In Defense of Bitcoin
Today the Texas Blockchain Council welcomes Erica Salinas as a guest writer. Erica Salinas is a Senior Fellow at the Value Technology Foundation, where she researches the use of blockchain technology for micro- and macroeconomic development. She finds purpose working at the nexus of technology, finance, and poverty alleviation.
Below, Erica shares her thoughts on why Bitcoin should be taken seriously as a fundamental innovation in global financial services.
An article written for the San Antonio Express News entitled “Taylor: This is your bitcoin warning” by Michael Taylor was recently forwarded to me by several people wanting to hear my response. I have to admit that up until that point, I never really felt myself to be a proponent of Bitcoin.
Working in the field of blockchain with a focus on Central Bank Digital Currencies and financial inclusion, I continue to be in awe of blockchain and its power to improve this world on a global scale. But Bitcoin itself, I wasn’t so sure. However, upon reading Taylor’s article, I suddenly felt defensive of this first and most well-known use case of blockchain technology.
Appreciating Bitcoin
Before I delve into the points on which I believe Mr. Taylor erred, let me share what I appreciate about Bitcoin. In truth, it reminds me of the space race. We spent years and billions of dollars proving that we could put a man on the moon. And while the moment itself brought pride to people around the world, it did little to change their daily lives. What did impact all of us was the technology that was created along the way. From water filtration systems to smoke detectors to satellite technology, we continue to see our lives improve from technology designed for space travel.
Bitcoin is proving to us daily the power of blockchain technology. We are learning the pros and cons of cryptocurrency, decentralized applications, and competing blockchain platforms. Fear of private money is driving Central Banks and governments around the world to think through the gaps in the financial system that cryptocurrencies are filling and become better themselves. And if you throw in Ethereum and all the tokens (both fungible and non-fungible) that exist on that platform, the power of tokenization and smart contracts are just starting to come to light.
Just because Bitcoin itself is a bit volatile, to put it mildly, doesn’t mean it isn’t providing those of us in the blockchain field with technology and insight to transform our world. We would do well to recognize its value. It’s the first of its kind.
OK, so onto Mr. Taylor’s complaints:
Common Criticisms of Bitcoin—and My Responses
Bitcoin is Worthless
Let us not forget that prices have always been set by the relationship between supply and demand. Bitcoin has a finite supply and is currently in high demand. Thus, the fact that people are willing to pay for it gives it value by definition—at least if you trust markets to define value. And unlike many other goods that are subsidized, taxed, etc., Bitcoin’s price is a clear and accurate representation of the demand for it. If that results in crazy swings of value, that is a result of the market and not a flaw of Bitcoin.
Now as for whether Bitcoin is a long-term store of value: With a finite amount of Bitcoins (only 21 million will ever be mined) and significant market indicators that demand for Bitcoin is only growing, Bitcoin will likely be worth a reasonable amount in USD terms for at least the medium term. Here though, I will admit that Bitcoin is a high risk, high reward stock. But unlike Mr. Taylor’s unfair comparison of Bitcoin to lottery tickets, Bitcoin’s value doesn’t automatically drop to 0 after the numbers are drawn or the card is scratched. A better comparison would be the madness around a tech IPO for a company still failing to make a profit, yet is deemed a unicorn because of the value it generates.
Bitcoin is a Useless Fiction
Let’s think about commercial bank money. That is what we hold in our bank accounts. It is insured up to $250,000 by the FDIC, and individual balance data is stored (hopefully) in a fully secure and redundant core banking system. But I’ve known banks to have only two data centers still running their mainframe systems using a programming language supported by a dying breed of programmers. In addition, any money above what’s insured can easily be wiped off the planet if a bank goes—indeed, bankrupt. And in the case of failure of a primary or redundant technology system, one could imagine a scenario where a bank would be unable to determine the balances of its customer accounts.
Now let’s think of Bitcoin. A user’s Bitcoin balance is stored on over 11,000 nodes across the world. Unless there’s a cataclysmic event, that data is not going anywhere. And while hacking of third-party services that act as Bitcoin custodians on behalf of users does occur, the Bitcoin ledger itself has never been hacked. Indeed, a true loss of Bitcoin funds is likely only to happen due to individual forgetfulness—specifically, if someone storing their own Bitcoin in so-called “cold storage” forgets where they hid their stash or doesn’t remember their public/private keypair(s). This does place some additional responsibility on the end user to manage their Bitcoin, but the Bitcoin ledger itself easily exists more universally than any bank ledger.
Dollars are Awesome, but Bitcoin Isn’t
There are 1.7 billion people in the world with no access to the formal financial system, and 7.1 million of them live in the United States (255 thousand of them live in San Antonio). All of these people have failed to get any support from the existing global financial system--apart from their use of cash. If you think cash is enough to build a stable financial foundation, let’s remember that cash doesn’t earn interest; isn’t accepted online; doesn’t build a credit score; can’t be used as collateral; can’t be insured for loss; and so on. Cash alone is insufficient to meet a person’s financial needs.
So the value of Bitcoin is not only in its unshackling of money from banks and nation-states, it’s about creating another option for the unbanked. One that is accessible to all and doesn’t care whether or not you hit a profitability threshold that makes it worthwhile for private entities to provide you with financial services. For a banked person to claim that dollars and their system of circulation aren’t limiting for anyone is an argument from a privileged position. And let’s not forget about privacy. Data is power in the hands of private entities. And until we gain some control over how that data is used, it’s reasonable to opt for an alternative that at least gives everyone equal access to the data collected. (I am referring here to the fact that Bitcoin is a public ledger where anyone can read every transaction, with transacting parties obscured by pseudonymous identifiers.)
Bitcoin is Designed to Avoid Government Control
As per its white paper, Bitcoin was designed for the single purpose of overcoming the weakness of a trust-based financial system. Paying for trust--whether through subscription fees or taxation--is expensive. Every intermediary along a transaction flow takes a cut (as it should), but those fees add up and increase the price of the transaction. This can most often be seen in cross-border transactions that travel in convoluted routes through a series of correspondent banks leading to remittance prices of up to 10%. The burden this places on ordinary people has led the United Nations has made it a Sustainable Development Goal to reduce remittance rates to 3%.
While Bitcoin itself isn’t controlled by any government, access to Bitcoin is still mediated by exchanges that are fully compliant with government regulations. For example, I had a full KYC process completed to get an account at a crypto-exchange. And there are tax laws governing how the government will be collecting their portion of my trading profits. What this means is that while Bitcoin can most certainly exist without any government intervention, it does not exist apart from it. Moreover, in some countries, the permanence of a financial record that the government cannot alter actually increases the security of the funds.
Bitcoin’s Only Use Cases Are Illegal Activities
This complaint is my favorite, as Mr. Taylor actually provides all counterpoints necessary to prove it wrong. But let’s first start with the fact that, yes, Bitcoin, just like all other currencies, is at times used for illegal activities. However, in 2020, a mere 0.34% of cryptocurrency activity was considered criminal. The reality is that Bitcoin is actually better than cash for tracking and putting a stop to illegal activities. How? Because unlike cash, sending Bitcoin is not anonymous. It is pseudoanonymous, which—interestingly—is something Mr. Taylor complained about as well. The address of the transacting parties as well as the amount transacted are visible to anyone with a block explorer. As an immutable (meaning unchanging) ledger, Bitcoin records all transactions, which are traceable and reproducible. And as Mr. Taylor so clearly states, a blockchain-aware law enforcement agency could very well use the ledger to help “follow the money” to any alleged criminals. This has become an increasingly common practice over the past decade, with companies like Chainalysis--which specializes in tracking blockchain transactions on behalf of law enforcement--growing at extraordinary rates.
Let’s also not forget that banks have suitcase-shaped drop-off windows to accept bags full of unmarked, non-sequential dollar bills. Those banks know exactly who their customers are. A correlation between anonymity, pseudonymity, or full transparency when it comes to financial crimes has not been convincingly demonstrated.
Only Tax Money is a Valid Currency
Mr. Taylor’s final criticism of Bitcoin is that he only considers a valid currency one that a government will accept as a tax payment. This is a rather restrictive definition, and it does not correspond to the definition of currency widely accepted and used by economists and social scientists--let alone people in general. A currency is anything that can serve as a medium of exchange. In today’s world, virtually all currencies are fiat currencies (issued by a government), but cryptocurrencies demonstrate that government issuance is not a requirement for people to adopt something as a medium of exchange. Bitcoin, like other cryptocurrencies, functions as a medium of exchange today. You can pay for physical and digital items with Bitcoin through many payment services and exchanges.
The real issue for Mr. Taylor seems to be the question of what Bitcoin is “backed” by. Fiat currencies are backed by sovereign violence: for example, the US government can demand you pay your taxes in dollars, and if you refuse to do so, it can put you in jail. Bitcoin, by contrast, is backed by strong cryptography; a widely-shared, uneditable and irreversible ledger of transactions that serves as a source of truth. This difference is why fiat currencies and Bitcoin don’t need to be at odds. It isn’t an “either/or”--people can and do use both Bitcoin and dollars, often for different purposes. For example, Bitcoin is more likely to be used to store long-term wealth, because it appreciates in value over time. Dollars, on the other hand, are more likely to be used to make payments on dollar-denominated products, services, and debts.
There is no reason we can’t live in a world where both Bitcoin and fiat currencies coexist and have value. In fact, we already do. I suspect that as awareness of this fact becomes more mainstream, arguments like Mr. Taylor’s will simply fall away.