Censorship resistance in the financial context is a powerful tool for pushing back against the encroachment of strong public and private entities. Censorship resistant financial products make it that much harder for governments to appropriate their citizen's freedoms, economic or otherwise. They also provide a check on financial institutions and companies by offering customers a viable alternative.
Let's look at some real-world examples to illustrate the importance of censorship resistance:
Capital controls
Capital control refers to a form of financial repression where governments restrict the ability of citizens to move their money into foreign assets like dollars, gold, or equities. Citizens are effectively forced to hold only the approved financial instruments of the regime. The goal of capital controls is often to artificially support the local currency, especially where inflation is high. In many cases, governments deliberately inflate the national currency while maintaining capital controls. By preventing citizens from converting their wealth into foreign assets in a high-inflation environment, capital controls effectively take wealth from citizens and give it to the state.
High inflation is now a global phenomenon, with rates doubling in 37 of 44 advanced economies between 2020 and 2022. The global average sits at 7.4% and now billions live in countries where inflation is in the double digits. Nearly every country has some form of capital control, but as inflation increases, so too does the implementation of stricter capital controls which have greater potential to harm economic freedom.
Cryptocurrencies, thanks to their high degree of censorship resistance, enable people to bypass capital controls, avoiding their most damaging effects. Furthermore, if enough people in a country have access to assets that are resistant to capital controls, it becomes difficult for a regime to enforce capital controls. This may encourage the regime to engage in more responsible economic management in the first place.
Bank runs
The money in your bank account is not legally yours. When you deposit money, you are loaning it to the bank, which is why you can earn interest on your deposit. When you withdraw, you are effectively recalling the loan. However, because banks don't hold 100% of deposits in liquid cash, they can't honor 100% of withdrawals (recalled loans) in the short term. A bank run is the name for the unfortunate situation where a critical mass of depositors decide to withdraw their money suddenly, draining the bank of its liquid cash holdings, and leaving all other depositors unable to withdraw.
If a bank run happens at a small scale in a regulated market, depositors will most likely be made whole eventually and up to a predetermined amount ($250 thousand via the FDIC in the US, £85 via FSCS in UK, etc.). The real danger is when bank runs occur at a nationwide level or in unregulated markets.
In the nationwide case, the response to a bank run is typically for the government to impose restrictions on withdrawals. For example, in Greece in 2015, people were restricted to withdrawals of 50 euros per day. Restrictions were not lifted until 2018. In Lebanon, after years of banks imposing draconian control on deposits in an attempt to halt rising inflation, desperate depositors resorted in 2022 to robbing banks in an attempt to get their own money back.
Something like a bank run can also occur in centralized cryptocurrency exchanges, acknowledging that such exchanges are not technically banks. This happened to dramatic effect in 2022 with the collapse of Celsius, Voyager, FTX, and Blockfi among others. Irresponsible and sometimes criminal mismanagement of customer deposits led to a loss of trust that trigged a stampede to the exit. Since exchanges didn't have the assets needed to honor deposits, they suspended withdrawals. Anyone left with deposits on the exchange will most likely never see their money or, if they do after years of legal battles, it will be a fraction of what they deposited.
Cryptocurrencies that are held in self-custody are impervious to bank runs. That's because you are the bank. Instead of having merely a claim on your money, as you do with a traditional bank or a centralized cryptocurrency exchange, you retain custody of your money, more like cash in your pocket.
It's important to note that the use of cryptocurrencies doesn't preclude engagement in financial activities that generate yield, such as borrowing and lending. Decentralized finance, or DeFi, uses smart contracts ****to automate financial products without requiring users to relinquish custody of their assets.
Freedom of speech
Fifty-four percent of the global population lives in an authoritarian regime as defined by the Human Rights Foundation. Restrictions on freedom of speech are one of the primary autocratic features of authoritarian regimes, who use such restrictions to suppress opposition.
When people organize to resist authoritarianism, money is inevitably required, so it is money that often serves as an easy lever regimes pull to clamp down. Dissidents and opposition groups routinely have their bank accounts frozen and their assets seized.
There are many examples of dissidents turning to cryptocurrency to fight back against tyranny, such as the over $2 million in Bitcoin that was raised to fund opposition of the Belarusian dictator Alexander Lukashenko in 2020. Censorship resistant money can thus serve as an important counteracting force to authoritarianism.
Sanctions
Economic sanctions are used to apply economic pressure, forcing regimes to comply with international rules.
While sanctions are an important tool, often used for objectively good purposes, their impact on individuals can be devastating. The aim is to effect change on a non-compliant regime, but it is often ordinary citizens who are most affected. This makes the moral argument for the use of sanctions, at least those deployed at national scale, somewhat hazy. Is it fair that all citizens of Russia, for example, should suffer because of the actions of a tiny minority?
With unstoppable money like Bitcoin, individuals in sanctioned countries can retain access to global markets, enabling them to receive, for example, remittances from friends and family abroad. Importantly though, large-scale actors like governments or large companies can't effectively use cryptocurrencies to avoid sanctions. As noted by the Financial Crimes Enforcement Network (FinCEN), this is due to a lack of liquidity in the cryptocurrency markets.
Freedom-go-up technology
So far the majority of people who buy censorship resistant cryptocurrencies don't care about the "unstoppable money" features they carry. For most of these early adopters, the primary draw is speculative investment: You buy crypto because you think it's going to increase in value. The feature of certain cryptocurrencies that they happen to increase in value over time is half-jokingly referred to in the space as "money-go-up technology." It is a powerful "technology" because it attracts people and builds momentum via network effect. Yet, as described by Human Rights Foundation CSO Alex Gladstein, money-go-up technology can be seen as a Trojan Horse for the much more impactful "freedom-go-up" technology entailed by censorship resistance. While investment appeal entices regimes to willingly bring the horse inside the city walls, ultimately it is economic freedom that is unleashed to the benefit of us all.
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