Surveillance

This is not a common criticism. it goes unnoticed in mainstream media, and perhaps unsurprisingly it remains the biggest risk to the truth of Bitcoin. For Bitcoin to be true, it must be sufficiently unstoppable and decentralized, allowing anyone -- even those we dislike, even those we loathe -- to use Bitcoin without fear of financial censorship. Unfortunately, because Bitcoin is fully auditable on the base layer -- which is necessary to verify the fixed supply -- it is not perfectly private nor free from potential censorship.

Any digital currency will have this problem. By virtue of being digital it will be as easy to surveil as the network itself. Unlike physical tokens such as coins, a digital money will be traceable.

While there are coin-mixing services which can obfuscate the tracing of Bitcoin, ultimately it's possible to know where specific Bitcoin was once spent and the path it took to get into your possession. It's all pseudonymous but the trace is still there. This could lead to the idea of tainted Bitcoin (that is, your Bitcoin may or may not have once touched illicit activity). Moreover, it would even be possible to whitelist transactions and only allow approved Bitcoin into a given market.

For example, let's say the Bitcoin in your possession was once used to finance terrorism (according to some unaccountable bureaucrat), and yet you had earned it honestly by selling goods and services. Imagine those funds are seized, because law enforcement held you liable for being in possession of this Bitcoin. After such an event, or even knowing such authoritarian overreach is possible, you would likely comply with whitelists in all future transactions, meaning you as a business are faced with the impossible task of vetting all your customers and scrutinizing their payments, all to ensure the risk of seizure from the authorities is minimized.

Whether we like it or not, we live in such a system right now. But what -- if anything -- can be done? And at what level of censorship would Bitcoin be rendered false? In both cases, the answer lies in the impossible task of whitelisting money.

The Impossibility of Whitelisting Money

Money exists in order to solve problems; such as storing value over time. More simply, money solves for uncertainty. We all attempt to store value over time to reduce the uncertainties of the future. Even in the simplest of circumstances, prices may increase on items important to us; and we store wealth to survive those kind of supply shocks.

Before modern economies we learned to store food, drying meat and raising livestock in order to manage uncertainty (avoiding famine). As societies grew and evolved, the need for a medium of exchange grew. And as history proves, good money enabled societies to scale, so not everyone needs to be drying meats and raising livestock in order to avoid a famine. Good money allowed specialization, artisans and engineers and even the dreaded central planners.

But money is good only to the degree there is trust in the money itself; trust that the money will hold its value over time, so rather than raise livestock one can choose to hold money, knowing that someone else will get rich raising livestock. The holder of the money creates a demand, and markets are formed, more complex societies emerge with more and more efficiency. The ascent of man is exactly this story, humans flourishing with ever-increasing efficiency and scale.

But what if the money is not trusted? What if a central authority can decide your money is no good? In this situation you're back to raising your own livestock. This isn't a minor setback, this puts us back to the earliest stage of civilization, where only small agrarian communities could exist. There's a reason centrally planned markets lead to starvation.

Whether Bitcoin can survive or not rests on this very basic question: can markets function freely in the information age (where mass surveillance is the norm)? Or will the temptation for surveillance and control be too great? The outcome will decide the fate of our civilization, Bitcoin standard or otherwise.

Ultimately, the very nature of money precludes whitelisting and gatekeeping. Economic activities must remain sufficiently free. And while there will always be a need for legal trusts, that is, legal arrangements where an entity empowers their financial decisions to someone else, the trustee, society cannot function if everyone is a trustor to a centrally planned trustee. These centrally planned societies fail quite spectacularly.

Can Bitcoin fix this?

No -- and let's not mince words -- this is a problem that Bitcoin does not fix. Bitcoin can be part of the solution -- but we must do the work. Bitcoin is but a tool to our advantage in fixing this problem.

Think of this as a great filter and that Bitcoin is but one of many necessary conditions for humanity to advance. Money is either free, or not. Markets can be free, or not. And if not, then we starve our civilization back into agrarian self-sufficiency (this is the historic pattern afterall). Perhaps another gold standard would emerge and humanity would get yet another chance.

But whether or not we make it as a civilization depends entirely on this very basic existential problem. Do we assume responsibility and allow for a suffienctly free market to produce and maintain a good digital money? In other words, a money that can survive and flourish in the information age in spite of mass surveillance?

Bitcoin privacy tools exist, using Bitcoin in ways to counter surveillance exists, but will they be widely adopted enough for Bitcoin to succeed in the face of authoritarian overreach?

Only time will tell, and our decisions -- yours and mine -- will determine the outcome.