Bitcoin: An ethical analysis of a neutral form of payment. Aaron P. Dederich. University of Wisconsin Madison

Transcription

1 Bitcoin: An ethical analysis of a neutral form of payment Aaron P. Dederich University of Wisconsin Madison

2 Introduction In 2013, Nobel laureate Paul Krugman stated in his New York Times blog post, Bitcoin is Evil, that since the bitcoin system is not reliant on any central intermediary, or trust, it must be questioned as a valid form of financial transactions (Krugman, 2013). Through the inflammatory nature of the title, Krugman drew attention to Bitcoin in a way that opened up the ethical debate surrounding it. However, before discussing the ethics, it is useful to understand exactly what Bitcoin is. In class, Brandon explained how Bitcoin utilizes the blockchain, first described by Nakomoto (2008), to allow for a system of anonymous transactions between individuals that are verified by the entire online network of miners. Each miner (or computer running open-source mining software) is incentivized to maintain legitimacy of the transactions in the system because they receive a calculated amount of bitcoins per block (or group of verified transactions) added to the public chain. In order to verify each transaction, mining computers must complete complicated mathematical calculations that are formulated such that a predictable amount of Bitcoins are rewarded to miners (released into circulation) over time. The technology of Bitcoin is thus built on several guiding principles that Brandon discussed, summarized by Sanchez-Allred (2011), [Bitcoin:] (1) is universalist (potentially everyone with an Internet-enabled computer or handheld digital device could use bitcoins); (2) diminishes the need for mediation (one individual can send another person on the other side of the globe bitcoins without the mediation of a bank, a middle-person, or institution); (3) privileges transparency (the code is open-source and the process and rate of minting coins is known in advance); and (4) is immanent (the value of Bitcoin is restricted to the actions of those who

3 participate directly in the market and does not depend on a central bank, government, or other external institution). As described in later sections, these guiding principles form the ethical foundation of Bitcoin. Brandon discussed these principles in the context of their advantages and disadvantages to society, and presented his ethical argument centered on the Angel and McCabe article (2014). The authors and Brandon conclude that, Payment tools as such are ethically neutral, but can be used in an ethical or unethical manner (Angel and McCabe, 2014). However, Brandon also used the article by Beir and Patterson (n.d.) to highlight his hesitations about Bitcoin, including that: the value is (for now) highly volatile, it can be used anonymously online for illicit activities, and it cannot be regulated by governments in severe economic circumstances. Despite his doubts, Brandon determined that, like other tools, Bitcoin is not inherently ethical or unethical and can be used for good or bad. Based on discussions of technologies earlier in class, especially surrounding the politics and life of technological artifacts and the lack of defined goals in technological progress, this conclusion should have been altered. Bitcoin, like other forms of technology, has an integral set of characteristics, advantages and disadvantages, and social and political effects that help determine its ethical nature in society. Upon analyzing the technology at this stage of its development, Bitcoin is not neutral, but biased towards unethical use and manipulation. Discussion Illegal Activity and Consumer Protection Bitcoin is praised as an anonymous system of payment that prevents outside parties from collecting personal data about transactions. While this was listed as a benefit in our in class discussion, it can certainly be argued that the anonymity of Bitcoin poses several problems,

4 including promoting illicit activity and reducing traceability and protection in the case of fraud or theft. The illegal means by which Bitcoin has been abused are well-known. The Silk Road, an online black market for drugs, weapons, and money-laundering that exclusively utilized Bitcoin for anonymous transactions, was shut down by the FBI in 2013 after years of painstaking evidence collection. In 2014, the dominant online Bitcoin exchange, Mt. Gox, declared bankruptcy after 850,000 bitcoins ($450 million at the time) in the exchange were stolen, additionally causing the largest collapse in value in Bitcoin s history (Abrams and Popper, 2014). These are two of many instances of unethical use and manipulation of Bitcoin. In response to these types of Bitcoin failures, many supporters argue that the system cannot be blamed since other forms of payment, like cash, are also anonymous and prone to theft. However, the important difference is that cash is supported and protected by the government. While cash is widely used in the illegal drug trade and can be stolen, the currency can be tracked by law enforcement and is insured in banks by the Federal Deposit Insurance Corporation when stored. Bitcoins do not have this sort of protection, and if it is used illegally or stolen, the government has little power to shield society from potential damages. This is one important quality of Bitcoin that biases it towards unethical use more than standard forms of payment. Like our discussions about the life of technology (Winner, 1983), technology should not be viewed as merely a morally neutral tool like Brandon suggested, in agreement with Angel and McCabe. As Winner says, technologies are not merely aids to human activity, but also powerful forces acting to reshape that activity and its meaning (Winner, 1983). Bitcoin fundamentally changes the way financial transactions are completed, and as such, must be evaluated in terms of its social and political effects. The anonymous and unregulated nature of

5 Bitcoin, in contrast to some benefits like enhanced consumer data protection through anonymity, breeds more dangerous and illegal activity in society than without it. The Ethics of Mining Another highly touted drawback of Bitcoin is the energy consumption and environmental cost during mining, which Brandon discussed during class. Right now, it has been estimated that the worldwide energy consumption for mining is more than 1.46 terawatt-hours per year, equal to the consumption of about 135,000 average American homes (The magic of mining, 2015). However, McCook analyzed the environmental impacts of bitcoin mining in comparison to traditional minting and found that bitcoin mining uses only 0.13% of the energy of the latter. Even if bitcoin use expands by a factor of one million, the environmental impact will still be insignificant compared to traditional currencies because of improved computer efficiency and renewable energy growth over the next 30 years (McCook, 2014). The ethical problem with mining thus may not lie solely in the technological or environmental merits, but in the redistribution and consolidation of the power to create wealth. The first Winner article about the politics of artifacts states that [technologies] can be accurately judged not only for their contributions of efficiency and productivity, not merely for their positive and negative environmental side effects, but also for the ways in which they can embody specific forms of power and authority (Winner, 1980). This is very applicable to the mining of bitcoins, which has consolidated into pools of thousands of connected computers. These computers dominate the wealth generation and consolidate it into the hands of a small portion of Bitcoin users. At one point, a pool of computers called GHash.IO briefly reached a majority of the mining power, which theoretically would allow for a 51% attack of the system (The magic of mining, 2015). A majority 51% attack is a domination of the Bitcoin network,

6 allowing for fraudulent changes to the blockchain, unapproved or invisible transactions, bitcoin hoarding, and other potentially unethical behavior. Even if this type of mining domination was prevented, the unmediated principle of Bitcoin allows for consolidation of power in purely private interests. Unlike government-sponsored currencies, there is no central regulation of currency generation and circulation, and therefore, little protection from abuses of that power. In its present state, Bitcoin enables unequal and unmanageable distribution of power over a currency, an ethical problem that can be prevented in centrally-mediated government currencies. Instability and Societal Goals In addition to the danger of power consolidation during the generation of bitcoins, there exists the all-too-present danger of instability. As described earlier, the value of bitcoins has fluctuated severely since its inception. Brandon discussed in class that, along the lines of the Beir and Patterson article, volatility of the currency is predicted to decrease as more users are introduced. Then, theoretically, Bitcoin would become not only a means of exchange, but also a reliable store of value, with a lower portion of users that solely bet speculatively on the currency in proportion to traditional money. In this ideal state, Bitcoin could be used instead of traditional forms of financial transactions by the average consumer. However, there is certainly skepticism as to how Bitcoin would deal with economic crises or other external economic pressures without centralized regulation. Deeper in this issue of fixing of instability and the drive towards pervasive use in society is the underlying question what is the goal of Bitcoin? The article Does Improved Technology Mean Progress is relevant to this ethical notion. Leo Marx says, we urgently need a set of political, social, and cultural goals comparable to those formulated at the beginning of the industrial era if we are to accurately assess the worth of new technologies (Marx, 1987). So what are the political, social, and cultural goals of Bitcoin?

7 If it is to replace traditional currencies to establish the principles of universal access, deregulation, transparency, and common control in our financial system, what are the societal changes that are anticipated to occur? The answer is not well-defined. Libertarian ideologies promote the free market benefits of Bitcoin, while socialist ideologies endorse its communal and universal nature. Sanchez-Allred says, When you ask someone why they use Bitcoin, for example, they will likely give you an explanation that will tell you about their political views or personal values they are subsuming the novelty of Bitcoin to a political framework that was elaborated before Bitcoin came into existence (Sanchez-Allred, 2011). This suggests that the end-goal of Bitcoin remains to be determined, and no matter the technical and economic solutions for its current instability, an obvious ethical question should be posed is it worth pursuing Bitcoin before deciding its social goal? Conclusion In class, Brandon concluded that, like basic tools, Bitcoin is not naturally ethical or unethical and can be used for good or bad. Upon examining Bitcoin with respect to illegal activity, the mining power consolidation potential, and economic instability all in relation to previous class discussions of politics, life, and societal goals of technologies Brandon s analysis should have been different. Bitcoin, like all technologies, has fundamental qualities and principles that determine its ethical nature in society. After analyzing the technology, it should be concluded that Bitcoin is not immune to ethical bias, and, in fact, is intrinsically unethical in its current form in society. In the future, if the societal goals of Bitcoin are explicitly outlined, power distribution of the currency is controlled to prevent abuse, and anonymity is balanced with inhibition of illegal activity and protection of consumers, the ethical balance may shift in favor of its ubiquity in society.

8 References Abrams, R., & Popper, N. (2014). Trading site failure stirs ire and hope for bitcoin. Retrieved March 20, 2015, from Angel, J. J., & McCabe, D. (2014). The ethics of payments: paper, plastic, or bitcoin?. Journal of Business Ethics, 1-9. Beir, D., & Patterson, S. (n.d.). Bitcoin's prospects: bane or boon? Retrieved March 20, 2015, from Krugman, P. R. (2013). Bitcoin is evil. New York Times, December 28, Retrieved March 19, 2015 from Marx, L. (1987). Does improved technology mean progress?. Technology Review, 90(1), McCook, H. (2014, July 19). Under the microscope: conclusions on the costs of bitcoin. Retrieved March 20, 2015, from Nakomoto, S. (2008). Bitcoin: A peer-to-peer electronic cash system. Retrieved March 19, 2015 from Sanchez-Allred, A. (2011). Bitcoin and ethics. Retrieved March 20, 2015, from The magic of mining. (2015). Retrieved March 20, 2015, from Winner, L. (1980). Do artifacts have politics?. Daedalus, Winner, L. (1983). Technologies as forms of life (pp ). Springer Netherlands.