Cash makes street crime. Does Bitcoin make e-crime?

From the United States National Bureau of Economic Research, an excellent new paper.

Richard Wright et al exploit a terrific natural experiment, wherein some counties of Missouri moved to paying benefits by debit card (Electronic Benefits Transfer or EBT) prior to others, leading to a decrease in circulating cash in those communities.

“Our results indicate that the EBT program had a negative and significant effect on the overall crime
rate as well as burglary, assault, and larceny. According to our point estimates, the overall crime rate
decreased by 9.8 percent in response to the EBT program.”

Wright et al show that the cycle of crime is thereby reduced, with fewer subsequent crimes in retaliation. They posit that part of the significant decline in crime in the United States over the last fifty years is due to the decline in the use of cash. Cash is now used in only 50 per cent of transactions in the US, down from 80 per cent 50 years ago.

It's all about the Platypi, baby.
It’s all about the Platypi, baby.

The data is sound, the methodology makes sense and the conclusions are appealing. So what are the lessons?

Like many of us, I am a fan of PayPass. I have a Mastercard I sling for every transaction I can these days, because PayPass means no need to bother my fingers with signing or PINs. It’s terrific. I use it for the piddliest little transactions, like a cup of coffee, and I go to the ATM perhaps once a month.

But that electronic transaction is anonymous. Anyone who has my Mastercard could use it. I strongly doubt any vendor would attempt to match my name to the identity of the person using the card. That card is only good for transactions up to $100, but a swift criminal could probably rush up to the card limit before I managed to cancel it, especially if they took the card surreptitiously rather than by force.

So I worry that the rise of PayPass and the Visa equivalent could reinstate some of the street crime that has been ebbing away.

But an even bigger lesson is there to be learned, online.

As recently as a year ago, there was no real cash on the internet. For online transactions you used credit cards or you provided proof of cash transfers made in the banking system. Both of these were intermediated by financial institutions who take the blame for fraud. Sure, you could steal a credit card number online, just as you could offline. But that was tightly policed and internet commerce was relatively safe.

Now there are 12 million Bitcoins in circulation, worth $573 each. That’s $6.9 billion of cash. The hermetic and pure world of the internet, which was once all about cat videos and enthusiastic editing of Wikipedia articles has been sullied by cash and the crime wave that has followed.

Is anyone surprised the news has been rife with stories about Bitcoin theft in the last few months?

Flexcoin had $620,000 worth stolen.

Poloniex lost 12.3 per cent of its coins.

And of course the big one. Mt Gox lost 650,000 Bitcoins, worth several hundred million dollars.

Crime does pay, and the way Bitcoins are designed to be anonymous means that it pays without great risk.

Hacking will continue so long as Bitcoins are kept on the internet. It remains inconvenient for Bitcoins to be kept offline, if they are to be used as an actual currency. Even if they are only kept as investments, they still need to be brought to market for trade, and that offers up opportunities for hacking.

The introduction of Bitcoins to the internet has transformed the internet into a place that traffics not just ideas and new shoes, but also drugs and murder. In other words, it is now just like the real world.Image

At the moment, the online cash economy has a frontier element, with big audacious thefts, akin to the bushrangers of early Australia. That will die down.

The way I perceive the hacking risk being diminished in future is if the big companies that have experience in protecting online transactions get involved.

I can imagine having a Bitcoin account attached to my Commonwealth Bank account, and/or attached to my Mastercard. It would undo a lot of the supposed advantages of the electronic currency, such as anonymity, but introduce convenience and trust.

“True” Bitcoiners will moan about the way the point of Bitcoin is lost, while everyone else just appreciates the fact that their currency is now secure and functional. I suspect people’s enthusiasm for perfect anonymity pales in comparison to their desire not to lose the money they put on the internet.

Of course, Bitcoin transactions outside, say, the “CitiBank Bitcoin Protection Protocol” would still be available, just like the way I can pay for a car with a big wad of cash.

But the people engaging in these transactions place themselves at greater risk. Who is most likely to trade anonymity for risk? The same kind of people who currently use cash.

Might it be that Wright et al can write another paper in 20 years about Bitcoin and security that shows less Bitcoin being traded online correlates with less online criminal activity?