A member of the U.S. House of Representatives last week called for a bill outlawing Americans from making cryptocurrency purchases, aligning with anti-cryptocurrency policies and approaches in countries such as Iran and Egypt. There is no language for this potential bill or any explanation of whether such a bill would ban Americans from buying cryptocurrencies, using cryptocurrencies to make other purchases, or both. Nonetheless, it’s a good moment to remind everyone why a bill outlawing cryptocurrencies is a terrible idea.
Attempts to ban cryptocurrencies are often rooted in fundamental misunderstandings.
Attempts to ban cryptocurrencies are often rooted in fundamental misunderstandings. One common refrain is that criminals use cryptocurrencies to facilitate illegal activity, and thus we should ban cryptocurrencies to hamper that illegal activity. This is wrong for several reasons: first, it ignores the many entirely legal uses for cryptocurrencies that already exist and that will continue to develop in the future. Cryptocurrencies have been used for a decade to store and transfer value with near-zero transaction costs and no need for intermediaries like banks. As more applications make holding and exchanging cryptocurrencies easier, everyday consumers are using cryptocurrency regularly for innocuous activities like buying furniture on Overstock.com and sending money to family members overseas. And innovation related to cryptocurrency technology is giving rise to more use cases: for example, some cryptocurrencies enable programmers to write computer programs (so-called “smart contracts”) that automatically transfer cryptocurrency to others upon certain conditions being met. These are just a few examples of the many potential uses of this technology that a ban on cryptocurrency would undermine.
The fact that a technology could be used to violate the law does not mean we should ban it. Notably, criminals have long used cash—which, like some cryptocurrencies, allows for greater anonymity—to aid in committing crimes. But we don’t call for a ban on cash as a result, and we don’t blame Ford when one of its cars is used as a getaway vehicle in a bank robbery. Nor would such a law likely stop criminals from using cryptocurrency, since criminals are, by definition, more willing to violate existing laws. Ultimately, banning cryptocurrencies would rob Americans of opportunities to access potentially significant technologies, and have no real impact on criminals abusing these tools.
We’ve seen this line of reasoning before. Critics of end-to-end encryption and Tor have claimed criminals can hide behind the privacy-protective functions of such technologies. But the increased anonymity and privacy-enhancing features of some cryptocurrencies are part of what make the technology so potentially important. To date, many cryptocurrencies are not terribly private; transactions are recorded on permanent public ledgers, and while users are identified with pseudonymous public keys, this is far less privacy-protective than using cash. There are promising new approaches to developing more private cryptocurrencies. However, none of those tools has yet reached the widespread popularity of Bitcoin or Ethereum. As the rise of privacy-protective cryptocurrencies begins to gain traction, it’s important we don’t let regulatory backlash prevent these tools from reaching people.
Our financial transactions paint an intimate portrait of our lives, often exposing our religious beliefs, family status, medical history, and many other facets of our lives we might prefer to keep private. Yet American laws do not adequately secure financial privacy. Rather, there is a patchwork of limited protections. These include the Gramm-Leach-Bliley Act (which requires banks to notify you about their information-sharing policies and give you some opportunity to opt out); the stronger California Financial Information Privacy Act (if you happen to be Californian); and the Fair Credit Reporting Act (which is primarily focused on credit and not financial transactions). That’s why new tools that people can use to protect the privacy of their own financial transactions are so appealing: they offer a technological solution to protecting consumer privacy when the legal rights aren’t as robust or enforceable as we would like. A bill banning cryptocurrency would cut off this pro-privacy innovation, chilling the development of new technologies that might protect financial privacy before they have any chance of being developed and widely adopted.
Cryptocurrency innovation also holds the promise of righting other power imbalances. There are millions of people living in the United States who cannot obtain a bank account because they don’t have appropriate government-issued identification, don’t have a permanent physical address, fear exposing their home address for safety reasons, or have a history of unpaid bank fees. The Fair Credit Reporting Act requires banks to tell consumers why they are denied an account, but doesn’t guarantee them a bank account. Cryptocurrency may eventually help many of these unbanked individuals get access to financial services.
Cryptocurrency is also naturally more censorship-resistant than many other forms of financial instruments currently available. At EFF, we’ve tracked numerous websites engaged in legal speech that faced financial censorship, often with little recourse. These include a social network for kinky people, a nonprofit supporting LGBTQ fiction, an online bookseller, and most famously the whistleblower website Wikileaks. Cryptocurrencies provide a powerful market alternative to the existing financial behemoths that exercise control over much of our online transactions today, so that websites engaged in legal-but-controversial speech have a way to receive funds when existing financial institutions refuse to serve them.
These ideas are not new. Censorship-resistance and privacy are attributes of cash, which people have enjoyed for thousands of years. Cryptocurrencies offer a pathway for bringing those attributes into our online world.
This is not to imply that cryptocurrency has achieved all of these goals. In fact, many watching the space have expressed frustration and skepticism about whether cryptocurrency can ever execute on some of the hopes of early adopters. But even the staunchest cryptocurrency critic should be concerned about how misguided regulation in this space might constrict the legal rights of coders.
As with many new technologies, the cryptocurrency ecosystem faces serious challenges. These include fraudsters taking advantage of people’s ignorance about technology to scam them, problems around achieving true decentralization of control, strong security in the applications built on top of cryptocurrencies, and the opportunity for entities holding cryptocurrency keys to abuse that access. These problems likely require responses that are technological and community-driven. In some instances, laws may be appropriate. But thoughtful laws regulating cryptocurrencies must focus on those who abuse the technology for fraud, not everyday consumers.
Crafting such laws requires a lot of care. Any such law would need to provide a significant on-ramp for emerging technologies, clear protections for anyone engaged in non-custodial services that technically aren’t able to exchange or take cryptocurrency from users without their participation, and strong protections for people who are merely writing and publishing code. These laws must also be technologically neutral, to avoid enshrining one particular cryptocurrency into law in ways that have unexpected consequences for projects with similar functionality.
Finding the right balance for regulating cryptocurrency requires that lawmakers protect consumer rights and foster innovation. Banning Americans from cryptocurrency purchases is short-sighted and anti-consumer, and falls far short of that standard.
With thanks to Marta Belcher, who provided feedback on an early draft of this post.
UPDATED 5/15/19: Added links and additional language to give more context to the approaches in Iran and Egypt on cryptocurrencies.