Thursday, September 3, 2015

Do payments systems like bitcoin change which transactions are treated as repugnant?

Rod Garratt of the NY Fed and UC Santa Barbara explores the idea that distributed payment systems like Bitcoin might change the manner in which some transactions come to be effectively regarded as repugnant:

A Distributed Version of Repugnance as a Constraint on Markets

"But who decides what is repugnant? In democratic societies, these decisions are ultimately made by the lawmakers, who are influenced by their constituents. Of course, it’s possible that an influential minority could exert undue influence on this process, but let us, for the sake of argument, say that the process is perfectly democratic, so that acts deemed repugnant actually reflect the majority’s wishes. What this basically means is that, in a democratic society, classifying things as repugnant, or declassifying them, requires some form of public debate and consensus formation. 

Or does it? Instead of relying on laws that punish repugnant behavior, it is conceivable that individuals or institutions might intervene directly, by preventing the payments from occurring in the first place. For the most part, existing payment platforms do not impose restrictions on the types of transactions that they facilitate beyond the requirement that the transactions be legal. However, it is worth noting that in addition to requiring that transactions be legal, credit card companies also reserve the right to limit activity that they, at their own discretion, deem potentially harmful to their brands (see rules documents from Visa, Section, and MasterCard, Section 5.9.7). 

In the last few years, a new type of payment system has emerged: the distributed public ledger. This new technology facilitates payments in terms of virtual currencies, most notably Bitcoin. The Bitcoin protocol uses a “proof-of-work” process that decentralizes clearing and settlement. Agents, known as miners, compete to win the right to validate transactions. Without delving into details, the important aspects are that (1) a miner’s probability of winning the right to process transactions is proportional to how much computing power he or she assigns to the task and (2) miners can choose which transactions to validate. This means that a miner can avoid validating transactions that he or she considers repugnant and that, if a majority of miners agreed, such transactions can be significantly delayed or even prevented. 

Virtual currencies like Bitcoin create a new opportunity for expressing views on repugnance that allows individuals to impede or even prevent transactions that they deem repugnant."
"There is at least one example where something like this has already occurred. Satoshi Dice is an online gaming site that uses bitcoin as its primary form of payment. In the spring of 2013, members of the Bitcoin community started to complain about these transactions and reportedly started excluding them from the transaction blocks that they were processing."

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