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Last week's advisory from the US Consumer Financial Protection Bureau
(CFPB) warning consumers about the risks of virtual currencies such as
bitcoin diligently listed several obvious risks, but simultaneously
omitted the very consumer protections provided by certain cryptographic
monies.
Citing malicious hackers, potentially high mark-up fees,
exchange-rate volatility, lack of governmental insurance, and risk of
private key loss is laudable given that so few market participants
conduct proper due diligence before jumping in to a new alternative. The
majority of companies involved in the bitcoin ecosystem have been
highlighting these risks for years.
To be fair, the CFPB charter may not include stressing the particular
benefits of some payment methods over others. However, when the words
'financial protection' are in your agency's official name, it appears
disingenuous to intentionally omit features from what may be one of the
world's most protective financial instruments ever designed.
Who benefits most?
Bootstrapping a competing free-market alternative in a field of
national currencies with so many pre-existing and unfair legal tender
advantages resembles the solving of the great chicken-or-the-egg
debate: which came first, the merchant or the consumer?
A recent New York Times article on bitcoin merchants sparked an instructive debate
about whether bitcoin was mostly a payment method benefiting merchants
or if consumers also gained substantial benefits from the digital
currency.
Merchants need an incentive to accept the new currency before
consumers can spend the new currency. And similarly, consumers need
reasons to hold the new currency before merchants can accept it. The CFPB advisory warning does little to instill confidence in the latter.
Therefore, in order to better assist consumers, I will describe some of bitcoin's superior attributes in the area of financial protection:
1. Protection from counterfeit bank notes
As the most counterfeit-proof currency in existence today, bitcoin protects consumers from the risk of accepting or receiving counterfeit bank notes in commerce, which continues to plague the world's fiat note issuers. By virtue of the innovative bitcoin block chain,
transactions are chronologically recorded in a shared database
preventing double-spending and it is computationally impractical to
modify once recorded in the chain.
2. Protection from financial surveillance
Just as massive digital surveillance of our email correspondence,
telephone conversations, instant messaging, and web surfing habits has
escalated in the last 20 years, so has surveillance of our income,
spending, and financial transactions. Individuals and corporations are
under the financial microscope now more than at any time in history – a
fact that has significantly eroded any remaining vestiges of financial
privacy. As we move from a paper money world to a digital money world,
maintaining our analog equivalent rights becomes a necessity.
Governments crave this information in the name of preventing money
laundering, fighting terrorism, collecting taxes, and fighting the drug,
gambling and pornography wars. Bitcoin restores the balance with
financial privacy and financial sovereignty by placing responsibility
for how transparent we want to be in the hands of the user where it
belongs, hence user-defined privacy. This is also permission-less
privacy and, if opted for, it includes total balance privacy in addition
to transaction date, type, amount, and recipient privacy.
3. Protection from identity theft
Bitcoin provides excellent protection from both identity theft and
fraudulent charges, primarily because it functions as a push-method
rather than a pull-method for personal financial details. Since account
details and identity are not transferred to the merchant for payment
purposes, the potential for malicious hackers and internal corporate
security breaches are reduced to zero. With current payment
methodologies, however, identity theft and resulting consequences to the victims are significant negative issues.
4. Protection from physical loss of assets
In this sense, bitcoin is virtual, however the comparison is to
trusting the safekeeping of your assets to a third party like a
financial institution or wallet provider. Of course, when utilizing a
third-party, a host of new risks is introduced which government
regulation and government deposit insurance seek to address. But, not
using bitcoin because it doesn't come with government assurances is like
not flying because you might fall out of the sky.
Bitcoin possesses the option of simply not having to trust a
third-party intermediary and, in this way, it resembles a digital bearer
instrument such as gold or paper cash. However, bitcoin's unique
exceptions include the ability to safely backup your assets multiple
times and to transfer them digitally without sacrificing their bearer
nature.
5. Protection from cross-border restrictions and excessive fees
Some money services businesses and financial institutions charge
exorbitant fees just to execute a simple monetary transfer often preying
upon those that are most financially vulnerable. Other countries
severely restrict the amount and type of national currencies that may
enter their borders causing hardship
for many American citizens and residents needing to transfer living
funds to family members overseas. Without requiring an intermediary,
bitcoin insulates individuals and businesses from these detrimental
restrictions and fees.
6. Protection from payment blockades
Blockades such as these are typically enacted in the name of
'political correctness' as witnessed by the aggressive payment blockade
against WikiLeaks
in 2011. As the US government leaned strongly on payment processors
Visa, MasterCard, and PayPal to discontinue donations to the
whistle-blowing site, donations in bitcoin continued to provide a
valuable method for WikiLeaks to maintain an ongoing financial stream
for operations.
7. Protection from government-sponsored inflation
As the so-called 'hidden tax', inflation represents one of the most
insidious methods ever devised by governments to boost their wealth at
the expense of the fleeced middle-class. Without significant assets to
appreciate and keep pace with government-induced inflation, it is the
poor and middle-class that suffer the most during inflation, despite the
fact that the decline in purchasing power may only be noticeable over a
longer time horizon. Bitcoin, with its fixed and predictable supply, provides a store of value alternative to the currency of nations with printing presses run amok.
8. Protection from confiscation
Arbitrary and capricious confiscation of assets has emerged as a new trend among debt-saddled countries in the euro zone. Cyprus and Spain
are two examples, but any government with control over its banking
system assets has the potential to enact a 'deposit levy' or a 'wealth
tax' if revenues from taxation are insufficient to meet ongoing
government obligations. The protections afforded by bitcoin in this area
prevent loss of wealth due to random government asset seizures.
Let the buyer beware
Today, I was reminded that Confucius once said: "The beginning of
wisdom is to call things by their proper name." So, let's not forget the
ongoing bitcoin word game played by governments and other wordsmiths.
Confucious
said, “The beginning of wisdom is to call things by their proper name.”
- See more at:
http://blog.gryfencryp.to/2014/08/17/cryptocurrency-and-the-return-to-free-markets/#sthash.v7h8EVMU.dpuf
Confucious
said, “The beginning of wisdom is to call things by their proper name.”
- See more at:
http://blog.gryfencryp.to/2014/08/17/cryptocurrency-and-the-return-to-free-markets/#sthash.v7h8EVMU.dpuf
Confucious
said, “The beginning of wisdom is to call things by their proper name.”
- See more at:
http://blog.gryfencryp.to/2014/08/17/cryptocurrency-and-the-return-to-free-markets/#sthash.v7h8EVMU.dpuf
Confucious
said, “The beginning of wisdom is to call things by their proper name.”
- See more at:
http://blog.gryfencryp.to/2014/08/17/cryptocurrency-and-the-return-to-free-markets/#sthash.v7h8EVMU.dpuf
While we should definitely heed the risks within a digital currency
environment, just as we heed the risks inherent with physical money, we
should be equally aware of the additional financial protections provided
by bitcoin that are so critical for maintaining a free society. Caveat
emptor!
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