Boing Boing pointed me to a few Bitcoin articles and then there was another one on Ars on 6 May. I’d be pretty surprised if you haven’t heard about Bitcoin; it’s been all over the news because of the crazy bubble the Bitcoin exchange rate was having recently. But, just in case, Bitcoin is a currency that exists entirely electronically. This is true of nearly all currencies nowadays (none of them are backed by anything but faith in the countries that issue them). The supply of Bitcoins is only increasing to a certain amount and then no more, preventing inflation. It’s main benefit is supposed to be that it’s completely anonymous. So is cash, but you can’t use cash online.
The first article Boing Boing pointed me to was by the respected hacker Dan Kaminsky. As a good big thinker, he was immediately able to make me see the problems with our current financial system that I hadn’t really spent much time considering.
I walked into a Jamba Juice recently, and was informed in no uncertain terms that if I attempted to use anything larger than a $20 bill, or if my credit card was demagnetized, no smoothie for me.
We do have credit cards. But credit cards change money from something anyone can give anyone (peer to peer) to something with a consumer class (client) and a merchant class (server). There are innovative startups that attempt to reverse that, and every time one of these systems pops up — Square, Stripe, Venmo — billions of dollars starts flowing through them.
We wouldn’t get this sort of growth without pent-up demand. But even the new systems find themselves failing — I love Paypal, but is there anyone who hasn’t either had their account suspended, or knows someone who has? I’ve certainly never had a $20 in my pocket go dark for 48 hours.
I’ve come up against these limitations here and there, but I hadn’t though about it in these terms. And, of course, Bitcoin is able to route around a lot of these issues by being electronic. I can accept them from others or send them to anyone around the world. And then Kaminsky had this to say about fraud and the financial system:
Fraud is what makes every money transfer system buggy. As a security professional, I am deeply aware of why Paypal blocks accounts, why credit cards limit who we can pay, why Jamba Juice doesn’t want to be on the hook for the validity of $100 bills and the loss of $95 in “change”: If these businesses aren’t paranoid and customer-hostile, they lose hundreds of millions of dollars.
Bitcoin’s fundamental principle of fraud management is one of denial. If we drop our wallet on the street, the U.S. government is not going to compensate us for our lost cash. Bitcoin attempts to make the same deal, to the point where it calls its stores of keys, “wallets.” If we drop our wallet on the street — heck, if someone picks it out of our pockets — the money’s gone.
There have been bitcoin thefts. A few years ago, I tried to break Bitcoin, and failed quite gloriously. The system and framework itself is preternaturally sound. But it too is built on the foundation of buggy technologies we call the internet, and so Bitcoin must experience failures from the code around it. Hackers don’t care whose code they broke on their way to bitcoin, any more than pickpockets care that they’re exploiting the manufacturer of one’s jeans or leather wallet. So they break the server below the money, or the web interface above it. They still win.
At least, that’s the theory. Reality is more complicated. Of all the millions of dollars of purloined bitcoin that’s floating around out there, not one Satoshi of it has been spent. That’s because while most other stolen property becomes relatively indistinguishable from its legitimate brethren, everybody knows the identity of this particular stolen wealth, and can track it until the end of time.
A pallet of $100 bills that disappears in Iraq is a socialized loss against everyone who holds dollars. A million dollars of lost bitcoin carries its identity, at least as a traceable taint. This loss remains privatized, and it can be sued for, forever.
There are a small number of choke points, which someday may be asked to honor these thefts. Will the currency translators accept the money? Will the mining pools? It’s really an open question. We just don’t know.
Perhaps the best way to think of stolen bitcoin is as stolen art. Sure, we can hang it anywhere. Don’t expect to sell it at Christie’s. A resource that loses its value as soon as it is stolen, may be one that isn’t stolen.
This quote was also in the original Boing Boing story and it leaves me confused. It’s under the heading “Bitcoin is not as secure as we think”, but this sounds amazing to me. Why is having a currency that can’t be stolen a bad thing? Right now I’m more than reluctant about having my cell phone tied to my payment system because it’s easy to lose or have stolen. But if I knew that nothing could happen with the money that was stolen I’d be happy. I’d be more than grateful if someone in the comments could explain to me what I’m missing.
He next mentions that the real issue with Bitcoin is turning it back into dollars. There are only a few places to do that. I have already recognized that as an issue as I’ve seen various issues arise up around this portals. After all, who cares if you have a billion USD worth of Bitcoins if the government doesn’t let you convert it to dollars. Of course, there might be ways around it – convert to some other currency then into dollars – but you probably end up running into the same issues as money launderers. You probably can’t do it in big enough amounts without attention being brought to you.
Perhaps I was just being too naive, but this section, talking about why Bitcoin is better than gold is somewhat scary. I had assumed we knew how much gold had been mined the way the the gold standard people talk about it.
Gold doesn’t have a teleporter like bitcoin, so it is just another commodity traded on electronic networks. People lie about how much stuff they really have all the time, and there’s no way to tell: Sometimes they know they’re lying (“naked shorts”), sometimes they don’t (“proven reserves”), but the point is, the supply can adapt to meet the demand.
Because everything’s backed by cryptographic keys in Bitcoin, one can actually prove s/he has access to a certain amount of it. We are either able to sign messages linked to the private keys, or we are not.
Thus, we end up with the Winklevii twins (of The Social Network/ Facebook fame, or notoriety) saying “We have elected to put our money and faith in a mathematical framework that is free of politics and human error.”
While most people see Bitcoin as an alternative to be free of the government, Kaminsky has this awesome analysis near the end:
Don’t think, by the way, that a thing like Bitcoin can’t be co-opted by governments. A global public ledger is a very good system for everyone seeing if taxes are being paid or not. The network could literally reject transactions that don’t include a tax declaration, and directly pay to a bitcoin account controlled by taxation services. Everything can be subverted.
The other main article linked by Boing Boing was by Ben Laurie. After reading it, I’m not sure if he is presenting an actual computationally correct problem with Bitcoin or if it’s all just a philosophical question. Basically he said that you need 51% of everyone to agree that a currency is valid by agreeing who holds what coins. So for Bitcoin to work 51% of all computers would need to be working on Bitcoin problems. If we had 1% of computing power and someone comes with 1.1%, they could say they own all the coins. Again, I’m not sure that works or if it’s just a philosophy experiment, but it could be bad for Bitcoin. Even though, as he explains in the paper, that’s not purely how Bitcoin works.
Finally, the Ars piece is about how US regulators claim they can regulate Bitcoin if they want to. Actually, if I read it correctly, the headline is a bit misleading. The regulators say that people are selling Derivatives and Hedges on Bitcoin and those could be regulated. Remember Derivatives and Hedges? They’re part of what destroyed the US economy when they were tied to housing. Really, I think the only issue here is when the banks and 401ks invest in this stuff. If it’s just random people trying to get rich – they’re mostly playing with the fakest of fake money anyway – betting on failure and selling shares in that or combining that with other things – so just let them fail hard and start putting their money into real things.