Sunday, April 17, 2011

Online Cash Bitcoin Could Challenge Governments, Banks

Time's Techland has published what is probably the first mainstream press recognition of the bitcoin RPOW (reusable proof-of-work) implementation as a functioning nonpolitical currency. "Online Cash Bitcoin Could Challenge Governments, Banks" by Jerry Brito was released on April 16, 2011. Jerry is a senior research fellow at the Mercatus Center at George Mason University and director of its Technology Policy Program. He also serves as adjunct professor of law at GMU.

Unlike previous articles that merely discuss bitcoin as one of many alternative currencies, Jerry has clearly done his research. What I find most important about the article is the fact that he points out the major trade-off that irreversible digital bearer currencies face now that we have entered the bitcoin era. Either centralize to reissue digital tokens at a mint or decentralize and maintain a transaction chain to prevent double spending. Hence, the trade-off becomes a centralized single point of failure with full anonymity vs. a distributed peer-to-peer system with pseudonymous transaction details. Jerry explains:
"That's because digital cash is different from physical cash in one very important way: If I hand you a 100 euro bill, I no longer have it. You can't be as sure of that, however, when the cash is just 1's and 0's. So it's been necessary to have a trusted intermediary deduct the amount from the payer's account, and add it to the payee's.
Bitcoin is the first online currency to solve the so-called 'double spending' problem without resorting to a third-party intermediary. The key is distributing the database of transactions across a peer-to-peer network. This allows a record to be kept of all transfers, so the same cash can't be spent twice--because it's distributed (a lot like BitTorrent), there's no central authority. This makes digital bitcoins like cash dollars or euros: Hand them over directly to a payee, and you don't have them anymore, all without the help of a third party."
He also hints at how probable law enforcement efforts will be unable to target end-users. The logical extrapolation of this means that if bitcoin assets are not left in the system, the point of vulnerability becomes the exchanger infrastructure performing convertibility into national currencies. Since the global exchanger network covers multiple legal and physical jurisdictions, we are in for some interesting times so buckle your seat belts. From the article, Jerry writes:
"Because Bitcoin is an open-source project, and because the database exists only in the distributed peer-to-peer network created by its users, there is no Bitcoin company to raid, subpoena or shut down. Even if the site were taken offline and the Sourceforge project removed, the currency would be unaffected. Like BitTorrent, taking down any of the individual computers that make up the peer-to-peer system would have little effect on the rest of the network. And because the currency is truly anonymous, there are no identities to trace."

For further reading:
"Bitcoin: Imagine a net without intermediaries", Jerry Brito, April 16, 2011
"U.S. Department of Justice Seizes Major Online Poker Sites",

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