Without doubt, the network will be used as every human invention for illegal purposes too. Nonetheless, these illegal purposes are severely restricted by a simple fact: Using the network, we can cooperate with others, but we cannot force them to cooperate. Thus, the main characterization of the illegal activities in the net is that all the participants consent to cooperate, participate because of their own free decision.
Let's evaluate some types of such illegal markets in more detail:
Thus, from a libertarian point of view, the side effects of supporting the first three types of crimes are even positive - they correct the injustice of the laws of the state, decreasing their negative side effects. Only the last type defines a real negative side effect.
There is one effect which suggests that those who use the net for illegal activities will gain more: For legal activities with strangers, one can use the legal system for conflict resolution, which is impossible for illegal activities. Even if the legal system is clearly inferiour in comparison with the network, it nonetheless means that the gain from participation is not as large as that for illegal activities.
But another effect points in the other direction: It is the problem of undercover agents. The danger of undercover agents is that finishing one cooperation successfully does not decrease the danger: Police may wait some years before using the information given by the agent to imprison those who have cooperated with him. Thus, the information given about the past promise-holding behaviour of a stranger does not give much certainty about him not being an undercover cop. The defense against this danger is localization of the network: Illegal activities which require personal contact, thus, are endangered by undercover agents, have to be restricted to small numbers of people. One of the main advantages of the network therefore cannot be used for illegal activities.
But if the network itself is legal one does not have to care about undercover agents as long as one is not interested in illegal activities. This effect increases the advantages of participation in the network for legal activities in comparison with illegal ones.
The situation would be different if the network itself would be illegal. In this case, every activity in the network would be endangered by undercover cops, and legal activities would not have those advantages. This effect is a particular case of a quite general pattern: If one makes some behaviour illegal, actual realizations of this behaviour become worse than before. If one makes the network illegal, one reduces mainly the legal activities in the network, while the illegal activities are influenced much less.
One of the most obvious illegal applications of the network is the improvement of illegal drug markets. Consumers as well as dealers meet each other in a pseudonymous way on some virtual drug market in the network. Those who violate their promises are out of the game, once this becomes known everywhere.
The consequence will be much more stable quality of the drugs: The dealer promises drugs of some standard, and will be out of the market if he violates this promise. The consument is much less dependent on a particular dealer, because there are lot's of other dealers in the network, and the network gives him information about the reliability of the dealers. This is a very important positive side effect, because it saves lifes - most letal cases of drug use are the result of heavily changing quality of the drugs.
Then, the system of conflict resolution by arbitration in the network allows for much more peaceful conflict resolution. Many violent crimes in the drug milieu are a consequence of the absence of such peaceful methods to solve conflicts: The victim cannot go to the police, because it has participated in illegal activities too, thus, it has to rely on other ways to protect his rights and to penalize the wrongdoer, namely on his own gun. This impossibility to call the police, of course, remains. But to violate contracts becomes much riskier if you appear on the blacklist for such violations.
We have, therefore, two important side effects which save lifes: More reliable quality of drugs, and better methods for conflict resolution. Above are important, life saving advantages.
Another side effect of the network is that the life of police informants becomes much riskier: They risk to appear on the blacklist. If, for this reason, trading drugs becomes less dangerous, prices will go down. If this is positive or negative depends on the political position: Those who prefer legalization of drugs anyway, and certainly those who are involved in the trade - dealers as well as consumers - will consider it as yet another advantage.
We conclude that the influence of the network on the drug market is similar to that of a legalization. The arguments in favour of legalization are strong - legalization would save lifes. It is a classical failure of mass media democracy that it fails to hear these arguments and to legalize drugs. The network allows to minimize the negative side effects of this failure.
Books, music, films and computer games are things which are often exchanged today for free, violating copyright. But these free exchange networks are under strong political pressure today. Because of the encryption provided for everything in the network, it may be used for such free exchange in case of increasing persecution.
Now, copyright is an artificial monopoly, created by the laws of the state. But the creator of some piece of art receives something even without copyright: The fame. To clarify who deserves the fame for creating something is easy - all one has to do is to protect priority by publishing and archiving it with date stamp in some neutral archive, something which is possible in the network.
Fame is something which can be transformed into money as well: Public lectures or meetings, payments for participation in advertizing or TV shows. Thus, famous artists will not starve to death. But there will be less monetary incentive to work as an artist, and, as a consequence, less products of arts on the market.
But is this really bad? I doubt. There is no underproduction of books, films, music or computer games today. Instead, I would argue there is far too much, and of low quality. So, if there will be less of it, it will be even better.
Moreover, there is a quite obvious correlation between bad quality of the product and "making money" as the incentive for the artist to create it. Those who only want to make money usually produce only cheap, bad art. The really good, true artists create even if they cannot make money at all, even if they are faced with penalties for doing it. If there is something we have lost with communism, it is the products of arts created in the underground, the samisdat literature. Their creators have not received money for copyright, but prison sentences and other forms of persecution.
Now, I do not want to argue that artists have to be persecuted to increase the average quality of their products. But that low payment for artists increases the average quality of their products is a quite obvious and positive effect.
But even more: I would argue that to a certain degree a decreasing number of products of art is in itself positive for the society as a whole. It increases the probability that two persons like the same artists, or the same products of art. But this is an improvement. Many old people remember the times when there was a much greater shared knowledge of folk songs, which has allowed them to sing them together. Having read the same interesting book is a starting point for an interesting conversation about its content. Of course, this argument is not very strong: Even if there is a large number of art products, only a few of them will become popular, and these winners can play the same role. Nonetheless, it is sufficient to show that large quantities of art products are not something positive in itself.
Summarizing, we see that there is nothing wrong with a world without copyright, a world where artists receive less money than today. Good artists will continue to work, and what they will receive - fame - will be sufficient as their payment.
Copyright for scientific articles is simply nonsense.
Scientists are paid today by the government. It is part of their job to publish articles in scientific journals, and they receive no extra payments for this. As well, all the work of evaluating the articles by peer review is done by government-paid scientists. Thus, for all that government (the taxpayer) has already paid, but the journals, which own the articles paying nothing, ask for money they do not deserve at all.
Scientific journals have had their value in the past, when they have participated in the distribution of scientific knowledge. It was their job to print the journals and to distribute them to public libraries. Today, they do more harm than good, because they effectively restrict access to scientific papers in the net: Online copies of scientific articles are sold for phantasy prices which, I think, almost nobody pays, except governement institutions. As a consequence, these articles become inaccessible to independent scientists without institutional affiliations.
Thus, the copyright for scientific articles is simply stupid, it has no justification at all. The network would allow to solve this problem in an easy way, by creating a (formally illegal) collection of all scientific articles. One supportive scientist with institutional access to all the copyrighted articles would be sufficient - he could install some robot who downloads all the articles and puts them into the network.
The network leads to free exchange, without any copyright restrictions, on another market as well: The market of pornography in general, including child pornography. The consequences will be similar: Once free child porn is available in large quantities, the possibilities for child porn producers to make money with child porn will be heavily reduced. Instead, it is the fight against the copyright-free exchange of child porn which would be supported by child porn industry, in the same way as the music industry supports the fight against copyright violations for music.
But maybe there simply is no child porn industry, so that the situation is simply different? It is indeed quite probable that there is no such industry in the usual meaning of "industry", that, instead, most of the child porn is created as a side effect of pedophile relations which would have happened anyway, where the child porn has been created only for memory or exchange between friends. But the argument does not depend on the size of the "industry": Even if everything is home-made, free legal exchange reduces the market price, thus, decreases the production.
There is one counter-argument: With the network, selling and buying child porn becomes much less dangerous too. In the same line of argument, legalizing free exchange would require the legalization of owning child porn, which would make persecution of child porn trade almost impossible: To store only one copy of the porn, for "personal use", would be sufficient for the trader of online porn.
But if free exchange is possible, one simply cannot make money selling it. So, it is simply not dangerous that persecution of trade becomes more difficult - if exchange is free, if no copyright and no law restricts it, one cannot make much money selling it. And in a market economy it makes no sense to forbid something which does not allow you to make money.
Unfortunately, child porn is a question where modern mass media democracy has gone completely insane. The simplest, most effective way to destroy any child porn market, namely legalizing free exchange of such porn, leaving only selling child porn for money illegal, is politically completely unrealistic: To propose a legalization of free exchange of child porn would be the political death for anyone who does it.
How can one explain that the same measure which the music industry would like to see implemented against the free exchange of music is considered to be a fight against child porn? The explanation requires a more detailed consideration of the process of formation of public opinion by mass media and the back-reaction of public opinion on these media, a process which is unstable and can lead to completely irrational results. But this is a different problem. While closely related (because if a proposal is a good one or not always depends on the alternatives), it has to be considered elsewhere.
Whatever, the simple fact remains: The effect of the network will be that free exchange of child porn becomes possible, which reduces the prices for child porn and, as a consequence, destroys in an effective way any child porn market.
There are lot's of markets with a high level of government regulation. One of the most important example is the job market, with minimal wages and restrictions against firing a worker as classical examples. Now, the network provides a simple possibility to circumvent these restrictions. The true, unrestricted contract is a private contract stored in the net. Part of it is the promise of all participants not to use state courts for conflict resolution. If state control is strong enough, some official fake contract can be created as well, but it is part of the true contract that this fake contract plays no role at all. For conflict resolution, the network-internal arbitration system is used. Using state courts for conflict resolution will be strongly forbidden in the contract.
What will be the consequence of this? It will be clearly and obviously positive. Economists have always argued that such laws are counterproductive: Minimum wages increase the problems of the poor, because those with low abilities simply find no job at all instead of a poorly paid one. And restrictions for firing workers have negative consequences as well: The firm has to think twice before offering a new job, once it is unable to fire the new worker if the market conditions become worse.
Similarly, consumer protection laws may be violated by users of the network: Things which in principle can be sold in the net may be sold pseudonymously in the network. The resulting contracts may violate consumer protection laws. As part of their contract, the participants will not use state courts for conflict resolution. Instead, conflicts will be solved internally.
But, as in the previous cases, this is more an advantage for society than a problem. The reason is that legal consumer protection standards are bad for the poor: They establish some minimal standards for quality of some products. As a consequence, the prices for the cheapest legal products increase. This hits the poor: They have to pay more, they have to pay for some higher quality products they don't want to buy, at least not for that price.
Consumer protection laws also decrease competition on the market: The standard strategy for newcomers is to produce cheap things for cheap prices. "Consumer protection" protects not the consumer, but the established firms, because it increases the costs of entering the market - one has not only to produce the product, but to produce it following the minimal, required standards.
Last but not least, there are simple ways to establish quality control for those who want it, ways which are compatible with freedom and which can be implemented and supported by the network: Labeling. A label is given by some agency which evaluates the products. The firms have to pay for evaluation. But the label has to give some promises about their fairness, and end on the black list if they cheat or are bribed. Thus, only fair labels will be attractive to consumers.
Note that labels in the net will be protected by simple technical means - the labeling company signs their classification of some particular product of a particular firm with their electronic signature. This is something which can be easily checked by a robot.
As well, there are some types of trade which are increasingly regulated by governments. In particular, insider trade is worth to be mentioned. Now, insiders can use the anonymous possibilities of the network to trade as much as they like.
The overall economic effect of this positive: One can expect that the price on the network market, which includes the offers of the insiders, reflects the true economic situation in a more accurate way. The insiders, knowing about some good or bad news about a company, try to sell resp. buy stocks, thereby decreasing resp. increasing the prices. As a consequence, the insider knowledge influences the price in the correct direction: With insider trade, the price of a company having bad news for insiders only will be lower than without. But more accurate prices are an obvious advantage for the society as a whole.
The network supports arbitrary contracts between people. These contracts are private, only the contracting sides know about the existence of the contract and its conditions. But a bank is nothing but a legal person making contracts with people: You give me now some amount of money, and we will return you some more money whenever you need them. Such contracts can be made in the network too, without a possibility of control by governments.
As a consequence, a network-internal banking system is likely to appear. It would allow you to buy and sell whatever can be offered for money inside the network, circumventing whatever restrictions of banking operations governments impose, with black markets for officially inconvertible currencies as an important example. As in most of the previously considered problems, there are not much good arguments in favour of these types of government regulations: The long term advantages of the free market solutions probably overweight any short term advantages of the government regulations.
The illegal banking which is possible in the network offers its clients complete secrecy: Government control becomes impossible. Even if there may be government spies in the bank, the anonymity of the network itself would allow the clients to protect themself: A particular bank may refuse to accept pseudonymous clients, but nothing prevents other banks from accepting them, thus, the market forces will allow pseudonymous customers to use banks.
Now, current governments have found that one of the most effective ways to fight various crimes, in particular drug-related crimes, is the control of the banking system. In particular, one problem of trading drugs is that the money one receives from drug users are a lot of small cash, those which one finally has to pay to local drug producers in the third world need a lot of small cash in another currency, and what one really wants to have is a large amount of legal money on your bank account. The transfer of money between these three different systems appears to be a critical part of the whole operation.
The uncontrollable bank system of the network allows to solve this problem, at least in part. In particular, the drug user can pay by a money transfer in the network, and, as well, the local producer can be paid in this way. All they need are some local exchange points for small amounts of money in whatever currency. As well, if the network becomes larger, one can sell and buy more and more things in a network-internal way, thus, one does not need to transfer money into the legal, government-controlled circuit.
In some sense, the problem of cleaning dirty money remains unchanged: All the money in the network banking system are as dirty as any large amounts of cash in small pieces. Thus, the transfer of money between the legal, government-controlled banking system and the uncontrolled network banking system remains unchanged.
But, on the other hand, the situation changes as well if the number of participants of the net becomes large enough: In this case, it may become unnecessary to legalize money, once one can buy whatever one wants to buy in the network. If you buy a luxery car and pay with lots of 10 dollar notes, you look suspect. But if the seller is part of the network, you simply transfer the money through the network. The drug-using prostitute does not have to use cash as well, if her clients pay her through the network, and she buys the drugs through the net as well. The otherwise socially integrated cocain user may receive some of his payment through the network, decreasing by the way the income taxes he has to pay, while his employer may sell the results of his work in part through the network too. If the number of people in the network becomes large enough, the circulation of money inside the network becomes big enough to reduce the necessity to transfer large amounts of money into the legal system.
This effect decreases the ability of the police to detect some forms of crime. But it should be noted that these crimes are only derivative: The operation of the network in itself does not contain any inherent wrongdoing. The criminal users of the network are not doing evil things in the network - the evil things they do outside the network. The logic of government control of the banking system is a simple one: Everyone who has large amounts of money is suspect, and has to prove his innocence by allowing the police to control how he has obtained them. The network simply destroys this totalitarian scheme of control.
In this sense, the abolishment of government control over the banking system is comparable to the removal of every other form of government control over the private life of its citizens: In every case, such governement control allows to prevent some crimes, thus, the removal of this government control has the side effect of making it impossible or less probable to detect some crimes. Nonetheless, we do not want government control of all our life, we prefer to live in freedom. A free, uncontrolled banking system is therefore preferred by lot's of people..
Paternalistic governments often like to protect their citicens from the dangers of loosing a lot of money by gaming, speculative investments, or getting money for unreasonably high interest rates. Those of us who do not like these forms of protection by government can use the network to circumvent them.
From a classical liberal (libertarian) point of view, such laws have to be rejected anyway: Governments have no right to be paternalistic in relation to their citizens. For those few which are unable to manage themself, there is a simple way out: They can give their money to some trusted person for management.
Of course, a network which is not controlled by the government allows to hide a lot of things from taxation. Therefore, one can expect that the network may be used to minimize taxation in legal as well as illegal ways.
But whatever is done to avoid tax payments in the network can be done without it as well. It is only a little bit less comfortable and less safe.
For example, payments on a black working market can be made through the network. But the same payments can be made in cash as well.
The network-internal banking system allows everybody to circumvent the government control of their bank accounts.
The network heavily improves cooperation between people who don't know each other personally. Cooperation is in general something positive - all participants of a successfull cooperation win.
But nothing is without a dark side. Even improving cooperation between people in general has its dark side. This dark side is that those who want to harm others - terrorists and gangsters - can use the network as well to improve their cooperation. In particular, the network leads to the following negative side effects:
On the other hand, all these supported crimes are crimes done outside the network, with victims who are not prevented by the network to call, in this case, the police, and with real evidence about the crime in real life which may be evaluated by the police.
Once the network enhances the reliability of cooperation in general, everybody who wants to cooperate with others wins. This includes also those who want to cooperate in illegal domains.
Even more, one has to expect that initially (until everybody uses the network) users with illegal interests will be overrepresented: The reason is that they gain more. Using the network is a gain for everybody who wants to cooperate. But those who want to cooperate on illegal markets gain more, because legal markets have an inferior but working replacement - the current legal system - while illegal markets lack this possibility.
On the other hand, not everything illegal is bad. The network is especially useful to improve illegal markets. But illegal trade is more often than not a victimless crime, an instance of paternalistic laws which should be abolished from libertarian point of view. As well, most of them should be abolished from utilitarian point of view too, because making these forms of trade illegal has side effects much worse than their gains. Our consideration of various illegal markets has shown this for such different markets as the drug market, where improved quality saves lifes of drug users, child porn markets where free distribution moves the prices down, destroying therefore any monetary incentives to create child porn, copyright violations which may decrease the current overproduction of low quality art, and the labor market where minimum wages create unnecessary unemployment today.
The network also allows to improve various legal and illegal methods for tax avoidance. Given that economic theory strongly suggests that government spending is much more inefficient than private spending, this may be considered as an improvement as well.
This does not mean that everything is nice, that there are no unwanted side effects of the network. Some real criminals can use the network to improve their criminal abilities, in particular terrorists, contract killers, kidnappers and buyers of stolen goods.
But it is worth to note that in all of these cases the real crime itself has nothing to do with the network. The real crimes are done by real criminals against real people outside the network, with classical means. Different from illegal markets, these real crimes have real victims which continue to call the police, and most of the classical police methods to fight these crimes continue to work. The network is used only as a tool in the background, comparable more to the use of cars for driving away after a bank robbery instead of weapons for the robbery itself.