F.

Giannopoulos 2

Abstract

This paper discusses the implications for Ethics given the rising popularity of a virtual currency

(Bitcoin) and perhaps others similar to it. A small introduction focusing on the attributes of the

currency. Overview related social contract theory views for the purpose of this paper. Ethical

considerations connected to the social contract. Examined examples from current financial systems

contrasted with bitcoin, its community and record.

Keywords: Ethics, Virtual Currency, Virtual Communities, Social contract theory.

 F. Giannopoulos 3

Bitcoin: Freedom or Anarchy?

1.Introduction

Currencies are at the core of economies without which at the current state of affairs, nothing

would get accomplished. They allow for trade and exchanges to take place at convenience. Civil states

and societies in most of the world operate and depend on currency in one way or another. It is what

enables Plato’s idea of specialization take place, in order to increase the efficiency of states. Benjamin

Franklin in his letter to Jean-Baptiste Leroy said “in this world nothing can be said to be certain, except

death and taxes”. Provided the whole of a society is dependent on easily tradable currency, for the civil

states to function taxes are necessary and a part of life. Virtual currencies, especially those that cannot

be monitored could act in a similar way to black markets: unregulated and untaxed. Bitcoin is a virtual

currency that due to its complete anonymity puts the decision, to act civilly or with regard to the state,

up to personal liberty. This begs the question: Can societies function well without the supervision of

the states and law?

1.2 Bitcoin explained in summary

This currency is nothing but a cryptographic algorithm supported by formulae of mathematics.

It is “[a] purely peer-to-peer version of electronic cash [that allows] online payments to be sent directly

from one party to another without going through a financial institution” (Nakamoto, 2010). To this
system identity is irrelevant, so long the program is running on a terminal and one has access to the

wallet data file one has access to the funds and can control them. The wallet’s address is encrypted and

changes often, making it impossible for anyone to track not only who is who but what wallet did what.
This is groundbreaking in terms that, any sentient being anywhere could use a wallet so long they could

use the technology and so long they can communicate with the network. Furthermore, the programming
 F. Giannopoulos 4

is open source for anyone to see; yet making a different version1 deems it incompatible with the system

and near-impossible to falsify. Those attributes it make the currency both open and secure in one. What

are the trade-offs in the case of Bitcoin?

1.3 Social contract theory

Rousseau with his social contract theory based on popular sovereignty intends to build the idea

of a state that is highly democratic in an active and direct sense; being in recognition of the freedom

humans are born with, and without more government than necessary. Furthermore he thinks that
“human beings are good by nature and are made wicked only in society. He then would not directly

oppose bitcoin on these grounds, although he was squarely against money, or the love of money. On

the grounds of “laws [being there] to mold a man’s character” (Rousseau), law operates on evidence,
and Bitcoin leaves next to none. Legality aside, Rousseau argues that a healthy state should participate

in the common issues via direct democratic processes and discussion, even though this is already a

rarity at least in western societies. Using bitcoin could let people evade this necessity even in states
where they are well designed to abide by Rousseau’s “forced to be free”. Especially in terms of Thomas

Hobbes’ claim, that without law and punishment civility would disappear from society – making

incrimination unlikely would according to him increase rapidly. Social contract theory then would only
work due to enforcement; Bitcoin makes enforcement near-impossible because forensics would not

work. For Hobbes this new currency would mediate a “state of nature”, one in which the stronger

attacks the weaker but they both lose because of the risk involved. It would just be on a new virtual
environment instead.

Proudhon in contrast with Rousseau proposes an individualist social contract: where

sovereignty is not surrendered but protected. “The social contract [for him] is an agreement of man
with man” (Proudhon, 1851), and Bitcoin mediates that even if the two persons never really witness

1
In the sense of calculating things differently – the proof-of-work would not match up and be rejected by the rest in the
network.
 F. Giannopoulos 5

each other. For him there should never be any overseeing authority governing over himself,

proclaiming that illegitimate and illegal. In the case of Bitcoin there indeed no such thing. Although

Proudhon was against property, if people in most societies need currency to live – he would definitely
choose one without central banks or under authorities. He himself tried to setup a bank that would

evade taxation and give people free loans similar to a credit union, but then he would temporarily be an

authority. On these grounds he would most definitely welcome a currency that in itself is devoid of
authorities making it completely self-organized, anarchic and highly liquid in every sense.

2. Currency changing societies

From the times of antiquity of commodity-based currency to the first coinage of the drachma –

currency has mediated societal change. Making trade easier increases trade, and by taxing also streng-

thens the states that allow for it. What would then be the effect of this currency? Given that so far no

taxation can be established, and if there was it would have to be voluntary and not systematic. It is ar-

guable that should this currency become very popular it could be a significant factor toward the change

of society to a state of anarchy driven by an invisible and quick-trading market. But this model if

wrongly used would obscure the ends of the exchange or end-goods even more than they are today in

modern stock markets. Proponents of the free market system would welcome this, finding a way to fi-

nally bypass the deadlocks of overregulation by governments. A big risk of this way of thinking is de-

ciding only based on numbers without considering societal or even environmental effects on a state or

even continent. This currency’s mining is directly based on electricity since the computer components2

that do all the calculations required to create cryptography-based currency are very energy intensive at

full utilization. As Hobbes would state: what then would guarantee that the individual would make the

ethical choice, especially when all he sees is numbers?

2
Currently GPUs(graphical processing units) are being used due to their superiority at mathematical calculations.
 F. Giannopoulos 6

Furthermore given bitcoin does not verify identity automated trading programs could easily be

designed and put to use in order to manipulate the markets. This however has already been put to use in

the stock markets in the recent years. It may have been one of the factors leading to the current finan-

cial crisis. This is another dimension of potential unethical use – and manipulation of markets without

even just looking at the numbers. By designing an automaton to simply hunt down the best profit in

terms of value for bitcoins for an owner. There is no connection of the value-profit actual benefit to be

experienced by the owner himself and the world in which he lives. This is already seen to some extent

in the current financial system. The trades are quick, the responsibility and punishment sluggish. In the

bitcoin economy the trades are even quicker, the responsibility unknown through the system itself and

the punishment non-existent.

Responsibility for this currency then lies with each user and his direct dealings with 3rd parties – in a

technologically enabled anarchy all we have is the individuals themselves to do both the law-keeping

and policing; thus we better make sure that they are well informed of the side-effects of potential mis-

uses. Proudhon would be in favour of the system but Rousseau would eventually battle it - because for

him every rational man would uphold at least a basic form of government and regulation to ensure the

safety of the state and the whole. Similar to Proudhon the assassinated former 20th president of the

United states said (James Garfield)3 said: “He who controls the money supply of a nation controls the

nation”. Consequently if through the mediation of technology the money supply is controlled by the

people using it directly (peer to peer), then this would unavoidably change civil states and society as

Proudhon would have liked to see. Evading the deadlocks that currently plague credit-based currency.

For Proudhon’s system to work, however. it would require more factors than the ideal designs of a de-

3
His presidency lasted only 200 days before his assassination. Some economic pillars of society potentially were not ready
for change.
 F. Giannopoulos 7

mocracy4. Every citizen should concern himself with the public affairs (on which even Rousseau

would agree given that this allows for healthy states), every citizen should make sure to be well in-

formed by independent sources. Perhaps the world is beginning to see some of the above witnessed

through the rise of protests and services such as Wikileaks defending the right to open and free infor-

mation. Examples from the bitcoin community so far show many projects following the paradigm of

open source models5. Perhaps this is so far a show of good faith among users of this system. Support-

ing members of the community. Donating to projects that are of common interest and utility6. This is a

good promise so far, but would that continue on now that the currency is gaining popularity and due to

its deflationary nature7 rising exchange rate? For the two years it has been in existence the currency has

had an exchange rate of 0.02 USD cents where it currently has an exchange 9.6 USD per unit of bitcoin

(See Chart 1). Taking this into account will the holders of bitcoin holders continue to be charitable?

Chart 1: Data from one of the popular exchange websites (Credit: bitcoincharts.com)

4
In the sense of every citizen directly being able to vote on issues modeled after the Athenian democracy.
5
Source code from which software can be built is free. Funding is collected by donations or for technical support and
consulting.
6
Countless services based on BTC simply ask for donations to a bitcoin address in order to exist.
7
Inflation curves are set over time and supply is limited at 21 million with 6 million currently in circulation.
 F. Giannopoulos 8

References

History, N. M. of A. (n.d.). The American Presidency. Retrieved June 1, 2011, from

http://americanhistory.si.edu/presidency/3d1d.html.

Rousseau, W. was. (2004). Rousseau and the Social Contract. bris.ac.uk. Retrieved June 1, 2011, from
http://www.bris.ac.uk/philosophy/current/undergrad/pastunits/units0607/Phil10006/Phil10006
Rousseau 1.doc.

Nakamoto, Satoshi (2009). Bitcoin: A Peer-to-Peer Electronic Cash System. Retrieved June 1, 2011,
from http://www.bitcoin.org.

WARD, D. (2001). Proudhonʼs Collected Works. 1997. Retrieved June 1, 2011, from
http://dwardmac.pitzer.edu/Anarchist_Archives/proudhon/ProudhonCW.html.

Williams, G. (n.d.). Thomas Hobbes Moral and Political Philosophy. May 21, 2003. Retrieved June 1,
2011, from http://www.iep.utm.edu/hobmoral/.