Thursday, 14 December 2023
by Rose White
Judaism is based on a construct of ethical codes of conduct that are taught at weekly gatherings. Each week on Saturday mornings, Jews come together to read a weekly portion of the Torah (Old testament) to learn about the tenets of living in harmony with Jewish ethics. One of these principles is the ban on taking interest on a loan. The ban is mentioned in the weekly Torah reading Ki Tzei.
Bitcoin = the protocol and payment network.
bitcoin = the currency.
Initially challenging for modern investors to comprehend, the ban on interest is rooted in severe consequences for non-payment in pre-biblical times, often leading to debt bondage and enslavement of the debtor and their family. This prohibition aimed to prevent such dire outcomes. The question arises: why is charging interest a standard practice in modern times?
Interest typically serves to counter the loss of purchasing power caused by monetary inflation. The supply of money matters. How much of the total do you own? What happens if there are 1000 units of money in the economy, you have 100 and the government increases the supply by 1000 units ? Your money is worth half as much as before. To offset inflation, market participants use mechanisms like interest rates.
Additionally, giving up money creates an opportunity cost. The return you could get on your money in the future if you parted with that money today should, in theory, be positive given the risk of loss and the fact that you cannot use the money for other investments.
Jewish law prohibits charging interest but it does not prohibit commerce and the exchange of money, including loans. In fact, the borrower remains responsible to pay back the debt in full. Lending is viewed positively and is consistent with Judaism’s ethos of caring for others. Yet, from an ethical standpoint, opportunity costs shouldn’t play a role in demanding interest rates. Unfortunately, strict restrictions on interest led to a decline in lending, which negatively impacted the economy. A solution had to be found.
Jewish scholars invented a clever workaround to the need of charging interest, called Heter Iska. An agreement through which two parties become business partners, rather than one party extending a loan to the other. This type of business venture is called a Pikadon.
In this venture, no interest is paid, but a complex partnership is formed where part of the profit is shared with the lender. The reasoning is that since both parties are partners, they also share the risk of the business, and thus sharing the profits is ethically justifiable and is not seen as an interest payment.
While this is an interesting approach to creating modern guidelines that follow ancient Jewish law, it may not fully address the core of the issue, namely the ethical one. After all, charging interest is forbidden. Not just in Judaism, but in all monotheistic religions. I suggest that the problem could be solved ethically with Bitcoin.
Bitcoin is money that eliminates the need for lenders to charge interest to counter purchasing power loss, since bitcoin is disinflationary, meaning the rate of inflation (new supply) decreases over time. According to the protocol’s code, mining rewards halve roughly every four years until the last fraction of a bitcoin is mined in 2140. After that the inflation rate will be zero. These rules are hard-coded into the protocol and cannot be arbitrarily changed. Bitcoin is designed to increase purchasing power over time, forever.
This marks a significant technological advancement. Unlike other monies with elastic supplies that can expand with demand, such as precious metals or fiat currencies, bitcoin has a perfectly inelastic supply.
In theory, on a Bitcoin standard, where bitcoin is the main unit account, someone lending bitcoin does not need to charge interest to offset inflation, because theoretically, the bitcoin that someone has lent out gain purchasing power over time and will have gained purchasing power by the time the loan is repaid.
Repaying loans denominated in bitcoin poses challenges as long as transactions are conducted in fiat currencies like dollars or euros. Converting bitcoin to fiat for business transactions subjects the funds to monetary inflation, contrasting bitcoin’s inherent value appreciation due to its limited supply. In order for Bitcoin-based lending to work, a switch to a global Bitcoin standard is necessary. The global economy is a long way from that. However, there is an ongoing acceptance of bitcoin as a legitimate payment method and there are a number of startups and established financial institutions that offer Bitcoin-based lending.
It remains to be seen which Bitcoin service providers will continue to be trustworthy and competitive. But the trend is very clear: Bitcoin is becoming an increasingly important part of the global economy.
In 2023, several of the world’s largest asset management firms have filed Bitcoin ETF applications for review by the SEC. These include BlackRock, Fidelity, Invesco, Franklin Templeton Investments, Wisdom Tree, VanEck, Global X, Ark Invest, Valkyrie, Bitwise Asset Management and Galaxy Digital, which have approximately $16.7 trillion in total assets under management (AUM).
Bitcoin serves as a tool to overcome the ethical barriers in lending, aligning with Jewish principles. In this context, “koscher” goes beyond its traditional use for food and denotes an action consistent with Jewish ethics. Bitcoin is koscher because, as disinflationary hard money, it removes the economic incentive to charge interest. A concept so abhorrent that it has become a religious law not to do so. Bitcoin has the properties to serve as a monetary base layer for a financial system consistent with Jewish ethics.
In Judaism, self-enrichment through others is considered unethical. A good example of such unethical behaviour is the continuous creation of money in the fiat system. The state finances itself through money creation, while everyone who holds their wealth in the inflated currency loses purchasing power.
Bitcoin, a decentralised monetary protocol, prevents such enrichment, as no central authority can inflate the supply of bitcoin or control the network. This characteristic makes bitcoin ethical money because it avoids the unethical practice of profiting at the expense of others.
Judaism adapts to modern circumstances, including changes in lending practices. However, the current approach lacks the ability to fully preserve its ethical essence, stemming from the immorality associated with interest. This concern is shared by all monotheistic religions, including Christianity and Islam.
Sharing risks and rewards rather than paying interest was one of the first historical changes in the Jewish monetary system. The next revolution that is coming, Bitcoin, offers a tool to finally eliminate the ethical concerns in lending. As disinflationary hard money, it removes the economic incentive to charge interest. Providing a monetary foundation for a universally ethical financial system. Bitcoin is “koscher”.
I would like to thank Rabbi Shlomo Bistritzky for his feedback on halachic matters.
This is a guest post by Leon Wankum. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.