Bitcoin: Understated benefits and overstated risks

In fact, a new study released by the Mercatus Center, “Bitcoin: A Primer for Policymakers,” details some of the innovative applications in the Bitcoin economy that the public debate may not fully appreciate. Before regulators rush to mitigate anticipated harm, they should first understand how this technology works and how it can improve lives.

First, Bitcoin is a promising way to lower transaction costs. Credit card companies charge merchant fees that are often prohibitively expensive for small businesses. Small-business owners face the hard trade-off of either refusing to accept credit card payments and losing business or accepting card payments and losing money by eating the costs. Transaction fees with Bitcoin are negligible and can save money for cost-conscious businesses.

Consumers, too, could benefit from these lower transaction costs in the form of lower prices. This is the business model of the Bitcoin Store, an online electronics retailer that only accepts Bitcoin transactions. Bitcoin allows sellers to charge only $436 for a Samsung Galaxy Note at the Bitcoin Store that currently sells for $517 on Amazon.

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Similarly, these lower transaction costs will greatly benefit people who send global remittances to their relatives in developing countries. Traditional wiring services, like Western Union and MoneyGram, may charge steep fees of up to 10 percent of the amount transferred and take days to process. With instantaneous transfers and fees of less than 1 percent, Bitcoin could significantly lower the cost of sending remittances—which amount to more than $400 billion annually.

Second, Bitcoin may provide affordable access to financial services for the world’s unbanked population. With Bitcoin, accessing the financial world is as easy as downloading an application on your phone. The popular mobile payment system, M-Pesa, recently added Bitcoin payment options for customers in Kenya. The world’s less affluent may stand to gain the most from the ease and affordability of making Bitcoin payments.

Countries with poor monetary management will also benefit from Bitcoin. Strict capital controls and high rates of inflation led to a surge of Bitcoin downloads in Argentina. Some even suggest that the Eurozone crisis drove the use of Bitcoin in distressed countries. Bitcoin increases the number of monetary options available to people in dire situations.

Finally, Bitcoin could be a democratic tool to ensure a basic level of freedom of speech around the globe. Dissident activists in authoritarian countries now no longer need to fear that their government will block payments for blogging services. Bitcoin places power back in the hands of the people.

These are just a few of the innovations to materialize so far. Built within the Bitcoin protocol are capabilities to develop other financial innovations, like notary services, encrypted communications, and “smart” collateral contracts. Developers and businesspeople are still learning the myriad applications for this innovative technology.

Just as the public debate understates some of the benefits of Bitcoin, it also overstates some of the concerns. The hypothetical crimes that Bitcoin may enable are traditionally committed with cash, but policymakers would never dream of criminalizing cash. Instead, they regulate the use of cash. Regulations targeting Bitcoin could adopt this time-tested approach.

What’s more, Bitcoin may not be an ideal vehicle to commit these crimes. Bitcoin is not actually anonymous, but pseudonymous. Each Bitcoin transaction is verified and recorded in a public ledger by all computers running the Bitcoin network. Criminals using Bitcoin will leave a perpetual smoking gun in the public ledger that could tie their identities to the illegal transactions. For this reason, criminals may opt to continue using their favorite currency of choice, the U.S. dollar, instead of using Bitcoin.

Policymakers understandably worry about the risks stemming from a new technology, but effective policy will also consider the substantial benefits that Bitcoin may provide. The risk of lost benefits from overregulating this promising technology appears greater than the risk of its criminal use, and that is an outcome that no policymaker should want.

Castillo is a program associate with the Mercatus Center at George Mason University and coauthor of the newly released study, “Bitcoin: A Primer for Policymakers.”