Cryptocurrencies have been quite the topic of interest over the past year, as Bitcoin (“BTC”), the first and most famous of all cryptocurrencies, soared from $370/BTC on November 30, 2016 to around $11,000/BTC on November 30, 2017 – a 2,900% increase in value over one year. With 16.7 million Bitcoins (out of a maximum of 21 million that will be available around the year 2035) in existence, the market value of all Bitcoins is approximately $184 billion.

Bitcoin is not the only cryptocurrency to garner similar investor enthusiasm. Ethereum (“ETH”), arguably the second-most popular cryptocurrency, saw its price rise from $8/ETH on November 30, 2016 to $460/ETH on November 30, 2017 – compared to Bitcoin, this is an even more impressive gain of 5,700% over the comparable one-year period.

Whether these skyrocketing valuations represent an asset bubble, I’ll leave it to others to debate. In this opinion piece, my aim is to convey some moral considerations not generally discussed in the mainstream narrative, but which could be of value to investors, users, issuers, and other participants in today’s cryptocurrency economy.

Constitutional Legality

I am not an expert on United States Constitutional Law but, Article I, which describes the powers and responsibilities of the legislative arm of the U.S. Federal Government, seems to give Congress monopoly power over the issuance and regulation of currency.

Article I Section 8.5 grants the Congress the right “to coin money, regulate the value thereof, and of foreign Coin…”

Article I Section 10.1 states that “no State shall…coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debits…”

My understanding is that any power not explicitly prohibited by the Constitution, is left up to individual States to decide within their area of jurisdiction. While nothing in the Constitution seems to explicitly prohibit individuals and businesses from issuing currencies, that Article Section 10.1 denies States from issuing currencies, it should follow that States have no power to allow their citizens to do so.

Debates around whether cryptocurrencies are a legitimate currency often center around whether it is a reliable store of value or useful medium of exchange. What is often missing in the discussion is whether a “currency” that is not made official by a sovereign government is even legal. Outside the U.S., France’s top central banker Francois Villeroy de Galhau seems to hint at this when he recently stated that “Bitcoin is in no way a currency, or even a cryptocurrency…It is a speculative asset. It’s value and extreme volatility have no economic basis, and they are nobody’s responsibility…those investing in Bitcoin…do so at their own risk.”

If Governor Villeroy de Galahu truly believes Bitcoin and other cryptocurrencies are illegal and have no economic basis for their valuation, his statement is arguably soft – he’s not, for example, calling for the arrest of cryptocurrency issuers. Perhaps he believes cryptocurrencies are doomed to fail soon, long before they become a material slice of the overall economy?

The Morality of Issuing, Using, and Investing in Cryptocurrencies

Putting aside constitutional legality, there’s also the question of whether just because one can, should one issue cryptocurrencies and attempt to create a material economy using a medium of exchange other than the official sovereign state currency?

By extension, is it right for businesses, some of them quite large, like Microsoft, Intuit, PayPal, Whole Foods (via gift card) and to accept Bitcoin or other cryptocurrencies as payment for goods and services?

Even if cryptocurrencies were not often used on the “Dark Web’s” illicit economy, including the financing of terrorist activities, is it right to be openly competing against one’s country’s treasury and central banking functions?

Proponents often cite government incompetence in managing fiat-money economies, specifically its inclination towards unwarranted inflationary policies that lead to excessive currency depreciation over time as a major reason for creating alternative mediums of exchange. In other words, they are doing their part to save our country from greedy and incompetent bureaucrats and politicians.

While this argument seems noble, and I do not question: 1) there are people with libertarian views on this subject who are honorable in their intentions, and 2) there are plenty of examples of corrupt and/or incompetent bureaucrats and politicians, I do believe, by and large, people who champion this rationale to be either: 1) insufficiently informed, or 2) to have dubious intentions.

What responsibility, for example, would a cryptocurrency’s issuer have when: 1) accounts are hacked and units are stolen? and 2) if a massive decrease in value occurs, wiping out savings? In the United States, the Federal Deposit Insurance Corporation insures each FDIC covered savings, checking, money market, and certificates of deposit accounts up to $250,000. Additionally, banks also generally carry insurance against robberies, adding an additional layer of protection to consumer deposits.

Once a cryptocurrency economy becomes sufficiently large and additional units are required, how will those units be created? Bitcoin’s FAQ page for example, asserts that despite a limit of 21 million bitcoins, each bitcoin can be divided into smaller and smaller subunits, up to a single “satoshi” (a homage to “Satoshi Nakamoto” – the pseudonym for Bitcoin’s unknown founder) or 0.00000001 Bitcoin. After that, the FAQ page states, smaller units can be created upon the network’s consensus. How is this different from printing money and creating potential inflation? And despite “greedy and incompetent” bureaucrats managing the U.S. Dollar, is it realistic to think the network of users collectively, most of whom know nothing about economics and monetary policy, will come up with a strategy to increase the cryptocurrency money supply any better than treasury and central bank officials? And finally, if the cryptocurrency network’s participants were to elect experts to make this decision, how likely are they going to be to choose experts better than the existing system of electing politicians who appoint fiscal and monetary policy-makers?

I’m not familiar with each of the 1,300+ cryptocurrencies that have been issued to date, but I have not seen any legitimate attempt by issuers and investors to address these fundamental questions. Instead, the default underlying belief seems to be centered on: 1) the free market, i.e. the forces of supply and demand are better than any regulation, and 2) the collective wisdom of large numbers of participants reduces risk.

This kind of thinking is the foundation of all of history’s great bubbles on speculative assets. In the United States, most recently, there was the financial collapse of 2008 lead by excessive speculation in real estate, especially the development of associated complex credit and hedging instruments. People thought there was no way real estate prices could collapse. If banks, real estate brokers, and alternative financiers were all participants, and exchanges produced hedging instruments that could guard against price depreciation, there would be no real risk.

After it’s over, everyone looks for someone to blame. After it’s over, everyone looks to the same entity to save them – the same entity they called “incompetent”, the government.

People wondered why after the 2008 crisis few bankers went to jail. The reason is that, technically, they didn’t do anything illegal. The average citizen likes to blame them, but, in truth, any participant, whether they be the consumer who bought properties with unrealistic expectations, the real estate broker collecting commissions, the exchanges that created large markets for real-estate backed financial instruments, or the bankers that created the exotic instruments themselves, are equally guilty of irrational exuberance.

I do not have sufficient expertise to know whether today’s cryptocurrencies are constitutionally legal, but I have a strong sense that their issuance, and the way they are being promoted, is morally dubious. Just because you can do something, doesn’t mean you should.

Concluding Thoughts

Regardless of one’s motivations for issuing, investing in, and transacting in cryptocurrencies, I hope this opinion piece has introduced a valuable set of considerations regarding its morality, and thus by extension, it’s long term sustainability as a medium of exchange, and risks as an investment and store of value.

In no way is this piece an attack on the concept of cryptocurrencies itself. If a sovereign government were to fully digitize its monetary supply using a blockchain-based cryptocurrency, i.e. no longer print physical paper bills and mint metal coins, and thus requiring that ALL transactions be digital, then the moral considerations opined here would not apply. Rather, it would become a moral consideration for the government deciding to do so, whether the digital divide in society has closed to a degree that such an overhaul of the nation’s currency would not unduly impact the lives of citizens who still very much rely on physical money.

And, for the sake of transparency, I do not own any positions in any cryptocurrency company, nor do I control or advise any investment account which holds cryptocurrencies.

Text by Lih-Hann Chiu