Saturday, August 25, 2012

WikiLeaks Bypasses Financial Blockade With Bitcoin

By Jon Matonis
Monday, August 20, 2012

People shouldn't fear their government; government should fear its people. Publishers and journalists will not be intimidated nor silenced. Now entering day 626 of the financial blockade against WikiLeaks, Julian Assange sits in the Ecuadorian Embassy in London awaiting safe passage.

Following a massive release of secret U.S. diplomatic cables in November 2010, donations to WikiLeaks were blocked by Bank of America, VISA, MasterCard, PayPal and Western Union on December 7th, 2010. Although private companies certainly have a right to select which transactions to process or not, the political environment produced less than a fair and objective decision. It was coordinated pressure exerted in a politicized climate by the U.S. government and it won't be the last time that we see this type of pressure.

Fortunately, there is way around this and other financial blockades with a global payment method immune to political pressure and monetary censorship.

On its public bitcoin address, Wikileaks has taken in over $32,000 equivalent in more than 1,100 separate bitcoin donations throughout the blockade (1BTC = $10.00). But these amounts may be significantly higher, because it does not even include the individually-generated bitcoin addresses that WikiLeaks provides for donors upon request.

Also announced last month, WikiLeaks appears to have found another way around the VISA and Mastercard blockade by using the French national credit card system, Carte Bleue, to process these payments (at least temporarily).

According to WikiLeaks, VISA and MasterCard are contractually barred from directly cutting off merchants through the Carte Bleue system and the French non-profit FDNN (Fund for the Defense of Net Neutrality- Fonds de Défense de la Net Neutralité) has set up a Carte Bleue fund for WikiLeaks.

Time Magazine declares that WikiLeaks "could be as important a journalistic tool as the Freedom of Information Act."

It used to be that people had secrets and the government was transparent; now it's the people that lack privacy and the government has secrets. Freedom of payments is an extension of financial privacy and digital cash-like transactions without financial intermediaries become a critical piece of that foundation. Money was never intended to act as a form of identity tracking or payments restriction and this is why the option for anonymous and untraceable transactions is so vital as society moves to a world of digital currency.

"It is the privatization of censorship, because this is being done because of extreme pressure by the U.S. Government," says Kristinn Hrafnsson, spokesman for WikiLeaks. "It’s extremely important to fight back and stop this process right here and now so that we won’t see in the future, ....where we have the financial giants deciding who lives and who dies in this field."

To those that don't support freedom of payments, consider this financial blockade invoked in the name of political correctness before you dismiss the inherent value of a nonpolitical unit of account and of a decentralized medium of exchange. It should be offensive to most free-minded people that you are not the final arbiter of how and where you spend your money. Bitcoin restores the balance.

Thursday, August 16, 2012

My Answer To A VC’s Bitcoin Question

By Jon Matonis
Saturday, August 11, 2012

Fred Wilson is a venture capitalist and principal of Union Square Ventures. On his popular blog, he recently solicited feedback (for the second time) on the bitcoin cryptocurrency. I was tempted to reply directly on the blog, but with over 400 comments posted already I did not want to be lost in the scroll.

My reply is directed first at Fred for sparking the discussion but also to those many other investors pondering bitcoin deals. Throughout, I will refer to bitcoin investments as investment in bitcoin-related deals as opposed to a direct investment in the currency itself which an entirely different business proposition.

Let's get some basics out of the way. First of all, an investment in a bitcoin entity will be a gut-wrenching, difficult investment to make if a particular VC has an inherent fundamental belief in any of the following: (1) the cashless society as promoted by the anti-cashists; (2) capital controls enforced at national borders; (3) the appropriateness of any government monetary policy; and (4) the taxation of income.

For a VC, this can be a soul-searching exercise. But it does not mean that the decentralized digital currency is political by nature. It means that through its cryptographic nature bitcoin reduces the monetary Statist to irrelevancy. Bitcoin has some pretty powerful and disruptive byproducts.

With optional, user-defined transaction privacy, the use of money for purposes of identity linking falls by the wayside. True, it enables a paper cashless society but not with the attributes that the tax-efficient anti-cashists want. Without government checkpoints for financial institution wire transfers, bitcoin capital flows freely, without limits, and perhaps anonymously. The harmful tools of centralized monetary policy would also not exist. And finally, the taxation of income that began in the United States in 1913 would operate on the honor system -- the honor of the taxpayer, that is. This could be welcome news for some as a progressive income tax was a fundamental tenet of Marxism.

In his first post, Fred mentioned "the emergence of currencies that are not controlled by nation states in my lifetime." He clearly acknowledges that significant ramifications result from the "decoupling of currencies from governments," but I wonder if he has come to terms with what that actually means.

What sounds cool and hip because it is technologically advanced can also turn a lifetime of engrained political assumptions on its head. If a VC happens to believe that Greece's problems can be solved by eliminating anonymous paper cash transactions and that the taxation of income is morally justified, how does he reconcile that with bitcoin dominance?

Definitely not for the faint of heart, those skilled and experienced venture capitalists entering the arena will be
playing with fire. This is not a game of targeting an app and throwing seed money at developers located in Silicon Valley or Silicon Alley. Nor is it like catching the social media wave or jumping on the mobile payments bandwagon.

Bitcoin is the quintessential disruptor for not only does it disrupt established primary-level players in the field of payments, like VISA, Mastercard, and PayPal, but it disrupts the very nature of monetary authority.  Bitcoin is disruption within supreme disruption.

Failing to recognize this maxim, especially as a venture capital investor, can be fraught with pitfalls. Regulatory acquiescence will be tempting, but counter-productive. In a company's strategic plan, relegation of bitcoin to just another national currency type among equals fails to exploit its incredible transformative properties. The venture capitalist could become boxed in by the lack of courage to set legal precedent, by the unwillingness to go overseas, or even by the reluctance of the board. To be fair, there will be VC plays in the regulation-friendly exchange space and processor space but they won't be the home runs!

The home runs will be transformative and that just may not be possible for a NewCo in all countries. I maintain that it is more a game of multiple jurisdictions that leverages the relative strengths of competing legal jurisdictions for the best foot into the global infrastructure.

Gibraltar made an early, and deliberate, strategic decision to embrace and promote the online gambling business. They executed it brilliantly and Gibraltar is now home to the industry's leaders like publicly-traded [BPTY:London]. Just as with online gambling, some jurisdictions around the world will be more bitcoin-friendly than others. Negotiating that outcome is the real frontier.

Many readers have commented and agreed that the investment opportunities will revolve around bitcoin-related services more than any type of client software play or attempt to control the mining and transaction fees. While I generally agree, I also think that a new company does not have to be bitcoin focused exclusively.

Also, keeping bitcoin value in bitcoin on the block chain will be the key. It may be an opportunity that moves significantly beyond an existing business model simply by having bitcoin in its arsenal. For example, a third-world e-commerce platform could bring massive shopping to the unbanked by leveraging the non-national and frictionless attributes of bitcoin. Or, asset vehicles could be designed that transfer inter-generational wealth without the need for trusts or trust administrators.

So, my advice to VCs seeking their piece of the block chain is study the FATF blacklist of 15 non-cooperative countries, go to airports you never heard of, and most importantly, surround yourself with management teams that mentally embrace bitcoin's powerful derivative byproducts.

For further reading:
"Sit down and shut up!", BLOGDIAL, August 13, 2012
"Cash Is Essential For A Free Society", Stowe Boyd, August 10, 2012
"Secure multiparty Bitcoin anonymization", Edward Z. Yang, July 20, 2012
"Nerdy Money: Bitcoin, the Private Digital Currency, and the Case Against Its Regulation", Nikolei M. Kaplanov, March 31, 2012

Wednesday, August 15, 2012

Legalize Competing Currencies

By U.S. Rep. Ron Paul
Monday, August 13, 2012

I recently held a hearing in my congressional subcommittee on the subject of competing currencies.  This is an issue of enormous importance, but unfortunately few Americans understand how the Federal Reserve and Treasury Department impose a strict monopoly on money in America.

This monopoly is maintained using federal counterfeiting laws, which is a bit rich.  If any organization is guilty of counterfeiting dollars, it is our own Treasury.  But those who dare to challenge federal legal tender laws by circulating competing currencies-- at least physical currencies-- risk going to prison.

Like all government created monopolies, the federal monopoly on money results in substandard product in the form of our ever-depreciating dollars.

Yet governments have always sought to monopolize the issuance of money, either directly or through the creation of central banks. The expanding role of the Federal Reserve in the 20th century enabled our federal government to grow wildly larger than would have been possible otherwise.  Our Fed, like all central banks, encourages deficits by effectively monetizing Treasury debt.  But the price we pay is the terrible and ongoing debasement of our money.

Allowing individuals and business to use alternate currencies, especially currencies backed by gold and silver, would expose the whole rotten system because the marketplace would prefer such alternate currencies unless and until the Fed suddenly imposed radical discipline on its dollar inflation.

Sadly, Americans are far less free than many others around the world when it comes to protecting themselves against the rapidly depreciating US dollar.  Mexican workers can set up accounts denominated in ounces of silver and take tax-free delivery of that silver whenever they want.  In Singapore and other Asian countries, individuals can set up bank accounts denominated in gold and silver.  Debit cards can be linked to gold and silver accounts so that customers can use gold and silver to make point of sale transactions, a service which is only available to non-Americans.

The obvious solution is to legalize monetary freedom and allow the circulation of parallel and competing currencies.  There is no reason why Americans should not be able to transact, save, and invest using the currency of their choosing.  They should be free to use gold, silver, or other currencies with no legal restrictions or punitive taxation standing in the way.  Restoring the monetary system envisioned by the Constitution is the only way to ensure the economic security of the American people. 

After all, if our monetary system is fundamentally sound-- and the Federal Reserve indeed stabilizes the dollar as its apologists claim--then why fear competition?  Why do we accept that centralized, monopoly control over our money is compatible with a supposedly free-market economy?  In a free market, the government’s fiat dollar should compete with alternate currencies for the benefit of American consumers, savers, and investors.

As Austrian economist Ludwig von Mises explained, sound money is an instrument that protects our civil liberties against despotic government. Our current monetary system is indeed despotic, and the surest way to correct things simply is to legalize competing currencies.

Monday, August 13, 2012

Parallel Currencies And The Roadmap To Monetary Freedom

By Jon Matonis
Tuesday, August 7, 2012

It may not be as historically significant as President Nixon closing the gold window in 1971, but Rep. Ron Paul laid out the framework for the inevitable monetary confrontation of the future in his final U.S. Domestic Monetary Policy Subcommittee hearing on "Sound Money: Parallel Currencies and the Roadmap to Monetary Freedom."

The experts testifying included Robert Gray, Executive Director of the American Open Currency Standard, Forbes contributor Nathan Lewis, author of Gold: The Once and Future Money, and Dr. Richard Ebeling, Northwood University economics professor. Rep. Paul also included a prepared statement from constitutional lawyer and monetary expert, Dr. Edwin Vieira, who was unable to attend.

Summarizing the August 2nd Congressional hearing, Alex Newman wrote for The New American:
"According to Paul, the only way to stabilize the economy is by returning to monetary freedom and legalizing constitutional money. And until the U.S. government and the Fed get out of the way so the American people can choose what money to use without government coercion, the economy will never be truly stable and the supposed 'recovery' will be 'illusory,' he added. Meanwhile, other nations are already catching on to the hoax even as Americans lack the freedoms that citizens in some other parts of the world have to invest and protect their wealth from inflation."
Largely echoing the sentiments of the chairman, the experts agreed that since the creation of the Federal Reserve in 1913 the dollar has lost 98% of its value and that central banking is a form of central planning with no place in a free society.

Generally, the repeal of legal tender laws will allow individuals to decide what to use as the preferred medium of exchange and open the door to alternative currencies without threat of prosecution.

Rob Gray has been a tireless advocate for alternative open currency systems and he is right to say "leave our money alone" but I fundamentally disagree with his stance on legal tender laws. He believes that the only effect of legal tender laws is that if a debt is incurred without a specific agreement for a particular type of payment, then that debt can be discharged with the declared legal tender, or federal reserve notes. He even goes on say that, in addition to not calling for repeal, he is in favor of existing legal tender laws because they are so innocuous.

Although technically correct in stating that legal tender laws do not result in "tax obligation, exclusive requirement, and/or mandatory acceptance," Gray misses a major and symbolic effect that they do have and sometimes it's a chilling effect.

The legal tender laws have the effect of giving one form of money an artificial preference over another by making that form of money acceptable for the payment of taxes. Therefore, it indirectly puts forms of money without legal tender status at a disadvantage because people will perceive the ‘legally’ preferred monetary unit as having an underlying value greater than zero. That is why I oppose legal tender laws, Mr. Gray.

Then, a bit of bitcoin drama occurred when Rep. David Schweikert (R-Arizona) initially referred to the cryptocurrency as "um....what was one of them called?....something....coin" near the end of the hearing. To my knowledge, that is only the second time that bitcoin has been entered into the congressional record. The first being when Prof. Larry White mentioned bitcoin in his prepared testimony for the Free Competition in Currency Act of 2011.

Contrary to Nathan Lewis' statement that "every currency has an issuer," bitcoin does not require an issuer.

Proving once again that events in the real world unfold faster than those in power can comprehend, the participants probably did not know that bitcoin is currently the largest distributed computing project in existence today, passing the Search for Extra-Terrestrial Intelligence (SETI) project some time ago.

They probably were also not aware that bitcoin is a three-year-old decentralized bootstrapped currency with a $100 million plus monetary base that is immune from government regulation and, more importantly, immune from the crippling effects of monetary policy.

Monday, August 6, 2012

Top 10 Bitcoin Statistics

By Jon Matonis
Tuesday, July 31, 2012

The concept of a decentralized cryptocurrency without political borders can be challenging at first. Bitcoin forces us to adjust the way that we think about money and value transfer. Fortunately, the bitcoin community has been excellent at consolidating informational data through a loosely-integrated group of dedicated volunteers.

Here are the top 10 bitcoin statistics in no particular order. I have intentionally omitted certain statistics like bitcoin miners' revenue and mining operating margin because they focus on a subset of the user community. Also, I have tried to provide alternate data sources where available to broaden the statistic's usefulness. If you don't see your favorite listed here or if I have missed any important statistics or charts, please feel free to let me know in the comments below.

1. Market Capitalization - This displays the historical number of total bitcoins in existence multiplied by the exchange rate for that day in US Dollars. It can be considered the bitcoin monetary base.

2. Price Chart - This chart displays the last trade price for bitcoin (BTC) against a number of currencies and ranks the exchanges by 30-day volume. Advanced charting capability is provided here. The price depth chart of BTC/USD on the MtGox exchange is usually the best indication of overall market price.

3. Exchange Volume Distribution - This pie chart displays trading volume distribution by exchange and by various bitcoin currency pairs.

4. Network Hashing Rate - This displays hashing difficulty and the estimated number of Giga hashes per second (computation speed) that the network is performing for various time windows. Calculated by dividing maximum target by current target where target is a 256-bit number, difficulty measures how difficult it is to find a new block compared to the easiest it can ever be. Difficulty adjusts every 2016 blocks (or two weeks) and to find a block, the SHA-256 hash of a block's header must be lower than or equal to the current target for the block to be accepted by the network.

5. Hash Rate Distribution - This pie chart is an estimation of hash rate distribution amongst the largest mining pools. It is important to monitor because the integrity of the network depends on a single actor not exceeding 50% of the overall hashing power. A more detailed alternate chart using a different data source, IP address that first relayed the block, is Block Origin.

6. Number of Daily Transactions - This chart displays the total number of unique bitcoin transactions per day. An alternate version is also provided that excludes transactions with the top 100 popular bitcoin addresses based on number of outputs. The advent of Satoshi Dice has probably been most responsible for the surge in nominal transaction count since late April.

7. Daily Transaction Volume - This measures the estimated transaction volume per day in US Dollars. An alternate graph visualizes bitcoin network activity in real-time, including transactions, block creation, and currency trade measured in BTC.

8. Bitcoin Days Destroyed - Applying a 7-day average to the non-cumulative chart calculation, Bitcoin Days Destroyed for any given transaction is calculated by taking the number of bitcoin in a transaction and multiplying it by the number of days it has been since those coins were last spent. Bitcoin Days Destroyed attempts to provide a reliable indication of transaction volume that strips out transfers to oneself and immediate account reorganizations since a high value for days destroyed indicates less hoarding and more old bitcoin on the move. It can be considered a measure of monetary velocity. The cumulative version can be found here.

9. Average Transaction Confirmation Time - This measures the average (mean) amount of time in minutes that it takes for a transaction to be accepted into a block. Reasonable estimates differ on the amount of time and confirmations for a transaction to be considered cleared and 'good' but that appropriate risk level would be associated with the transaction's value. Also, see this excellent chart that displays transactions with fees paid against those with no fees paid.

10. Largest Recent Transactions -  Culled from the last 50,000 transactions, this top 100 list gives an indication of actual transaction sizes in bitcoin occurring on the network.

Another useful site with real-time statistics and tools that I like is provided by Bitcoin Block Explorer.

Saturday, August 4, 2012

Cryptocat Increases Security In Move Away From JavaScript Web Delivery

By Jon Matonis
Monday, July 30, 2012

Announced over the weekend, encrypted chat service Cryptocat will soon be accessible only by downloading a local browser extension for Mozilla Firefox and Google Chrome. Beta release date for version 2 is currently set for August 18th.

This major revision highlights an important and ongoing debate in the market for secure privacy-related software applications. Should convenient usability for a broad non-techie demographic trump increased tech-savvy security in a world of imperfect and varying threat models? Responding to feedback from the security and cryptography communities, developer Nadim Kobeissi justifies the modifications from web-based app to installed client in the Cryptocat blog,
"We understand that pushing this change strongly lowers immediate accessibility to those who don’t have the Chrome or Firefox extension installed, but we do believe that the security benefits outweigh the accessibility disadvantages in this case. Installing a Chrome or Firefox extension is a one-minute process in most cases and affords the user protection against a variety of threats."
This is a positive step especially if the original extension download is from a known, trusted source and/or verified against a strong cryptographic hash function. But herein lies the heart of the problem, because the entire web security architecture rests upon the integrity of the embedded SSL certificate authority (CA) system. The existing presumption, correct or not, is that original downloads occur in a relatively safer network environment than recurring usage. Today, there is no total solution -- only the striking of a satisfactory balance. At the far end of the security spectrum, end users ideally would verify original download against hashes that were published or distributed in offline fashion. But does that introduce too much complexity for the average web surfer? What good are cryptography and security tools if they're not used?

Since the temporary detainment of Kobeissi at the U.S. border in June of this year, the Cryptocat application has been more publicly visible. With this increased scrutiny comes a renewed focus on overall security as Cryptocat continues to move beyond experimental phase.

The Cryptocat Project has always stated that, with its encrypted instant messaging, it does not protect you against hardware or software keyloggers and that it does not anonymize you by default. Although they do offer a Tor hidden service at xdtfje3c46d2dnjd.onion for anonymization.

They have also cautioned chat users about potential threats to the web-based version. Also, client-side JavaScript encryption has its limitations since it would still be susceptible to a server-side code poisoning attack executed either through a man-in-the-middle attack or the service provider acting maliciously or subject to jurisdictional court order. This existing vulnerability was the driving factor behind the above modifications as browser-based crypto is not seen as sufficient protection from determined State-level actors.

The Cryptocat 2 beta release will deploy transparently as an XMPP client with Off-the-Record Messaging (OTR) encryption protocol requiring username and password at log in (although it's not clear yet if XMPP account will be retained on server). According to Kobeissi, "We understand that the requirement of a username and password destroys the capacity to use Cryptocat to set up instant chat rooms, but we also believe that standardizing Cryptocat into an XMPP client is worth it." The industry standard OTR protocol was chosen for its security and  interoperability with other XMPP clients, such as Pidgin and Adium.

Privacy advocates should welcome these fundamental enhancements. I also applaud the fact that Cryptocat drives the effort for the first working multi-party OTR specification and that they are developing native Cryptocat applications for mobile, including iOS, Android, and BlackBerry.

[Note: Many writers have associated Javascript cryptography to refer to 'browser Javascript' by default. Please see ]