The Hamartias of Digital Currency: Discussing the Effectiveness of Cryptocurrencies
By: Andrew Sveda, Contributor
In the wake of Edward Snowden’s leak of NSA surveillance programs in 2013, the public has only increased its skepticism of the government and corporations. Many Americans, in fear of a rising Orwellian reality, have been striving to evade these institutions on many levels; one of the most popular tactics is an investment in decentralized, electronic currencies such as Bitcoin, Ethereum, or Dash. Instead of having banks or credit card companies review one’s purchases, customers can directly transfer digital currency to the other party, making this process unregulated, extremely convenient, and cheaper than credit cards. Despite the benefits of digital currencies, however, a cryptocurrency is a poor monetary system because of its volatility, security and legality concerns, and abridgment of privacy rights.
Yet it is vital to first understand the necessities of a proper monetary system. First, a monetary system must be investable, meaning that a person must feel comfortable placing their money into it. It is consequently essential that the currency must be transferable to other forms of payment in order to set a fair evaluation of the currency’s “strength” and lay a foundation of public confidence. This market value, nevertheless, must be subject to only a modest volatility, so as to reassure its bearers of its continuing stability and promise. In addition, an investable system must be reasonably safe; that is, the organization must observe rigorous security standards to protect the holdings of its investors and make theft an uncommon occurrence. Of course, an investable system also depends on the value of the currency. For example, Zimbabwe’s recent financial crisis forced its government to offer five U.S. dollars for “175 quadrillion . . . Zimbabwean dollars,” rendering the money practically worthless — making it “a good conversation starter” instead of actual money. In other words, an investable monetary system requires a degree of respect from the international community; if it lacks this, reasonable consumers will not deposit money in such an organization. But above all else, an investable financial system must conform to the laws of the country which it inhabits. It must, among other obligations, attempt to fight fraud and illegal transactions for few would endorse a corporation that did not. Aside from investability, a monetary institution also must be easily accessible for the sake of relative convenience.
Beyond these criteria, however, this organization must keep a certain degree of privacy. While it is not imperative that these organizations create complete anonymity (since that would make it impossible to curtail black market trading, scams, and other illegal activities), it is critical to maintain a certain level of privacy. Specifically, a financial system must, at least, respect a privacy of “intimacy,” which, as defined by the late Columbia professor and author Alan Westin, “is the state of disclosing information only with an in-group environment.” This information, however, must be relevant to that institution’s law enforcement and security endeavors for this privacy to be sustained.
While cryptocurrencies, such as Bitcoin (the world’s leading digital currency), do meet a portion of the requirements, they lack sufficient criteria necessary to be defined as a “good monetary system.” Transactions using digital currencies are very convenient and inexpensive, not to mention the fact that Bitcoin is “the most valuable currency in the world.” Nevertheless, even though the value of Bitcoin doubled in 2016 and Ethereum has increased by more than 5,000% this year, cryptocurrencies are subject to extreme downward volatility, too. Duke finance professor Campbell Harvey estimates that Bitcoin “is five times more volatile than the S&P 500,” making it “an extremely risky investment.” Even Bitcoin’s official website concedes that its product “is still experimental” and “should be seen like a high risk asset.” Thus, digital currencies’ drastic, sudden fluctuations do not portray it as an investment for the average American, but more as a gamble for the wealthy.
Even if some investors do make a profit from digital currencies, these users are still susceptible to security breaches. In fact, there was a 32% difference between the percentage of cryptocurrency markets breached from 2009-15 and those of American banks during the same time period. Only last year, Bitfinix, a widely used and revered “dollar-based exchange for bitcoin,” was infiltrated by hackers, who stole around “$72 million” from individual users, prompting the company to seize 36% of each user’s holdings to compensate for the loss. Although Bitfinex has promised that its members “will be compensated for these losses with tokens of credit,” many investors still have lost enormous amounts of money. One investor confessed, “I lost a small amount [$1,000] compared to others, but I know of traders who lost millions of dollars worth of bitcoins.” This compensation strategy, however large or small it may be, is not even a guaranteed right of cryptocurrency users, since the users of the infamous Mt. Gox exchange lost half a billion dollars in Bitcoin and still await retribution after a heist in 2014. While some may claim that, as a young method of exchange, these companies simply require time to develop an effective security system, this is not necessarily the case. Tyler Moore, a cybersecurity professor at the University of Tulsa, laments that he is “skeptical there’s going to be any technological silver bullet that’s going to solve security breach problems. No technology, cryptocurrency, or financial mechanism can be made safe from hacks.” Therefore, in the near future, cryptocurrency will remain uninvestable as it is both volatile in prices and extremely vulnerable to cyberattacks, resulting in the loss of millions from the pockets of investors.
Furthermore, cryptocurrency organizations have failed to obey the United States’ laws, and the Department of the Treasury has even fined “one of the largest virtual currency exchanges by volume in the world,” BTC-e, over 110 million dollars “for willfully violating U.S. anti-money laundering” mandates by “facilitating transactions involving” crimes from “identity theft” to “drug trafficking.” Clearly, in addition to being highly volatile and unsafe, some digital exchanges are dangerous and illegally-run institutions, resulting in the loss of respect for digital currency and traders’ hopes of fiscal soundness.
To make matters worse, cryptocurrencies do not present their users adequate privacy. Despite the many assumptions involving decentralized cryptocurrencies, its users do not exercise complete anonymity, as that would make it even more difficult for the upstanding blockchain to unveil illegal activity. Instead, unlike a credit card, records of all negotiations done through Bitcoin are forever made public, meaning that Bitcoin users can view every transaction and note the addresses involved. Furthermore, customers are ordinarily required to disclose “their identity” at the end of a transaction, thus creating a traceable account. Therefore, it should not be surprising that a study at Princeton University indicated that “unique linkage [of Bitcoin account to individual] is possible in over 60% of cases.” Additionally, despite attempts to shield one’s identity through organizations like CoinJoin (which allow multiple consumers to pay under the same transaction) identification, after only three purchases on the site, can be as high as “98%.” While Bitcoin may advocate for its users to create a separate address for each transaction, another study has concluded that “in a typical university environment. . . the profiles of 40% of Bitcoin users [can be uncovered] even if these users try to enhance their privacy by manually creating new addresses.” Thus, even if one continually changed their Bitcoin address, there is still a large probability that their true identity can be uncovered; the consequences of such an action could be disastrous. While it is necessary to relinquish some privacy for the sake of security, this sensitive information should not be openly accessible to the general public (recall Westin’s definition of the privacy of “intimacy”). Thus, digital currency’s attempt at secrecy has actually allowed for a large possibility of threats to one’s privacy.
In a world that is becoming increasingly digitalized, it is essential that the rising generations understand the concerns with digital currencies like Bitcoin. It is imperative that we send a clear message: digital currencies are not, and will not be, a viable alternative to the status-quo. If the youth of today do not stand up to a digital currency, we may see the slow erosion of our security and privacy — “a Path to Authoritarianism” if manipulated correctly.
Thus, digital currencies are poor monetary systems because they are not investable and they sacrifice their user’s privacy rights for the sake of “transparency.”
Image Credits: https://steemit.com/steemit/@taimoorabbas/all-about-cryptocurrency