The Monetary Future

Saturday, March 17, 2012

Brainwallet: The Ultimate in Mobile Money

By Jon Matonis
Forbes
Monday, March 12, 2012

http://www.forbes.com/sites/jonmatonis/2012/03/12/brainwallet-the-ultimate-in-mobile-money/

For as much as I am fascinated by the societal and political implications of bitcoin, I must admit that I am equally fascinated by the implications of Brainwallet. Quite simply, a brainwallet, or thoughtcoin, refers to the concept of storing bitcoin in one's own mind by memorization of a special and unpredictable phrase. No, you are not actually storing the bitcoin in your mind but you are storing the access mechanism, or seed, to your stash's private key.

For example, the phrase must be sufficiently long (12 words or more) to prevent a brute force guessing attack, such as "I went seeking freedom, but all the world's islands were already taken." It is further suggested not to use a simple phrase or a phrase taken from existing literature because it is more likely to be hacked by a computer that systematically attempts all phrases, similar to a dictionary attack. You want a high level of word entropy. Seemingly random modifications of the phrase would aid in strengthening brainwallet, such as "I went seeking freeeedom, but all the world's issslands were alreaDy taken." These simple changes make the entire phrase very difficult to predict.

Next, the phrase itself without the quotation marks is turned into a 256-bit private key with a hashing or key derivation algorithm. Completing this process turns my secret phrase into the 64-character hexadecimal key shown below (this should be kept secret also):
8E66837DDD412A72007571BF05977C7005324B285B918AB0DBC9A2BA9B86F849

You are basically creating your own public Bitcoin address by personally determining the private key and that single instance is sufficient for our brainwallet. With larger deterministic wallets, multiple public/private key pairs are generated using a 'root key' derived from a starting seed and a 'chaincode', thus allowing a continual creation of different key pairs based on the same root node. So the final step in our process is to use this hexadecimal key to compute a standard bitcoin address with a utility such as one provided by Casascius or Electrum. Additionally, you can perform this function on bitaddress, a JavaScript client-side bitcoin wallet generator, and even run a stored version locally on an offline computer for security. The testing-only site is Bitcoin Tools. I add the serious disclaimers that hashing/address generation should not be performed online and, although possible, the importation of private keys is not yet standard functionality on most bitcoin clients. Given that, my hexadecimal key computes into the following base58 Bitcoin address:

1BgciYijPjVWvnpChmBNwB3isZUFKCJSox

Now, you are ready to receive bitcoin from anywhere in the world and have the peace of mind that the corresponding private key to unlock, access, and transfer those bitcoin resides solely in your brain. If you forget the phrase or if you die suddenly, the bitcoin is lost and unrecoverable just like if you had burned cash. You can even memorize multiple phrases for multiple accounts, like casual spending and nest egg savings. Why is this so profound?

For starters, it represents the ultimate in mobile money. You have complete financial privacy and asset protection combined with the ability to have those assets fully accessible from anywhere in the world provided there is Internet connectivity or a telephone. You are also protected from theft or confiscation unless a legal jurisdiction can force you to reveal your bitcoin private key that isn't even known to exist. Possible applications include revealing the secret phrase to a loved one for inheritance reasons or even splitting the phrase into segments with each family member possessing a portion of the total phrase. Off-grid transactions are also possible by simply conveying the phrase via voice or encrypted email. It would also be possible to send bitcoin immediately to someone without an existing address because one could easily be created based on a selected phrase.

It may be awhile before this practice is commonplace since most people do not use bitcoin on a regular basis and most of those do not generate deterministic keys holding $1 million. But, it sure beats lugging around 17 kilos of gold bullion.

Sunday, March 11, 2012

Virtual Currencies and Roach Motels

By Jon Matonis
Forbes
Tuesday, March 6, 2012

http://www.forbes.com/sites/jonmatonis/2012/03/06/virtual-currencies-and-roach-motels/

According to Google's Eric Schmidt at the recent Mobile World Congress in Barcelona, the company once considered issuing its own digital currency for use and circulation across its expanding global platform. After reviewing various proposals for the proposed Google Bucks, the company decided not to proceed, citing 'legal concerns' which most likely implies the strict licensure and compliance regulations for quasi-financial institutions.

They probably realized that Google Bucks could end up like Facebook Credits and become a virtual currency roach motel where your money checks in, but it doesn't check out. Facebook does not provide two-way convertibility and person-to-person payments due to the potential for fraud and the emergence of a secondary market beyond Facebook's control. For the moment, that is good news for Facebook shareholders but it could quickly lose appeal for users and game developers that are locked into the self-serving paradigm. Although with money transmitter licenses in at least 15 states now, Facebook Credits is further along than previously thought in competing more directly with banks.

Google probably also realized that they could not improve upon the elegance and resiliency of bitcoin, a three-year-old decentralized P2P digital currency with an independent floating exchange rate of about $5.00 per bitcoin. In March 2011, Mike Hearn, a Google engineer, released an open source java client for bitcoin called BitcoinJ so obviously the protocol did not go unnoticed at Team Google. A true, and ideal, virtual currency will have the attributes of two-way convertibility, an independent floating exchange rate, and a nonpolitical unit of account. Consequently, it is those core features that stoke direct competition against national currencies and bitcoin possesses all three.

Renowned gamer and welfare economist Edward Castronova rejects bitcoin as the ideal virtual world gaming currency because, according to him, good game currencies should be based on controlled 'productive work', promote mild inflation, and rely upon a strong central authority for enforcement and repudiation. The freedom-loving, Libertarian gaming world of World of Warcraft and Eve Online was aghast. How could a PhD in economics think that a Keynesian currency system that has failed so badly in the real world be the desired path for currencies like WoW Gold and EVE Online ISK in the virtual world? Is the range-bound Linden Dollar of Second Life the future model of virtual currency and virtual monetary policy? Not only was Castronova rejecting bitcoin as a gaming currency, he was condemning the unregulated virtual world to a gray, inflationary future of State-sanctioned centrally-managed currency roach motels.

Castronova misses the point here and misses it badly. Bitcoin is the perfect virtual game currency precisely because it is not controlled by any State authority or virtual world company. It also facilitates the many other currency features that are so important to users, but not to governments, such as unrestricted person-to-person payments, user-defined anonymity and untraceability, near-immediate bearer settlement, transaction irreversibility, reliable store of value, multi-grid capable, and decentralized processing. You can think of bitcoin as the distributed digital representation of a real world physical casino chip also making it extremely suitable for online casinos and social betting. We are fast approaching a time when currencies will be serious differentiators and competitive wedges for companies simply because customers demand a particular payment type. The virtual gaming environments will be forced to adapt in order to survive.

Gamers and virtual world avatars don't want the corporations controlling their money anymore than they want central banks debasing the value of their real world money. Certainly, the regulations will be there for the digital currency exchanges that provide the conversion into and out of bitcoin; however, once the bitcoin is in the gaming and virtual world environment, it can function as gold coins and paper cash to stimulate and drive economic activity. No other virtual currency will even come close to that kind of vibrant liquidity and building walls to ring fence a virtual environment will turn out to be a counter-productive strategy. The bearer nature of these digital instruments like the cryptocurrency bitcoin will keep transaction costs low by eliminating third-party processors and counter-party risk. Electronic commerce will flourish.

Contrary to utopian social planning, free-market virtual economies will emerge spontaneously rather than through design and the ultimate victorious currency will be a market-based competitor that can move seamlessly across multiple grids. The virtual world is the perfect crucible for launching unrestricted currency competition and that competition will enable further opportunities for transporting virtual world earnings to real world value. This bridging of the two worlds could be the sought-after "killer app" for open-loop digital cash. Now, there will be three different mega-places for income and wealth generation -- the traditional taxable economy, the informal shadow economy, and the virtual world economy. However, with the virtual world bitcoin wealth being selectively anonymous and practically untaxable, it may just decide to stay there.

Note: The Virtual Policy Network has a podcast to accompany this article.

Thursday, March 8, 2012

Doug Casey on Cashless Societies

Interviewed by Louis James, Editor
International Speculator
Wednesday, March 7, 2012

http://www.proactiveinvestors.com/columns/casey-research/928/doug-casey-on-cashless-societies-0928.html

L: Doug, we've had a lot of questions from readers about the apparent push governments are making to go to paperless currency – all electronic, no cash. Do you think that's likely, and what would be the implications?

Doug: I think it's probably inevitable. It's not just cash, but the whole world is becoming increasingly digital. Credit cards already work very well all around the world, and everyone in the world, it seems, will soon have a smartphone – or at least everyone who might have any cash.

But it's not just a question of evolving technology. Governments hate cash for lots of reasons, starting with the fact it costs a couple of cents to print a piece of paper currency, and they have to be replaced quite often. As the US has destroyed the value of the dollar, they've had to take the copper out of pennies, and soon they'll take the nickel out of nickels. Furthermore, with modern technology, counterfeiters – including unfriendly foreign governments – can turn out US currency that's almost indistinguishable from the real thing. And the stuff takes up a lot of space if it's enough to be of value. So sure, governments would like to get rid of tangible currency. They'd like to see all money kept in banks, which are today no more than arms of the state. But it's not so simple: increasing numbers of people trust neither banks – most of which are insolvent – or currencies – most of which are on their way to their intrinsic values.

L: Hm. On the technology front, when I was in central Africa a few weeks ago, plastic money was accepted happily everywhere I went – Rwanda, Burundi, the DRC, and Kenya – though not by street vendors yet. And I had access to the Internet everywhere I went, even in the middle of the jungle…

Doug: Yes, the move towards digital currencies is already happening, and not just as a result of government efforts. Remember Bitcoin. And, as you know, I'm a big fan of Goldmoney.com, which is leading the way to a sound digital currency. Although Goldmoney.com has bowed to government pressure and has suspended its service allowing customers to transfer funds among one another, it's another sign of the times…

L: Yes, and Goldmoney.com is not the first attempt, nor will it be the last. We should mention to new readers that you are an investor in Goldmoney.com.

Doug: The world's going to digital currencies is in part a good thing, because it's convenient. But it's definitely a double-edged sword, because of government involvement in the field. If it were a strictly market phenomenon, I'd have no problem with it. It'd be just another choice. But if the state runs it, it would reduce people's choices – and privacy. But that's entirely apart from the fact that government – and I know this assertion will be shocking to most readers – has no business creating currency or minting money. Money, of all things, should be a purely market phenomenon. Government, as an institution, inevitably and necessarily corrupts everything it touches. Money is far too important to be left to the tender mercies of the state.

L: Sure. A completely digital currency would be an unlimited license to print and spend. Need to give people more welfare? Just tap a few keys, and it appears in their bank accounts. Need to buy more missiles? Just a few more taps on the keyboard… But the privacy issue is even scarier: digital money would seem like Big Brother's dream come true. They wouldn't even have to send their minions out to go through people's trash. They could see everything anyone ever spent money on and where they were physically when they did it, search for activity nearby, and much more, just by having computers report the details of people's accounts.

Doug: Exactly. They would justify it with a host of phony excuses ranging from the so-called War on Terrorism to the so-called War on Drugs. Maybe they'll tie it in to their disastrously failed War on Poverty. As the War on Islam heats up, one front will be an attack on the excellent Muslim hawala system, which allows cheap and reliable transfer of money between countries; that system, which is kind of a private SWIFT network, is excellent for evading FX controls. Ironically, Islamic countries are some of the very worst perpetrators of currency controls.

L: Maybe that's why the informal network exists in the first place? But yes, they gotta stop those evil money launderers from washing their money and hanging it out to dry…

Doug: Don't get me started on "money laundering." It's a completely artificial crime. It wasn't even heard of 20 years ago, because the "crime" didn't exist. Now, everyone speaks of it as though it were a real crime, like murder. It's ridiculous, and further proof of the totally degraded state of the average person worldwide, absolutely including US citizens – what we used to call Americans. The government proclaims something as a law, and "sheeple" robotically assume it's part of the cosmic firmament. If an official tells them to do or not to do something, they roll over on their backs like whipped dogs and wet themselves out of fear. The War on Drugs may be where "money laundering" originated as a crime, but today it has a lot more to do with something infinitely more important to the state: the War on Tax Evasion.

Incidentally, not that a US citizen can open an account with a Swiss bank anyway any longer – except with at least seven figures and loads of paperwork – but now the policy in Switzerland is to insist that clients prove that their funds are all tax paid. The situation is out of control. And the world's governments are increasingly working together to make sure no one slips through the net.

Read the rest of the article.

For further reading:

"The Assault on Financial Privacy Goes On", Kevin Brekke, December 22, 2011

Wednesday, February 29, 2012

Voucher-Safe: Open Source Digital Bearer Certificates

Voucher-Safe is an open source project from the founders of Pecunix. This overview of the decentralised P2P digital currency was published originally in the December 2010 issue of DGC Magazine. Siddley Voucher-Safe Project

Voucher-Safe Open Source Voucher Payment Project

For further reading:
"Voucher-Safe Goes Live!- Global Anonymous Digital Cash", Voucher-Safe Forum, November 18, 2010
"P2P Voucher System Implementation", Voucher-Safe, January 8, 2010

Friday, February 17, 2012

Foreign-Located Money Services Businesses

By Financial Crimes Enforcement Network
Wednesday, February 15, 2012

http://www.fincen.gov/statutes_regs/guidance/html/FIN-2012-A001.html

On July 21, 2011, the Financial Crimes Enforcement Network (FinCEN) published in the Federal Register a final rule on definitions and other regulations relating to money services businesses (Final Rule).¹ The Final Rule amended the definition of "money services business" at 31 CFR 1010.100(ff). An entity may now qualify as a money services business (MSB) under the Bank Secrecy Act (BSA) regulations based on its activities within the United States, even if none of its agents, agencies, branches or offices are physically located in the United States. The Final Rule arose in part from the recognition that the Internet and other technological advances make it increasingly possible for persons to offer MSB services in the United States from foreign locations.² FinCEN seeks to ensure that the BSA rules apply to all persons engaging in covered activities within the United States, regardless of the person's physical location.

FinCEN is issuing this Advisory to advise financial institutions of their obligations under the BSA when providing financial services to foreign-located MSBs. Financial institutions should note the following:

To qualify as an MSB, a person, wherever located, must do business, wholly or in substantial part within the United States , in one or more of the capacities listed in 31 CFR 1010.100(ff).³ Relevant factors include whether the foreign-located person, whether or not on a regular basis or as an organized or licensed business concern, is providing services to customers located in the United States.

Foreign-located MSBs are financial institutions under the BSA. With respect to their activities in the United States, foreign-located MSBs must comply with recordkeeping, reporting, and anti-money laundering (AML) program requirements under the BSA. They must also register with FinCEN.⁴

Foreign-located MSBs are subject to the same civil and criminal penalties for violations of the BSA and its implementing regulations as MSBs with a physical presence in the United States.

The Final Rule requires each foreign-located MSB to appoint a person residing in the United States as an agent for service of legal process with respect to compliance with the BSA and its implementing regulations.

The Final Rule became effective on September 19, 2011. Reporting, recordkeeping and AML program requirements under the BSA now apply to foreign-located MSBs. However, registration and the appointment of an agent for service of legal process will not be required until the revised registration form is available, which is currently planned for release in early March 2012.

Guidance

Financial institutions may find it necessary to update their AML programs if they provide financial services to foreign-located MSBs or engage in financial transactions with these entities.⁵ Financial institutions may find previously issued Guidance and Advisories helpful when incorporating foreign-located MSBs into their AML policies and procedures. In 2005, FinCEN and the federal banking agencies issued guidance (Joint Guidance) on providing financial services to MSBs operating in the United States.⁶ Additionally, financial institutions may find FinCEN's 2010 Advisory on informal value transfer systems (IVTS) to be useful in determining if their customers are operating as unregistered money transmitters.⁷

Suspicious Activity Reporting

Consistent with the standard for reporting suspicious activity under the BSA, if a financial institution knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at, or through the financial institution involves funds derived from illegal activity or appears to be indicative of money laundering, terrorist financing, or other violation of law or regulation, the financial institution should file a suspicious activity report (SAR).⁸ As noted in the Joint Guidance, financial institutions that provide banking services to MSBs should file a SAR if they become aware that their customers are operating as unregistered or unlicensed MSBs.⁹

Questions or comments regarding the contents of this Advisory should be addressed to the FinCEN Regulatory Helpline at 800-949-2732. Financial institutions wanting to report suspicious transactions that may relate to terrorist activity should call the Financial Institutions Toll-Free Hotline at (866) 556-3974 (7 days a week, 24 hours a day). The purpose of the hotline is to expedite the delivery of this information to law enforcement. Financial institutions should immediately report any imminent threat to local-area law enforcement officials.

¹ Definitions and Other Regulations Relating to Money Services Businesses, 76 FR 43585 (July 21, 2011). http://www.gpo.gov/fdsys/pkg/FR-2011-07-21/pdf/2011-18309.pdf.
² Id. at 43588.
³ See 31 CFR 1010.100(ff)(1)-(7) for a full description of these activities.
⁴ See 31 CFR 1022.380 et seq.
⁵ See, Federal Financial Institutions Examination Council (FFIEC) Exam Manual, pp. 307-313 (April 29, 2010). Although the FFIEC Exam Manual is issued by the federal banking regulators regarding AML requirements applicable to banks, it contains guidance that may be of interest to other financial institution types that provide financial services to foreign-located MSBs.
⁶ Advisory - Interagency Interpretive Guidance on Providing Banking Services to Money Services Businesses Operating in the United States (April 26, 2005). http://www.fincen.gov/statutes_regs/guidance/html/guidance04262005.html
⁷ FIN-2010-A011, Advisory - Informal Value Transfer Systems (September 1, 2010). http://www.fincen.gov/statutes_regs/guidance/html/FIN-2010-A011.html.
⁸ See e.g. 31 CFR 1020.320.
⁹ Supra at note 6.

For further reading:
"Bitcoin Exchange's Crisis Bodes Ill for Payment Innovation", Jeremy Quittner, Bank Technology News, February 17, 2012
"New FATF AML Recommendations And Bitcoin", Bitcoin Money, February 17, 2012
"Bitcoinica Legal Complaint", Amir Taaki, Bitcoin Media, February 17, 2012
"Major Bitcoin exchange shuts down, blaming regulation and loss of funds", Timothy B. Lee, ars technica, February 16, 2012

Sunday, February 12, 2012

Paxum Exits From Bitcoin Business

By Jon Matonis

Citing "new bank regulations" and "the fact that we are constrained to act in this manner", Canada-based Paxum has exited from the bitcoin business which put them on the map in 2011. On February 10th, Paxum stated that they can no longer accept any accounts related to bitcoin or bitcoin exchanges and that all current bitcoin-related accounts have been closed. Paxum spokesperson, Ruth Blair, posted Paxum's rationale here and here.

Paxum is an e-wallet company that also offers the Paxum Prepaid Mastercard via Choice Bank in Belize. Effective immediately, this action has impacted all customers that rely on Paxum for two-way transfers into and out of the exchanges, but it was first noticed by exchange intermediary BitInstant and the floating-rate exchange TradeHill.

Paxum, Inc. is licensed and registered as an MSB (Money Servce Business) with main offices in Quebec, Canada. Apparently, the MSB regulatory body in Canada, FINTRAC (Financial Transactions and Reports Analysis Centre of Canada), has decided to exert some soft pressure on e-wallet companies and their banks that facilitate bitcoin exchanges.

As no court jurisdiction has ruled on whether bitcoin is actually money, the regulators have decided to issue statements of guidance as to how bitcoin may or not be interpreted by the courts. The result of this has been to exert regulatory influence through warnings because the licensed money service businesses are being 'pre-warned' of potential legal issues ahead. As with PayPal and others, the adjustment that this causes has revolved mostly around modifying the company's terms of service to list 'currencies and currency exchange services' as a restricted class of transactions for the e-wallet or e-money company.

For further reading:
"Paxum Ends Association with Bitcoin Exchanges", Tom Hymes, AVN, February 13, 2012
"For Banks, Digital Currency Poses Threat — and Opportunity", Jeremy Quittner, Bank Technology News, January 13, 2012

Thursday, February 2, 2012

Dutch Supreme Court Rules Virtual Objects Are Legal Property

By Ren Reynolds
Virtual Policy Network
Wednesday, February 1, 2012

http://www.virtualpolicy.net/runescape-theft-dutch-supreme-court-decision.html

On the 31^st of January 2012, the Supreme Court of the Netherlands found that items in the online game RuneScape had been stolen from a player. This is a ground-breaking case as it is the highest national court in the West to rule that taking virtual objects in this way is theft under national criminal law. This ruling may have broad implications for the online games industry.

The case dates back to 2007 when two youths used violence and threats of violence to force another player to log into the game of RuneScape. After the victim logged in to the game one of the defendants transferred virtual items and virtual currency from the victims account to their own. The Supreme Court upheld the conviction for theft but reduced the number of hours of community service to be served (taking into account Juvenile detention served).

The appeal did not turn on the material facts, i.e. whether there were threats were made or items were transferred. Rather, the appeal centred on the question of whether what had occurred was ‘theft’ as defined by the law of the Netherlands.

Key Arguments

The key arguments against the incident being defined as ‘theft’ considered by the court they were as follows:

Virtual items are not goods but an ‘illusion’ of goods made up of bits & bytes i.e. they are data
Virtual items are Information
The point of the game is to take objects from each other
The virtual items are and remain the property of the publisher of the game not the victim or the defendant - hence they could not have been stolen

The ‘Illusion’ argument

The court ruled that:

Virtual items have value in virtual of the effort and time invested in obtaining them
The value in Virtual items is recognised by those that play the game (including the defendents who went to the trouble to take them)
The Virtual items were under the exclusive control of the player – who was relieved of this control

The court made reference to cases of electricity theft which is a similar intangible good but certainly has properties of power and control, and consequently can be stolen.

The ‘mere data’ argument

The court agreed that virtual items are data, but crucially added that they are not just data. That is, the fact that virtual items have data like properties does not mean that they don’t also have properties that make them capable of being stolen. In particular the court noted again that the virtual item had perceived value and were under the exclusive control of a player.

The ‘I was playing a thief’ argument

The defence argued that one of the points of the game of RuneScape is to take virtual items from other players. The court noted that this was true but the way that the property was taken was outside the ‘context’ of the game.

The ‘not your property’ argument

The court agreed that under the RuneScape terms and conditions, the virtual items in the game are owned by the publisher of RuneScape who grant the players have a ‘right to use’. However it concluded that the items in question were under the ‘exclusive dominion’ of the victim until they were removed from them, hence the position of RuneScape being owners of the items (from the perspective of intellectual property / contract law) is ‘not relevant’ in the context of the criminal case under consideration.Here the court made defence to money – which is the property of the sate but can still be stolen.

In coming to these conclusions the court noted that it is down to the discretion of the court to determine whether “due to the digitization of society, a virtual reality has been created, all aspects of which cannot be dismissed as mere illusion where the commission of criminal acts are not be possible” [Google Translation with amendments by R Reynolds].

tVPN Commentary: Significance

This case is significant because it changes the relationship between individuals and service providers in respect of digital objects. That is, RuneScape’s contract clearly states that the players of the game do not own the game or any of the digital objects within it, whether they control them or not. This has long been a contentious matter as there is a large trade in the sale of objects between players for hard currency, so called Real Money Trading (RMT).

This ruling means that there is a degree of control that someone can have over an object which is sufficient for that object to be stolen. The question that has puzzled both the industry and academics for many years is: if a digital object is capable of being stolen, does this mean that other rights accrue to a player? For example, irrespective of what the contract says, can a player:

sell an object?
claim rights if an object is deleted or changed by company?
claim compensation if a game is closed?

For the moment, this matter is restricted both to The Netherlands and to the specific matter of theft. However in China and South Korea there have been similar types of cases which have made it to the courts, in these judges have displayed a general trend to grant more rights to players than are stated in their contract and to see digital objects as being akin to physical property in certain important respects. The fact that a case in the EU has got to such a senior court and has ruled along the same lines is likely to carry some weight with other cases that may occur in the West.

For details of the Chinese, Korean and other cases see tVPN’s white paper on Virtual Objects and Public Policy which examines both cases and statute in detail.