Bitcoin as an Ethical Dilemma Bitcoin is an open-source, peer-to-peer digital cu
ID: 1142926 • Letter: B
Question
Bitcoin as an Ethical Dilemma
Bitcoin is an open-source, peer-to-peer digital currency
introduced to the world on January 3, 2009, by developer
Satoshi Nakamoto. The cryptocurrency is based on a protocol
and software that allows instant peer-to-peer transactions
and worldwide payments with minimal costs. In its
few years of existence, bitcoin has seen unprecedented
media coverage, a roller-coaster ride of epic spikes and
epic plunges, and adopters from major retailers to lemon
stands (e.g., Amazon, Target, Victoria’s Secret, and Whole
Foods). Bitcoin has also been covered by numerous major
news organizations (e.g., ABC, CNBC, Forbes, Fox News,
Reuters) as the most popular form of virtual currency.
At the same time, ethical concerns exist with this new
digital currency. The coupling of no regulations, virtually
free movement of value, and a Ponzi scheme–like system
have led renowned economist Paul Krugman to suggest
that “bitcoin is evil.” At the basic level, Krugman argues
that money must be both a medium of exchange and a
stable store of value. Krugman argues that it is unclear to
him why bitcoin should be a stable store of value. Joining
in the discussion, Charlie Stross, the British writer of science
fiction, says that “bitcoin looks like it was designed
as a weapon intended to damage central banking and
money issuing banks, with a Libertarian political agenda
in mind—to damage states’ ability to collect tax and
monitor their citizens’ financial transactions.”
What is the difference between bitcoin and normal
currency, such as the U.S. dollar? Bitcoin is an unregulated
peer-to-peer digital currency that is not backed by
any other commodity such as gold or silver. Bitcoins exist
almost entirely in the digital, online world, although
some bitcoins have actually been privately minted. The
U.S. dollar, like many other stable currencies, are paper
or coin currency issued by a national reserve–type bank
(in the United States, it is the Federal Reserve Bank).
This means that dollars are really Federal Reserve Notes
that are printed or minted at the U.S. Bureau of Engraving
and Printing. The dollar is so-called fiat money,
which means that dollars derive their value from the U.S.
government regulation or law. Interestingly, the United
States decided in 2014 that bitcoins will be taxed as
property, not currency, for International Revenue Services
(IRS) purposes. The IRS defined bitcoin as a “convertible
currency that can be used as a medium of
exchange, a unit of account, and/or a store of value.”
Technically, Bitcoin with a capital B refers to the technology
and network associated with the currency, while
bitcoin with a lowercase b refers to the actual currency.
The philosophy underlying the bitcoin is complete mistrust
in authority or control—basically a perfectly stateless,
market-based approach, with no country or
region-level bank intervention. It is also very technical.
Bitcoins are generated through a process called “mining.”
The mining process involves adding transaction records
to bitcoin’s public ledger of past transactions, which is
called the block chain (i.e., a chain of blocks). Bitcoin
nodes use the block chain to identify legitimate bitcoin
transactions. Even in today’s high-tech world, the mining
process is intentionally designed to be resource intensive
and difficult. This means that the number of blocks found
daily by miners remains relatively steady. So, basically, in
order to “mine” a bitcoin, a person has to solve a complex
mathematical problem using substantial computational
power. There’s a twofold reason for this: It controls the
supply of bitcoins and incentivizes people to maintain the
underlying infrastructure that keeps bitcoins in place.
A unique feature of the bitcoin is that the number of
new bitcoins that are created is intentionally halved every
four years until the year 2140, when it will wind down to
zero. So, starting in 2140, no more bitcoins will be added
to virtual circulation and they will have reached their
maximum of 21 million. Perhaps most people will not
worry about the year 2140 just yet, but it does mean that
there is, technically, a finite supply of bitcoins. Such a finite
number has the potential to adversely affect the value
of bitcoins. Economist John Quiggin argues that this has
resulted in “the finest example of a pure bubble.”
Perhaps more remarkably, bitcoins do not have any
real value per se (compared to gold and silver), which
means that the coin’s value depends on classical demandand-
supply economics, leading many financial experts to
liken bitcoins to a Ponzi scheme, similar to Krugman’s
viewpoint. A Ponzi scheme is a fraudulent investment
operation that returns payment to its investors from capital
paid by new investors rather than from profit earned.
(Charles Ponzi was born in Italy, but became known in
the early 1920s as a swindler in North America for his
unusual money-making scheme.)
Bitcoins have also been the subject of scrutiny by various
governments because of concerns that they can be
used for illegal activities. Some say the cryptocurrency is
unethical because it is allegedly used to buy illegal drugs
and guns and to pay for other illegal activities. Additionally,
given its unique code, once stolen, bitcoins cannot
be returned, and there is no central bank or agency that
can help catch thieves. But, bitcoins have also attacked
the cost of moving money around and have successfully
created a simple measure of value that can be very efficiently
moved around at virtually no cost.
Sources: P. Krugman, “Bitcoin Is Evil,” The New York Times, December 28,
2013; U. Goyal, “Bitcoin and the Future of Money,” Informilo, June 5, 2013;
D. Leger, “IRS: Bitcoin Is Not a Currency,” USA Today, March 25, 2014.
Case Discussion Questions
1. Do you think bitcoins are approaching being
unethical monetary instruments without technically
carrying a value similar to “real” money?
2. If bitcoins are used to buy drugs, firearms, or
other products that are considered illegal in
the country in which the bitcoins are being
used, does that make bitcoins unethical?
3. Do you think the bitcoin system is “evil” as
Paul Krugman suggests? Is it similar to a
Ponzi scheme?
4. Do you think that bitcoins were created as a
weapon intended to damage central banking
and money-issuing banks?
Explanation / Answer
1. I don’t think bitcoins are close to being unethical because they have no “real” backing from government or in gold and silver. In reality people have been spending money that way for years, in the form of credit cards and other online currencies, such as paypal. The only unethical part of bitcoins, is the fact that if your bitcoins are stolen or used by someone who is not you, there is no way to track them and get your bitcoins back.
2. No it does not make bitcoins unethical, because people use actual cash and coins to make those purchases already. Even though bitcoins can’t be tracked like “real” money issued by the government it’s no different with trackable transactions. Even though they can track it, still people are able to buy drugs, weapons etc. with central banks currency.
3. People could call anything “evil”, in fact people do it all the time, labeling movies, books, digital media, etc., evil because they didn’t understand it. Much like all these things, depending on how bitcoins are used and by whom, determining whether or not they are evil. As a tool they cannot be inherently evil. They aren’t like a Ponzi scheme because with a Ponzi scheme, you can keep making money infinitely as long as you can continue bringing innew “investors”. Bitcoins production does have a finite supply, as every four years bitcoin production is reduced by half until the year 2140.
4. I believe that bitcoins were created to try and further evolve the world’s currency into a form that is universal. The biggest issue with them is that as of right now they have no “real” presence and chances of Hacker’s attack are more.
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