of the use cases of Bitcoin currently involve regulatory arbitrage, it may not be this way forever. If enough people decide to hold bitcoin as a store of value, then it may eventually become an often-used medium of exchange for everyday transactions as well.
A more efficient version of the traditional financial system may eventually come to pass, but for now, it appears that developers should mainly turn to Bitcoin in situations where they need to get around onerous regulations and inefficiencies.