A Tool for Criminals

This is one of the first arguments ever used against bitcoin, and one that some people still use today. The argument can be summarized as follows:

Since bitcoin is anonymous, it is an ideal tool for money laundering, arms trafficking, drug trafficking, and criminal activity in general. Whenever someone demanded a ransom in bitcoin, bitcoin made the news. If the ransom had been demanded in any fiat currency, the story would not have focused on the fact that euros, dollars, or pesos were used, but on the crime itself. The underlying message was clear: if criminals use it, it must be banned.

There are several reasons why this argument does not hold up. First, the fact that criminals use something does not mean it should be banned for everyone. Drug traffickers tend to use fast boats, not rowboats. They also drive expensive cars and live in luxury homes. The luxury homes do not help them commit crimes more effectively, but the boats and cars are fast precisely because they need to outrun the police if necessary. This is not a superfluous feature that just happens to appeal to them as it might to anyone else --- it is an essential feature of their criminal activity that helps them operate. Does this mean we should ban fast boats or expensive cars? Or even all cars in general --- they do not need to be fast. There are criminals who use cars to ram through jewelry store windows and steal the merchandise. Should we ban all cars, then? That is hardly a serious question.

But the list does not end there. Criminals use every technology available to the general public, and even if they use those technologies to commit crimes, we do not want to ban them outright, since the loss to society would be far greater. The list could include mobile phones, instant messaging apps, email, satellite communications, GPS, Google Maps, and any other internet service. In fact, the internet itself --- the entire internet, or the very TCP/IP protocol it runs on --- is, of course, a tool used by “the bad guys”. Today it seems absurd to ask whether we should ban personal computers or the internet, yet in their early years they were attacked with exactly this same argument¹. And in the media, beyond amplifying the negatives, the positives were consistently undervalued.

By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.²

— Paul Krugman

This 1998 quote from Nobel Prize-winning economist Paul Krugman illustrates how arrogance combined with ignorance creates a high risk of being wrong. Mr. Krugman did not learn from his prediction about the internet. In 2018 he wrote in his New York Times column that bitcoin was a bubble;³ in 2021, that it had no meaningful economic impact;⁴ and in 2024, that it has no utility.⁵ When it comes to bitcoin, he continues to demonstrate how dangerous the combination of arrogance and ignorance can be.

It is perfectly normal for the statu quo to magnify the negatives and ignore the positives whenever a new technology comes along --- this is not unique to bitcoin. It happened with the automobile,^{↗ ↗} it happened with electric light,^↗ it is happening now with bitcoin, and it will happen in the future with any disruptive technology that poses a threat to the statu quo.

In the late nineteenth and early twentieth centuries, stagecoach and carriage manufacturers tried to discredit automobiles by claiming they were dangerous, unreliable, and less practical than horse-drawn vehicles. A car could leave you stranded in the middle of nowhere due to a mechanical failure or lack of fuel --- something a horse would never do. Furthermore, the roads were not paved but full of potholes, which posed no problem at all for horses. In England, a law was even passed, known as the Red Flag Act,⁶ which required a person to walk some 50 meters ahead of the vehicle waving a red flag to warn of the danger. The maximum speed was limited to 6 km/h, which is the speed at which a person can walk.

Following Thomas Edison’s invention of the incandescent light bulb, candle and oil lamp manufacturers also used every form of misinformation to cast doubt on the safety, reliability, and cost of electric light. They highlighted cases of electrical accidents and exaggerated the maintenance costs of electrical systems. But just as the automobile prevailed over horse-drawn carriages and the incandescent bulb prevailed over candles and oil lamps, the same will happen with bitcoin. It is a far superior technology with many more advantages than disadvantages, and sooner or later, reality will prevail.

We could end this chapter here, since we have already established that the fact that some criminals use a certain technology is not sufficient reason to ban it. But in the specific case of bitcoin, there is a nuance of this criticism worth examining. If only bitcoin were as anonymous as its critics claim. Unfortunately, it is not. A bitcoin transaction is recorded on the public blockchain and is permanently accessible to anyone who wishes to look it up.

Critics say that even though transactions are public, they are anonymous because no identity is associated with the addresses. But bitcoin is not anonymous --- it is pseudonymous. And that subtle difference is a strong enough disincentive for it to be used as payment for criminal activities. There are already companies dedicated to deanonymizing the blockchain --- that is, linking addresses to identities. At the moment a transaction is made, perhaps no one knows who sent it or who received it. And if no one has an interest in finding out, it is possible that no one will investigate and the identities will remain unknown. But if a criminal act has occurred, an investigation will be launched. And all the information is public and accessible to anyone --- no court orders are needed to compel a bank to disclose certain movements. Criminals do not seem enthusiastic about the idea that their transactions will be permanently public for all eternity, even if only a bitcoin address and not a name appears. They are well aware that the moment someone manages to link that address to an identity, all the information will be there for the taking.

The traditional banking system, by contrast, is far more opaque --- which is essential for payments related to criminal activity. It is a much safer environment for criminals to conduct their transactions. And this is not merely theoretical: in practice, commercial banks are the primary tool for money laundering. JP Morgan Chase,⁷ Goldman Sachs,⁸ Bank of America,⁹ Wells Fargo,¹⁰ Citigroup,¹¹ U.S. Bancorp,¹² HSBC,¹³ Barclays,¹⁴ Standard Chartered,¹⁵ UBS,¹⁶ Credit Suisse,¹⁷ BNP Paribas,¹⁸ Société Générale,¹⁹ Crédit Agricole,²⁰ Deutsche Bank,²¹ Commerzbank,²² Santander,²³ BBVA,²⁴ ING,²⁵ UniCredit,²⁶ Danske Bank²⁷… an almost endless list of major commercial banks have paid, and will continue to pay, fines for money laundering and other fraudulent financial practices. To say they will continue paying is to venture a prediction about the future, which is generally inadvisable, but in this case it is quite likely, because the reality is that commercial banks do very good business with criminals --- providing financial services to criminals is far more profitable than providing services to the vast majority of ordinary people. As long as no executives go to jail, the only calculation required is whether the criminal business exceeds the fines to be paid. Criminals are happy to pay a ten percent commission on a transaction, as long as their activity remains invisible or allows them to launder money obtained through criminal activity. Law-abiding citizens, on the other hand, are not willing to pay such commissions. The relationship between commercial banking and criminals is almost a perfect symbiosis.

If criminals were to use bitcoin, everyone would lose. On one hand, their transactions would be permanently exposed to public scrutiny; on the other, commercial banks would lose their lucrative commissions. The next time we hear Jamie Dimon²⁸ speak about how harmful bitcoin is, we should remember that JP Morgan has paid over 35000 million dollars in fines for money laundering and other criminal activities over the past 25 years²⁹, including the largest fine ever paid by a company³⁰. The business must be quite lucrative for these fines to be worth paying…

From all of the above, we can draw two conclusions: first, there is no sense in banning a technology simply because some criminals use it; and second, it is not even a good idea for criminals to use bitcoin for making or receiving payments in exchange for criminal activity. For both of these reasons, we can say that this criticism is, at the very least, unfounded --- and in some cases, self-interested and malicious.