Is That a Feature or a Bug? – Keith Weiner


by Keith Weiner, Sprott Money:

We have covered many reasons why bitcoin is unsound and not money. It’s a ledger of unbacked liabilities. It is designed to have finite quantity but therefore indeterminate and hence volatile value. This makes it unusable for borrowing or lending and hence savings, but a great a vehicle for conversion of one person’s wealth into another’s income. It is not a commodity—discussion of the usefulness of the network notwithstanding—nor is it backed by a commodity or any asset. It is a perfect, cryptographically secure record—of itself. People use it to get rich quick. In other words, it’s the very model of a (post)modern monetary marvel (OK, Keith is not the next Gilbert and Sullivan).

And bitcoin has a questionable feature. Transactions are irreversible.

First it should be addressed that irreversible transactions have an appeal to merchants. Everyone who sells on eBay knows the frustration of shipping merchandise to a customer only to have the customer claim it was never received. Merchants would surely love the idea that once payment is made, it cannot be unmade.

However, there are good reasons why our payments system was designed as it is. Sometimes there is a clear mistake. No one has an interest in allowing the payee to keep $100,000 when $10,000 was the purchase price of the used car. No one wants to see Jon Schmidt get the money that was intended for John Smith. There is also the occasional case of fraud. If someone breaks into your account, you want recourse to recover the lost funds. Irreversible transactions are not a dream come true for consumers who are defrauded by merchants.

Consider that bitcoin’s designer, Satoshi, built the system so that transactions cannot be reversed. Is this a merchant’s dream come true? Or a criminal’s? Qui bono (who benefits?) It is hard to even think of a good legitimate case for this.

Now also consider that bitcoin was designed so payments can be sent and received anonymously. You not only cannot reverse a transaction, but you don’t even know who got it, so there is no way to know who to sue in court. Your money (well your bitcoin) is irretrievably lost.

The combination of irreversible and anonymous may still seem to have some legitimate appeal, but let’s acknowledge the elephant in the room. It’s perfect for criminals. Anyone who sells fake driver’s licenses or murder for hire would love it.

As an aside, bitcoin’s anonymity is not perfect. The ledger shows every transaction, which means that if your identity is ever discovered, anyone can go through the history of what you have done. For example, if you sell bitcoins in an account at an exchange, and wire the dollars to your bank account.

To address this problem, there is the bitcoin mixer. It is designed to mix up your bitcoins with the bitcoins of others who also want to hide the identity of their coins and their origin. It seems almost as if it is designed for money laundering. While irreversible transactions may have some legitimate use cases, this is a whole ‘nother beast. If you steal millions of dollars of bitcoin from an exchange, hack a DAO, sell rocket launchers to terrorists, or even infect companies with ransomware, the mixer is great. You need a way to get paid, without anyone being able trace your loot.

It’s just like bags of cash left in the phone booth at 2am across the street from the all-night diner (as we recall from detective shows in the 1970’s), only better. In those shows, the bad guy always demanded “unmarked” bills, but no one ever clearly showed what “marked” vs. “unmarked” looked like. Well (we assume) bitcoins that have been tumbled are unmarked.

Irreversibility, anonymity, and untraceable unmarked bills. That may still sound attractive to a consumer, an end user of the system. However, that is not the main question, which is: are these desirable features for businesses who sell you things? Are they appropriate features for financial businesses who ask you to trust them with your life savings?

If no trust is possible, if civil society ever breaks down so far that no one can trust anyone else, that transactions are conducted between two armed groups with cash exchanged for goods under cover of more armed men with rifles, then we will have arrived in Keynes’ long run—a dark age. This has not happened just yet. So let’s continue with our inquiry into the nature of anonymity, irreversibility, and untraceability.

It takes us now to the concept of transparency. Let’s look at some examples outside finance. A grocer sells tomatoes labeled “locally grown”. Consumers want to be able to trust the label, and not have to be suspicious that they were really grown in Venezuela. If E Coli breaks out, everyone has an interest in tracing the tainted produce back to the packaging plant or farm which introduced the bacteria.

If a solar panel company tells you that its panels generate 15 watts per square foot, you want to trust that it is not only telling the truth but the whole truth. Is this figure for residents of a high altitude southern desert like Albuquerque or is it for a northern city like Oslo?

If an electric car company claims that its HEPA air filter is good enough to block biological warfare agents, buyers want to know if this has been validated by a credible third party.

It’s one thing if such marketing claims are mere puffery. We don’t know if any Tesla buyers are planning to drive through war zones where anthrax bacteria are in the air. We assume it is more about so calledbragging rights:

“Oh yeah, your 911 turbo S can out-accelerate my Tesla in super-duper ludicrous insane mode?! Well can it do it under conditions of biological warfare??”

It is quite another when a company custodies client assets, or brokers or conducts financial transactions. A responsible financial business thinks constantly about—and establishes systems and controls for—conflicts of interest, unsustainable structures, shady transactions, and all factors which affect pricing or execution for its clients. For example, Monetary Metals publishes graphs of the offers that set the gold interest rate in its lease auctions.

You would expect disclosure statements, documented processes, guidance from a credible law firm, and an auditor—not to mention due diligence. Conversely, if a firm seems optimized to avoid government scrutiny, if there is no way to discover who owns it much less its liabilities, then it may not be seeking to build a great business for the long term.

Like it or not, we live in a world which is demanding more transparency from the companies we trust. And consumers and savers should like it.

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