As the recent indictment of Michael Oppenheim clearly shows, the traditional financial system is rife with abuse. On the rare occasions that I unexpectedly find someone in my area that has already heard of Bitcoin, however, they invariably associate it with the black market, and lack familiarity with applications outside its use for maintaining anonymity. This impedes Bitcoin’s mainstream acceptance, and warrants an explanation of its potential to combat crimes, like financial fraud.
Readers might better conceptualize Bitcoin’s technology as a form of pseudonymity, rather than anonymity, since its addresses serve as users’ pseudonyms. Depending on the method of implementation, users can consequently employ it either for obscuring their identities, or for providing a means of proving their role(s) in transaction records. By voluntarily associating themselves with particular addresses, organizations’ members can use the blockchain for combatting fraud, with far greater efficiency and effectiveness than bureaucracy would permit.
Provided that the program runs on a sufficiently vast network to prevent a single user from commandeering over half of its mining power, the blockchain provides unassailable protection against unauthorized alteration of its records. This absolves the system not only of the unnecessary overhead incurred by operating such brick-and-mortar establishments as banks, but also frees it from the inevitable risks that come with relying on humans for performing financial functions.
Oppenheim, a former investment adviser at JPMorgan Chase Co, recently embodied these risks by embezzling $22 million of his clients’ funds, a crime to which his defense lawyer has claimed that he plans on pleading guilty. Such criminals rely on conventional currency’s secretive transaction records for evading detection. In contrast, the blockchain automatically makes its records publicly available. Rather than forcing voters, journalists, or potential prosecutors to waste time on the bureaucratic protocols that impede investigations into these matters, cryptocurrencies can render the transaction records immediately and completely transparent to anyone who has to trust them with their money. (e.g. taxpayers, investors, etc.)
According to a Forbes article in 2011, the United States alone loses approximately $190 billion per year to fraud, more than the annual interest on our national debt in 2010. Requiring authorities to use Bitcoin would effectively negate this waste, saving each taxpayer roughly $1,000 per year. Beyond explicitly illegal fraud, such a system would also help voters identify political candidates’ financial affiliations. This transparency would allow the public to make more informed decisions during elections, and encourage integrity among the authority figures in whom we invest political power.
More advanced blockchain technology enables users to remedy many other forms of corruption. Issuing and recording votes on the blockchain, for example, would prevent electoral fraud. Though its potential uses might extend even beyond the imaginations of contemporary users, the ability to prevent crimes like Oppenheim’s has been an intrinsic feature of Bitcoin from its inception.