Sunday, April 29, 2012

CoinLab Attracts $500,000 in Venture Capital for Bitcoin Projects

By Jon Matonis
Tuesday, April 24, 2012

In the first official venture capital raise for a direct investment in bitcoin, CoinLab secured $500,000 today from seed stage Silicon Valley firm Draper Associates and others, including Seattle angel investor Geoff Entress, former assistant treasurer at Microsoft Jack Jolley, and familiar bitcoin investor Roger Ver. Jolley will also join the company as its Chief Financial Officer.

Based in Seattle, CoinLab is an emerging umbrella group for cultivating and launching innovative bitcoin projects. Until now, they have been relatively quiet regarding their initiatives but they are credited with releasing a comprehensive Bitcoin Primer in January 2012. The founders are startup entrepreneurs Peter Vessenes, Mike Koss, and Tihan Seale, each with a strong passion for the broad advancements enabled by a decentralized currency.

CEO Vessenes said, "if there is a currency that can trade around the world, it's semi-anonymous, it's instant, it's not controlled by government or bank, what's the total value of that currency? The answer to that is, if it works, it's gotta be in the billions. It just has to be for all the reasons you might want to send money around the world."

Apparently, seasoned investors are starting to agree. Draper Associates partner Tim Draper explains the allure of the decentralized bitcoin, "The idea of a private currency has always been appealing to me as a way to diversify away from holding currency in irresponsible governments. It is more relevant now than ever." Hopefully bitcoin will maintain its current exchange value and appreciate, especially since this investment represents over 1% of the total $45 million worth of existing bitcoin in the world.

CoinLab intends to go into serious hiring mode as they build out their development team and launch new bitcoin projects. Although an SMS bitcoin texting service called Bitsent was announced briefly on their site, a greater focus has been on the concept of MMORPG mining, leveraging bitcoin to monetize players for the online gaming companies like World of Warcraft and EVE Online. Two companies have already agreed to participate in a beta for the CoinLab mining concept -- Wurm Online, an independent MMO that allows players to dig, flatten, raise and shape the land and create the frontier world they live in, and graFighters, the first online fighting game for your hand drawn characters.

The business model is clever. A few whales, or big spenders on virtual goods, make up the majority of gaming company revenue while the infrequent casual players constitute the bottom 10%. "CoinLab wants to grab that 80% in the middle," says Vessenes. They intend to accomplish this by offering a configurable app that players download from the gaming site which would allow bitcoin mining jobs to run on these beefy GPU-outfitted client computers.

Like DropBox, the CoinLab app will reside in the background so that the players are not even aware of the mining that occurs during the gaming session. To the gamer, certain virtual items or level upgrades would be obtained. This is a new revenue stream for online game companies as they monetize the free-to-play gamers via cluster compute work and a win for CoinLab as they convert the mined bitcoin to dollars or euros that are passed on to the companies after a tidy spread of course.

Vessenes doesn't want to refer to CoinLab as 'just another mining pool' because they have a distinctly different type of payout, but you can certainly imagine some non-gaming miner opportunities entering the CoinLab platform. After all, bitcoin miners and the mining pools collectively gain clout by virtue of the fact that a majority of miners is necessary to accept changes and slight variations to the protocol. It is easy to view the bitcoin mining pools as guardians of the free and open monetary system of the future -- powerful de-central bankers if you will.  CoinLab is poised to earn a seat at that table.

Saturday, April 28, 2012

The Death of All Banking Freedom?

By Wendy McElroy
Future of Freedom Foundation
Tuesday, April 24, 2012

Last week, the Internal Revenue Service (IRS) extended its reach and tightened its grip on every cent Americans earn or try to preserve anywhere in the world. The final regulations of the Foreign Account Tax Compliance Act (FATCA) were announced.

Enacted in March 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, FATCA seeks to have foreign financial institutions report on accounts held by any American living in the United States or abroad. You can take your money and run, but you cannot hide from an IRS that functions as a taxation clearing house to the world. If you have never lived in the United States but have American parents, then you will still fall under the jurisdiction of the IRS and the Department of the Treasury. Only the costly and cumbersome act of renouncing American citizenship can provide protection.

Americans are already required by tax law to disclose any foreign accounts that total more than $10,000; that controversial requirement is called the Report of Foreign Bank and Financial Accounts, or FBAR. (FATCA broadens the sort of assets that must be reported and raises the reporting requirement to $50,000 for an individual or $100,000 for a couple.) But using FBAR to rake in money that has fled to more friendly environs relies too much on the voluntary compliance of foreign-account holders.

FATCA is supposed to bypass this need and supplement FBAR. And it is expected to do so by January 1, 2014, when the final regulations are slated to go into effect.

The final regulations

Law professor Alan Appel provides an example of one "incentive" that will be applied to financial institutions. Appel explains,
"These foreign banks, which are called foreign financial institutions, or FFIs, and also foreign entities that are not banks — called non-financial foreign entities, or NFFEs [for example securities brokerages] — have to enter into a compliance agreement with the IRS starting Jan. 1, 2013 … they’ll agree to basically [disclose] the names, Social Security numbers and account balances of U.S. [account holders] every year. … And if they don’t enter into this agreement and they invest in U.S. stocks or securities, or have any U.S. source income, then there’s going to be a 30 percent withholding tax on all payments, including interest, rents, royalties, and things like that."
Read the rest of the article.

For further reading:
"Tax time pushes some Americans to take a hike", Atossa Araxia Abrahamian, Reuters, April 16, 2012
"Law to Find Tax Evaders Denounced", David Jolly and Brian Knowlton, The New York Times, December 26, 2011
"Should You File FBAR For The First Time?", Robert Wood, Forbes, June 14, 2011

Thursday, April 26, 2012

Bitcoinica Registers in New Zealand for Bitcoin Margin Trading

By Jon Matonis
Saturday, April 21, 2012

Bitcoinica LP announced today that their new corporate structure is finalized and they have completed registration as a Financial Services Provider in the legal jurisdiction of New Zealand. As the self-proclaimed 'bitcoin trading platform for everyone,' they offer margin trading, short selling, stop-loss orders, and guaranteed liquidity.

Bitcoinica burst onto the scene in September 2011 as the first consistent and reliable provider of bitcoin margin trading. To be sure, the young founder and lead developer, Zhou Tong, has had his fair share of challenges along the way but he has persevered and prospered.

According to the company announcement, "Bitcoinica began as an experiment to help investors trade bitcoins with the advanced trading features seen in traditional forex markets. The response has been overwhelming and we are very pleased that we've been able to meet this need." They further stated:
"We recognize that it's important to operate in a transparent manner and meet all the requirements expected from a legitimate financial services organization. Therefore we have taken the necessary steps to become a registered provider of the following financial services: (1) Providing credit under a credit contract, (2) Operating a money or value transfer service, (3) Issuing and managing means of payment, (4) Changing foreign currency, and (5) Entering into or trading on an exchange."
Bitcoinica is not the place to acquire bitcoin or to convert your bitcoin into national currencies, but it is the place to speculate and hedge on the price movements of the bitcoin exchange rate expressed in U.S. dollars as they offer short selling and guaranteed liquidity levels up to 100 bitcoin. They make bitcoin the base currency so it's quoted as BTC/USD. Other national currencies may be supported soon but Bitcoinica has to follow the liquidity of the physical exchanges, such as Mt. Gox, since that is where they lay off their risk. Currently, they operate a trading platform that is similar to the CFD market, but without the standardized contract sizes the experience is closer to foreign exchange trading and they maintain sufficient bitcoin inventory for all orders.

By responding swiftly to market demand, they have accomplished much in a short period of time. CEO of CoinLab, Peter Vessenes, commented, "They are essentially an online forex site but their current code base is what makes me uncomfortable. Rails platform is not ideal for financial trading due to the lack of auditing." Governmental registration, still controversial with some in the bitcoin and free banking communities, may resolve one of the issues for greater customer trust in Bitcoinica but a robust technical platform will ensure their ultimate success.

Regardless, Zhou Tong and Bitcoinica conservatively still pocket $54,060 a month from trading operations and here's how they do it. First of all, anyone can trade -- with just $1 or ฿1. As with forex trading, there is no commission -- only the bid/ask spread. Customers place buy or sell orders with a leverage variable selected anywhere from none to a factor of 10:1. With average monthly volume of approximately ฿1.2 million, Bitcoinica internally matches trades where they can. Given that their typical 'unmatched' hedge ratio is 50% and ignoring spread premiums on the customer-related Mt. Gox trading, Bitcoinica earns its internal 'weighted' average spread of 1.7% on ฿600,000 per month, or ฿10,200. Applying a U.S. dollar exchange rate of $5.30 per ฿1, we get $54,060 per month. It's good to be king.

The New Zealand jurisdiction is well known in the payments industry and although not a local bank license, this type of registered financial institution can carry out many similar activities for their own clients just like a bank. The structure is ideal for receiving third party funds for deposit, opening accounts for clients, and engaging in leveraged currency trading activities. Bitcoinica's registration details can be viewed here.

Bitcoin thrives as a protocol and a currency when multiple jurisdictions compete for innovative and unhampered bitcoin services as some jurisdictions are more forward looking than others. Without overly relying upon the State's seal of approval, jurisdictional competition can still have a net positive effect on those jurisdictions that continue to be overbearing.

Ultimately, if bitcoin currency amounts don't ever intersect with the formal banking system or fiat currencies, is there anything to regulate? As Max Keiser stressed on a recently televised Keiser Report, "I support Zhou Tong -- he could be a worthy adversary for Jamie Dimon or Lloyd Blankfein -- because he promotes the advancement of an anti-bank currency that can go to war with the JPMorgan Chase and Goldman Sachs banksters. We can only hope that he doesn't get bought out along the way!"

Saturday, April 21, 2012

Bitcoin and the State: Asking Permission to Be Free

By Beautyon
Irdial Discs
Friday, April 20, 2012

Should people who want to see the widespread and rapid adoption of Bitcoin seek tight regulation and integration with the State, or should they rely only on their skills as developers, marketers and entrepreneurs to create the rock solid, reliable and trustworthy products that people will use in their millions, like the other well known internet companies that have changed the way we do things?

A Bitcoin innovator has just applied for and received a registry entry from the US Federal Government's Financial Crimes Enforcement Network:

On that linked page you can read the following statement clarifying FinCEN's position on each entry they list:
"The inclusion of a business on the MSB Registration Web site is not a recommendation, certification of legitimacy, or endorsement of the business by any government agency."
This disclaimer appears on the certificate as the first paragraph, in large letters. The certificate also says that, “FinCEN does not verify information submitted by the MSB. Information provided on this site reflects only what was provided directly to FinCEN”.

It appears that anyone, can register as an MSB, and the department does no thorough checking into the business, its capitalization, the backgrounds of the directors, who funds it, where those funds originate, the security of the software that powers the service or anything else about it. Registrants are not required to be insured, or make a deposit of money as a guarantee to their customers should something go wrong. Applicants simply fill out a form, and then are entered on the FinCEN database unscrutinized. If registration with FinCEN is being done by anyone in the vain hope of securing some sort of government legitimacy or seal of approval, it really does not pass muster by any stretch of the imagination.

Showing that you are registered with FinCEN cannot act as a guarantee of any kind whatsoever, and FinCEN explicitly warns consumers not to rely upon a company's appearance on their register as proof of suitability, solvency or fitness for any purpose of any kind.

On the other hand, registration with FinCEN should serve as a warning to anyone thinking about using a business that is registered with them, and who also wants to maintain their privacy. A company listed with FinCEN has explicitly entered into a legally binding agreement with them to spy on its customers and partners and has a duty to report 'large and suspicious' transactions to the State. This means that in order to be compliant, you as a customer of a FinCEN registered business must be authentically identified and contactable by the registrant so that they can interrogate you should you move 'too many' of your own Bitcoins through their service.

For the record, there is no case law, no legal requirement, no legal precedent, and no legal opinion on the status Bitcoin of any kind. As is the case with almost all of the software that connects to the internet, what you think Bitcoin is, and what you choose to do with it is entirely your business, and that is how it should be. You are responsible for who you get into bed with, and it is not the place of the State to hold your hand and bottle feed you.

The real problem behind this FinCEN registration is the thinking driving those entrepreneurs who so desperately seek a stamp of legitimacy from the State. Rather than build secure services that are sticky, viral, disruptive and useful, it appears that these well meaning people are trying to get a psychological boost by receiving the blessings of the State. This simply will not work to catapult their businesses into widespread acceptance and profitability. And it will not help to gain them users; on the contrary, in the long term, it may make it impossible for them to even operate at all.

We have been here before. Other very fine, insightful people have initiated contact with 'the financial authorities' in the hope that they can integrate their businesses with the State to gain credibility, thankfully, only to find themselves rebuffed with the retort, "Bitcoin is not money".

Entrepreneurs breathed a sigh of relief and a little surprise on reading this correct conclusion from the State, for it means that there will be a significant amount of time before they reverse their position and weigh in to crush Bitcoin businesses, if they ever bother to do so at all. If they do, it will mean going back on their previous lengthy categorical statement that Bitcoin is not within their purview.

The bottom line question is this; do the advocates and entrepreneurs who pine for the mass adoption of Bitcoin want this world-changing event to be stillborn or not?

If they want it to succeed, and become rich and famous in the process, it is logical to refrain from doing anything that will prevent a miscarriage from happening, and any sort of registration other than that which provides operators with limited liability protection is surely a grave error.

Recent history has demonstrated amply that the State is not needed to make the magic of the market happen. The evidence for this is all over the internet and is represented by the internet itself. Bitcoin is a threat to traditional banking and the State, just as the internet is a threat to censorship, telecoms businesses, companies like Kodak, Penguin, EMI and many others. Anyone who has even a slight grasp of history understands that Bitcoin is dangerous to the status quo in a very real, and absolutely lethal sense. Why then would you even think of asking for permission to operate from the very people who stand to be wiped out by the success of the innovation you are working on? Not only that, but if other companies eschew registration and avoid all the inevitable fees and restrictions that are to come, they will be able to out compete you in terms of price and ability to pivot, putting you out of business. Trying to force Bitcoin to behave like money from a legal standpoint doesn’t make any sense either in terms of the definition of money, or the entrepreneur's requirement of a frictionless market space.

The FinCEN registration in question lists the company's MSB Activities: as 'Money transmitter', with the Number of Branches equaling 1. Clearly the language of this certificate is meant to refer to physically located bricks and mortar money services with branches on the street, not a network based Bitcoin business. More importantly are the facts of how this business actually works. The company accepts money and then provides its clients with Bitcoins, and it accepts Bitcoins from its clients and remits money to them in return. It does not at any stage, transmit money directly from one client to another. Quite how this business has been construed as a money transmitter is baffling; it is no different to Amazon, in its role as a second hand book trade intermediary, because all Bitcoins are second hand goods, if they are goods at all.

As I have said before, Bitcoin is not money. I say this both because it is not money, and because it is money. If Bitcoin is money, it will either be regulated to death or hampered into a crippled, non disruptive form, or taken over by the State. On the other hand, if Bitcoin is not money, it can flourish on the strength of its features just like SSL has, protecting everyone's transactions and communications world-wide.

If no regulation touches it, what you believe Bitcoin is, and how you choose to characterize it will ultimately not affect its utility; only the software built on it will define its nature. Building services based around Bitcoin is what counts, not registering with the State. Registering with the State will not cause users to adopt Bitcoin; only a compelling service will do this.

You need only look at the newest companies with tens of millions of users like Pinterest, Tumblr and Tinychat to understand what a compelling service looks like, and of course, none of those companies sought the registration of the State before gaining many users.

What we are seeing now is a myriad of experimental Bitcoin services emerging, as developers try and discover the correct balance of features that will make up the killer Bitcoin service. You will know what this service is when the number of people using it is increasing exponentially. No registration with the State, no banking license or other poisonous anointing will cause users to flock to your service.

But what if Bitcoin really is money? If Bitcoin is declared money by fiat, then this will kill it as a platform for small software developing entrants to write and launch services. Hysteria over money (which is actually the unquenchable thirst of the State for tax) has erected very large barriers to entry for anyone who wants to set up a disruptive financial service. In the USA, entrepreneurs have the Federal Government and then the State Governments to contend with. See Facebook's recent adventures in approval, licensing and certification, as they went from State to State paying exorbitant and ridiculous license fees and submitting applications. Facebook has the money and manpower to do this, so for them it is as simple as making a decision, allocating staff and sitting back and waiting. For the starving entrepreneur however, registering as a money service in every state of the Union is an impossibility. Bitcoin as it stands now, has no such artificial and offensive barriers, and you can operate at will across the entire USA, without having to expend capital on anything other than the bones of the service itself and Ramen to keep you alive.

If Bitcoin is not money, everything changes. Essentially, it means that the world of money transfers is subjected to the same network effects that caused the internet to explode over the last twenty years, with benefits to all mankind of a similar if not greater extent.

It is hard to imagine the scale of the cascade of the prosperity that will flow from Bitcoin becoming 'the money of the internet'. The imaginations of millions of people will be focused on creating new and exiting services built around it and fueled by it, in the same way that there are new websites and services popping up that no one could have imagined in the time before the internet.

Bitcoin in the hands of millions of innovators who are free to experiment and fail with it without any cost or regulation will change everything for the better, just as the internet has. What the people who seek the baptism of the State for Bitcoin are saying is analogous to saying in 1997 that anyone who wants to run a website should be forced to obtain a license from government before she puts it online. The internet that has so changed the world for the better simply would not exist in its current form if all entrants were forced to register with the State and pay for a license. The net would have ended up as a MiniTel 2.0. Go Google MiniTel.

I find the thinking behind the idea that Bitcoin services should be registered to be perplexing and fascinating. No one would dare suggest that a man wanting to publish a magazine, newspaper or book should be required to register with the State, but when it comes to money, or something that is money-like, that people are not even sure what its true nature is like Bitcoin, a different set of rules springs into being. It is well understood and accepted that, despite being an incorrect use of the word 'right', the power to publish is a right that all free men have. Why do people not understand that this right extends to publishing anything, not just words on a page?

Extending this line of thought, if Bitcoin services need to be registered by default, why then should not booksellers be registered? Why is there no 'PubCEN' for book publishers, or any other type of seller, and why do the people who advocate registration of Bitcoin businesses not advocate the registration of book publishers? There is a long history of book banning in the west, but publishers in free countries have never been required to register before they enter the business of book printing and distribution, and books are always banned after publication, not before publication and passing through a censorship board.

There are people who assert that financial regulations and registration are needed because money can be put to bad use. If you accept this premiss, you must also accept that plain information is as dangerous as money. The Dutch government works from this position, and does not allow scientific papers to be published without the permission of the State. Yes, that is correct; scientists need to obtain export licenses to publish academic papers; sheets of A4 with type on them. This is because the information in scientific papers “could be put to bad uses”. Correctly thinking people are scandalized by the idea of having to obtain a license to publish a scientific paper, but for some reason, when it comes to money or something that is money-like, like Bitcoin, the 'thinking' changes and all of a sudden, not only is registration seen as correct, desirable and beneficial but it is actively sought out, before the applicants even have a client base.

Why does the registration fetish not apply to every good that can be sold or transferred between two people? In the USA the parasites from the State have asked this question and answered, "Why not?!". This is the reason sellers of Raw Milk and organic vegetables have found themselves raided and placed in handcuffs as armed thugs point automatic weapons at their heads. It is why people who sell their old possessions in 'garage sales' are being harassed by the State. People who are thinking properly understand that these examples of State interference in publishing and exchange are unacceptable on principle; the question that I have not had a good, fallacy free answer to however is this, “Why is a money business a special case for registration by the State?”.

Bitcoin, living on the internet as it does, can be sent and received from anywhere and on any device. If the Americans developing Bitcoin services cripple themselves with a self inflicted wound of onerous regulations, the Bitcoins will see this as damage and flow around those services. The only answer to this effect is a world-wide harmonized Bitcoin law, so that there is no jurisdiction to escape to. This is not going to happen any time soon, as we have seen with ACTA. The various states of the world reflexively imitating the American way of doing things is coming to an end, and there are markets out there that are bigger than the USA, whose government and its malignant influence has been disproportionately large. Take for example, the fallacious idea of copyright and its term of the life of the author plus 70 years. China has just passed a law essentially limiting copyright exclusivity to three months:

If Bitcoin becomes popular in any jurisdiction other than the USA, any American FinCEN regulations will become meaningless. American companies will simply be Balkanized, marginalized and excluded from the action. Note that only companies will be affected by this; individuals on the internet spending Bitcoins in China or anywhere else will not be affected at all. Anyone who has had the experience of buying exceptionally well made and inexpensive hand made clothes from Hong Kong knows what this will mean.

Thanks to the resilient nature of the internet, a Balkanized Bitcoin at the user level is not possible. There is no way that Bitcoin transfers can be stopped as they cross borders, just as it is not possible to prevent people from pirating Warez or downloading copies of films and TV shows.

What the State can do however, is prevent entrepreneurs from building a large central hub service built on top of Bitcoin. They can make it impossible to build a business based on Bitcoin or that overtly accepts it as a payment option. As long as some countries take no action against businesses accepting Bitcoin, there will be a vibrant market on the internet running with it. If that country is China, or Indonesia, or India or Brazil or any combination of countries with large populations, there will be a huge market operating on Bitcoin. The question then becomes how can people from the repressed western economies get a piece of the action? True entrepreneurs will smell the coffee (more likely, green tea) and simply flee the evil, crony capitalist jurisdictions for freer shores. Whatever solution is found by the creative people, the public that could use and benefit from the services is the ultimate loser, as they are reduced to using buggy, buggy whip, legacy surveillance systems from the twentieth century to make purchases online. That's credit cards over the internet by the way.

If you want to have a glimpse of what the repression of a service provider that is a central hub for Bitcoin might look like, you need look no further than the recent Hollywood sponsored armed raid and shut down of the file locker service Megaupload. People are still sharing files by the billion, but this business has been shut down and has had its assets seized. Rapidshare and several other file locker services have unilaterally capitulated and neutered their services so as not to attract the vicious attentions of the State. The Megaupload raid demonstrates the lengths parasites will go to to violently attack entrepreneurs.

Fundamentally this is a problem in morality and ethics. There is a difference between creating a piece of software and keeping its source code proprietary and secret, like Adobe's Photoshop, and using the State to kill competition. One is selfish and evil, and the other is a legitimate form of business practice arising out of the technology.

In crony capitalist countries, businessmen have the ability to use the State to kill and restrict competition. They do this because they do not have the will or the ability to survive in a free market; its easier to kill the competition than to be creative.

People who try and gain advantage through the leverage of the State are evil in my opinion; through no one's fault but theirs, they are not able to compete on a level playing field, and so they use violent tactics to keep competitors from entering.

It's rather like mobsters setting fire to businesses that try to emerge in their territory that compete with existing firms that they 'tax'. It is immoral, unethical, criminal and short sighted, and ultimately will fail, because the world is not suffering under a single mob's jurisdiction.

Now that computing in hand held devices has permeated every corner of the globe, we are beginning to see beneficial services emerge that are changing everything. M-PESA is a good example, where in a country with a population that is mostly unbanked, mobile phones have served as the platform for prolific money transfers. Superimpose the features of Bitcoin on the M-PESA success and then scale it to the entire world and you begin to see just what sort of revolution we are on the cusp of.

People talk of Bitcoin in terms of revolution. I agree with this sentiment, however a revolution, by definition, cannot happen by command or sanction of the State. The State is the carbon rod for your back that prevents critical mass. The State destroys revolutions in the field of business especially when those businesses constitute an attack upon it and its ability to control. Bitcoin cannot become a revolutionary service if it is regulated by the State. If you want this revolution to happen therefore, asking the State to authorize, shackle and penalize you doesn’t make any sense.

Bitcoin businesses will need to survive on very low margins. In order for them to spread into every transaction on the internet, the cost of getting them has to be very low. More market players will drive the cost of getting them down, and cause entrepreneurs to innovate. Artificially high barriers to entry will winnow out the small, agile entrants, and allow the remaining large players to charge a higher percentage for transactions. This will function as a form of friction when you enter or exit the Bitcoin ecosystem, slowing down the adoption and rates of transfer of money to and from Bitcoin. This is why no interference from the State of any kind is desirable. From a purely business point of view, regulations, license fees, guarantees, KYC reporting requirements, secured deposits and all arbitrary rules are very damaging to Bitcoin business models because the customer ultimately pays for them. Useful services will be crippled, delayed and even prevented from emerging by the State. What is needed is a plethora of different businesses and outlets, not a small number of State protected and sanctioned monopoly players. This is best for the consumer as well as the entrepreneur.

There is nothing anyone can do to stop a determined Statist from trying to shut out competitors by running to the State for protection. I guarantee you however, that someone is going to go to court to challenge the idea that Bitcoin is money, and that arbitrary licenses, fees, guarantees, registrations and everything else that comes from the State are applicable to Bitcoin businesses. Someone is going to make this challenge, perhaps on a purely philosophical basis, and the facts are going to be on their side.

When this happens, the court is going to either have to declare that Bitcoin is money, or that it is not money. Both of these outcomes have significant repercussions. If the court decides that Bitcoin is money, it means that anyone downloading the source and starting their own Block Chain has de-facto started their own currency. The last person who tried to start their own currency, Bernard von NotHaus, faces 15 years imprisonment and a fine of not more than $250,000 after being found guilty of counterfeiting by a jury. This will be the penalty for running an unlicensed Bitcoin Block Chain in the USA, should the Statists get their way and have the court rule that Bitcoin is money; anyone trying to set up a Block Chain will be branded a counterfeiter.

The next logical outcome is that the Bitcoin client will be regulated and re-engineered by the State or its agents so that it works (or doesn’t work) in ways that they stipulate. The lead developers of Bitcoin will either be coopeted by the State or replaced. If Bitcoin is money, the State will demand that it has absolute control over the network, since it is a part of the national infrastructure. This is exactly what they are doing now with the internet, threatening everyone with their vile 'kill switches', Domain Name seizures and bogus legislation.

Money is like plutonium to the State. They know its true power, and are obsessed with controlling it because they understand that by controlling the supply and nature of money and its flow, they control everything and everyone. To imagine that they will allow Bitcoin to be regulated with a 'light touch' is naïve in the extreme. The State will do anything they can to strangle Bitcoin if they cannot control it absolutely, and as the move to all digital money gathers steam (see MintChip and the fact that Denmark is openly and seriously considering going cashless: the threat of Bitcoin will become absolutely clear even to the lowest and most stupid apparatchik.

This is entirely separate from the threat that the established money businesses will wake up to when Bitcoin takes off. These established businesses will work overtime to kill Bitcoin from both sides, the legislature and the service, to destroy Bitcoin businesses. They will lobby hard for equal regulation turning Bitcoin businesses into banks, while at the same time, denying service to any Bitcoin business, cutting off their ability to remit monies to their clients. Just ask those Bitcoin businesses that have had their bank accounts summarily terminated in a coordinated attack what this is like.

Bitcoin is a threat to the State, and in an all electronic money world, it is an existential threat. There is no possibility that the State will allow Bitcoin to supplant or even co exist with their centralized electronic fiat currency; the only way Bitcoin can win is if it becomes too big to destroy without dealing a fatal blow to the economy. I assure you that if SSL did not exist, it would not be adopted now because of 'fears over terrorists hiding their communications'. At the very least all SSL communications would require a back door in the form of the secret key being deposited with the State. This was actually legislated in France with PGP key pairs. It follows from all of this that what is required is the building of the world-changing Bitcoin services that are needed, without running to the State for prior approval or licensing, so that they become a de facto standard service that if it is tampered with in any way, will kill society.

Running to the State does not confer legitimacy. Amazon, Ebay and Underwriter's Laboratories didn’t need the state to confer trust or ensure reliability; they built consumer powered systems to protect their users and have grown very large and very trustworthy. Building trust takes time, and the people running to the State for its stamp of approval as a substitute for building trust over time and the related mechanisms that manage it are not thinking long term and are not willing to do the hard work of entrepreneurs.

If people think that a registration entry with the State will help them raise capital, they are mistaken. The evil talisman of the State will not convince any venture capitalist that an idea is sound; voo-doo signs and badges are not what VCs are looking for. Venture capitalists are looking for the killer idea, and the team that can execute it. The idea does not have to be particularly new or innovative, as we can see with TransferWise, which is as dull and disruptive as dishwater, and registered to the hilt. What is needed with Bitcoin is a single compelling idea, an irresistible concept and solution to a problem that only Bitcoin can solve.

We know that Bitcoin is revolutionary and extraordinary and that it is as disruptive as the internet itself. What is missing from the disruption equation is a consumer friendly set of features and capabilities that will cause its adoption to go viral.

Integrating with the State is not one of these features. No user out there cares that you have jumped through some arbitrary hoops for approval by the State. You need look no further than Skype to see what a proper approach to innovation looks like. No Skype user cares whether or not Skype has a license to operate as a telephone service; all they care about is that they can download the software and make perfect calls world-wide for nothing straight out of the box. The same is true for Bitcoin. All people want is to be able to download it, use it, buy what they need and transfer money to their friends and family as easily as possible. In order to make that happen, software expressing the correct small feature footprint and business model needs to be designed and developed, which has nothing to do with licenses from the State.

This registration of a Bitcoin business with FinCEN is a mistake, but it is not a big deal. FinCEN registration is not compulsory for Bitcoin businesses and they can painlessly de-register. What is wrong here is the signal that is being sent and the thinking driving the voluntary registrants to submit themselves to this, and it is this thinking that needs to be addressed.

As Bitcoin grows, this precedent of reflexively registering Bitcoin services as money services will be used to compel other entrepreneurs to register their businesses, and eventually they will all be made to pay fees and obtain arbitrarily crafted licenses, and that is an entirely bad thing. For anyone that wants to run a Bitcoin business in the United States of America that is. Banks in Switzerland are shunning Americans, closing the accounts of all U.S. citizens precisely because the U.S. regulations are completely over the top. The sensible, rational people of the world are simply not willing to put up with this mania. There is no money in it and it is immoral.

Finally let me be make my position on Bitcoin developers and entrepreneurs clear. Bitcoin is a tool and business for heroes. It is an unprecedented and unique invention, that straddles the abundance world of digital information and the world of scarce physical money. Bitcoin has the potential to transform the world. The people who involve themselves with it at any level are the forward thinkers, the brave and the innovative. They are the true entrepreneurs and pioneers, the risk takers and leaders. They are the sorts of people who make the world a better place to live in. I support them and their efforts.

The urge to succeed and to be a part of this revolution is very strong for entrepreneurs, and the desire to cover every possible eventuality to avoid pitfalls is just as powerful. In trying to reassure a skeptical public, some people make the critical mistake of believing that obtaining the stamp of approval of the State will help them reach their goals. This is a fundamental error, but it does not mean that they are bad people, in fact quite the contrary. These entrepreneurs are willing to fully expose themselves to the State and its humiliating scrutiny as a sacrificial demonstration of their clean purposes, good will and intention to offer a useful and trustworthy service. In the world of software however, there is absolutely no need for the State to certify people for any particular purpose.

The risk of involving the State in the early stages of Bitcoin's development is high. It could at the very least, retard the progress of Bitcoin and at worst, prevent the mass adoption of this new idea. And that would be a tragedy as great as if the internet had ended up as a world-wide AOL.

Reprinted with permission.

Tuesday, April 17, 2012

MintChip Misses the Point of Digital Currency

By Jon Matonis
Thursday, April 12, 2012

A new digital currency from the Royal Canadian Mint dubbed MintChip boldly claims to represent "the evolution of currency." However, digital currency is not simply about taking official money and making it useful for online and offline environments in a digitized form. The point of digital currency, and especially free-market digital currency, is to broaden the avenues for issuance and adoption of alternative nonpolitical monetary units. Most electronic cash systems already expand and revolve around the State-issued currencies although they don't have to.

I am reminded of the Mondex experiment during the 1990s which is actually when I first met MintChip Challenge judge David Birch of Consult Hyperion. Originally and laudably, Mondex wanted to replicate the characteristics of physical cash via a smart card but due to centralized authorizations, it only embraced partial and contingent privacy for the user. The true test of any anonymous cash-like system is what happens when your device or digital tokens are permanently lost or destroyed similar to burning a paper $100 bill. If they can be recovered and returned to you, then you don't have full privacy.

Then there was DigiCash and the brilliant blind signature protocol from Dutch cryptographer David Chaum. Combining a powerful centralized issuing mint with true transaction irreversibility and anonymity, DigiCash would have flourished if it weren't for the legacy intermediaries that tend to insert themselves into fledgling centralized systems when they smell a loss of revenue. The misadventures of DigiCash paved the way for needing decentralized systems and bitcoin elevated it to marquee feature by resolving the double-spend problem through the distributed block chain.

Yes, the functional goals of MintChip are commendable and we have indeed come a long way when we witness a monetary authority advocating the protection of privacy and emulating the attributes of physical cash, even if they are trying to remove physical cash from circulation at the same time. At its core, MintChip is a smartcard integrated circuit that holds electronic value and can securely transfer value from one chip to another. Since it's based on tamper-resistant proprietary hardware and currently supports microSD cards, USB sticks, and special high-end hardware security modules, it can perform transactions without an intermediary.

According to bitcoin analyst Vitalik Buterin, "It even has a few advantages over Bitcoin; secure transactions are instant, it’s backed by the Canadian dollar and it even manages to solve the double spending problem without connecting to the internet." Cautiously however, Vitalik goes on to say:
"There are other aspects of the system that Bitcoin users are likely to object to. The currency creation model is centralized: value is originally injected into the system by the Royal Canadian Mint and customers can purchase value to spend by going through trusted brokers. The system is designed to be able to force upgrades, giving the Mint the power to introduce onerous tracking features over time if it so desires. Innovative means of value storage like paper and brain wallets are out of the question, since nothing can be done without the physical chip, and it’s impossible to have an online wallet that does not require trusting the provider."
Wow! That's a litany of show-stopping issues to be vigilant about -- not to mention the potential fallibility of the proprietary hardware and the sure-to-come AML (Anti-money laundering) provisions or arbitrary transaction size limitations. I get the feeling that MintChip might be better off if it processed in bitcoin units rather than Canadian dollar units but that would be redundant. Ironically, one of the leading ideas for the use of MintChip in the MintChip Challenge is to purchase bitcoin with it since it's irreversible.

My objection still lies with the fact that it is a non-free-market approach to the payments issue. Bitcoin has so far demonstrated its exchange value without being backed by anything that isn't backed by anything. Remove the standing armies and all money is essentially a mass illusion. Bitcoin just happens to be a voluntary, bottom-up mass illusion with scarcity, like gold.

If the integrated circuit chip is not hacked first, I can imagine a prestigious future gathering in the beautiful resort city of Victoria, British Columbia (similar to Jekyll Island in 1910) where the Royal Canadian Mint officials and the Government of Canada carve up the country into 12 MintChip Reserve Districts and bestow the privileged monopoly of issuance to their well-connected financier amigos. May the odds be forever in your favor.

For further reading:
"Canada Moves Closer to Cashless Society With Digital MintChip Currency", Alex Newman, April 16, 2012
"Bitcoin - The Libertarian Introduction", Erik Voorhees, April 11, 2012
"Bitcoin - Finally, Fair Money?", Scott Lenney, Mute, February 21, 2012
"The (Non-Monetary) Value of Cash", Rivendell, December 1994

Monday, April 16, 2012

Virtual Currency Exchange First Meta Closes $466,000 Funding Round

By Jon Matonis
Tuesday, April 10, 2012

In a little-discussed announcement, First Meta took in nearly half-a-million dollars for the expansion of its multi-world virtual currency exchange. Singapore-based First Meta is unique in that they have consistently provided a two-way exchange service for virtual currencies that typically only see one-way activity. Why is this significant? For starters, it gives individuals the opportunity to cash out or monetize their virtual world activities just as I outlined in my previous article Virtual Currencies and Roach Motels. When it comes to Linden Dollars, IMVU Credits, Frenzoo Gold Coins, and other currencies, it is this two-way convertibility and getting the most out of your virtual assets that make the team at First Meta stand out.

The investment announced on March 29th came from Silicon Valley business accelerator Plug and Play Tech Center and Singapore’s National Research Foundation. The new capital will be used to build the next generation of its virtual goods and currency exchange and expand support to other platforms. First Meta was founded in February 2007 by Douglas Abrams and Aileen Sim who then had their early prominent business success in Second Life with MetaCard and virtual ATMs. It is important to note that the co-founders also have a background in banking, finance, and venture capital which could prove valuable as virtual exchanges encroach upon their more traditional trading house brethren.

Online virtual currency trading has close similarities to online forex trading so obviously it is a natural progression for the nonpolitical digital currencies. According to new CEO Autumn Radtke, "Consumers are being bombarded with virtual currency today like we’ve never seen before. As gaming becomes more mainstream so will secondary trading. We’re here to help the new generation of game companies and currency issuers participate in revenue and avoid the black market fraud problems associated with unsanctioned trading."

Unlike most third-party dealers of game currencies and virtual currency platforms, First Meta emphasizes the potential for publishers and game developers to open up their proprietary currency to player-2-player trading which gives users the much-desired liquidity and also introduces the currency to new users thereby exploiting the inherent viral nature of a currency. Citing new revenue streams for their partners, they claim to have the most robust player-2-player virtual asset trading platform in the industry. As they say: "Why let someone else profit from your hard work?"

Trades at First Meta may occur between two different virtual currencies or between the virtual currency and the US Dollar or Euro. This highlights what I believe is a growing trend for virtual world environments and MMO gaming -- namely the ability for participants to extract digital value from the virtual experience and convert it into real-world money.

Expected to be released on May 15th, Blizzard's Diablo III takes this value extraction to the extreme with their controversial real money auction house. Apparently, so much was at stake regarding the real currency trade that South Korean officials even persuaded Blizzard to remove the auction house feature from the local market version. Moreover, gold farmers are reportedly stunned as GamesRadar's Tyler Nagata observes:
"Traditionally, the black market for in-game items has been the elephant in the room that game developers just don’t talk about. That’s why the real money auction house for Diablo III marks a huge shift for how game studios handle player driven economies in online games. By taking the cash-for-item trades away from traditionally sketchy gold farmer sites and putting it under the official banner of its service, third-party gold farming businesses and services may become a thing of the past if more online games adopt a similar business model to Blizzard’s moving forward."
We can expect more in the way of these types of strategic moves as virtual worlds collide and the twin mega-trends of grid portability and real money trading (RMT) accelerate. Virtual currency exchanges like First Meta will be there to provide trading liquidity and to expand the overall pie.

Saturday, April 14, 2012

Another Market Not Available to U.S. Citizens

By Jon Matonis
Monday, April 9, 2012

I find this incredible. U.S. citizens blocked out a market that the rest of the developed world has access to. Of course, I am speaking about the CFD market. CFD stands for "contract for difference" and it is a marketplace where regular people can trade the markets of the large trading houses without the same capital requirements. So, basically it is a form of democratized financial trading for the masses.

In financial parlance, a contract for difference is a contract between two parties stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time. Alternatively, if the difference is negative, then the buyer pays instead to the seller. Utilizing leverage, CFDs are traded on margin without the need for ownership of the underlying asset and positions may be either long or short. Unlike futures contracts, CFDs have no fixed contract size or expiry date. Investors appreciate these instruments because of their flexibility as CFDs can be traded in an almost endless variety of contracts that are sometimes unavailable at the traditional exchanges, such as diamonds and even bitcoin.

Due to restrictions by the Securities and Exchange Commission on over-the-counter financial instruments, trading in the CFD market is not an option for U.S. residents and U.S. citizens but curiously you can still buy a book about the practice on Amazon's U.S. site. Having lived and worked in both Ireland and the United Kingdom, the choices available to foreigners in the area of online trading and online gaming puts the U.S. market to shame. CFD markets and spread betting are prevalent in other locales not to mention the smorgasbord of voluntary online gambling and poker choices.  Gibraltar has staked their jurisdictional reputation on supporting the online wagering industry and they are the leader.

America's puritanical heritage has traditionally steered it away from such pursuits but that is changing slowly. Legislation continues to be evolving in the direction of permitting online casinos and gambling provided that the established gaming lobbies and layered tax jurisdictions can receive their pound of flesh.

The restrictions against the CFD market in America are just another example of protecting us from ourselves, but instead of protection from the "sin of compulsive wagering" it is protection from the "sin of excessive leverage".

Now, there is also the sin of illiquid asset trading. Recently, the SEC charged SharesPost and Felix Investments over pre-IPO trading in the illiquid shares of Facebook. This activity occurs over an online trading platform for private shares that provides a way for small and large shareholders to cash out and new entrants to participate prior to a formal IPO event. Eventually, successful innovations such as SharesPost and SecondMarket may be driven overseas as well due to excessive regulation.

Although I disagree with Josh Brown's capitulatory conclusions of while-the-rules-aren’t-perfect-they’re-the-only-rules-we've-got attitude for the private shares secondary market, he certainly has a colorful way of describing it:
"Imagine a private market where tech-savvy people and the Digerati could buy and sell within their own little bubble stretching from San Francisco to the off-campus housing around Stanford to the Diablo Mountain range bordering the eastern fringe of San Jose.  There would be no need for all that physical “dead tree” paperwork or the prying eyes of CNBC and the Wall Street Journal.  There could be less rules because, frankly, these would be negotiated transactions between millionaires and billionaires – a brotherhood of enlightened self-interest, in it for the challenge and intellectual self-satisfaction with the money being a mere afterthought."
But we do want our private markets if we so choose, sorry Mr. Brown. It isn't all millionaires and billionaires. Marketplaces like the CFD market and the private shares secondary market are alternative free-market solutions to a financial world rife with favoritism and increasing regulatory chokeholds. Regulating these emerging markets in the U.S. under the guise of "it's for your own protection" doesn't fly and it's offensive. Markets will always seek a way to self-regulate and to survive.

Tuesday, April 10, 2012

Sound Money Project Interviews Dr. Edwin Vieira, Jr.

In this part 2 of the Sound Money Project "Dollar in Crisis" series, Dr. Edwin Vieira, Jr. is interviewed at George Mason University by Rutger van Bergem on April 9, 2012.

Part 1 of "Dollar in Crisis" series with Dr. Thomas Rustici on March 27, 2012 can be seen here.

The Sound Money Project Interview with Dr. Judy Shelton on March 14, 2012 can been seen here.

Sunday, April 8, 2012

Bitcoin is Voluntarist Not Socialist

By Beautyon
Irdial Discs
Sunday, April 8, 2012

The idea of socialism is diametrically opposed to the core philosophy of a voluntary peer to peer system like Bitcoin. Peer to peer systems dis-intermediate the transfer of information and eliminate the need for an arbitrary governing authority or service provider. Bitcoin, like maths, has no philosophy and is neutral.

Socialism's basic premise is that 'property is theft', and that all property, goods and services should be collectively owned for the benefit of all people in a coercive State with no opt out. Under a socialist system of forced organization, individuals do not have free use of their inherent rights, which are violently suppressed.

This is an inherently immoral proposition, where one group of people inevitably coalesce into an illegitimate ruling class to control and administer other people 'for their own good'; the good of the collective. Even if this aggregation of power were not the case, no man or group of men has the right to force another man to relinquish his property.

Libertarians understand that there is no such thing as 'the rights of the collective' and that only a living individual human has rights. Chief amongst these rights, the 'root right', is the right of property.

Anyone who contends that Bitcoin is a socialist idea is fundamentally mistaken about how Bitcoin works and its true nature, or is trying to redefine socialism so that it can fit in with and be the standard bearer of the inevitable rise in Bitcoin. You can detect this when you read the phrase, "my idea of socialism is" in this context, which means that the speaker wants to abandon the bad smell of socialism and re-brand the word to mean something that it is not, so that he can remain 'a committed socialist' and be a part the real world at the same time.

Bitcoin is the antithesis of socialism. Bitcoin transfers, the ownership of Bitcoins and the rules governing exchanges are not administered by a central State authority, unlike a system designed by a socialist, where who can own what, how much of it, and what can be done with it is absolutely regulated by a group of violent bureaucrats.

Bitcoin is a strict peer to peer protocol, and not a centralized system under the control of arbitrary rules or fallacious economic ideas like Keynesianism. In its essence, Bitcoin acts like a law of nature (powered by cryptography) and it does not 'care' about your philosophy or ideology. By dint of this alone, Bitcoin cannot be called 'socialist' or have a political philosophy attributed to it, any more than an inanimate object, or a fundamental force of nature can. It is designed to do one thing, it does that thing, and that thing is not inherently political; only Bitcoin's users have political ideas that they try, and fail, to superimpose upon it. Bitcoin is neutral, like a hammer or an neutron or a hand gun.

Bitcoin is a stateless suite of software protocols that is purely voluntary. You may or may not use Bitcoin at your own discretion. No one forces you to be a part of the Bitcoin ecosystem or to abide by its rules. How many Bitcoins you accumulate in exchange for goods and services is entirely up to you and your trading partners, and what you spend your Bitcoins on is entirely up to you.

The users of Bitcoin do not 'have a say' in what you can or cannot do with them. There is no State, Statist, or socialist that can tell you that you may not collect as many Bitcoins as you can, or that your Bitcoins belong to the collective, or that you must hand over a percentage of them to the State 'for the good of the people'. Users of Bitcoin, by default, are freely associating humans, choosing freely to accept the rules of the Bitcoin system. This is the complete opposite of socialism, which is the negation of individual liberty, the abolition of free choice and the elimination of property rights.

Anyone who claims to be a socialist whilst advocating for the widespread adoption of Bitcoin is de-facto acting against their socialist principles and desire to create a world where collective property ownership and centralized direction of capital is enforced with violence.

In a world where money transfers are made entirely through the Bitcoin block chain, a socialist state will at the very least, have a huge amount of trouble compelling people to hand over their money to the State by force. As usual, the socialist collectivists will resort to threats, violence, imprisonment, confiscation of real property and any other immoral and disgusting means they can come up with to steal money from people. This begs the question, "how can an avowed socialist advocate the adoption of Bitcoin when it has the potential to destroy his violent Statist utopia from the inside out?"

Its an interesting question. I suspect that many socialists who advocate the adoption of Bitcoin are having a profound internal struggle with the emergence of not only Bitcoin but of the internet itself and its astonishing, undeniable example of stateless cooperation between men that has had the effect of benefiting everyone.

The internet has brought to everyone on it, at a cost that is near zero, the entire body of human knowledge. Two billion, two hundred and sixty seven million two hundred and thirty three thousand, seven hundred and forty two people and counting. It has also rendered practically redundant, the state monopoly telephone systems and postal systems. Anyone who still believes that we need the State in the face of these revelations is completely insane, or is on the road to abandoning socialism, or is sticking his fingers in his ears unable to face the facts of this matter.

Man is better off in every way without the State. The paradigm shifts brought about by the internet in publishing, music distribution, postal mail, telephony and the new, without precedent services created by the connectivity of the internet are proof of this. Each of these industries has been regulated by the State in the offline world, and now that they are running in the online world without State regulation they are more efficient and beneficial by orders of magnitude. The only people who are against this are the vested interests, the buggy whip makers, and the socialists, and every time they try and exert their influence they inconvenience and damage people and cause them to expend time and money where they would otherwise not have to.

The next great shift on the internet is going to be the complete disruption of the sclerotic bank mediated money transfer systems in favour of internet facilitated money transfers that remove banks from the process flow. This event will cause a great acceleration in the transaction rate of commerce world-wide, will de-fund the socialist states and be of great benefit to everyone everywhere.

All the attempts the banks are making now to embrace the internet and peer to peer payments systems will eventually fail, as long as people are free to develop software, release it and freely interface with money. This is why PayPal has banned transfers that touch Bitcoin in any way; they know that Bitcoin is completely superior to PayPal, and that it constitutes an existential threat to their business. PayPal allowing its system to be used to make payments in exchange for Bitcoins is allowing blood vessels to feed a cancerous tumour. Bitcoin is cancer to PayPal and they must kill it at any cost.

The PayPal response to the inevitable peer to peer payment ecosystem in the form of their 'Blue Dorito' suffers from the fatal elixir of powdered friction, arbitrary rules, suppression and regulation by the State, all made soluble with a profound lack of imagination - none of which Bitcoin suffers from... but that is beyond the scope of this post. PayPal will eventually become the MySpace of moving money because it is wedded to the pre internet mode of thinking when it comes to payments, and they are in an abusive shotgun wedding with the State.

Money sees the State as damage and routes around it. This is the fundamental truth of Bitcoin that will completely disrupt the business of money transfer and benefit billions of people world-wide. Bitcoin, or one of its successors is going to be the service that makes this disruption come to pass. Once critical mass is reached, Bitcoin will be completely unstoppable. We need only look at the French restrictions on 128bit SSL and the way they dropped them when it became the standard protection for eCommerce transactions. The first sign of this shift will be the adoption of Bitcoin as an accessory service on one of the major money transfer service providers, offering Bitcoin transfers to the computer illiterate.

Bitcoin is not socialist. It is not collectivist. It is voluntarist.

Reprinted with permission.

Saturday, April 7, 2012

Watch Bitcoin Robbery in Slow Motion

By Jon Matonis
Monday, April 2, 2012

Bank robberies of the future may not reveal the traditional security camera shot of the ski-masked gun holder but rather we will watch them evolve slowly in front of our eyes as the money hops around the globe. It's not so much where is the money but when is the money? The public and transparent nature of the bitcoin transaction ledger ensures that all transactions are known by date, time, amount, and block number although not necessarily by the who or the where. Contrary to conventional opinion, this is not a negative for the protocol because bitcoin liberates cash by putting it online.

On March 1st, a total of 46,703 bitcoin worth $228,845 at the time was stolen from customer accounts at VPS hosting company Linode. As described in a Linode Security Incident Report:
"This morning, an intruder accessed a web-based Linode customer service portal. Suspicious events prompted an immediate investigation and the compromised credentials used by this intruder were then restricted.  All activity via the web portal is logged, and an exhaustive audit has provided the following:
All activity by the intruder was limited to a total of eight customers, all of which had references to 'bitcoin'.  The intruder proceeded to compromise those Linode Manager accounts, with the apparent goal of finding and transferring any bitcoins."
The victims were not exactly banks but, in the bitcoin world, they come pretty close to being banks because they hold significant quantities of deposited bitcoin for various purposes. Of course, we may never know who or how many individuals were involved in the heist, but that doesn't stop us from seeing how the loot was divvied up. The slow motion heist of bitcoin stored at Linode can be viewed by methodically clicking through web-based block chain information in a weird voyeuristic game of 'follow-the-money' (click on the dendrogram's orange circles to follow the money).

The 25,000 bitcoin in the real dendrogram example represent only a portion of the total 43,554 bitcoin stolen from leveraged trading house Bitcoinica that was transferred from servers at Linode to many IP addresses scattered around the world. Bitcoinica was by far the victim that suffered the greatest and admirably they have pledged to cover all losses on behalf of their customers which should give you an indication of their daily positive cash flow. Bitcoin mining pool Slush and the Bitcoin Faucet were two of the other theft victims.

Does bitcoin possess the property of fungibility? I believe it does through sufficient mixing, plausible offline transactions, and the absence of a software-enforcing address black list. Just as we don't examine that gold Krugerrand for who had previously held it, we don't do so with bitcoin. As some have commented in the community, obviously the lack of anonymity and lack of untraceability will lead us straight to the thief's doorstep. Famously, Fergal Reid and Martin Harrigan have even observed that "the actions of many users are far from anonymous" in their 2011 research paper "Bitcoin is Not Anonymous".

So then, has the thief been apprehended yet? Not exactly, but that is because public traceability does not always equate to real-world identity and therefore the transactions themselves are still reasonably anonymous. Reid and Harrigan state that they are not law enforcement officials and they don't really have subpoena power but that sloppy thieves can indeed leave a digital trail, like an unmasked static IP address or a known public key, that would link them to a real-world identity. In other words, anonymity is not built-in to the protocol as lead core bitcoin developer Gavin Andresen warns:
"Unless you are very careful in the way you use Bitcoin (and you have the technical know-how to use it with other anonymizing technologies like Tor or i2p), you should assume that a persistent, motivated attacker will be able to associate your IP address with your bitcoin transactions."
Andresen adds that multisignature capability is technically possible for bitcoin security purposes and it's on the horizon in one form or another. Bitcoin private keys stored on a "hot wallet" in the cloud are like physical paper banknotes left on your kitchen table and this really is an emerging policy and procedures issue for network security managers. Clearly, it's a whole new world for electronic money especially when that money comes with the powerful irreversibility of cash. But that's not a bug -- it's a feature.

Sunday, April 1, 2012

The Payments Network As Economic Weapon

By Jon Matonis
Tuesday, March 27, 2012

"Extraordinary and unprecedented" is how SWIFT chief executive, Lázaro Campos, describes the March 17th move by Belgium-based SWIFT to discontinue service to 30 Iranian banks. The Society for Worldwide Interbank Financial Telecommunication, or SWIFT, is a worldwide financial messaging network to facilitate the interbank transfer of funds. Now, it has become an economic weapon as well.
SWIFT Headquarters in La Hulpe, Belgium
Campos emphasized the monetary blockade is "a direct result of international and multilateral action to intensify financial sanctions against Iran" and that SWIFT was forced by recent European Union sanctions designed to isolate Iran financially for its failure to demonstrate to Western nations that it is not developing nuclear weapons.

SWIFT has never expelled an institution in its 39-year history and in 2010 it processed 2 million messages for 19 Iranian member banks and 25 financial institutions. This is a vastly significant change in tactics and the repercussions are still unknown. Governments have long used the financial system as a method of tracking and blocking payment flow for targeted individuals and companies, but now it has been escalated to the nation-state level via the modern telecommunications network.

Mark Dubowitz is a sanctions specialist in Washington D.C. who advised U.S. lawmakers on the recent SWIFT legislation. He said the decision could limit the ability of Iran’s banks "to move billions of dollars in financial transactions and put immense pressure on Iran’s leaders to reconsider their policies" and that it underscores "the growing political isolation of Iran as it becomes the first country to be expelled from what is the financial equivalent of the United Nations."

Highlighting and exposing the structural importance of centralized financial institutions that sit at the very top of the payments pyramid will hasten the trend to more decentralized and regional payment structures. Moreover, a single worldwide financial structure with near-absolute authority will begin to be seen as a vulnerability to many nations because they cannot always be expected to comply with U.S. and European Union directives. Now that the precedent has been set for evicting a country's financial institutions from the prevailing global payments network, all nations will be rightly suspicious of that powerful weapon.

Trader and gold advocate Jim Sinclair explains to King World News how the U.S. government uses the international payments system as a weapon of war:
"We go to war, challenging the other side to do the same because whatever you use as a weapon, the other side is going to tend to use as a weapon.  The weapon that’s being used is the interbank transfer system, the way money is sent from bank to bank. We’ve already seen that Iran has been basically shut out of the SWIFT system and the SWIFT system is what this is all about.  The SWIFT system doesn’t take any money for the money that goes through it.  The SWIFT system is like the old telephone company.  What it does is charge for the use of its communication.
Believe me the SWIFT system works for the West.  It’s located in Belgium and you would think the US had no power on it.  It’s never discussed as being a US arm, but it is a US weapon. You’ve got to see now you’ve got this visual in front of you of a battlefield.  You’ve got Wall Street firing by lighting off something that looks like a cruise missile, but it’s got SWIFT written on the side."
India is now told to cooperate or suffer the consequences implying tacitly that payment network sanctions are a real possibility. In a March 26th, 2012 audio interview, Sinclair goes on to forecast how the BRIC economies and other emerging trade areas around the world may soon look to establish their own SWIFT-type transfer systems so as not to get locked out of the international monetary system in the future. The backlash from this action will lead to the remonetization of gold around the world as barter and currency substitutes to the U.S. dollar gain in importance.