Consumer Protection Would Eliminate an Essential Function of Bitcoin

-- By MorreaseLeftwich - 19 Mar 2022

According to its white paper, bitcoin was meant to overcome the “inherent weaknesses of the trust based model” that is being relied upon for transactions over the net. Satoshi Nakamoto presented a few specific benefits, but it was always clear that privacy was probably primary. But while Americans today often raise privacy concerns in their day-to-day lives, most do little to protect our privacy, usually entrusting much of their personal and confidential information to intermediaries. Of course, for most of the relationships formed by such entrustments, there is no legally recognized privilege. Still, for either convenience or insurance, Americans entrust our information to intermediaries anyway. In the case of bitcoin, its technology, which purposefully encrypts the identity of its holders, will not be able to overcome threats to anonymity as Americans continue to allow our concerns for convenience and insurance to predominate.

Without anonymity, Bitcoin cannot facilitate "completely non-reversible transactions" as its founder envisioned

Satoshi Nakamoto argued that bitcoin was better than the status quo because it would do away with the “transaction costs” of the “trust based model.” Those transaction costs are, according to the white paper, a result of the inability of financial institutions to allow for “completely non-reversible transactions.” Given that–the trust-based model’s persisting susceptibility to demurrer under the laws of governments–costs are significant, supposedly “limiting the minimum practical transaction size and cutting off the possibility for small casual transactions.” That may have almost been true, but now there is Zelle. And while it may be true that there are significant transaction costs inherent in the present model reliant on financial institutions, that is similarly true, if not more so, when it comes to bitcoin. Fees for bitcoin transactions are far from nonexistent and the white paper itself envisioned a time when bitcoin transactions would be powered entirely by transaction fees. But the costs are really only comparable if we compare actual money costs. On its face, the whitepaper seems most concerned with the impossibility of irreversible transactions, but anonymity is actually of foundational importance. Satoshi Nakamoto writes that given the status-quo’s reversibility, each party to a transaction must be more wary of the other, “hassling them for more information than they would otherwise need.” He does not expound upon the privacy issue there, but the reason for the hassling is that a party can sue to contest the contract and take their money back only if they know the identity of the transferee. Regardless of whether a financial institution is serving as the medium or a blockchain, so long as identities are visible, lawsuits and reversals can occur. Thus, the anonymity piece really is foundational. However, it is notable that while bitcoin wallet holder identities are directly encrypted, there is no protection from the tracing of transactions that any one wallet participated in. This is just one example of how bitcoin users must actually expend effort to maintain their anonymity, since it can be easily circumvented.

Americans today constantly entrust intermediaries with their information for convenience or insurance

Americans are constantly surrendering the confidentiality inherent in their everyday processes. For example, many people travel to all of their destinations via a ride-sharing service or with the assistance of a navigation app. Potentially most also receive the majority of their income via intermediaries–and that may also be so for those engaging in illegal business, given the incredible convenience offered by applications like Zelle, Venmo, and Apple Pay. The case of those engaging in illegal business is obviously especially interesting, but there are more mundane and widespread examples as well–email, social media, and others.

American governments have set the stage for the trust based model to enter cryptocurrency markets

A few weeks ago, President Biden passed an executive order which was dreaded by the cryptocurrency trading community in the weeks leading up to it. But when it was released, that same community was very welcoming of its contents, which essentially acknowledged both cryptocurrencies’ great potential and concerns over consumer protection. An additional but much prior development has been the creation of cryptocurrency depository institutions by some state legislatures to allow for secure holding with state approval.

Americans will likely bite the bait

At this point, cryptocurrency users have not been vocal about concerns over the lack of insurance when it comes to their virtual coins, which literally disappear when misplaced. But if such concerns are there but just not yet voiced, then the federal government has stepped in to provide a platform. The executive order passed by President Biden did little to change federal policy, but just announced what was already underway, in addition to, most notably, describing the executive branch’s view as it addresses the technology. Essentially, the order admitted the promising nature of the technologies, but raised concerns over consumer protection. This will likely lead to regulations aimed to protect retail cryptocurrency traders, but would also require disclosures that will reduce anonymity. Furthermore, it might influence the rise of cryptocurrency depository services being opened up to retail traders, which would largely eliminate anonymity.