- Spitfire List - http://spitfirelist.com -

FTR #764 Bit[coin]burg, Part 2, The Snowden-Inspired, Bitcoin-operated Online Murder Incorporated

[1]

Dave Emory’s entire life­time of work is avail­able on a flash drive that can be obtained here. [2] (The flash drive includes the anti-fascist books avail­able on this site.)

Side 1 [3]   Side 2 [4]

NB: On Side 1, Mr. Emory mispells Pierre Omidyar’s name. At the beginning of Side 2, the program is misidentified as “FTR #760, its predecessor broadcast.

This description contains supplemental information not included in the original broadcast.

INTRODUCTION:  In FTR #760 [5], we examined the techno-libertarian, Ludwig von Mises milieu-affiliate [6]d nature of the bitcoin phenomenon. Quite possibly developed by elements of German intelligence [5] and the Underground Reich, bitcoins are not only vulnerable to “tape-painting,” but can be stolen [7] by hackers.

In a [perhaps] predictable extension of the Ludwig von Mises, anarcho-fascism underlying the bitcoin phenomenon, as well as the political forces behind Eddie the Friendly Spook” Snowden, someone operating under the name “Kuwabakatake Sanjuro” has begun a bitcoin-funded, online assassination consortium called “The Assassination Market.” His project was inspired by the “disclosures” of Snowden.

After discussing the bitcoin-funded assassination consortium, we will underscore the extreme vulnerability [8] of this virtual currency to theft.

Program Highlights Include these Points of Information:

1. In FTR #’s 758 [11], 759 [31], we looked at the anti-democratic, pro-monarchist philsophy of Hans-Hermann Hoppe [32], a devotee of the Ludwig von Mises [13] school of economic and social theory and a student of Juergen Habermas. Habermas was examned at length in FTR #757 [14]. One of the most visible supporters of bitcoin is a “techno-libertarian” named Cody R. Wilson [33], whom we examined in FTR #760 [5]. Wilson, not surprisingly, is a devotee of Hans Hermann-Hoppe and an active opponent of democracy.

“All Markets Become Black” by Daniel Fellenstein and Cody R. Wilson; Blink; 12/27/2012. [12]

. . . . According to your profile on defense dist. you’re “a student of Bastiat, Hoppe, and Anthony de Jasay”. Could you go over your philosophical basics before we dive into the project? How much of a state would you accept in your life?. . .

. . . . I am but a conduit for ideology. Modern neoliberal democracy is a crumbling idol. The God has failed, to invoke Hoppe. . . .

2. “San­juro” was inspired to real­ize the project by the “dis­clo­sures” of Edward Snowden. The largest “bit­coin bounty” is on the head of Ben Bernanke, chair­man of the Fed­eral Reserve, to whom Snow­den referred as a “cock­bag” in the 2009 online post­ing [9] in which he advo­cated the elim­i­na­tion of social secu­rit [10]y and a return to the gold standard. “San­juro” also has bit­coin boun­ties on the heads of  Pres­i­dent Obama and Gen­eral Keith Alexan­der, the head of the NSA. “San­juro” sees his online assas­si­na­tion con­sor­tium as a real­iza­tion of laissez-faire mar­ket the­ory to politics.

We note that the theories of Hans Hermann-Hoppe [11] (disciple of Ludwig von Mises, student of Juergen Habermas, idol of bitcoin advocate R. Cody Wilson [12]) explicitly reject democracy. So does the Ludwig von Mises Institute [13], the epicenter for the economic theories of Ron Paul and Edward Snowden. So does Peter Thiel, a bitcoin advocate and capitalizer of Ron Paul’s 2012 political campaign. Thiel is also the largest stockholder in Palantir, which appears to have developed the PRISM software at the center of the Snowden leaks. (Palantir CEO Alex Karp [14] is also a student of Juergen Habermas.) “Sanjuro” takes this benighted philosophy to its [perhaps inevitable] conclusion. The endgame of libertarian philosophy does indeed appear to be “anarcho-fascism.” [15]

“Meet The ‘Assas­si­na­tion Mar­ket’ Cre­ator Who’s Crowd­fund­ing Mur­der With Bit­coins” by Andy Green­berg; Forbes; 11/28/2013. [34]

As Bit­coin becomes an increas­ingly pop­u­lar form of dig­i­tal cash, the cryp­tocur­rency is being accepted in exchange for every­thing from socks [35] to sushi [36] to heroin [37]. If one anar­chist has his way, it’ll soon be used to buy mur­der, too.

Last month I received an encrypted email from some­one call­ing him­self by the pseu­do­nym Kuwa­batake San­juro, who pointed me towards his recent cre­ation: The web­site Assas­si­na­tion Mar­ket, a crowd­fund­ing ser­vice that lets any­one anony­mously con­tribute bit­coins towards a bounty on the head of any gov­ern­ment offi­cial–a kind of Kick­starter for polit­i­cal assas­si­na­tions. Accord­ing to Assas­si­na­tion Market’s rules, if some­one on its hit list is killed–and yes, San­juro hopes that many tar­gets will be–any hit­man who can prove he or she was respon­si­ble receives the col­lected funds.

For now, the site’s rewards are small but not insignif­i­cant. In the four months that Assas­si­na­tion Mar­ket has been online, six tar­gets have been sub­mit­ted by users, and boun­ties have been col­lected rang­ing from ten bit­coins for the mur­der of NSA direc­tor Keith Alexan­der and 40 bit­coins for the assas­si­na­tion of Pres­i­dent Barack Obama to 124.14 bitcoins–the largest cur­rent bounty on the site–targeting Ben Bernanke, chair­man of the Fed­eral Reserve and pub­lic enemy num­ber one for many of Bitcoin’s anti-banking-system users. At Bitcoin’s cur­rent rapidly ris­ing exchanges rate, that’s nearly $75,000 for Bernanke’s would-be killer.

Sanjuro’s grisly ambi­tions go beyond rais­ing the funds to bankroll a few polit­i­cal killings. He believes that if Assas­si­na­tion Mar­ket can per­sist and gain enough users, it will even­tu­ally enable the assas­si­na­tions of enough politi­cians that no one would dare to hold office. He says he intends Assas­si­na­tion Mar­ket to destroy “all gov­ern­ments, everywhere.”

“I believe it will change the world for the bet­ter,” writes San­juro, who shares his han­dle with the name­less samu­rai pro­tag­o­nist in the Akira Kuro­sawa film “Yojimbo.” (He tells me he chose it in homage to cre­ator of the online black mar­ket Silk Road, who called him­self the Dread Pirate Roberts, as well Bit­coin inven­tor Satoshi Nakamoto.) ”Thanks to this sys­tem, a world with­out wars, drag­net panopticon-style sur­veil­lance, nuclear weapons, armies, repres­sion, money manip­u­la­tion, and lim­its to trade is firmly within our grasp for but a few bit­coins per per­son. I also believe that as soon as a few politi­cians gets offed and they real­ize they’ve lost the war on pri­vacy, the killings can stop and we can tran­si­tion to a phase of peace, pri­vacy and laissez-faire.

Just read­ing about that coldly cal­cu­la­tive sys­tem of lethal vio­lence likely inspires queasy feel­ings or out­rage. But San­juro says that the public’s abhor­rence won’t pre­vent the sys­tem from work­ing. And as a mat­ter of ethics, he notes that he’ll accept only user-suggested tar­gets “who have ini­ti­ated force against other humans. More specif­i­cally, only peo­ple who are out­side the reach of the law because it has been sub­verted and cor­rupted, and whose vic­tims have no other way to take revenge than to do so anonymously.”

Even set­ting aside the immoral­ity of killing, doesn’t the notion of enabling small minori­ties of angry Bit­coin donors to assas­si­nate elected offi­cials sound like an attempt to crip­ple democ­racy? “Of course, lim­it­ing democ­racy is why we even have a con­sti­tu­tion,” San­juro responds. “Major­ity sup­port does not make a leader legit­i­mate any more than it made slav­ery legit­i­mate. With this mar­ket the great equal­is­ing forces of cap­i­tal­ism have the oppor­tu­nity to work in pol­i­tics too. One bit­coin paid is one vote closer to a veto of what­ever leg­is­la­tion you dislike.”

San­juro didn’t actu­ally invent the con­cept of an anony­mous crowd­funded assas­si­na­tion mar­ket. The idea dates back to the cypher­punk move­ment of the mid-1990s, whose adher­ents dreamt of using encryp­tion tools to weaken the gov­ern­ment and empower indi­vid­u­als. For­mer Intel engi­neer and Cypher­punk Mail­ing List founder Tim May argued that uncrack­able secret mes­sages and untrace­able dig­i­tal cur­rency would lead to assas­si­na­tion mar­kets in his “Cryptoanarchist’s Man­i­festo [38]” writ­ten in 1992.

A few years later, another for­mer Intel engi­neer named Jim Bell pro­posed a sys­tem of fund­ing assas­si­na­tions through encrypted, anony­mous dona­tions in an essay he called “ Assas­si­na­tion Pol­i­tics. [39]” The sys­tem he described closely matches Sanjuro’s scheme, though anonymity tools like Tor and Bit­coin were mostly the­o­ret­i­cal at the time. As Bell wrote then:

If only 0.1% of the pop­u­la­tion, or one per­son in a thou­sand, was will­ing to pay $1 to see some gov­ern­ment slime­ball dead, that would be, in effect, a $250,000 bounty on his head. Fur­ther, imag­ine that any­one con­sid­er­ing col­lect­ing that bounty could do so with the math­e­mat­i­cal cer­tainty that he could not be iden­ti­fied, and could col­lect the reward with­out meet­ing, or even talk­ing to, any­body who could later iden­tify him. Per­fect anonymity, per­fect secrecy, and per­fect secu­rity. And that, com­bined with the ease and secu­rity with which these con­tri­bu­tions could be col­lected, would make being an abu­sive gov­ern­ment employee an extremely risky propo­si­tion. Chances are good that nobody above the level of county com­mis­sioner would even risk stay­ing in office.

Bell would later serve years in prison for tax eva­sion and stalk­ing a fed­eral agent, and was only released in March of 2012. When I con­tacted him by email, he denied any involve­ment in Sanjuro’s Assas­si­na­tion Mar­ket and declined to com­ment on it.

San­juro tells me he’s long been aware of Bell’s idea. But he only decided to enact it after the past summer’s rev­e­la­tions of mass sur­veil­lance by the NSA exposed in a series of leaks by agency con­trac­tor Edward Snow­den [40]. “Being forced to alter my every happy mem­ory dur­ing inter­net activ­ity, every inti­mate moment over the phone with my loved ones, to also include some of the peo­ple I hate the most lis­ten­ing in, analysing the con­ver­sa­tion, was the inspi­ra­tion I needed to embark on this task,” he writes. “After about a week of mut­ter­ing ‘they must all die’ under my breath every time I opened a news­pa­per or turned on the tele­vi­sion, I decided some­thing had to be done. This is my con­tri­bu­tion to the cause.”

Assas­si­na­tion Mar­ket isn’t the first web­site to sug­gest fund­ing mur­der with bit­coins. Oth­ers Tor-hidden web­sites with names like Quick Kill, Con­tract Killer and C’thulhu have all claimed to offer mur­ders in exchange for bit­coin pay­ments. But none of them responded to my attempts to con­tact their admin­is­tra­tors, and all required advanced pay­ments for their ser­vices, so they may be scams.

If the sys­tem does prove to work, the launch of Assas­si­na­tion Mar­ket may be ill-timed for San­juro, given law enforcement’s recent crack­down on the dark web. In August, the FBI used an exploit in Tor to take down the web host­ing firm Free­dom Host­ing [41] and arrest its founder Eric Eoin Mar­ques, who is accused of offer­ing his ser­vices to child pornog­ra­phy sites. And just last month, the FBI also seized the pop­u­lar Bit­coin– and Tor-based black mar­ket for drugs known as Silk Road [42] and arrested its alleged cre­ator, Ross Ulbricht.

San­juro coun­ters that in addi­tion to Tor, Bit­coin, and the usual encryp­tion tools, he has “mea­sures in place to pre­vent the effec­tive­ness of such an arrest. Nat­u­rally these will have to be kept secret.”

He adds that, like an ear­lier gen­er­a­tion of cypher­punks, he puts his faith in the math­e­mat­i­cal promise of cryp­tog­ra­phy to trump the government’s power to stop him. “With cryp­tog­ra­phy, the state, or any pro­tec­tion firm, is largely obsolete…all activ­ity that can be reduced to infor­ma­tion trans­fer will be com­pletely out of the government’s, or anyone’s, hands, other than the par­ties involved,” he says.

“I am a crypto-anarchist,” San­juro con­cludes. “We have a bright future ahead of us.”

3. In an update, we learn that the alleged mastermind of the bitcoin-funded Silk Road–the Ludwig von Mises/Ron Paul devotee Ross Ulbricht–allegedly sought the contract murders [17] of six people–five more than originally stated. It is interesting and relevant that both Ulbricht and “Sanjuro” proceed from an anarcho-libertarian perspective, decrying slavery AND democracy, ultimately arriving at a lethal advocacy position, allegedly so in Ulbricht’s case. Again, these people are indeed the “neue-wandervogel.”

“One thing is clear from this arti­cle [19]: Ross Ulbricht had a HUGE per­cent of the total bit­coin sup­ply. At least for an indi­vid­ual. The FBI received 144,336 bit­coins off of just one of Ulbricht’s com­put­ers, and with ~12 mil­lion bit­coins already in sup­ply (a lit­tle over half of the total 21 mil­lion), that means Ulbricht had over 1% of the cur­rent bit­coin sup­ply on that sin­gle com­puter alone. Accord­ing to the researchers, 78% of Ulbrich’s bit­coins are still “buried” and beyond the FBI’s reach [19]. So Ulbricht, alone, may have actu­ally con­trolled closer to 5% of the total bit­coin sup­ply. It’s a reminder that bit­coins have an addi­tional built-in defla­tion­ary force: Lost bit­coins that can’t be recov­ered are lost for good [20], per­ma­nently reduc­ing the sup­ply of trade­able bit­coins while main­tain­ing the over­all sup­ply offi­cially in exis­tence (because a lost bit­coin is indis­tin­guish­able from one that’s sim­ply being saved). The small casual users with tiny frac­tions of a bit­coin in their accounts are prob­a­bly the most likely source of bit­coin losses, but since we have no real idea who the large bit­coin own­ers are at this point you have to won­der how many more hid­den bit­coin barons are going to end up either hand­ing siz­able per­cent­ages of the total bit­coin sup­ply over to law enforce­ment agen­cies or just los­ing them altogether.”

“Alleged Silk Road Boss Ross Ulbricht Now Accused of Six Murders-for-Hire, Denied Bail” by Andy Greenberg; Forbes; 11/21/2013. [17]

A New York judge denied bail to alleged Silk Road cre­ator Ross Ulbricht Thurs­day, based in part on fresh accu­sa­tions of vio­lence: That the 29-year-old allegedly com­mis­sioned the mur­ders of a total of six peo­ple through would-be hit­men he con­tacted online, four more than the two attempted killings described in pros­e­cu­tors’ orig­i­nal crim­i­nal complaint.

Judge Nathaniel Fox said that the risk that Ulbricht might flee or present a dan­ger to the com­mu­nity over­whelmed argu­ments that he be released on bail, cit­ing “pow­er­ful evi­dence pre­sented to us that the defen­dant has attempted to secure the mur­ders of a num­ber of people.”

Pros­e­cu­tor Ser­rin Turner laid out that evi­dence in a state­ment to the court, say­ing that much of it was gath­ered from a Silk Road server located by the FBI as well as Ulbricht’s seized com­puter after he was arrested in Octo­ber and accused of run­ning the Silk Road’s mas­sive anony­mous online drug sales oper­a­tion under the pseu­do­nym the Dread Pirate Roberts [43]. Ser­rin said that Ulbricht had not only sent mes­sages to two would-be hitmen–an under­cover agent on one of those two occa­sions–ask­ing to have a wit­ness and a black­mailer killed [43]but had fol­lowed up by order­ing the killing of the blackmailer’s asso­ciate and three peo­ple who lived with him.

Mys­te­ri­ously, Turner said that in none of the cases were actual vic­tims found; In the first, FBI agents say they faked the death of alleged for­mer Silk Road employee Cur­tis Green [44]to con­vince Ulbricht the mur­der had taken place. But the out­come of the other five mur­ders remains unex­plained. Nonethe­less, Turner argued, “the evi­dence is crys­tal clear that the defen­dant intended these mur­ders to happen.”

Crim­i­nal com­plaints against Ulbricht pre­vi­ously accused him of order­ing the killing of for­mer Silk Road employee Cur­tis Green in Jan­u­ary of 2013 for $80,000 and then pay­ing a user known as “redand­white” $150,000 in the cryp­tocur­rency Bit­coin to kill a Silk Road user iden­ti­fied as “Friend­ly­Chemist,” who claimed to have hacked another Silk Road ven­dor and threat­ened to release Silk Road cus­tomers’ iden­ti­fy­ing infor­ma­tion if he wasn’t paid $500,000.

In court Thurs­day, Turner added four more attempted mur­ders, say­ing that Friend­ly­Chemist had impli­cated another Silk Road user known as “tony76.” And when redand­white had told Ulbricht that tony76 lived with three other peo­ple who would have to be killed if they were to obtain the money and pos­ses­sions in his home, Ulbricht allegedly agreed to have all four killed for $500,000 in bit­coins. “Based on the say-so of [an online assas­sin,] he was will­ing to kill three oth­ers just liv­ing with him,” said Turner.

Turner also described evi­dence on Ulbricht’s com­puter that included a log he kept of his activ­i­ties that he said included the line “com­mis­sioned hit on black­mail­ers with angels,” imply­ing that redand­white may have been a mem­ber of the Hell’s Angel motor­cy­cle gang, given its asso­ci­a­tion with the col­ors red and white. Another line allegedly read “sent pay­ment to angels for hit on tony76 and his 3 associates.”

In fact, Turner enu­mer­ated evi­dence found on Ulbricht’s seized machine that went far fur­ther in tying him to his alleged Dread Pirate Roberts iden­tity. When Ulbricht was arrested in the Glen Park library in San Fran­cisco, Turner said he was logged into the Silk Road under his Dread Pirate Roberts account and was look­ing at an admin­is­tra­tor con­trol page for the site as well as another page called “Mas­ter­mind” that showed Silk Road sales num­bers. Turner added that he was also logged into a chat pro­gram under the han­dle “dread,” and his Mac­book had the user­name “Frosty,” which he said was linked to Ulbricht’s email address in a post he’d made to a cod­ing forum.

Remark­ably, Turner also described a jour­nal taken from Ulbricht’s hard drive that recounts the story of Silk Road’s cre­ation. He listed details like the fact that Ulbricht had ini­tially called the Silk Road “Under­ground Bro­kers,” but had later decided to change the name. The pros­e­cu­tors’ let­ter to the court includes this passage:

I began work­ing on a project that had been in my mind for over a year. I was call­ing it Under­ground Bro­kers, but even­tu­ally set­tled on Silk Road. The idea was to cre­ate a web­site where peo­ple could buy any­thing anony­mously, with no trail what­so­ever that could lead back to them.

At another point, he wrote that in 2011, he would be “cre­at­ing a year of pros­per­ity and power beyond what I have ever expe­ri­enced before,” and added that “Silk Road is going to become a phe­nom­e­non and at least one per­son will tell me about it, unknow­ing that I was its creator.”

The jour­nal, accord­ing to Turner’s account, also details how Ulbricht grew sev­eral kilos of psy­che­delic mush­rooms in a lab in an “off-the-grid” cabin to have an ini­tial prod­uct to sell on the Silk Road. In a spread­sheet found on Ulbricht’s com­puter, Turner said Ulbricht’s expenses and income were listed, includ­ing a line for “sr inc.” that he said listed its value at $104 million.

To sup­port the prosecution’s argu­ment Ulbricht rep­re­sented a flight risk, he noted that Ulbricht had taken steps towards apply­ing for cit­i­zen­ship in the island nation of Dominica, and had dis­cussed mov­ing there with friends on Facebook.

4. In another update, we learn that the successor to Silk Road–Sheep Marketplace–has vanished taking vast amounts of its users’ bitcoins [21] with it. The users of Sheep Marketplace, it would seem, have been fleeced!

“Anonymous Online Marketplace that Replaced Silk Road Vanishes . . . Taking $100 Million of Users’ Money With It” by Joshua Gardner; Daily Mail [UK]; 12/2/2013. [21]

A shady online marketplace that anonymously sold drugs and guns has virtually disappeared, leaving illegal vendors believing they’ve been scammed out of as much as $100 million.

Sheep Marketplace emerged as the go-to replacement to Silk Road, a similar bazaar shuttered by the FBI in October.

Now users of the site, which operated outside the law to begin with and dealt only in anonymous Bitcoins, fear it was a scam all along.

Shielded from authorities and using special software to access the so-called ‘Deep Web’ site, buyers could find drugs, guns, and even hit men.
Buyers would put their Bitcoins into the marketplace, where sellers would withdraw them, with all the transactions moderated by the website.
Which is where the issue first arose.

In the days before the site shut down, vendors suddenly found themselves unable to access the Bitcoins tied up in the site’s wallet.
As they complained, reports RT, they found their comments suddenly yanked from the site’s forums.

Buyers also began to see suspicious things in the time leading up to this possible scam. Some vendors, though not all, began to list their drugs and other goods at prices far lower than ever before.

Now, many believe they were being bilked out of as many of their Bitcoins—a difficult to trace form of online currency currently worth over $1,000 a piece—as possible before taking the money and running.

On Sunday, visitors to the site found a note in place of the homepage that claimed a vendor called EBOOK101 had stolen from the site’s cache of Bitcoins.

‘This vendor found bug in system and stole 5400 BTC,’ reads the brief note. ‘Your money, our provisions, all was stolen.’
However, according to a post on Hacker News, a wallet of far more Bitcoins has been traced back to the site.

Valued at $45 million, 39,918 in Bitcoins could now be in the hands of a those behind the site after scamming untold numbers of hopeful drug users and gun toters out of their hard earned virtual cash.

Or perhaps even more.

According to the Daily Dot, one Redditor claims to have engaged in a virtual chase with Czech computer programmer Tomáš Jiřikovsky, who user sheeproadreloaded2 claims is behind the site and has absconded with 96,000 bitcoins, or about $95 million dollars. . . . .

5. “Pter­rafractyl” informs us of another aspect of the vul­ner­a­bil­ity of Bit­coin: “One of the inter­est­ing aspects about the bit­coin phe­nom­ena is that the more peo­ple that start using bit­coin the greater the defla­tion­ary pres­sure on the value of the bit­coins. That’s because there’s a fixed max­i­mum of 21 mil­lion bit­coins that can ever exist, so the greater the demand for bit­coins the more each bit­coin will cost in other cur­ren­cies. With the Chi­nese mar­ket now warm­ing up to bit­coin, and all those new poten­tial users, we might see a fas­ci­nat­ing exam­ple of a hyper­de­fla­tion­ary vir­tual gold bub­ble [22].”

“Bitcoins Climb to Record, on Wider Acceptance, China Trade” by Olga Kharif; Bloomberg News; 11/6/2013. [22]

Bitcoin’s price hit a record at $265 on the Bit­Stamp online exchange, dri­ven by wider accep­tance of the vir­tual currency.

The dig­i­tal money, which can be used to pay for goods and ser­vices on the Inter­net, has risen 20-fold so far this year, as trad­ing activ­ity has increased. Bit­coins were trad­ing at $251.36 apiece at 6:30 p.m. in New York on Bit­Stamp, one of the more active Web-based exchanges where Bit­coins are traded for dol­lars, euros and other currencies.

The rally comes a month after the clos­ing of the “Silk Road Hid­den Web­site,” where peo­ple could obtain drugs, guns and other illicit goods using Bit­coins. The vir­tual cur­rency lost a third of its value in the days after the web­site was shut down. Bit­coins are becom­ing increas­ingly pop­u­lar, par­tic­u­larly in China, said Ugo Egbunike, direc­tor of busi­ness devel­op­ment at Index­U­ni­verse, an index-fund researcher.

“I thought Silk Road is going to do some dam­age to the price,” Egbunike said. “But with BTC China buy­ing this up — they seem to have picked up the slack.”

BTC China is now the world’s largest Bit­coin exchange, Nicholas Colas, a Con­vergEx Group ana­lyst, wrote in a Nov. 5 report.

The vir­tual cur­rency exists as soft­ware that’s designed to be untrace­able, mak­ing it an attrac­tive ten­der for those seek­ing to trade anony­mously via the Web. There are about 30 trans­ac­tions per minute, at an aver­age amount of 16 Bit­coins, accord­ing to a report today by the Fed­eral Reserve Bank of Chicago. . . .

6. Fur­ther updat­ing the dis­cus­sion “Pter­rafractyl” informs us: It would be pretty hilar­i­ous if Bit­coin, a cur­rency cher­ished by haunted by hyper­in­fla­tion­ary fears, because an object les­son in the dan­gers of defla­tion. But it’s hard to see how this les­son will be avoided if Bit­coin ever really caught on. One of the main fea­tures of the the cur­rency is that it’s capped out at 21 mil­lion coins but you can divide each coin up into smaller and smaller pieces. There­fore, the rea­son­ing goes, Bit­coin has defeated the infla­tion beast while still main­tain­ing the scal­a­bil­ity required [24] to han­dle the vol­ume of trans­ac­tions in vir­tu­ally any sized econ­omy! Rev­o­lu­tion awaits! And this is sort of true of Bit­coins but the vic­tory over infla­tion also comes at the cost of built-in defla­tion cor­re­lated to the growth of the Bit­coin econ­omy (imag­ine if dol­lars grew more expen­sive with the growth of the US econ­omy). So the more Bit­coin grows in pop­u­lar­ity the greater the defla­tion, the greater the pay­out to the ear­li­est bit­coin investors, and the greater the temp­ta­tion to keep hold­ing onto those Bit­coins [25].

“If You Believe in Bitcoin, You Should Never Buy Anything in Bitcoin” by Jon Weisenthal; Business Insider; 11/10/2013. [25]

Many Bit­coin believ­ers think that the dig­i­tal cur­rency will one day become the pre-eminent cur­rency of the inter­net. They basi­cally see it becom­ing the internet’s ver­sion of gold in that it’s nat­u­rally scarce, inde­pen­dent, vir­tu­ally impos­si­ble to manip­u­late, and cru­cially suited for a dig­i­tal world when money ought to be able to be moved seam­lessly and at no cost.

Well here’s a tip: If you think that this is true, then never use Bit­coin in a transaction.

As more peo­ple have got­ten into Bit­coin, the price has gone way up.

Vir­tu­ally every­one who has ever bought any­thing in Bit­coin has been a huge loser, who would have been bet­ter suited just hold­ing onto the Bit­coins instead.

Remem­ber the pizza that was pur­chased for $25 in Bit­coins years back? [45] Had the per­son not bought that pizza, it would be worth nearly $3 mil­lion. That pur­chase was a cat­a­strophic deci­sion, as that was prob­a­bly the most expen­sive pizza of all time.

Of course this presents a Catch-22. How can Bit­coin become a real cur­rency if it’s not used in trans­ac­tions? And why would any­one use it in trans­ac­tions if becom­ing a real cur­rency offers so much more price appre­ci­a­tion? This con­tra­dic­tion is a core prob­lem, and it’s a rea­son why it’s prob­a­bly doomed to fail (real cur­ren­cies don’t have this issue, since cen­tral banks pre­vent rapid price appre­ci­a­tion, and they man­date that the cur­rency be used). . . .

7. The perils of “Bitcoinery” were illustrated when a Hong Kong Bitcoin market vanished [23], taking $5 million dollars with it!

Hong Kong Bit­coin Trad­ing Plat­form Van­ishes with Millions” by Liu Jiayi; ZDNet; 11/12/2013. [23]

When ardent Chi­nese Bit­coin investors found that they could no longer access the web­site of Global Bond Lim­ited (GBL) in the early morn­ing of Octo­ber 26, it was already too late.

One investor under the pseu­do­nym of South Amer­i­can Vicuna orga­nized an online group for the los­ing traders and told IT Times [46] on Mon­day that more than 30 mil­lion yuan from 500 investors, many of whom sold homes to get in the vir­tual cur­rency trade, could never be retrieved.

Accord­ing to the Vicuna, after the GBL’s web­site shut­down, it left only one mes­sage, say­ing that the site was com­pro­mised and investors who want to get back their invest­ment data shall trans­fer money to a des­ig­nated account. Now all con­tacts are not respond­ing, and the com­pany office in Hong Kong is as empty as the traders’ pockets.

GBL self-proclaimed that the local gov­ern­ment had approved vir­tual cur­rency exchange back on June 8, and lured buy­ers in with high lever­age rate and high yield. How­ever, the too-obvious-to-ignore trad­ing loop­hole in its trad­ing sys­tem raised con­cerns, but the “always-winning” traders were too obsessed to get out, accord­ing to Vicuna. . . .

8. Cornell University researchers have discovered a fundamental flaw in bitcoin that can permit a very small number of users to take over the market.

“Bit­coin Vul­ner­a­bil­ity Could Allow Mali­cious Min­ers to Seize Control”; MIT Technology Review; 11/8/2013. [27]

One of Bitcoin’s big advan­tages is that it is decen­tralised with nobody in over­all con­trol. But now a sim­ple strat­egy has emerged that could allow almost any group to take over, say com­puter secu­rity analysts.

The dig­i­tal cur­rency Bit­coin is one of the zeit­geist phe­nom­ena of our time. Since 2009, it has grown from a dig­i­tal curios­ity to an online phe­nom­e­non. There are now some 11.5 mil­lion Bit­coins in cir­cu­la­tion and each one is worth over $300.

The Bit­coin sys­tem is specif­i­cally designed to over­come one of the seri­ous flaws of pre­vi­ous dig­i­tal currencies—the pos­si­bil­ity of dou­ble spend­ing; that two peo­ple could spend two copies of the same cur­rency at the same time. It is also decen­tralised so that no sin­gle organ­i­sa­tion or organ­ised group of indi­vid­u­als can con­trol the cur­rency and pre­vent cer­tain types of transactions.

But Bit­coin may not be quite as secure as every­body thought. Today, Ittay Eyal and Emin Gun Sirer at Cor­nell Uni­ver­sity in Ithaca say they’ve dis­cov­ered a flaw that allows any organ­ised group of Bit­coin min­ers to take over the cur­rency. And they say that some groups today are already big enough to do the job.

First some back­ground. Per­haps Bitcoin’s biggest advan­tage is its unique approach to pre­vent­ing dou­ble spend­ing. It does this by record­ing every trans­ac­tion in a sin­gle log known as a blockchain. An indi­vid­ual account can only spend a Bit­coin if the blockchain records that it owns the Bit­coin in the first place.

This log is pro­tected by cryp­top­uz­zles that can only be solved by large scale num­ber crunch­ing. When any­body solves such a puz­zle, they can record new trans­ac­tions and are rewarded with a fee in the form of new Bitcoins.

Hence the emer­gence of Bit­coin min­ers. These are peo­ple who devote com­put­ing power to solve cryp­top­uz­zles and are paid for their work in Bitcoins.

If you’re think­ing of a career as a Bit­coin miner, you’ll imme­di­ately run into a prob­lem. The cryp­top­uz­zles are so dif­fi­cult that the chances of solv­ing one by your­self is tiny. So Bit­coin min­ers work together in groups so that they can solve the prob­lems more quickly. If any one of them solves a puz­zle, they all share the proceeds.

There are lots of groups to join and there’s no advan­tage in join­ing one over another. The received wis­dom is that this keeps the min­ing decentralised.

But now Eyal and Sirer say that’s not true and have worked out how a self­ish group of min­ers could take over the cur­rency. “We show that the con­ven­tional wis­dom is wrong,” they say.

The trick is to mine for Bit­coins but to keep the results secret. This cre­ates a fork in the blockchain so that one half of the fork is pub­lic and the other half is secret.

The Bit­coin sys­tem has a way of resolv­ing these kinds of forks, which occur by acci­dent from time to time. It requires min­ers to join the longest fork. The trans­ac­tions in the other fork are then resub­mit­ted for resolution.

If the self­ish min­ers make their fork longer than the pub­lic one, it becomes the cho­sen chain.

The prob­lem is that the num­ber crunch­ing done on the fork that is aban­doned is wasted. So the self­ish min­ers end up get­ting more than their fair share of Bit­coins. This “enables pools of col­lud­ing min­ers that adopt it to earn rev­enues in excess of their min­ing power,” say Eyal and Sirer.

Hav­ing skewed the sys­tem in favour of self­ish min­ers, other min­ers see that they can make more Bit­coins by join­ing this group. The result is a tip­ping point in which the Bit­coin min­ing sys­tem sud­denly becomes dom­i­nated by a sin­gle group. And this group can exer­cise what­ever con­trol it likes over how trans­ac­tions are recorded.

Of course, self­ish min­ing only reaches a tip­ping point if the self­ish group con­sists of a cer­tain frac­tion of Bit­coin min­ers. Groups that are smaller than this can­not force the sys­tem to tip.

The key result that Eyal and Sirer have cal­cu­lated is that the tip­ping thresh­old is close to zero zero. So almost any group could adopt the self­ish min­ing strat­egy and end up con­trol­ling the system.

Eyal and Sirer have a solu­tion of sorts. This involves a chang­ing the sys­tem so that it chooses one fork over another at ran­dom (rather than choos­ing the loner one). When this choice is ran­dom, then it is harder for the self­ish min­ers to take control.

But not that much harder. Eyal and Sirer cal­cu­late that this raises the tip­ping thresh­old to groups that con­trol around 25 per cent of all Bit­coin min­ing. “Even with our pro­posed fix that raises the thresh­old to 25 per cent, the out­look is bleak: there already exist pools whose min­ing power exceeds the 25%,” they point out. . . . .

9. Not sur­pris­ingly, it turns out that Bit­coin is highly vul­ner­a­ble [26] to self­ish “min­ing,” which could per­mit knowl­edge­able and enter­pris­ing male­fac­tors to cor­ner the market.

“In the Murky World of Bitcoin, Fraud is Quicker than the  Law” by Nathaniel Popper; The New York Times; 12/05/201 [47]3.

It was an invitation to a penny stock-style pump-and-dump scheme — only this one involved Bitcoin, the soaring, slightly scary virtual currency that has beckoned and bewildered people around the world.

While such bid ’em up, sell ’em off scams are shut down in the financial markets all the time, this one and other frauds involving digital money have gone unchecked. The reason, in no small part: Government authorities do not agree on which laws apply to Bitcoin — or even on what Bitcoin is.

The person behind the recent scheme, a trader known on Twitter as Fontas, said in a secure Internet chat that he operated with little fear of a crackdown.

“For now, the lack of regulations allows everything to happen,” Fontas said in the chat, where he verified his control of the Twitter account, which has thousands of followers, but did not give his identity. He added that Bitcoin and its users would benefit when someone steps in to police this financial wild west, and would stop his schemes when they do.

Chinese authorities drew attention to the issue on Thursday when they announced that they were barring Chinese banks from making Bitcoin transactions. The same day, the Bank of France issued its own warning about the potential risks. The news sent the price of Bitcoin tumbling, but it quickly bounced back to near its all-time high of around $1,200. . . .

10. Bit­coin users have relied on the TOR net­work, to a con­sid­er­able extent. Because TOR is not as secure as advertsed, some have avoided using it. Now the Max Planck Insti­tute [48] is research­ing the devel­op­ment [29] of a more secure oper­a­tion, that might per­mit dras­tic pro­lif­er­a­tion of the types of ills that appear inher­ent in the bit­coin concept.

“Anonymity Network Tor Needs a Tune-Up to Protect Users from Surveillance” by Toni Simonite; MIT Technology Review; 10/25/2013. [29]

. . . . This month’s reports, based on documents leaked by Edward Snowden, didn’t say whether the NSA was doing so. But a 2012 presentation [49] marked as based on material from 2007, released by the Guardian, and a 2006 NSA research report [50] on Tor, released by the Washington Post did mention such techniques.

Stevens Le Blond [51], a researcher at the Max Planck Institute for Software Systems in Kaiserslautern, Germany, guesses that by now the NSA and equivalent agencies likely could use traffic correlation should they want to. “Since 2006, the academic community has done much work on traffic analysis and has developed attacks that are much more sophisticated than the ones described in this report.” Le Blond calls the potential for attacks like those detailed by Johnson “a big issue.”

Le Blond is working on the design of an alternative anonymity network called Aqua [52], designed to protect against traffic correlation. Traffic entering and exiting an Aqua network is made to be indistinguishable through a mixture of careful timing, and blending in some fake traffic. However, Aqua’s design is yet to be implemented in usable software and can so far only protect file sharing rather than all types of Internet usage. . . . .

11. A supplemental story, not included in the original program, concerns Ron Paul’s enthusiastic views [30] on bitcoin.

“Ron Paul:Bitcoin Could Destroy the Dollar” by Jose Pagliery; CNNMoney; 12/4/2013. [30]

Imagine a world in which you can buy anything in secret. No banks. No fees. No worries inflation will make today’s money worth less tomorrow.

The digital currency Bitcoin promises all these things. And while it’s far from achieving any of them — its value is unstable and it’s rarely used — some have high hopes.

“There will be alternatives to the dollar, and this might be one of them,” said former U.S. congressman Ron Paul. If people start using bitcoins en masse, “it’ll go down in history as the destroyer of the dollar,” Paul added.

It’s unlikely that Bitcoin would replace the dollar or other government-controlled currencies. But it could serve as a kind of universal alternative currency that is accepted everywhere around the globe. Concerned about the dollar’s inflation? Just move your cash to bitcoins and use them to pay your bills instead. Tired of hefty credit card fees? Bitcoin allows transactions that bypass banks. . . .

12. In another supplemental story [53], not included in the original program, we learn that the European Central Bank views bitcoin as rooted fundamentally in the Ludwig von Mises/Friedrich von Hayek theoretical construct.

“ECB: ‘Roots Of Bitcoin Can Be Found In The Austrian School Of Economics'” by Jon Matonis; Forbes; 11/3/2012. [53]

The ECB (Euro­pean Cen­tral Bank) has pro­duced the first offi­cial cen­tral bank study of the decen­tral­ized cryp­to­graphic money known as bit­coin, Vir­tual Cur­rency Schemes [54]. Ignor­ing for a moment the ECB’s con­de­scend­ing and deroga­tory use of the vir­tual cur­rency phrase and scheme phrase, the study pro­duced at least one land­mark achievement.

In claim­ing that “The the­o­ret­i­cal roots of Bit­coin can be found in the Aus­trian school of eco­nom­ics,” the ECB for­ever linked Bit­coin to the proud eco­nomic her­itage of Menger, Mises, and Hayek as well as to Aus­trian busi­ness cycle the­ory [55]. This recog­ni­tion is also a direct tes­ta­ment to the mon­e­tary the­ory work of Friedrich von Hayek who inspired many with his 1976 land­mark pub­li­ca­tion of Dena­tion­al­i­sa­tion of Money [56].

Bit­coin fully embod­ies the spirit of dena­tion­al­ized money as it seeks no author­ity for its con­tin­ued exis­tence and it rec­og­nizes no polit­i­cal bor­ders for its cir­cu­la­tion. Indeed accord­ing to the report, pro­po­nents see Bit­coin as “a good start­ing point to end the monop­oly cen­tral banks have in the issuance of money” and “inspired by the for­mer gold standard.”

Econ­o­mists from the 19th and mid-20th cen­turies [57] can be for­given for not antic­i­pat­ing an inter­con­nected dig­i­tal realm like the Inter­net with its p2p dis­trib­uted archi­tec­ture, but mod­ern econ­o­mists can­not be. From their own con­clu­sions (on page 48) which inac­cu­rately lump Bit­coin together with Lin­den Dol­lars, here is what the modern-day econ­o­mists at the ECB are still not get­ting:

1. ECB con­cludes that if money cre­ation remains at a low level, bit­coin does not pose a risk to price sta­bil­ity. This is incor­rect on two lev­els. One, the cre­ation of new bit­coin is capped at 21 mil­lion with eight cur­rent dec­i­mal places so it grows through adop­tion and usage rather than mon­e­tary expan­sion. And two, as with gold, sil­ver, and other com­modi­ties hav­ing a mon­e­tary com­po­nent, price sta­bil­ity is a func­tion of the mar­ket not cen­tral planners;

2. ECB con­cludes that bit­coin can­not jeop­ar­dize finan­cial sta­bil­ity due to its low vol­ume and lim­ited con­nec­tion with the real econ­omy. Con­versely, bit­coin will tend to increase finan­cial sta­bil­ity and over­all sound­ness. Bitcoin’s con­nec­tion with the real econ­omy is only a con­cern for the reg­u­lated and taxed econ­omy, whereas bit­coin inde­pen­dently may thrive in the $10 tril­lion shadow or “orig­i­nal” econ­omy [58]. Besides, with its repeated mar­ket inter­ven­tions, no one has done more to jeop­ar­dize finan­cial sta­bil­ity than the ECB itself;

3. ECB con­cludes that bit­coin is cur­rently not reg­u­lated and super­vised by any pub­lic author­ity. It would be more accu­rate to say that State-sponsored reg­u­la­tion is largely irrel­e­vant because of the inher­ent design prop­er­ties of a peer-to-peer dis­trib­uted com­put­ing [59] sys­tem. But hap­pily, this is still a con­clu­sion that I can agree with and rec­om­mend that it remains the case;

4. ECB con­cludes that bit­coin could rep­re­sent a chal­lenge for pub­lic author­i­ties, given the legal uncer­tainty and poten­tial for per­form­ing ille­gal activ­i­ties. While pub­lic author­i­ties will cer­tainly be chal­lenged by the intro­duc­tion of a mon­e­tary unit that can­not be manip­u­lated for polit­i­cal pur­poses, bit­coin in some cases does have the abil­ity to pro­vide track­ing capa­bil­ity that far exceeds that of national cash or money sub­sti­tutes. What author­i­ties will find most trou­bling though, with bit­coin, is that money flows between indi­vid­u­als and busi­nesses will no longer be exploitable for pur­poses of unlim­ited iden­tity track­ing and uncon­sti­tu­tional ‘fish­ing expeditions’

13. We link a characteristically important and detailed post [60] by “Pterrafractyl” on this subject.

14. In a comment, “Pterrafractyl” updates [61], noting that the probably mythical “Satoshi Nakamoto” is apparently the biggest bitcoin holder. This would make German Intel/Underground Reich the biggest holder, if our working hypothesis presented in FTR #760 is valid.

15. Another “Pterrafractyl” comment supports the working hypothesis [62] that “Satoshi Nakamoto” is a fictitious name for probable European elements.

16. Yet another “Pterrafractyl” contribution notes that concentration of ownership [63] appears to be a fundamental characteristic of bitcoin miners.