Bitcoin: Precaution vs. Permissionless Innovation
As a fan of the Harry Potter series, there is a quote from Harry Potter and the Order of the Phoenix that always stuck out to me. “Progress for progress’ sake must be discouraged, for our tried and tested traditions often require no tinkering.” The line is only a snippet from a long monologue by an advisor to the Minister of Magic, Dolores Umbridge. It’s interpreted by the main characters to mean that the governing body of the magical world is afraid of changes, and prefers a stagnant society because they feel as if a perfect world or balance has been achieved. This desire to stifle innovation and progress ends up being a detriment to the wizarding world, because while they may not want to acknowledge the rise of outside forces that may be a detriment to their way of life, they are also not taking steps to prepare their society for the inevitable changes to come.
Because change cannot be stopped, either in Harry Potter or the real world, being prepared to accept and even embrace the changes that are happening in the world is important. One such change that is slowly penetrating society is the use of cryptocurrencies such as Bitcoin. While Bitcoin is not yet as prevalent as other innovations, it has already provoked strong reactions. Many are excited by the currency’s potential as a system of trade separated from governmental regulations and oversight, which can be intrusive and politically motivated. Others are afraid that the lack of institutional control will allow cryptocurrencies to fuel criminal transactions. I believe that Bitcoin and other similar currencies have the capacity to redefine the way we view currency and finances for the better, and should not be stifled as they become more prevalent.
First, let’s take a look at how money works now. Money primarily serves three functions; as a medium of exchange, a unit of accounting, and a store of value. As a medium of exchange, society has agreed to accept it in transactions. Merchants accept money in exchange for goods, employees accept money in exchange for labor, and so on and so forth. As a unit of accounting, money serves as a simple method of communicating value. How much is an iPhone worth? Contrary to Jason Chaffetz’s beliefs, it’s nowhere near the annual cost of health insurance. Its MSRP is approximately $650. In this way, money serves as a convenient way to easily understand and communicate value. The annual US average premium costs for health insurance is $1255. So it can be safely stated that annual health insurance costs approximately two iPhones, based on the use of money as a unit of account. Finally, as a store of value, money allows us to maintain and amass wealth without the fear of it losing value. Compare this to a dowry of sheep, for example, which will lose value if the sheep die and will require maintenance in the form of food.
Money is largely defined by the functions that it serves. When we look at how Bitcoin exists and functions today, we can easily see how it disrupts our relationship with financial institutions by also expanding upon the functions of money. Bitcoin primarily serves as a medium for exchange. While not accepted as ubiquitously as the United States Dollar or the Euro, it is being accepted by more and more vendors as a currency. Unlike modern currencies backed by a governing body, Bitcoin isn’t tied to a country. This can be seen as both a benefit and a detriment.
In the previous comparison using iPhones and health insurance, we used the USD as the unit of accounting. If we made a comparison of a European iPhone to health insurance in the United States, we not only need to convert the value of the service or product to currency, but we also need to convert the values of currencies. This adds an additional step or process in money’s function as an unit of accounting. While Bitcoin’s current status as a niche currency without any large backing or support by a major bank or government may make it too volatile to be used as money, if it was to receive that support and grow in everyday use (Japan and Russia are both already moving to legitimize the currency), then Bitcoin could eventually replace traditional currencies and become a universal unit of accounting in a global market.
Besides the conversion of currency for a global market, traditionally, an independent intermediary was necessary to sit between the two parties involved in the use of money as a medium of exchange. If you made a purchase at your local Starbucks with your debit card, your bank would securely process the payment and update their own private ledgers. However, with Bitcoin, the transaction is direct between the parties, and relies on copies of the ledger being distributed to a vast network of Bitcoin users. These Bitcoin users exist all over the world, and can use the record to independently authenticate any changes, removing the need of the bank to verify the transaction and puts the records and verification of transactions in the hands of the masses.
Though this may not seem terribly important in a country like the U.S., where banks are generally easily accessible, it may have great benefits for people living in third world countries. Looking at a country like Nigeria, only 36% of the population has access to traditional banking services. While there are some services that aggregate micro-finance institutions, the fees average 12%, leaving many Nigerians to physically put money on a bus in a bag to send it instead of using a bank transfer. Arguably, Bitcoin could be an incredible transformation and innovation for financial institutions, making the centralized systems of the banks and the services they provide redundant while still fulfilling the needs and functions of money, and extending financial services to people who previously could not afford them.
With any changes in our world there are always those who are skeptical. The precautionary principle caters to the belief that “new innovations should be curtailed or disallowed until their developers can prove they will not cause any harm to individuals, groups, specific entities, cultural norms, or various existing laws, norms or traditions.” A belief like that, however, can lead to stagnation, causing the countries which adhere to it to fall behind in the global technology race. South Korea, for instance, has surpassed the United States in many areas by accepting and committing to blossoming technologies. They boast the fastest wireless broadband in the world, while American Telecoms are slow to innovate and produce a generally inferior service. The European Union has begun using National Identity Cards, which serve a similar purpose as the American Social Security Card but feature actual security measures and a photograph, making it a much better form of identification.
I believe that we should adopt an approach of permissionless innovation in regard to new technologies like Bitcoin. In light of the benefits they offer, their development and expansion should be permitted until a compelling case of their danger and risk can be made. To put it in terms of American law, innovation is innocent until proven guilty. A policy of permissionless innovation was successful for the United States in 1997, when the Clinton Administration released its Framework for Global Electronic Commerce. The FTC Commissioner Maureen K. Ohlhausen observed in regards to the Clinton Administration’s policy that, “the success of the Internet has in large part been driven by the freedom to experiment with different business models, the best of which have survived and thrived, even in the face of initial unfamiliarity and unease about the impact on consumers and competitors.” When policy is dictated in response to fear of worst-case scenarios, innovation can be greatly stifled. While risks can be dangerous or scary, these risks lead to experiences that in turn become wisdom, knowledge and advancements in our society which are necessary for an ever-changing world.
In regards to the emergence of Bitcoin as a catalyst for the transformation of money, I feel that it should in general be embraced and promoted. Bitcoin has the potential to change money by expanding on its function as a medium of exchange as well as an unit of accounting. While there may be some policy vacuums that need to be ironed out (two months ago the IRS sent Coinbase, the largest Bitcoin exchange company, a subpoena to disclose records on all U.S. customers over a three year period), these are issues that can be addressed in time, and do not need to stand in the way and completely disrupt the integration of Bitcoin and permissionless innovation in our society.