On October 31, 2008, a user going by the name Satoshi Nakamoto sent a message to The Cryptography Mailing List about his new project, a fully peer-to-peer electronic cash system which he called Bitcoin. Though released to little fanfare, his white paper detailed a revolutionary system of distributed consensus.
To the average Internet user, Satoshi’s work may seem redundant since online payments have been possible for many years now. But examining the technology of money demonstrates why a peer-to-peer electronic cash system solves critical issues in the real world. In this post, I will examine just one of those issues: censorship.
Satoshi intended Bitcoin to function as electronic cash. Physical cash operates on a peer-to-peer basis, which means that a user can transfer cash to another user without the need of a third party. The payer and the payee operate as peers, as equals. Neither is functionally more important than the other, since a successful transaction requires both. The transaction can proceed as long as both the payer and payee trust the validity of the physical cash. Therefore, cash operates in a permissionless fashion. It allows transactions between any two entities without the need to secure permission from a third.
Financial transactions mostly worked in this fashion until banks and other institutions provided various forms of debt instruments, where a payer could issue a promise to give money to the payee at some future date, with a trusted third party providing the assurance that the debt would be settled. Checks are one modern example of a debt instrument. With a check, a payee accepts as valid payment the payer’s check. While worthless on its own, the check has value because of the issuing bank, which mediates the transaction after the fact.
Prior to Bitcoin, online transactions had always required a trusted third party to act as a mediator between the payer and the payee. Credit-card processors and PayPal are examples of these trusted third parties. The additional party provides assurance that money will be transferred from the payer to the payee, but the mediator in the transaction does not act as a peer.
The payment processor has complete control over both sides of the transaction, so online payments do not function on the same voluntary basis as cash transactions do. The payment processor could decide to reverse a transaction, or it could simply refuse to complete a transaction. For example, in 2013, the Obama Administration started Operation Choke Point, through which the federal government forced banks to terminate relationships with legal customers whose businesses the administration found objectionable.
A lack of banking has serious consequences for acquiring capital and protecting funds from thieves and disasters. Most businesses in America would find operating without a bank exceedingly difficult, as the legal cannabis industry has discovered. Since the federal government considers cannabis to be illegal, most banks will not work with legal cannabis businesses, forcing many of those companies to operate solely with cash. By denying banking, governments and institutions can increase financial burdens in order to censor users’ behaviors.
Bitcoin, however, provides the ability to transact peer to peer. With no trusted third party, Bitcoin transactions can operate without censorship, making online financial transactions function much like in-person cash transactions, free from institutional manipulation. While this censorship resistance in cryptocurrencies has certain issues, blocking a cryptocurrency transaction is practically much more difficult than it is in traditional banking. Censhorship resistance, therefore, is a major benefit of cryptocurrencies, one which cannot be replicated in any other online payment system.
However, Bitcoin in its current form, like most other crytpocurrencies, can suffer from a form of transaction censorship due to privacy consequences of the network’s design. But due to the complexity of the issue, this topic deserves its own post. Next week, I plan to give an overview of privacy in cryptocurrencies and how privacy relates to user freedom and security.