Cryptocurrencies are one step closer to becoming a regular trading commodity. Recently, Coinbase (one of the largest platforms to trade digital currencies) launched the ‘Dow’ of cryptocurrencies, an index fund that reflects the currency’s market trends.
So far, cryptocurrencies have remained a part of the global economy’s wild west. Some of the largest internet sites, most notably Google, Facebook and Twitter have banned cryptocurrencies advertising through their platforms.
Indeed, many critics associate the encrypted digital currencies with organized criminal networks laundering their assets and orchestrating international fraud schemes through the dark web. There is truth to that. Some cryptocurrencies, like Monero and Zcash, are specifically designed to avoid tracking. They do it by crafting the currencies’ blockchain (the underlying technology) in a way that disguises the recipient or sender’s address, as well as the transaction amount. This is especially useful to mask dirty profit. It is then unsurprising that these digital currencies have increased in value and become more popular among online extortionists.
Not all cryptocurrencies, however, are cut from the same coin, so to speak. They can be designed to be fully trackable, like Global Denomination. This makes transactions safer than even using regular cash. And then, there’s everything in between. The most notable example in this grey space arguably is Bitcoin, which tracks every transaction but does not require the sender or recipient to disclose their real identity.
Cryptocurrencies in politics
As cryptocurrencies become increasingly normalized (illustrated by the release of the Coinbase Index), and as their value keeps on rising—albeit under some volatility— it is key to keep track of their usage in areas like campaign financing, state procurement and lobbying.
Politicians seem ready to jump onto the cryptocurrency train. But these new avenues for private entities (foreign and domestic, legal and illegal) to funnel money into the political system have serious repercussions for the fight against corruption and policy capture.
International IDEA’s 2017 report on the Global State of Democracy provides a detailed account of how "big money provides a disproportionate advantage to a selected few." In the report we explore a new set of democracy indices. These revealed that while over the past 40 years democracy as a whole has grown and expanded around the world, corruption levels have not improved during the same period.
The mass use of new technologies, like cryptocurrencies, can therefore have a profound effect on the integrity of politics, for better or worse. We know this because the same happened in the past with the introduction of other types of technologies, like social media and big data analytics.
What experience tells us
Former UN Secretary-General Kofi Annan recently warned about authoritarian regimes’ strategic use of social media to crack down on personal freedoms. The examples sadly abound. Russia has recently dominated the headlines for its strategic use of Facebook and Twitter to meddle with elections in Europe and the United States. Similarly, Rachel Botsman of Oxford University discussed at the World Economic Forum in January the pitfalls of granting technology companies with far-reaching responsibilities over individuals, without matching levels of accountability. Uber, for example, hosts an incredible amount of data. How it uses it (to safeguard its users, for example), or how it ought to use it, is still a matter of debate.
The problem is that the speed of implementing regulatory processes measured in years is too slow given that the speed at which these technologies evolve can be measured in milliseconds. Current policy making processes are not designed for the digital era.
But there are also positive examples of new technologies helping in the fight against corruption and state capture. For example, digital tools for political parties to report on their income and expenditure, or for authorities to disclose these reports to the public, is making it easier for civil society watchdogs to keep an eagle eye on them. Early warning and graphic information systems also offer good solutions to fight corruption and organized crime. These tools allow us to systematize information on threats and risks, going from the micro-level (the towns and municipalities where criminals operate) to the macro-level (the connections that tie the different nodes in the transnational network’s chain).
The bottom line
What these examples tell us regarding cryptocurrencies is that at the heart of the matter is not whether they are good (or not) for democracy. It is whether we are well prepared to regulate them. And when it comes to regulating money in politics, we need to start considering banning cryptocurrencies that do not allow for proper tracking, while incentivizing the use of cryptocurrencies that do. An easy win would be introducing more regulations mandating that cryptocurrency wallets be tied to traditional bank accounts. These and other strategies can tilt the market in favour of transparency and away from criminal activity.
Have you read?
This blog post was prepared as part of International IDEA’s participation in the 2018 OECD Global Anti-Corruption & Integrity Forum #OECDintegrity.
About the author: Catalina Uribe Burcher is a Senior Programme Officer at International IDEA, focusing on research and policy-oriented analysis regarding political finance, integrity, and the threats that transnational illicit networks pose to democratic processes.