BitCoin, the Most Dangerous Project Ever?

Jamie found a followup to the bitcoin story we've been following awhile. The article talks about the untraceable, un-hackable nature of BitCoin. They can't be locked down like PayPal, and the article predicts that governments will start banning them in the next 18 months.

Article Has a Very Strange Conflict

[eldavojohn]

First it says:

Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures to verify the chain of ownership.

Then it says:

Of course, since bitcoin transactions are untraceable, you would have zero recourse if you sent a dozen bitcoins to someone for a couple of tabs of LSD. Just like you might lose your $10 if you gave it to a kid in the school yard for a dime bag and he never came back.

Well, which is it?

I first read about BitCoins on Slashdot a while ago and what intuition I have seems to wager there's a lot of Catch-22s with this pseudo-fiat currency. I mean the value is derived from scarcity but is also tied to what ... computational complexity? They serve absolutely no purpose with no possible side usages (like gold). The only purpose they serve is being a resource in contention. So what happens when people just decide to stop contending for it?

I think that the title of this article being "BitCoin, the Most Dangerous Project Ever?" is a crude attempt at a self fulfilling prophecy as it's no danger unless people start to use it and actually value the BitCoins at their trading rate. I liked the section titled "BitCoins in Real Life" that says:

In the next year you’ll hear about people in casinos in Vegas buying and sell bitcoins for cash and casino chips.

Riiiiight. I somehow doubt that.

I think this amounts to some very smart people engaging in a cute little experiment that will experience initial success as those with GPU farms get some of this novel currency. But it can never grow very large because you need a pretty expensive infrastructure even to handle BitCoins and the only interests it serves will be those industries that want easy untraceable ways to exchange value for illegal products or to avoid taxation. And once that's exhausted, I suspect it will flounder.

Does anyone honestly think the promise of protection from inflation will cause people to ask for their paycheck in BitCoins?

Not untraceable.

[Timmmm]

It's not untraceable, at least not easily. As I understand it, every user has a copy of the the complete history of every bitcoin. Every coin is explicitly traceable - much more so than cash. The only way in which it is untraceable is that you don't know which bitcoin identities correspond to which real-life identities. Unless you happen to run an exchange, or carry out transactions with known people.

The way around it is by using the http://bitcoinlaundry.com/ [bitcoinlaundry.com] which jumbles up the coins, but then you have to trust that they aren't actually run by the FBI/whatever.

I think the banning prediction is right though (although maybe not 18 months). If this becomes popular there's no way it will stay legal. The government will be able to stop it fairly effectively by shutting down exchanges.

FUD Much?

[lavagolemking]

TFA looks like a biased politically-motivated piece, likely written by someone who works for a bank. It talks all about how operating currency independently from the banks or government, who are there to protect you, is dangerous for you (only criminals would do something like this, right?) and risks toppling the government. Of course it will cause problems for banks; people using it might not have to deal with abuse, fees, or identity theft from a badly broken security model that is our financial system when they close their bank accounts for it. FUD aside, I suppose that in itself is reason for the governments to ban it, since the powers that be have something to lose. At least if they're in the pockets of CEOs like they seem to be as of late...

Say what?

[ath1901]

I thought they wanted to be funny but there was no punch line. If the article wasn't supposed to be funny, it must have been machine generated (like SCIgen). Statements like this give it away:

* Bitcoin is unstoppable without end-user prosecution.

What does that actually mean? Are standard coins and notes "stoppable" and "with end-user prosecution"? Could someone come up with a car analogy so I understand?

Re:Article Has a Very Strange Conflict

[IamTheRealMike]

I agree the article is badly written. Transactions take place between public keys. As a public key is just a big random number, they are essentially "anonymous" unless the key is linked to your identity somehow - for example, because somebody you traded with told the police "I sent X coins to Eldavo John and he used address Y".

That's why it's better described as pseudo-nonymous rather than fully anonymous. It's possible to break the anonymity if people co-operate. I'd say it provides about as much privacy as the regular internet does. An IP address is basically private to regular citizens. If you represent law enforcement and turn up at a bunch of companies with the right paperwork you can make everyone work together and the privacy of the IP address falls.

It can never grow very large because you need a pretty expensive infrastructure even to handle BitCoins and the only interests it serves will be those industries that want easy untraceable ways to exchange value for illegal products or to avoid taxation.

Well, to handle Bitcoins today all you need to do is install and run the software from bitcoin.org. It runs just fine on regular servers, desktops and even laptops - hardly expensive infrastructure. If the system takes off and traffic levels reach PayPal levels, running it on a laptop won't be feasible anymore, you'll need some kind of high end server. If the system really takes off and starts matching VISA, a node would have to be distributed and might take a rack of machines. It never really gets infeasible because there is a "lightweight mode" in which the resource requirements are much lower and the security properties are slightly weakened. In this mode it's quite possible to run the system on a smartphone. Your device is independent, but if somebody is able to overtake the networks hashing power it can be made to believe anything. Right now that's 1-2 terahashes/sec, not something that's going to be beaten by anything except rich, sophisticated organizations (big tech companies or governments).

But I think your question/pondering is more about whether Bitcoin has value beyond mischief. I think it clearly does, otherwise I wouldn't be working on it ;) The existing electronic payments system isn't that great, really. To pay for something instantly over the internet today you have to use credit cards. Wiring money is an alternative but due to outdated banking systems it's extremely slow, money moved this way often moves slower than a physical truck would even though the transfer is actually electronic. It's also quite expensive.

Credit cards have a bunch of problems for both buyers and sellers. For sellers the biggest problems are chargebacks and the costs of taking part in the system. It's really hard to handle chargebacks. Big companies use sophisticated risk analyses to try and spot unusual behavior, smaller companies just bump the price of everything by 10% to handle the fact that some payments just won't happen. The costs of taking part are also a problem. You can't just install some software on your web server and go. Credit card details are basically big passwords, but in an inconvenient form that you can't change and that every merchant you buy things from must be given. Unsurprisingly, this is totally insecure even with the PCI auditing process that is intended to ensure merchants keep CC data safe. See the recent Sony breach for an example.

Credit cards aren't really great for buyers either. Whilst chargebacks are useful, you can't opt-out of the ability in order to get lower rates from the merchant, or set up some other kind of escrow scheme. For another, the system is very inflexible. Whilst you can theoretically take steps to secure your CC credentials better on your end, the fact that you share them with anyone you buy things from makes such effort mostly worthless. Finally they are kind of inconvenient. Despite being one big password you usually have to type in several long, hard to remember codes and

Re:Tabloid trash

[Anonymous Coward]

Because the Confederate states were full of slave owning traitors. As much as I'd like to watch the southern half move even closer to a 3rd world nation they aren't allowed to secede or print confederate money.

You can take your Confederate money and shove it up your libtard ass.

Umm... I'm confused

[Millennium]

Among other things, the article makes two claims about Bitcoin: one, that the coins are untraceable, and two, that because each transaction is cryptographically signed, you can verify the chain of ownership of any Bitcoins you are given.

Doesn't the second point contradict the first?

Re:No shit

[Khyber]

"It is a pretty clear cut case."

Please explain the fake money at Chuck E Cheese and other places that have arcade games, then. It's intended for use as current money (geared to be accepted by CURRENT coin collecting and vending machines, it also weigh the same and is similarly-sized to our currency, for the purpose of compatibility with current machines.)

Re:Tabloid trash

[Anthony Mouse]

There are alternatives other than "is legal tender" and "is worthless." A thing is worth whatever people will pay for it. If some people start accepting bitcoins as payment, other people will be willing to pay money for bitcoins in order to use them as payment -- particularly if the exchange rate is favorable. Once people realize that they can thereby sell their bitcoins for money to those people, more people will be willing to accept them as payment.

This has nothing to do with its status as legal tender. Canadian dollars are not legal tender in the US, but if someone on the US side of Niagra Falls wants to operate a store and list all the prices in US and Canadian dollars and accept either one as payment, is that illegal? Even assuming it is, if they put a vending machine in the lobby where you can exchange Canadian dollars for US dollars and then spend the US dollars, does it result in any practical difference, or do anything someone couldn't do with bitcoins?

But none of it matters until they reach critical mass. People will only buy them if vendors accept them, and vendors will only accept them if people are buying them. The problem is how you get one to happen in significant numbers before the other.

May not work

[Animats]

This has been done before. See DigiCash [wikipedia.org], from 1990. "Clouds gather over Amsterdam as I ride into the city center after a day at the headquarters of DigiCash, a company whose mission is to change the world through the introduction of anonymous digital money technology. I have been inundated with talk of smart cards and automated toll takers and tamper-proof observer chips and virtual coinage for anonymous network ftps. I have made photocopies using a digital wallet and would have bought a soda from a DigiCash vending machine, but it was out of order. " - Wired, 1994. See the article for what went wrong.

The soundness of Bitcoin's crypto doesn't seem to have been analyzed by third parties yet. There's nothing in Cryptologia or sci.crypt. Until there's agreement in the crypto community that it's sound, I'd be suspicious. There's also the problem that if the money resides on user PCs and smartphones, the usual attacks on those devices can steal it. Once stolen and used, there's no way to get it back.

Transactions are not very anonymous. If you spend a coin with a server, the server now knows your public key, and can associate it with any other identity information it has for you ( IP address, Facebook login, shipping address, etc.) If Amazon, eBay, Google Checkout, or Facebook accepted bitcoins, they'd be able to collect this info for a sizable fraction of the online world. Since your public key remains associated with the coin for at least the next few transactions, it's possible to follow the money.

Systems like this detect duplicate spending of the same item, but you can't tell if someone has a duplicate but unspent copy of your coins. So you don't know your money been stolen until you try to spend it.

There's also the technical problem that "new transactions are broadcast to all nodes". That won't scale.

Re:Not untraceable.

[IamTheRealMike]

That's an interesting point. I looked up what the FSA has to say about this. The rules seem to be laid out in this document [fsa.gov.uk]. It defines e-money as:

monetary value as represented by a claim on the issuer which is: (i) stored on an electronic device; and (ii) accepted as a means of payment by persons other than the issuer

Bitcoin satisfies both points 1 and 2 - but, note that this has to be a "claim on the issuer". Bitcoin does not have a specific issuer. The closest you might find are the miners, who create new currency, but I think a clever lawyer could argue even they are not really "issuers" because they cannot control how much money they create, and the money that is created is assigned to the miner not anyone else. It'd be more accurate to say miners are collectively rewarded by all of the systems participants for securing the network, with a de-facto agreement that finding a block rewards you with coins.

But even if you define a miner to be an issuer of the currency, Bitcoins do not represent claims on them. Miners have no obligations to accept Bitcoins in return for anything. There are no guarantees made by anyone that Bitcoins can be redeemed for anything in particular. For this reason I think it's unclear whether the FSA rules would apply. The rationale for the rules makes sense as long as the e-money issued is backed by something else, which was a pretty reasonable assumption until Bitcoin came along. The rule that says e-money issuers must have at least 1 million euros in liquid assets has no rational basis for miners however, as miners do not back the currency.

At any rate, this will be an interesting discussion between lawyers and regulators in coming years I'm sure. One thing to bear in mind is that it's not necessarily (as so often painted) an "us vs them" fight. One reason Bitcoin is interesting is that it lets people be more independent of banks. Politicans know that in the wake of the financial collapse there has been a crisis of trust and confidence in banks. Many ordinary people are quite disgusted with how bankers gambled with the system, were then bailed out and immediately went back to paying themselves massive bonuses. What's more whilst all politicians agree the system is broken, none of them have been able to propose convincing solutions. Basel 3 etc are incomplete at best. If Bitcoin is marketed well, it could easily be seen by seized by forward thinking politicians as a solution to over-reliance on banks, thus making their constituents happier.

Re:Not over the top at all!

[jbolden]

Keynes has a classic statement in general theory, which is like "the good, fast, cheap; pick any 2" meme about programming.

a) adjustability (the ability of the government to manipulate interest rates for the common good)
b) stability (the currency trades at a stable level relative to other currencies)
c) convertibility (you can move easily between this currency and other currencies)

Pick any 2.

Our system is designed for (a) and (c).
Bretton Woods was (a) and (b)
Gold standard (or bimetalism which is what the US actually had for most of its history) is (b) and (c)

In a (b) and (c) system the government's involvement is helpful. The real problem for the "keep-the-government-out-of-my-money crowd" is they hate adjustability.

In any case, it's not clear that you need to factor in virtual currencies when relying on bitcoin, since those instruments would no longer be useful.

Why? You certainly agree you could have bonds in bitcoin? If I can have short term bonds that means I can have money market instruments. I can price stocks. I can have derivatives on those stocks and bonds.