The Future of Bitcoin

The latest guidance from US Leviathan’s Financial Crimes Enforcement Network (FinCEN) is a leaf ripped straight out of Moldbuggian prophecy. The target acquisition revealed in Administrators and Exchangers of Virtual Currency, section c. De-Centralized Virtual Currencies could not possibly be clearer:

A final type of convertible virtual currency activity involves a de-centralized convertible virtual currency (1) that has no central repository and no single administrator, and (2) that persons may obtain by their own computing or manufacturing effort.

A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter. By contrast, a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter. In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.

[See Fotrkd’s link feast in this comment thread]


RIP Bitcoin, I think Moldbug confirms:

I have not of course seen the questionnaire [for money transmitter licenses], but I imagine it asks you how you know the monies you’re transmitting are not the product of illegal activity. Of course, Bitcoin provides no such assurance. By design. That’s because it’s well-designed — for a free country that doesn’t exist.

With licenses unobtainable, and unlicensed monetary transactions proscribed, Bitcoin price-discovery has been criminalized. The conclusion: Bitcoin no longer has a practically meaningful US$ exchange rate, which is equivalent, in fact, to having a yet undiscovered (but already implicit) value of US$0. The cliff edge has been crossed, and all that remains is the impact.

Empirically vulnerable predictions are pure gold, and this is an especially precious example. The fate of Bitcoin tests the real power of the State, the practicability of economic controls, and all political theories — whether reactionary or progressive — which subordinate market dynamics to more fundamental levels of social order. If Bitcoin does soon die, it will have been demonstrated that government can effectively dominate the economic sphere, dictate price, and eradicate commerce, under conditions which are — in at least some important respects — extremely challenging. Freedom might still seem attractive, but it will have been shown to be puny.

Alternatively, if Bitcoin survives, and spreads, the Right’s libertarian current will be vitalized. These types will not only find their analytical models reinforced, but the sovereign insubordination of markets will have been dramatically evidenced, the State humiliated and weakened, and an archetypal anarcho-capitalist institution entrenched. Interesting times.

ADDED: Eli Dourado argues that anonymity is the “real target”:
Contrary to some popular accounts, Bitcoin is not completely anonymous, but pseudonymous. The entire Bitcoin ledger is publicly shared so that the same coins can’t be spent twice. Bitcoin “mixers” take coins from multiple pseudonymous actors, shuffle them around, and return them to their original users under new pseudonyms. In other words, mixers help anonymize a system that is not truly anonymous.
If the government were to succeed in regulating mixers, it would not destroy Bitcoin as a payment mechanism or even hurt Bitcoin’s price, which has now reached an all-time high of $60, but it would ruin one of the chief advantages of using it—the quasi-anonymity that it affords.

ADDED: Meanwhile, in Europe

March 20, 2013admin 26 Comments »
FILED UNDER :Commerce

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26 Responses to this entry

  • Sconzey Says:

    I don’t think this is true. My disagreement with Moldbug’s thesis is twofold:
    1. I don’t think it is totally implausible that a bitcoin changer might implement satisfactory Know Your Customer procedures and thus be a legitimate ‘money transmitter’ under FINCAN regs.
    1a. The bitcoin community may voluntarily do this themselves. The nature of bitcoin — transactions are secure because they are publically broadcast — lends itself to bitcoin users voluntarily maintaining a blacklist of bitcoins known to have passed through wallets known to be owned by e.g. child pornographers.
    2. China could lock down bitcoin. Russia could lock down bitcoin. I do not think the US government could lock down bitcoin and certainly not outside it’s borders.

    [Reply]

    admin Reply:

    I don’t think it’s true either.

    On your points, (1) would be rather disappointing — Bitcoin survival through voluntary submission to the State. Beyond the ‘politics’, it would strip off the most significant experimental consequences — by smothering them in lukewarm liberal convergence. As for (2), I’m not really sure. Mao or Stalin could (probably) have locked down Bitcoin, through sheer social skeletalization, but Internet-saturated post-totalitarian societies? That seems unlikely.

    [Reply]

    fotrkd Reply:

    Doesn’t Leviathan destroy itself? Isn’t that how this plays out? Unwittingly letting the outside in? This first move – a crude divide and conquer – is exactly that. And so bitcoin becomes Sconzey’s 1 to gain legitimacy. It’s freedom value is temporarily diminished but it retains enough other appeal and support to survive and slowly grow… Once entrenched the Hong Kong super island with a no questions asked policy to bitcoin becomes more viable and more appealing to high rate taxpayers and multinationals – as a tax haven. And the dollars start flooding out…

    [Reply]

    admin Reply:

    The whole new Hong Kong aspect of this is utterly exquisite.

    Sconzey Reply:

    It’s a technical issue more than anything. Price discovery happens through voluntary exchange. China could shutdown BTC/CNY, because the only people who own CNY are in China. USG cannot shut down BTC/USD because most of the USD are not actually in the USA. MtGox — one of the biggest exchanges — is based in Japan.

    [Reply]

    admin Reply:

    Sure, but even if the entire formal CNY financial system could be absolutely disciplined, there’s a very large (and growing) shadow banking system, and there’s cash. Nothing less than total government control over monetary circulation could effectively prohibit the possibility of BTC exchange — even North Korea would be incapable of it today.

    Posted on March 20th, 2013 at 10:12 am Reply | Quote
  • Nick B. Steves Says:

    As someone who, within the confines of Mt. Gox, exchanged USD for bitcoin and then traded them for USD, it appears from a strict reading of the FinCEN “guidance”, that makes me a Money Transmitter, and by inference a Money Business Service, and by inference responsible for going through the motions of certifying the entities with which I traded were doing nothing illegal. How would that even have been possible in theory? How is what I am doing any different than folks exchanging currencies in the street, except safer?

    Since I have not taken significant anonymizing precautions the Feds will find me, if they want to.

    Nevertheless the big (and therefore smart) money does not appear to be exiting BTC. Is the market daring the FEDs to come after it? Unlikely.

    [Reply]

    admin Reply:

    “How is what I am doing any different than folks exchanging currencies in the street …?”
    — exactly. (“Safer” is, I guess, arguable. There’s no street hazard, but more of a record trail.)

    [Reply]

    Nick B. Steves Reply:

    Carrying around large amounts of currency is always a little dangerous. Maybe the dude that I’m buying from doesn’t trust me and decides to not play fair. Maybe I decide not to play fair with him… this risk increases his fees. Yes, the way I (non-paranoid, law-abiding white guy that I am) went about exchanging USD for BTC and back again has left a paper trail, all the way (if one cares to trace it) to a credit union account with my smiling face on it. But when and if the fit hits the shan, I’m pretty sure there are grey ways to do the same thing.

    Mt. Gox does not require users be “verified”. Dwolla required me to be verified to send USD to Mt. Gox. In reciprocation, Mt. Gox requires me to be verified to get USD out through Dwolla. But there are other ways out in USD… geesh at least I think so…

    [Reply]

    Posted on March 20th, 2013 at 2:59 pm Reply | Quote
  • Vladimir Says:

    As far as I can tell, there are four logically possible scenarios:

    1. Bitcoin remains an irrelevant geek toy, unable to make any significant impact regardless of what USG does.

    2. Bitcoin is about to make a large impact, but USG crushes it.

    3. Bitcoin makes a large impact, while USG remains too stupid to realize what’s going on, or is perhaps too sluggish and incompetent to crush it hard enough. (Although USG could crush Bitcoin effectively if it really cared.)

    4. Bitcoin makes a large impact, while USG is somehow incapable of crushing it, even if it’s hell-bent on doing so.

    It seems to me that anyone predicting great success for Bitcoin must believe in either scenario (3) or (4). However, both seem immediately absurd to me. USG might be stupid and sluggish in many ways, but it still has an infallible predator instinct when it comes to any serious challenges to its sovereignty. And once it decides to crush Bitcoin, doing so is trivial: just launch a propaganda offensive combined with some high-profile prosecutions, and the message will be sent that this is simply not a business that normal, respectable, law-abiding people engage in. All such people, which includes almost everyone smart enough to figure out the Bitcoin thing in the first place, will instantly obey. Even if some murky underground market remains after that, who cares?

    [Reply]

    Nick B. Steves Reply:

    It’s the murky underground market that gives bitcoin its value in the first place, i.e., an actual currency. As long as it remains, bitcoin will have non-zero value. Once USG attempts to crush it, new (or returning) investors will simply have to be better anonymized. TOR makes this possible.

    [Reply]

    Baduin Reply:

    http://en.wikipedia.org/wiki/Tor_%28anonymity_network%29

    “Originally sponsored by the U.S. Naval Research Laboratory[8] (which had been instrumental in the early development of onion routing under the aegis of DARPA), Tor was financially supported by the Electronic Frontier Foundation from 2004 to 2005.[10] Tor software is now developed by the Tor Project, which has been a 501(c)(3) research-education nonprofit organization [11] based in the United States of America [1] since December 2006. It has a diverse base of financial support;[10] the U.S. State Department, the Broadcasting Board of Governors, and the National Science Foundation are major contributors.[12] As of 2012, 80% of the Tor Project’s $2M annual budget comes from the United States government, with the Swedish government and other organizations providing the rest,[13] including NGOs and thousands of individual sponsors.[14]”

    Tor is Cathedral in action. Timeo Danaos et dona ferentes. Also, avoid relying on the kindness of strangers. Especially if the gift consists of the ability to send your data unencrypted to some unknown – to you – computer, using system developed and owned by the US Government.

    And a lot of computers in the Tor network belong to police, intelligence agencies and the like. This is a wonderful way to have a lot of interesting data sent to you.

    http://www.aclu.org/blog/national-security-technology-and-liberty/does-using-certain-privacy-tools-expose-you

    “There are an estimated 500,000 users of Tor. These include law enforcement and intelligence agencies in the United States, which was the intention of the US Naval Research Lab when it invented the underlying technology and funded the early development of the project. Tor is also used by activists, journalists and the general public in Iran, Syria, China and other countries with authoritarian governments, which has led to significant funding for Tor from the US State Department and the Broadcasting Board of Governors. However, Tor is also used by many people in the United States—it is estimated that approximately 15% of the users of Tor are located in the United States.”

    http://en.wikipedia.org/wiki/Tor_%28anonymity_network%29#Weaknesses

    As Tor does not, and by design cannot, encrypt the traffic between an exit node and the target server, any exit node is in a position to capture any traffic passing through it which does not use end-to-end encryption such as TLS. While this may not inherently breach the anonymity of the source, traffic intercepted in this way by self-selected third parties can expose information about the source in either or both of payload and protocol data.

    http://www.nbcnews.com/technology/technolog/inside-underweb-home-pedophiles-hitmen-drug-dealers-free-speech-1B7938756

    Silk Road is carefully cultivated. On the other hand, all attempted competition has been eliminated. Using Tor to hide from US Government! What a joke!

    http://arstechnica.com/tech-policy/2012/04/feds-shutter-online-narcotics-store-that-used-tor-to-hide-its-tracks/

    Federal authorities have arrested eight men accused of distributing more than $1 million worth of LSD, ecstasy, and other narcotics with an online storefront that used the TOR anonymity service to mask their Internet addresses.

    “The Farmer’s Market,” as the online store was called, was like an Amazon for consumers of controlled substances, according to a 66-page indictment unsealed on Monday. It offered online forums, Web-based order forms, customer service, and at least four methods of payment, including PayPal and Western Union. From January 2007 to October 2009, it processed some 5,256 orders valued at $1.04 million. The site catered to about 3,000 customers in 35 countries, including the United States.

    To elude law enforcement officers, the operators used software provided by the TOR Project that makes it virtually impossible to track the activities of users’ IP addresses. The alleged conspirators also used IP anonymizers and covert currency transactions to cover their tracks. The indictment, which cited e-mails sent among the men dating back to 2006, didn’t say how investigators managed to infiltrate the site or link it to the individuals accused of running it.

    http://decryptedmatrix.com/live/a-primer-on-wikileaks-espionage-on-tor-exit-nodes/

    http://cryptome.org/0003/tor-spy.htm
    http://techsecu.blogspot.com/2007/09/sniffing-tor-traffic.html

    Tuesday, September 18, 2007
    Sniffing TOR traffic

    The last few weeks some incidents regarding information leaked from the TOR network hit the news (see my MediaDefender and Swedish hacker posts). In this post I will explain how this can happen, how you can try it out yourself and how you can protect yourself against it.

    What happened?

    People using the TOR network to guarantee their privacy have used the network to read their email and browse the web. Anytime you use an unencrypted protocol (e.g. HTTP, POP3, IMAP) some people participating in the TOR network can read your traffic. The TOR network has encryption in place, but only in the internal network. When your information is send from the TOR network to the internet server it is NOT encrypted, so the last TOR node can see your request (and response) in plain text.

    How does it work?

    So how do you setup a machine to get some information from the TOR network. It is actually pretty simple. You install a machine with your favourite OS (Linux, Windows or OSX), you install the TOR client software and configure it as an exit node. Now your TOR node is routing TOR traffic and people can also use it as an exit node to request information from the internet. The only thing left is to dump the unencrypted packets to disk for analyses. There are many ways to do that, but tcpdump or similar works fine. Later analysis can be done with the dsniff tools to extract passwords, emails and chat-conversations or ethereal for a full packet analysis.

    [Reply]

    Nick B. Steves Reply:

    Okay, well not TOR.

    Obviously, its origins in DARPA may or may not be a strike against it. DARPA remains part of the Red Empire, and sponsors lots of things of which the Blue Empire would not approve. Of course, on-going grants from Foggy Bottom, according to La Wik, suggest that maybe it’s the Blue Empire that likes it best… at least today. They like it, presumably, because it allows dissidents from Eeevil Dictatorships, an avenue of “free” speech. Of course US Dept of State’s definition of free speech is speech that we agree with, especially that which destabilizes Eeevil Dictatorships. So at least they think that the Eeevil Dictators can’t get under TOR.

    There’s a helluva lotta drugs getting sold on Silk Road. I find it hard to believe that the risk of getting busted on there, assuming anonymizing software is not perfectly anonymizing, exceeds the risk of getting busted selling dope on the street.

    admin Reply:

    @ Vladimir
    That’s a useful schema, thanks. By the time we get to #4 we’re in tingly anarcho-capitalist revolution territory (by trying to crush Bitcoin the State has lost all right to the loyalty of “normal, respectable, law-abiding people” — the only supporters it has left are cowering slaves, fascist gangsters, and collaborators) .

    [Reply]

    Vladimir Reply:

    On the other hand, my understanding is that at least some of the original cypherpunk anarcho-capitalists hoped not for any open revolt, but for the state truly “withering away” without anyone really noticing a radical shift, with economic activity gradually seeping off into the untaxable and unregulable crypto-economy. So the last supporters of the state in this scenario would be more like funny obsolete relics whom nobody would take seriously.

    The problem however is that USG/Cathedral is not at all stupid. Sure, the wider ranks of its Inner Party include many not quite bright folks whose main qualification is their ideological firmness and zeal. But its nerve centers are full of extremely bright people who have a perfect understanding of the situation, and won’t hesitate to let loose the attack dogs on anything they see as a threat. (I’m sure many of them would, if you could get them to speak openly, offer a more accurate and incisive analysis of their system and ideology than any reactionary contrarian — which they’d however follow by asserting their honest and unwavering commitment to it.)

    [Reply]

    admin Reply:

    ‘Revolution’ in the sense of ‘Industrial Revolution’ — at least partly. No Bastille-storming necessary (or desirable).

    The ‘stupidity’ of the State has nothing to do with the average IQ of its administrative elite. It’s based entirely on Mises-type analysis, which is to say: the impossibility of realistic social planning in the absence of relevant price signals (i.e. access to catallactic intelligence).
    Defeating Bitcoin, similarly, is a structural problem (like the ‘war on drugs’ and — to a lesser degree — on terror). Is it possible to comprehensively suppress a strongly incentivized, massively decentralized system that cuts across political jurisdictions? I’ll resist dogmatically asserting that it isn’t, but obviously I have my doubts.

    spandrell Reply:

    (I’m sure many of them would, if you could get them to speak openly, offer a more accurate and incisive analysis of their system and ideology than any reactionary contrarian — which they’d however follow by asserting their honest and unwavering commitment to it.

    I’m not so sure about that at all. Whence the confidence?

    Posted on March 20th, 2013 at 6:23 pm Reply | Quote
  • Nick B. Steves Says:

    One item left off Vladimir’s list:

    5) Bitcoin makes a large impact AND that’s just how certain USG Departments want it.

    Bitcoin is, more or less, anonymous… but NOT by anywhere near as anonymous as cash. As pointed out here, referencing Moldbug’s monetary restandardization post, transactions, while psuedonymous, are fully public and traceable.

    There is no financial secrecy in Bitcoin – it’s a completely transparent system.

    Which means that, if money launderers try to launder money through Bitcoin, they are actually doing the authorities a massive favor. It is very easy to track dirty bitcoins. If you know Pablo, a drug dealer, is using Bitcoin address X, you can download the entire graph of parties that X trades with, and roll up Pablo’s whole network. Instead of shutting down the real-money exchanges, you can secretly force them to send you their entire customer database. That way, the terrorists, drug dealers, etc, are not hiding their transactions at all – they are sharing their most intimate details with the government. Heck, the DEA probably understands Pablo’s finances better than Pablo’s own people. That’s what he gets for using Bitcoin.

    The FBI would, I think, rather have BTC exist. It’s a lot easier to track pseudonymous btc addresses than serial numbers on $100 bills. The Treasury department would obviously prefer BTC not exist… but who wins? And how long does the intramural struggle take?

    As for TOR coming out of DARPA… and being the free gift of Greeks… Same deal possibly. The CIA and DoD would very much like to have ways of hiding end-nodes (e.g., spies) from middle nodes and vice-versa. In order to do that, you’ve gotta get a diverse network of nodes. Give it away, even for unsavory purposes. TOR works as advertized. Of course it doesn’t encrypt at the exits… there are other publicly available protocols for that. And criminals tend to be pretty lazy and pretty stupid. You catch them in meat-space and then search their computer for their suppliers.

    I just don’t know… we in the Hate-o-sphere tend to see in the Cathedral a monolithic mind. But that’s just the geostationary view. Wherever we dig down, we find large powerful branches of USG fighting other large powerful branches. It is not at all implausible that big pieces of USG actually want BTC to succeed.

    [Reply]

    Posted on March 22nd, 2013 at 9:26 pm Reply | Quote
  • Vladimir Says:

    Spandrell,

    I’m not so sure about that at all. Whence the confidence?

    The first line of evidence is their success. If the top ranks of Cathedral institutions were filled with people who are seriously detached from reality, some opposition would have figured out a way to subvert the system. Yet it always turns out that they’re thinking two steps ahead, and running circles around their opponents (as well as their naive and confused non-insider allies and followers).

    The second line of evidence are the occasional glimpses of Cathedral insiders speaking with their guard down. I can’t really offer any systematic list of examples here; it’s more like a general impression from many examples over the years, none of which would be particularly significant by itself.

    Of course, if you somehow got to have an honest conversation with them, and you really pushed hard, you’d get to the point where they’d display O’Brianesque doublethink. But note that this is something very different from the naivete, ignorance, and propaganda-induced delusions among the broader ranks of true believers.

    [Reply]

    spandrell Reply:

    Come on, you can be more specific than that.

    I think smart Cathedralists work more through inertia than through deep thought ont the situation.
    I mean, some contrarians have a pretty bad analysis of what liberalism is really about, but how many liberals can really analyze their thoughts to the same depth as, say, Jim Kalb?
    A really sober, deep analysis of liberalism shows the ugly corollaries it has. If smart liberals thought that far they’d knew. But of course they don’t. They are just pushing for the next budget.

    [Reply]

    Posted on March 24th, 2013 at 2:14 am Reply | Quote
  • Nick B. Steves Says:

    The dude that built the first ASIC bitcoin miner seems to think that Occupy and bitcoin are philosophically aligned. Weren’t the Occupy-ers the ones that wanted like free everything? Seems like bitcoin is kinda the opposite of that…

    [Reply]

    admin Reply:

    Yes, tagged: ‘idiots’
    (Never underestimate the capacity for self-delusion of the radical hipster)

    [My initial knee-jerk on this was way too harsh. The interview is fascinating, and Yifu Guo is clearly a brilliant, creative guy, doing Cthulhu’s work. The Occupy connection is absurd though — they’re a bunch of crypto-commies who want to grow the redistributive State.]

    [Reply]

    fotrkd Reply:

    He’s obviously not done a lot of thinking on the broad implications of widespread bitcoin adoption – “Eventually you’ll be able to hook it up to APIs where it will automatically order your groceries for you” is even less interesting than speculating about how you’d be able to order pizza over the Internet back in 1995. But the article is an interesting case study in terms of why bitcoin might really (properly) ‘work’. The following:


    Bitcoin is an enabler based around the ideals of peer-to-peer, open source, and decentralization. That’s the future and bitcoin is the vehicle that will take us there. It takes the banks and the humans and the Federal Reserve out of the equation. Without those institutions, we can do things more freely and easily. It allows us to get things done without all of the friction, and whatever we do will be built around these ideals.

    Is not at all inconsistent with Occupy. Occupy protestors I imagine would embrace the p2p/screw the banks/crony capitalism (damn the man) aspect of bitcoin and not link it to the other social inequality/welfare concerns they may have held… Isn’t that consistent with the something for nothing/high time preference diagnosis? And isn’t that another reason why bitcoin is so diabolically clever? If it properly works it’s going to take revenge on an awful lot of people who thought it was their friend.

    [Reply]

    Posted on March 26th, 2013 at 9:37 pm Reply | Quote
  • admin Says:

    “… isn’t that another reason why bitcoin is so diabolically clever?” — an excellent point that can be extended to the multi-century capitalist insurgency in general.

    [Reply]

    Posted on March 27th, 2013 at 12:32 am Reply | Quote
  • Nick B. Steves Says:

    An interesting development: Local governments may start accepting fees in BTC. BTC is destabilizing (to TPTB, not to actual economies) because it is better money–in the case of local governments changing hands at tiny fractions of the overhead that paypal or credit cards would charge–better money which just about everyone would want; everyone that is except for the procurers of breads and circuses for the ignorant masses.

    Of course Treasury would want to kill it. But it is not merely a question of how, but why? Why would you kill something of so much value to so many libertarians anarcho-capitalists local governments and mom-n-pop bakeries? The longer they wait to kill it, the harder it is going to be to justify it.

    BTC at this writing 102.94USD (off from a high of 105.99 earlier)

    Surely a bubble, mainstream analysts say.

    “Money is the bubble that doesn’t pop.” — Mencius Moldbug

    [Reply]

    admin Reply:

    That is really fascinating — and a shock even to hard-core Bitcoin boosters, I would have thought. Something has to give …

    [Reply]

    Posted on April 1st, 2013 at 5:08 pm Reply | Quote

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