Combatting Corruption with Cryptocurrency

This article was originally posted on the Let’s Talk Bitcoin blog.

In a March 2012 article written for the MIT Technology Review, Jessica Leber shared an anecdote from leaked State Department cables describing the shock of Afghani policemen when they received their first paycheck via the mobile phone payment system M-Paisa. The amount they received was around 30% more than they were receiving previously, prompting them to believe they’d received a raise. After some investigation, it was discovered that they hadn’t received a raise, but rather that their superiors had been skimming that “extra” 30% off the top and were now unable to do so with payments going directly to their subordinate’s phones. So deep was the corruption that after paychecks went digital some superiors even took to confiscating their subordinate’s phones in an attempt to cash the M-Paisa credits themselves.

The lesson here, aside from the importance of using encryption on one’s mobile devices, is that digital currencies offer unique ways to combat corruption that aren’t possible with traditional payment systems. Bitcoin compounds this effect by decentralizing control and adding features such as programmatic smart contracts, wallet backups, and file encryption to create a resilient, censorship-resistant payment network. And one more thing: the whole transaction history is completely public.

When I first learned about the radical transparency of the Bitcoin block chain, the history of all transactions which have ever been confirmed by the Bitcoin network, I was simultaneously attracted and repelled by it. My approach was cautious – here was a payment and monetary system which has full accountability for the honesty of every account balance mathematically hard-coded into the software, but with full accountability came full traceability of every satoshi back to the coinbase transaction from which it originated. It seemed a devil’s bargain: you can monitor the network, but the network can also monitor you.

Despite this fact, the pseudonymous nature of every Bitcoin address and the advent of “mixers” which bundle Bitcoin transactions together to conceal the sender and intended recipient from block chain investigators has led technologically-savvy privacy advocates to promote Bitcoin as a way to protect personal information when paying for goods and services.

While Bitcoin does have the ability to provide privacy, speed, and security for the financial transactions of private citizens and organizations, there are also opportunities for using the public ledger technology that Bitcoin pioneered to provide transparency and accountability for public figures and institutions.

Using an open public ledger system like Bitcoin, the entire funds flow from banks and public treasuries to government agencies and their contractors can be tracked to provide accountability for every unit of value received and spent. Government agencies and public officials could be associated with a specific payment address so that auditors and citizen watchdog groups can monitor the accounts for suspicious activity.

The huge amounts of waste, fraud, and “lost” money that recently occurred during the Iraq and Afghanistan occupations could have been prevented if public ledger technology had been used to provide full accountability for the funds. Government employees and citizens who are routinely victimized by corrupt officials could protect wages and savings from theft by using encrypted wallets and multisignature accounts.

Hyperinflation, capital controls, bank account “haircuts,” wage skimming by superiors, civil forfeiture, and other forms of kleptocratic government corruption and overreach are all made completely irrelevant by Bitcoin, which turns over control of the currency supply to a mathematical algorithm and control of the currency accounts to the individuals controlling the private keys that allow funds to be spent.

In the future, public institutions of all kinds, whether governments, NGOs, or even for-profit corporations, could see their accounting become fully transparent as stakeholders demand the use of public ledger technology to provide more accountability. Corrupt officials may find it more difficult to extract money from subordinates and citizens as more people use cryptocurrency to transfer funds peer-to-peer and store funds behind layers of encryption.

The technological breakthrough that cryptocurrency represents is likely to be a welcome arrow in the quiver of justice advocates around the world who desperately need such tools to combat serious cases of theft, fraud, and abuse. The good news is that the tools are available today – it’s now up to the people of the world to choose how, and if, they want to use them.