Part 4: Bitcoin

Note: This content is still evolving and will undergo significant revisions.

Bitcoin is a significant topic in this book, especially in contrast to the previous sections that focused on historical perspectives. Instead, this discussion will largely look ahead. My own journey with Bitcoin began in 2011 when I attempted to mine it but ultimately failed. I found someone willing to sell me Bitcoin for about $100. Unfortunately, shortly after acquiring it, the value plummeted over 50%. This misfortune led me to dismiss the experience as a scam and I subsequently deleted my wallet. Over the years, I’ve been asked if I regret that decision or if I could access those lost bitcoins. The answer is no; I understand that I would likely have sold them long before their value soared to $2,000, let alone $70,000. My pragmatic nature led me to remain a mere spectator of Bitcoin for nearly ten years.

In 2016, I authored a series of articles on anti-money laundering laws for the Banking Law Journal, dedicating a few pages to Bitcoin, yet I did not fully engage with it again for another four years. As I proceed, I assume that many readers are already familiar with Bitcoin; however, for those who aren’t, I will provide a brief overview. This summary is adapted from my earlier work on money laundering, aimed at a general audience and explaining Bitcoin's essential functions.

Bitcoin is one of the most recognized forms of digital currency. It operates on a decentralized model using a peer-to-peer (P2P) network. Its core feature is a public ledger known as the blockchain, which records all transactions between users. This ledger is maintained by users running Bitcoin nodes, ensuring decentralization. To authenticate transactions, Bitcoin employs a unique approach based on asymmetric cryptography, where each user possesses two linked keys: a public key visible to all and a private key known only to the user.

The public key allows for a transparent record of transactions, while the private key is required to send or access funds. Once funds are transferred, only the recipient can access them via their private key, preventing the sender from reclaiming them. The public ledger makes it impossible for the recipient to deny receipt, as the transaction is recorded and verifiable. The decentralized nature of the system means there is no central authority overseeing these records; instead, transactions are validated by "miners" who use computing power to confirm transaction details, adding them to the blockchain and earning new bitcoins in the process.

While Bitcoin is often viewed as an anonymous payment method, the existence of a public ledger means a record is always kept. Users can employ various methods to obscure their digital footprints, but researchers at the University of California, San Diego (UCSD) have demonstrated that they can trace transactions back to exchanges where regulatory authorities can intervene. Although individual transactions can be difficult to trace, using large amounts of Bitcoin will likely require interaction with exchanges, making anonymity challenging. While enhanced protocols could improve transaction privacy, they demand considerable technical expertise, which is not common among the general public.

As it stands, Bitcoin is not an ideal medium for everyday transactions, particularly for those who prioritize anonymity, like activists in oppressive regimes. However, fiat currencies share similar issues, which often only surface during international exchanges. For instance, in the film industry, companies often license films for international distribution, but fluctuating foreign exchange rates create significant challenges. License fees are typically based on box office performance, but since these earnings are collected in local currencies, the risk of exchange rate changes complicates financial settlements. Contracts governing these transactions are complex, leading to disputes as each party seeks to optimize their financial outcomes.

Furthermore, fiat currency transactions face their own anonymity hurdles, particularly when large sums are transferred internationally. Criminal organizations often resort to cash smuggling to avoid detection, carrying millions across borders. In comparison, Bitcoin transactions are generally faster than traditional international wire transfers, which are subject to government control, making Bitcoin's seven transactions per second seem remarkably quick.

Ultimately, Bitcoin functions similarly to any other currency without sovereign backing, floating within the market like all other monetary units. This creates the same challenges as traditional currencies, but they are often more visible to users. Each Bitcoin holder effectively operates as an independent entity, subject to the same cross-border transaction limitations faced by sovereign nations.

I emphasize this context because the Bitcoin Whitepaper is titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” The author, Satoshi Nakamoto, mentions various potential uses for Bitcoin akin to cash transactions. For instance, it is stated early on that a system is needed allowing two parties to transact directly without a trusted intermediary.

Recalling the definitions of money from the first part of this book, we find:

1. A medium that facilitates value exchange in low or no-trust situations.
2. A medium for extracting value through taxation from the efforts of individuals or groups.
3. An asset that appreciates in value parallel to the sovereign's increase in monetary supply.

It appears that Nakamoto's primary intention was to fulfill the first definition. He showed little interest in creating an efficient tax mechanism for governments and considered the appreciation of Bitcoin as a possible outcome. In a 2010 forum discussion, he speculated on a scarce metal with unique properties that could facilitate wealth transfer over distances, indicating that even without intrinsic value, people would likely adopt something as currency.

In conclusion, while I acknowledge that many may find value in Bitcoin as a transactional medium, I personally see limited utility in using it for everyday purchases. The ability to buy coffee or illicit goods with Bitcoin seems trivial in the broader context. Additionally, I remain skeptical about the viability of a Bitcoin-backed sovereign currency due to the inherent challenges in auditing and managing its issuance, which could lead to the same pitfalls that caused the collapse of the Bretton Woods system.