Misconception: Bitcoin is Used Primarily for Illicit Activity
Bitcoin does not encourage nefarious citizens, it benefits disenfranchised ones
In last week’s newsletter, I covered the misconception that Bitcoin is bad for the environment. I think that is a good segway into this topic. Many people seem to believe that Bitcoin has no practical use, it in no way improves upon the current financial system, and that it’s only good for memes and money laundering. When discussing energy use, I mentioned that whether something is a good use of energy or not should be determined by the benefits it provides to society. If something provides no benefit to society, then any energy use would be too much.
One of the biggest hurdles Bitcoin has had to overcome is this — most people have no idea how the current financial system works. Prior to Bitcoin, I really didn’t either. But now, when I say I’ve spent countless hours “researching Bitcoin,” what I really mean is I have been expanding my knowledge on monetary and fiscal policy, macroeconomics, geopolitics, past currency crises, and more. This has been eye-opening for me.
As I’ve fallen further down the Bitcoin rabbit-hole, I more acutely realize the lack of economic freedom many in the developing world face. I touched on this in my article about the El Salvador Bitcoin law, but I want to dive deeper in this piece. First, let’s quickly debunk the categorically false statement that Bitcoin is primarily used for illicit activity. Then, we can focus on how Bitcoin is actually being used and who it really benefits.
Bitcoin is Rarely Used by Criminals
The story of Silk Road is of great importance to Bitcoin’s history. Named after the famous historical trade route linking the Chinese and Roman Empires, Silk Road was an online marketplace using the “dark web” to transact anonymously using Bitcoin. As Silk Road grew, it was mostly used to buy and sell illegal goods and services. Since then, there have been other such sites and marketplaces using cryptocurrency to fund illicit activity. This has burned the idea that Bitcoin is used ‘primarily’ for drug trafficking and money laundering into many people’s minds, but that simply is not the case. Even today, uninformed pundits will point towards cybercriminals demanding Bitcoin for ransom in the Colonial Pipeline hack1 as a way to paint it in a negative light.
Per an analysis by Beacon Global Strategies, lead by Michael Morell, former Director of Intelligence at the C.I.A., less than 0.5% of total Bitcoin transaction volume is estimated to be used for illicit finance. That is a low number in absolute terms, but what about in relative terms? Is Bitcoin used more frequently by criminals vs. traditional currencies? The answer is no. When looking at total global GDP, 2%-4% can be attributed to illicit activity via legacy financial intermediaries and fiat currencies. Unfortunately, any form of money will always be used for the wrong reasons. Bitcoin will be no different than any past currencies in that regard. But the arguments of politicians and journalists to ban Bitcoin because of its prominent use in criminal activity are not founded in facts and they distract from how Bitcoin is advancing human rights.
If Bitcoin isn’t being used by criminals, then who is using it? Bitcoin is not just a get-rich tool, it’s a freedom tool. Bitcoin is supporting philanthropic efforts in places where political repression runs rampant. Bitcoin allows the billions of people worldwide without access to a bank the chance to save for a better future. Bitcoin is undercutting the global foreign exchange market, allowing hardworking men and women to send money home to their families without worry that financial intermediaries will take their cut. Bitcoin isn’t just an inflation hedge against higher than expected CPI in the U.S.; it’s an escape from rapid currency debasement in many poor countries all around the globe.
Who’s Using Bitcoin
According to The World Bank, 1.7 billion people (31% of the global population) are unbanked. The percentage of unbanked adults gets much higher when looking at countries like El Salvador (70%), Pakistan (79%), and South Sudan (91%)2. People in the U.S. often joke about hiding money under their mattresses. In many parts of the world, if you want to save for the future, that might be the only option you have.
The lack of banking infrastructure is just one problem facing many citizens of developing countries. According to the above tweet from Alex Gladstein, Chief Strategy Officer for the Human Rights Foundation and my favorite follow on this topic, 1.2 billion people currently live in countries experiencing double- or triple-digit inflation. Do you think those same people are seeing double- or triple-digit increases in their income? How can they provide for their family when their purchasing power is eroding at such a rapid pace? Financial inclusivity and access to a stable currency are human rights that billions are deprived of.
My favorite article on this topic was written recently in Bitcoin Magazine by the author mentioned above. It is appropriately titled “Check Your Financial Privilege.” In the article, Gladstein tells us about citizens of three African countries that have been using Bitcoin to send money back to their families, as a way to save for the future, and as a means to fund philanthropic efforts that their governments had previously thwarted. Many of Bitcoin’s believers in the developed world are storing wealth in Bitcoin as an inflation hedge, dubbing it “Gold 2.0.” In the examples below, Bitcoin was used out of necessity. Corrupt governments, currency debasement, and greedy financial intermediaries have held hundreds of millions of Sudanese, Nigerian, and Ethiopian people back for a long time. Fortunately, Bitcoin offers them a chance to take back their economic freedom.
Ire Aderinokun, an entrepreneur and founding member of the philanthropic group the Feminist Coalition, details a story about how the Feminist Coalition was able to pivot and accept Bitcoin donations when their local bank accounts were frozen by corrupt police. They raised over 7 BTC and were able to continue their fight for equality in education, financial freedom, and representation in public office for women in Nigerian society.
Mo, a Sudanese doctor, is able to send Bitcoin home to his family in Sudan from the money he generates via his medical practice in Europe. He’s able to do this within minutes (vs. days using fiat currency), can avoid high remittance fees, and his family does not have to suffer from what he estimates as 340% inflation of the Sudanese Pound. The technology has also inspired him to start a podcast in Arabic to teach Sudanese youth about Bitcoin, money, and freedom.
Kal Kassa, an Ethiopian businessman living in the United States, uses the Lightning Network to pay contract workers back in Ethiopia, who in turn use the free, open-source lightning wallet, Blue Wallet, as their savings account (65% of Ethiopian adults don’t have a bank account). Being able to transact via the Lightning Network using an app like Blue Wallet allows Ethiopians to avoid high fees associated with Western Union transfers or having to deal with government exchange rates that authorities have notoriously used as a means to line their own pockets.
“In reality, only 13% of our planet’s population is born into the dollar, euro, Japanese yen, British pound, Australian dollar, Canadian dollar or Swiss Franc. The other 87% are born into autocracy or considerably less trustworthy currencies. 4.3 billion people live under authoritarianism, and 1.2 billion people live under double- or triple-digit inflation.”
— Alex Gladstein
Belarusian Protestors, Syrian Refugees, and Bitcoin Beach
The stories of Bitcoin’s use across Africa are remarkable, but far from exhaustive. Examples of people taking back their economic freedoms via Bitcoin span the entirety of the globe, from Eastern Europe to the Middle East to Central America.
An episode3 of the podcast What Bitcoin Did from the fall of 2020 details the story behind last year’s protests in Belarus. Hundreds of thousands of protestors took to the streets of Minsk, condemning autocratic president Alexander Lukashenko of rigging the 2020 Belarusian election. His pro-democracy opponent, Svetlana Tikhanovskaya, and her camp insist they won at least 60% of the vote, yet the “official” count came in at 80% in favor of Lukashenko, Europe’s longest-standing dictator. Mrs. Tikhanovskaya had to flee to nearby Lithuania for the safety of her and her children. Her husband is already in prison for trying to run opposite Lukashenko, which inspired her to run in the first place. Jaraslau Likhachevski of the philanthropic organization BYSOL partnered with the Human Rights Foundation (HRF) to support protestors and other repressed peoples in Belarus. The current, corrupt regime has control of the banking system, so anyone making payments towards democratic efforts can be tracked and subject to prosecution. BYSOL is able to use Bitcoin’s censorship-resistant properties to circumvent traditional means of money transfer:
Local authorities cannot seize these funds when transferred from the likes of the HRF to Belarusian citizens
A peer-to-peer wallet was set up and used to send 1,500 Euros worth of Bitcoin (about 3 months salary in Belarus) to pro-democracy citizens
Recipients can then convert that BTC back to Belarusian Rubles for their daily living expenses; conversely, they can hold the Bitcoin as a means to escape their corrupt financial system
An earlier episode of What Bitcoin Did with Moe Ghashim, a Syrian refugee, provides another example of just how impactful Bitcoin can be. In this conversation, Moe details how the exchange rate of the Syrian Lira has gone from 45-50 lira for every 1 USD in 2011 (at the beginning of the Syrian Civil War) to 1000 lira for every 1 USD in 2019. Moe left Syria to move to Jordan, then ultimately England, in hopes of building a startup to solve payments problems in Africa and the Middle East — the very problems Bitcoin is now addressing. Bitcoin caught his attention because, in Syria, the government controls money and information. He said “taking your own path” is not an option there and he sees Bitcoin as leveling the playing fields for the people of many Middle Eastern countries. Now, he travels around Europe and Asia, teaching refugees about Bitcoin and how they can use it to send money back home. He said the idea immediately resonates with these refugees because it’s “just better money” than what they’re used to. The idea of memorizing your Bitcoin seed phrase to store your Bitcoin might sound ridiculous to some, but for Syrian refugees, it’s a much safer storage method than anything they could do with physical cash. He cited two good examples of this:
Syrian refugees can’t easily open a bank account when they migrate. Refugees caught in Turkey are deported immediately. In this scenario, a refugee living in Turkey who kept their life savings at their local residence loses everything in the blink of an eye
Refugees at the border of Greece have suffered from brutal police beatings who then steal whatever physical cash the refugees have on them. Moe wraps the conversation up with a simple explanation for why Bitcoin appeals to Syrian refugees like himself — “We know for a fact our government is going to steal our money”
Another story about the good Bitcoin can bring to the world is Bitcoin Beach. Bitcoin Beach is a project focused on bringing financial freedom to the coast of El Salvador. El Zonte, a small surfing town hit hard by COVID-19, is using Bitcoin to create a self-sustaining local economy that is made up of residents who are unbanked and businesses that don’t meet the requirements to accept credit card payments. During the pandemic, donations were able to reach the people of El Zonte via locals’ Bitcoin wallets. The Bitcoin Beach initiative has since grown, setting up youth work programs, educational grants, transportation to and from school, and much more. The resilient people of El Zonte are working towards a circular economy — run on Bitcoin — that ensures they are included in the financial system they were previously left out of
The stories above span 4 continents across both hemispheres. They demonstrate the breadth of Bitcoin’s reach. Charlie Munger — Warren Buffet’s long-time business partner — made headlines recently calling Bitcoin “disgusting and contrary to the interests of civilization.” Having read about the individuals from these stories and many more like them, I couldn’t disagree more. I’d contend government-controlled currencies more accurately fit that description.
My Take — Bitcoin is Financial Inclusivity
Even as I fell further and further down the Bitcoin rabbit-hole, it was still just a store of value to me. I wondered if the takes I saw online about Bitcoin having failed as a medium of exchange were true; they are not. Such statements either come from a place of privilege, ignorance, or both. Prior to educating myself on this topic, it would be fair to bucket me into the ‘both’ category.
Bitcoin is certainly being used to store wealth, but it is also being used every day. The stories I shared in this article illustrate that its practical use cases are vast. And we’re still early. Many people — in both the developed and developing worlds — still have no idea what Bitcoin is. When someone asks me why do we need Bitcoin, I could cite some simple statistics:
4.3 billion live under authoritarianism
1.7 billion people are unbanked
1.2 billion people live under double- or triple-digit inflation
My preferred way to answer that question, however, is with the stories behind these numbers. These stories are why I’ve latched onto the phrase financial inclusivity. Billions of people have their economic freedoms stolen from them every day. Billions of people are not included in their domestic financial systems. So how do we fix this? Fiat currencies have failed at being financially inclusive. Currencies under autocratic government control will be used to censor and repress. Currencies that can be infinitely printed and misappropriated will continue to be so. Money alone can’t fix the world’s problem, it takes people to do that, but a stable, decentralized, censorship-resistant currency will give us a much better chance.
“I’ve been using bitcoin for years because my family needs it, not because I enjoy speculative trading.” — Tey Elrjula, Syrian Refugee and Tech Entrepreneur
And that wraps up this week’s discussion. Thanks so much for tuning in.
My initial plan for this article was to go deeper into the misconception that Bitcoin is being used prominently in criminal activity. I wanted to briefly counter that false notion with stories about how Bitcoin is actually being used — I ended up flipping the two. I found the stories about how disenfranchised people all over the globe are using Bitcoin to be far more important to write about. I hope you enjoyed reading this piece as much as I enjoyed writing it.
This is another topic I know I’ll be circling back to. There are simply too many examples of what Bitcoin is bringing to those who need it most, and I intend to share as many of those with you as I can. For now, see the amazing content below to learn more.
3 Things to Read:
Bitcoin Magazine: Check Your Financial Privilege by Alex Gladstein
Bitcoin Magazine: Bitcoin is a Trojan Horse for Freedom by Alex Gladstein
Coindesk: I’m a Syrian Refugee. This Is How Bitcoin Changed My Life by Tey Elrjula
3 Things to Listen to:
The Investor's Podcast: Bitcoin's International Impact w/ Alex Gladstein
What Bitcoin Did: Syria - How Bitcoin Can Help Refugees
Next week, I'll tackle the misconception that governments will ban Bitcoin. I’ll save the details for now, but I want to make one thing clear — governments cannot ban Bitcoin. They can make it very difficult for their citizens to mine, acquire, and trade it, but they cannot ban the Bitcoin network. The stories from this week’s article should serve as a good primer, highlighting Bitcoin’s censorship-resistant qualities which make it a tool to combat authoritarianism and corruption.
Remember to subscribe if you don't want to miss out on next week's topic. You can check out the Why We Bitcoin archive for previous posts and follow me on Twitter for more takes on all things Bitcoin.
The FBI were ultimatley able to seize 2.3M worth of Bitcoin from the cybercriminals responsible for this hack. These criminals weren’t that smart after all, they left their private keys on a centralized payment server, which the FBI was able to seize. Some great resources for Bitcoin storage can be found here.
Data points on unbanked adults by country come from The World Bank’s Global Findex Database and have been aggregated here.
Links to the podcasts and articles referenced throughout this newsletter that inspired me to write about this topic in the first place can be found in the ‘3 Thing to Read/Listen To’ section