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For The Record  

FTR #770 Bit[coin]burg, Part 3: Fool’s Gold

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

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Introduction: This program continues our exploration and analysis of the online cryptocurrency bitcoin. (We have previously explored this in FTR #’s 760 and 764. In addition, we recommend a penetrating essay by “Pterrafractyl” on the bitcoin phenomenon, upon which we have drawn in this broadcast.)

In recent years, much attention has been devoted to the increasing economic concentration and resulting social inequality in this country. The 1% versus everybody else is a common element of awareness and discussion.

Originally envisioned as a way around the shortcomings and pitfalls of the contemporary economic and fiscal landscape, bitcoin is proving to be a very bad “cyberpenny,” indeed.

In addition to the numerous, almost endemic scams and gambits to which this unregulated currency is subject, bitcoin is already turning out to lend itself to exactly the kind of concentration of ownership that is characteristic of the mainstream economy decried by bitcoiners.

As is the case with the “tape painting” and other scams that characterize bitcoin, the already pronounced concentration of ownership of this “fiscal panacea” are built in to the very technological landscape and nature of bitcoin.

Increasingly, various groups of “miners” are dominating the bitcoin landscape. Not surprisingly, the largest accumulation of bitcoins appears to belong to the mythical “Satoshi Nakamoto, who is credited with developing the cryptocurrency.

If bitcoin were to achieve the acceptance hoped for by its advocates, the enormous carbon footprint required to “mine” the currency would make it a threat to the global environment.

The program also notes the increasing degree of overlap between the milieu of bitcoin and that of Edward Snowden and our investigation into his activities.

Central to the analysis is the comparison of bitcoin to gold–presented as negative by the brilliant economist Paul Krugman and a positive by Julian Assange, Edward Snowden and Ron Paul, as well as the bitcoiners.

Program Highlights Include: Examination of an hypothesis that the mythical “Satoshi Nakamoto”–creator of bitcoin–is, in fact, a European-based consortium (consistent with our hypothesis that the creator is a group of individuals working for Lantiq); the increasing concentration of bitcoins in two syndicates; the prospect that Ghash.io–the largest of the bitcoin mining syndicates–is growing so large that it threatens the very operating premise of bitcoin; the probability that higher transaction fees will undermine the very premise of bitcoin; similarities between bitcoin and the gold standard; review of Eddie the Friendly Spook’s advocacy of a return to the gold standard (a “barbaric relic” according to John Maynard Keynes); Ron Paul’s opinion that bitcoin could threaten the dollar; the European Central Bank’s view that bitcoin is the expression of the Austrian School of Economics (favored by Ron Paul and Snowden); the arrest of a prominent bitcoin promoter for money laundering in the Silk Road case; review of apparent Silk Road developer Ross Ulbricht’s affinity for Ron Paul, bitcoins and the Austrian School; the possibility that NSA surveillance might be involved in the Silk Road case; Julian Assange’s fondness for bitcoin and statement that he and bitcoin’s creators share common ground; Asange’s fopndness for gold as a medium of exchange; Hans Hermann-Hoppe disciple R. Cody Wilson’s “Dark Wallet” scheme (which would allegedly make it impossible to trace bitcoin operations); review of Max Planck Institute attempts at making Internet communications immune to surveillance; the Max Planck Institute’s association with the Underground Reich.

1. In FTR #760, we advanced the hypothesis that the actual originator of bitcoin may well be three employees of Lantiq, a spinoff of Siemens/Infineon AG and Bain Capital offshoot Golden Gate Capital. A recent post in International Business Times opines that “Satoshi Nakamoto” is actually a European-based cell, possibly from the financial sector.

 “Bit­coin Inven­tor Satoshi Nakamoto is Anonymous-style Cell from Europe” by Vasude­van Srid­ha­ran; Inter­na­tional Busi­ness Times; 12/16/2013.

As the mys­tery sur­round­ing the iden­tity of Satoshi Nakamoto, the cre­ator of the dig­i­tal cur­rency Bit­coin, con­tin­ues to grow, it is believed that the ‘inven­tor’ could infact be the cre­ation of a com­puter col­lec­tive, IBTimes UK understands.

Josh Zer­lan, the Chief Oper­at­ing Offi­cer of But­ter­fly Labs and a per­son famil­iar with the Bit­coin net­work, has said it is highly likely that Nakamoto could be a group of peo­ple work­ing the finan­cial sec­tor.

Speak­ing to IBTimes UK on the side­lines of a Global Bit­coin Con­fer­ence in Ban­ga­lore, India, Zer­lan said: “One of the pre­vail­ing the­o­ries, I think has cred­i­bil­ity, is that it was some group of peo­ple from finan­cial sec­tor that cre­ated this. They released it and stepped back and let it go. So, Satoshi Nakamoto is a group of peo­ple, I think, is a rea­son­able possibility.”

When quizzed where the group of peo­ple might be based, Zer­lan indi­cated they could prob­a­bly be from the Euro­pean continent.

How­ever, Zer­lan from But­ter­fly Labs, which is involved in sup­ply­ing hard­ware for min­ing Bit­coins, con­ceded: “Nobody knows who he really is. The name ‘Satoshi Nakamoto’ is more like John Smith in Eng­lish. So, it’s kind of a generic name.”

He added that the recent spec­u­la­tion that Nakamoto could be the Japan­ese blog­ger and pro­gram­mer Nick Szabo does not seem plau­si­ble, con­sid­er­ing the style of writ­ing. . . .

2. The mythical “Nakamoto” owns the largest aggregation of bitcoins.

“Who Owns the World’s Biggest Bit­coin Wal­let? The FBI” By Robert McMil­lan; Wired; 12/18/2013.

. . . This honor is thought to belong to bitcoin’s shad­owy inven­tor Satoshi Nakamoto, who is esti­mated to have mined 1 mil­lion bit­coins in the currency’s early days. His stash is spread across many wal­lets. But it does put the fed­eral agency ahead of the Cameron and Tyler Win­klevoss, who in July said that they’d cor­nered about 1 per­cent of all bit­coins (there are 12 mil­lion bit­coins in circulation).

In the fun house world of bit­coin track­ing, it’s hard to say any­thing for cer­tain. But it is safe to say that there are new play­ers in the Bit­coin world — although not as many peo­ple are buy­ing bit­coins as one might guess from all of the media attention.

Satoshi stores his wealth in a large num­ber of bit­coin addresses, most of them hold­ing just 50 bit­coins. It’s a bit of a logis­ti­cal night­mare, but most savvy Bit­coin investors spread out their bit­coins across mul­ti­ple wal­lets. That way if they lose the key to one of them or get hacked, all is not lost. . . .

3.  “Pterrafractyl” highlights an important consideration for us: Here’s an inter­est­ing fact about the con­cen­tra­tion of power in the bit­coin min­ing mar­ket and the risk of “self­ish min­ing” (which we spoke about in FTR #760.):

If you go here you can find a charge of the “hashrate dis­tri­b­u­tion” that shows the rel­a­tive amounts of the total hashes (hashes are cal­cu­lated as part of the min­ing process). Notice how two guilds, BTC Guild and GHash.IO, con­trol well over 50% of of the total min­ing pro­cess­ing power. Sit­u­a­tions like this are a huge poten­tial prob­lem for how bit­coin is sup­posed to work. But, in a way, this is a sym­bol of bitcoin’s poten­tial pop­ulism in that a guild con­sists of THOUSANDS of users all work­ing together. So at least when the BTC Guild and GHash.IO take over the min­ing mar­ket the pro­ceeds would be going to a large num­ber of peo­ple and not just some hand­ful of super-miners. Except it may not be quite that clean because, as of April of this year, the top 10 users in the BTC Guild accounted for half of the entire guild’s pro­cess­ing power and would there­fore get about half of BTC Guild’s the pro­ceeds and it’s unclear why a sit­u­a­tion like that that wouldn’t still be the case today.

“Getting Started with Bitcoin Mining”; The Bitcoin Beginner Blog; 4/4/2013.

. . . . BTC Guild is the largest mining guild, both in terms of the number of Blocks found and the sheer amount of processing power it can bring to bear. Since the start of this year, it’s found nearly one third of all Blocks added to the Block Chain.

It’s worth nothing that there’s a distinct “upper class” to BTC Guild. The top 10 users accounting for almost half of the pool’s entire processing power (which means they get almost half of all payouts).

For payouts, you can choose Pay-per-Share (PPS) or Pay-per-Last-N-Shares (PPLNS). Which one you choose changes whether or not transaction fees are included in the payout, and what the pools’ fee percentage is. . . .

4a. In addition to the BTC Guild, another “mining consortium” (Ghash.io) is getting so big that its activities are perceived as threatening the viability of bitcoin itself.

“Cryp­tor­ag­narok: The Exis­ten­tial Threat to Bit­coin Its Boost­ers Said Was Impos­si­ble Is Now at Hand” by Christo­pher Mims; Quartz; 1/9/2014.

A dooms­day sce­nario that has long been dis­missed by bitcoin’s biggest boost­ers is now a clear and present dan­gerAt 3am ET this morn­ing, a sin­gle bit­coin min­ing col­lec­tive known as Ghash.io reached 45% of the com­put­ing power of all global bit­coin min­ers, just six points short of the 51% that would be required to break bit­coin by arbi­trar­ily manip­u­lat­ing the record of future trans­ac­tions upon which it rests. The result could be, at min­i­mum, “dou­ble spend­ing” of exist­ing bit­coins, which would ren­der the cur­rency effec­tively unusable.

To put this in con­text: Imag­ine that tomor­row, a sin­gle cor­po­rate entity gained the abil­ity to clone all of its dol­lars, and then imme­di­ately went on an asset buy­ing spree. To say that it would under­mine trust in the US dol­lar would be an under­state­ment. That’s what could hap­pen to bitcoin.

Update: Ghash.io has issued a press release on the poten­tial for it to launch an attack on bit­coin. The min­ing pool says it is tak­ing steps to make sure that Ghash.io never reaches 51% of the world’s bit­coin min­ing capac­ity, “as it will do seri­ous dam­age to the Bit­coin com­mu­nity, of which we are part of.” Ghash.io also said that they will tem­porar­ily stop accept­ing new inde­pen­dent bit­coin min­ers in their pool, and will allow exist­ing mem­bers of Ghash.io to mine bit­coins through other pools.

Update 2: Bit­coin mag­a­zine has weighed in, assert­ing that the suc­cess of Ghash.io is indica­tive of a larger prob­lem in bit­coin: nearly unprece­dented cen­tral­iza­tion of the min­ing upon which the currency’s secu­rity depends.

Update 3: Bit­coin entre­pre­neur Henry Brade weighs in on Ghash.io’s pro­posed solu­tion, and finds it want­ing. Quartz’s Ritchie King weighs in: No, bit­coin isn’t about to be taken over by a mas­sive car­tel.

Pop­u­lar dis­cus­sion boards devoted to bit­coin are freak­ing out about this pos­si­bil­ity, and every post on the home­page of, for exam­ple, the por­tion of Red­dit devoted to bit­coin is cur­rently devoted to the dan­ger­ous rise of Ghash.io . . . .

4b. “Pterrafractyl” notes another factor that may very well promote concentration of bitcoin ownership: “The CEO of But­ter­fly Labs makes an impor­tant point: As the rewards for bit­coin min­ing drop off to zero (by ~2040), the trans­ac­tion fees are going to be the only thing financ­ing bit­coin min­ing. And at that point, “min­ers will grav­i­tate towards trans­ac­tions with higher fees attached to them, which will be processed before those with smaller rewards”. How that ten­sion between cheap trans­ac­tions and the profit-maximizing desire of cor­po­rate min­ers gets resolved is a pretty big ‘unknown’ for a trans­ac­tion plat­form that’s mak­ing low-transaction fees a key sell­ing point. Espe­cially when the sys­tem is also set up to incen­tivize the cre­ation of min­ing car­tels that could col­lude to ensure high wait times for lower fees. The much-feared “51% attack” isn’t the only threat posed by a bit­coin oligopoly.”

Note that 4–yes 4–bitcoin mining consortia control 75 percent of the bitcoin market!

“The Future of Bit­coin: Cor­po­rate Mines and Net­work Peer­ing?” by Rich Miller; Data Cen­ter Knowl­ege; 1/24/2014.

What’s the end game of the Bit­coin min­ing arms race? Min­ers are build­ing ever-more pow­er­ful hard­ware and larger data cen­ters, try­ing to stay a step ahead of their rivals and keep pace with “the dif­fi­culty” – algo­rithm changes that make it pro­gres­sively harder to earn new bitcoins.

Some Bit­coin watch­ers believe the net­work will ulti­mately shift from min­ing for new coins to a model based on trans­ac­tion fees, which could accel­er­ate a shift of Bit­coin hard­ware into data cen­ters and the cre­ation of peer­ing net­works to man­age fees, just as cur­rent peer­ing agree­ments seek to reduce net­work tran­sit costs.

The long-term out­look for Bit­coin is impor­tant for the data cen­ter indus­try, where some leases can run from three to 10 years. The emer­gence of Bit­coin has seen the cryp­tocur­rency soar in value, accom­pa­nied by rapid advances in the hard­ware required to suc­cess­fully cap­ture new coins. The Bit­coin pro­to­col is designed so that these rewards will become harder to earn and will shrink over time. That means that the eco­nom­ics and busi­ness mod­els of bit­coin could shift over the life of a data cen­ter lease.

Fees and the Future

Over the past two years, gain­ing block rewards has become pro­gres­sively more dif­fi­cult, forc­ing min­ers to upgrade their hard­ware from CPUs to GPUs and then FPGAs (Field Pro­gram­ma­ble Gate Arrays) and finally spe­cial­ized ASICs (Appli­ca­tion Spe­cific Inte­grated Cir­cuits) opti­mized for bit­coin data-crunching. As the hard­ware has become more expen­sive, many enthu­si­asts have been priced out of the min­ing market.

Prince­ton Uni­ver­sity com­puter sci­ence researchers Ed Fel­ten, Joshua Kroll and Ian Davey have stud­ied the bit­coin reward sys­tem and fore­see a shift ahead.

“At present, the min­ing reward seems to be large enough, but under the cur­rent rules of Bit­coin the reward for min­ing will fall expo­nen­tially with time,” the Prince­ton team wrote in a recent paper on Bit­coin eco­nom­ics“Trans­ac­tion fees, which are vol­un­tary under the cur­rent rules, can­not make up the dif­fer­ence. The only way to pre­serve the system’s health will be to change the rules, most likely by either main­tain­ing min­ing rewards at a higher level than orig­i­nally envi­sioned, or mak­ing trans­ac­tion fees manda­tory. The choice is likely to drive polit­i­cal dis­putes within the Bit­coin community.”

Researchers from Microsoft and Cor­nell have also explored this sce­narioand out­lined refine­ments that would be needed to make incen­tives work in a shift to trans­ac­tion fees.

The bit­coin com­mu­nity is “debat­ing that (shift),” said Emmanuel Obio­dun, founder and CEO of Cloud­hash­ing, which leases com­put­ing power to cus­tomers. “It’s becom­ing more expen­sive to mine coins. But trans­ac­tion fees are very low right now, and have very small profit mar­gins. For now, there’s still a lot of upside in bit­coin mining.”

One Vision of a Fee-Based Future

The future of min­ing was a hot topic at the Inside Bit­coins con­fer­ence in Las Vegas in Decem­ber, where Josh Zer­lan, Chief Oper­at­ing Offi­cer of But­ter­fly Labs, gave a pre­sen­ta­tion on the future role of trans­ac­tion fees.

“In the future, there will not be much incen­tive to mine (for block rewards),” said Zer­lan. As rewards become harder to achieve and the growth of bit­coin leads to more trans­ac­tions, Zer­lan says that fees will need to increase to ensure that min­ers con­tinue to sup­port the net­work. As this hap­pens, min­ers will grav­i­tate towards trans­ac­tions with higher fees attached to them, which will be processed before those with smaller rewards.

If bit­coin gains wide accep­tance as a pay­ment plat­form or even as a cur­rency, the growth of fees will present sev­eral chal­lenges, Zer­lan said.

“If you’re a large com­pany, you have a prob­lem (with pay­ing trans­ac­tion fees),” he said. “The solu­tion is to main­tain a large min­ing farm in your data cen­ter to process your own trans­ac­tions for free, and your cus­tomers’ trans­ac­tions for free. You can also earn extra income to pro­cess­ing oth­ers transactions.”

Dis­trib­uted vs. Centralized

As we noted yes­ter­day, a shift to pro­fes­sional data cen­ters and cloud com­put­ing plat­forms would make the bit­coin net­work more effi­cient. But there’s also a built-in cul­tural chal­lenge: much of the bit­coin com­mu­nity remains wary of efforts to cen­tral­ize the network.

Ear­lier this month bit­coin­ers raised alarms when Chi­nese min­ing pool GHash.io was gain­ing 45 per­cent of new coins – approach­ing the level where a sin­gle par­tic­i­pant could under­mine the net­work by con­trol­ling a major­ity of its power (known as a “51 per­cent attack”).

The grow­ing power of min­ing pools – con­sor­tiums orga­nized to com­bine the min­ing power of indi­vid­u­als – has been a con­cern for some time. This week the four largest min­ing pools (GHash.io, BTC Guild, Eligius and Slush) held a com­bined mar­ket share of 75 per­cent of the network’s power, as mea­sured by com­put­ing hashrate.

“We’ve already cen­tral­ized the min­ing sys­tem,” said Zer­lan. “There are already large pools to con­trol a large per­cent­age of the min­ing. Cen­tral­iza­tion of min­ing will be a good thing.”

Zer­land believes the Bit­coin com­mu­nity can adapt to the trade­offs of a more cen­tral­ized infra­struc­ture. “It cre­ates a more desir­able tar­get, but I think that’s some­thing we have to man­age,” he said.

5. Because bitcoin mining requires the long-term running of super computers, which in turn, require the use of massive amounts of electricity. As a result the carbon footprint of serious mining is alarming and, if perpetuated over a period of time, will exacerbate the “greenhouse effect.”

“Bit­coin Has a Dark Side: Its Car­bon Foot­print” by Michael Car­ney; Pan­do­Daily; 12/16/2013.

Bit­coin may be mak­ing a few peo­ple wealthy, but it’s killing us all. The crypto-currency that’s caught the world by storm has a dark side: its car­bon footprint.

At today’s value of roughly $1,000 per bit­coin, the elec­tric­ity con­sumed by the bit­coin min­ing ecosys­tem has an esti­mated car­bon foot­print – or total green­house gas emis­sions – of 8.25 mega­tonnes (8,250,000 tonnes) of CO2 per year, accord­ing to research by Bitcarbon.orgThat’s 0.03 per­cent of the world’s total green­house gas out­put, or equiv­a­lent to that of the nation of Cyprus. If bitcoin’s value reaches $100,000, that impact will reach 3 per­cent of the world’s total, or that of Ger­many. At $1 mil­lion – which seems far­ci­cal but which may not be out of the realm of pos­si­bil­ity given the arti­fi­cially lim­ited bit­coin sup­ply – this impact rises to 8.25 giga­tonnes, or 30 per­cent of today’s global out­put, and equiv­a­lent to that of China and Japan com­bined.

Bit­coins aren’t mined from the earth’s crust like most phys­i­cal com­modi­ties – although at least that leaves tan­gi­ble evi­dence of its envi­ron­men­tal impact. Rather, they are “mined” by com­put­ers solv­ing a set of com­pli­cated com­pu­ta­tional prob­lems. These prob­lems are designed to get more dif­fi­cult over time, until the year 2140 when the 21 mil­lionth (and final) bit­coin is mined. Early in bitcoin’s exis­tence, it was fea­si­ble to run a suc­cess­ful min­ing oper­a­tion with a stan­dard PC. Now the task requires cus­tom min­ing rigs that can run orders of mag­ni­tude more processes per second. . . .

6. Paul Krugman notes that bitcoin mining and the gold standard–termed by John Maynard Keynes “a barbaric relic”–have similar characteristics.

Edward Snowden is an advocate of returning to the gold standard, something that would devastate the global economy.

We are seeing an increasing degree of concurrence between the milieu of Edward Snowden. Like gold bugs, Snowden political idol Ron Paul, the Ludwig von Mises Institute and Snowden himself, the bitcoin advocates exist in the perpetual fear of hyperinflation, a reality that has failed to materialize and is historically rare.

“Bits and Barbarism” by Paul Krugman; The New York Times; 12/22/2013.

. . . . The second money pit is a lot stranger: the Bitcoin mine in Reykjanesbaer, Iceland. Bitcoin is a digital currency that has value because … well, it’s hard to say exactly why, but for the time being at least people are willing to buy it because they believe other people will be willing to buy it. It is, by design, a kind of virtual gold. And like gold, it can be mined: you can create new bitcoins, but only by solving very complex mathematical problems that require both a lot of computing power and a lot of electricity to run the computers.

Hence the location in Iceland, which has cheap electricity from hydropower and an abundance of cold air to cool those furiously churning machines. Even so, a lot of real resources are being used to create virtual objects with no clear use.

The third money pit is hypothetical. Back in 1936 the economist John Maynard Keynes argued that increased government spending was needed to restore full employment. But then, as now, there was strong political resistance to any such proposal. So Keynes whimsically suggested an alternative: have the government bury bottles full of cash in disused coal mines, and let the private sector spend its own money to dig the cash back up. It would be better, he agreed, to have the government build roads, ports and other useful things — but even perfectly useless spending would give the economy a much-needed boost.

Clever stuff — but Keynes wasn’t finished. He went on to point out that the real-life activity of gold mining was a lot like his thought experiment. Gold miners were, after all, going to great lengths to dig cash out of the ground, even though unlimited amounts of cash could be created at essentially no cost with the printing press. And no sooner was gold dug up than much of it was buried again, in places like the gold vault of the Federal Reserve Bank of New York, where hundreds of thousands of gold bars sit, doing nothing in particular.

Keynes would, I think, have been sardonically amused to learn how little has changed in the past three generations. Public spending to fight unemployment is still anathema; miners are still spoiling the landscape to add to idle hoards of gold. (Keynes dubbed the gold standard a “barbarous relic.”) Bitcoin just adds to the joke. Gold, after all, has at least some real uses, e.g., to fill cavities; but now we’re burning up resources to create “virtual gold” that consists of nothing but strings of digits.

I suspect, however, that Adam Smith would have been dismayed.

Smith is often treated as a conservative patron saint, and he did indeed make the original case for free markets. It’s less often mentioned, however, that he also argued strongly for bank regulation — and that he offered a classic paean to the virtues of paper currency. Money, he understood, was a way to facilitate commerce, not a source of national prosperity — and paper money, he argued, allowed commerce to proceed without tying up much of a nation’s wealth in a “dead stock” of silver and gold.

So why are we tearing up the highlands of Papua New Guinea to add to our dead stock of gold and, even more bizarrely, running powerful computers 24/7 to add to a dead stock of digits?

Talk to gold bugs and they’ll tell you that paper money comes from governments, which can’t be trusted not to debase their currencies. The odd thing, however, is that for all the talk of currency debasement, such debasement is getting very hard to find. It’s not just that after years of dire warnings about runaway inflation, inflation in advanced countries is clearly too low, not too high. Even if you take a global perspective, episodes of really high inflation have become rare. Still, hyperinflation hype springs eternal.

Bitcoin seems to derive its appeal from more or less the same sources, plus the added sense that it’s high-tech and algorithmic, so it must be the wave of the future.

But don’t let the fancy trappings fool you: What’s really happening is a determined march to the days when money meant stuff you could jingle in your purse. In tropics and tundra alike, we are for some reason digging our way back to the 17th century.

7. 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.

The ECB (Euro­pean Cen­tral Bank) has pro­duced the first offi­cial cen­tral bank study of the decen­tral­ized cryp­to­graphic money known as bit­coin, Vir­tual Cur­rency Schemes. 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. 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.

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 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. 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 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’

8. Ron Paul’s enthu­si­as­tic views on bit­coin:

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

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. . . .

9. Julian Assange is a big advocate of bitcoin. The WikiLeaks milieu is inextricably linked with the Snowden operation.

“WikiLeaks’ Julian Assange Schools Google’s Eric Schmidt on Bitcoin” by Michael del Castillo; Upstart Business Journal; 4/19/2013.

In June of 2011 the founder of WikiLeaks, Julian Assange, was holed up in Norfolk, England, awaiting word on his possible extradition to Sweden for rape charges, which he denies. While there he took a rather interesting house guest, Google Chairman Eric Schmidt, who interviewed Assange on tape for his forthcoming book The New Digital Age, due to be published, April 23.

WikiLeaks today published the “majority” of a “verbatim” transcript of the five-hour-long conversation, including the first time Schmidt ever heard of Bitcoin, and an ensuing lesson from Assange that we would have loved to have seen for ourselves.

Incidentally the “cypherpunks” Assange said are at the genesis of Bitcoin, are a group he himself is often associated with, and also happens to be the name of his book.

The actual origin of Bitcoin is still quite a mystery, with its mysterious inventor, Satoshi Nakamoto, still unknown, though the New Yorker claims to know the person’s identity. . . .
. . . . Assange:

OK, Bitcoin is something that evolved out of the cypherpunks a couple of years ago, and it is an alternative… it is a stateless currency.

And very important, actually. It has a few problems. But its innovations exceed its problems. Now there has been innovations along these lines in many different paths of digital currencies, anonymous, untraceable etc. People have been experimenting with over the past 20 years. The Bitcoin actually has the balance and incentives right, and that is why it is starting to take off. The different combination of these things. No central nodes. It is all point to point. One does not need to trust any central mint. If we look at traditional currencies such as gold, we can see that they have sort of interesting properties that make them valuable as a medium of exchange. Gold is divisible, it is easy to chop up, actually out of all metals it is the easiest to chop up into fine segments. You can test relatively easily whether it is true or whether it is fake. You can take chopped up segments and you can put them back together by melting the gold. So that is what makes it a good medium of exchange and it is also a good medium of value store, because you can take it and put it in the ground and it is not going to decay like apples or steaks. . . . .

10a. One of the most prominent “bitcoiners” has been charged with money laundering in connection with the Silk Road conspiracy. Charlie Shrem’s Bitcoin Foundation received backing from the Winkelvoss twins, who also helped start Facebook.

“Prominent Bitcoin Entrepreneur Charged with Money Laundering” by Emily Flitter; Reuters; 1/27/2014. 

The vice chairman of the Bitcoin Foundation, a trade group promoting the adoption of the digital currency, has been charged by U.S. prosecutors with conspiring to commit money laundering by helping to funnel cash to illicit online drugs bazaar Silk Road.

Charlie Shrem, who had financial backing from the Winklevoss twins and is well known as one of the bitcoin’s biggest global promoters, was arrested on Sunday at John. F. Kennedy International Airport in New York, the U.S. Attorney’s Office in Manhattan said on Monday.

Shrem, who was also charged with operating an unlicensed money transmitting business, appeared in U.S. District Court in Manhattan on Monday and was released on $1 million bond. . . .

10b. Ron Paul/Ludwig von Mises devotee Ross Ulbricht is the apparent kingpin of the Silk Road network. His brand of libertarianism would subject people to some very “unliberating” things, such as getting their bank accounts hacked.

In another apparent dovetailing of the Snowden/bitcoin stories, it has been theorized that NSA may have been involved in the takedown of Ulbricht. One wonders if “team Snowden” may help to obtain the freedom of Citizen Ulbricht.

“Eagle Scout. Idealist. Drug Trafficker? by David Segal; The New York Times; 1/19/2013.

. . . . What few friends realized is where his philosophical quest had brought him. At Penn State, he was becoming a dedicated libertarian. He joined the school’s Libertarian Club and wore a Ron Paul for President shirt to classes. Mr. Ulbricht was quoted in the school’s newspaper, The Daily Collegian, saying of Mr. Paul, “there’s a lot to learn from him and his message of what it means to be a U.S. citizen and what it means to be a free individual.”

. . . . By the time Mr. Ulbricht left Penn State, his views had taken on a vehemently anti-tax tone. A friend in Austin said Mr. Ulbricht’s politics at the time were more “hard core” than his own. . . .

. . . . Ross Ulbricht and Dread Pirate Roberts have other similarities, including a fondness for the Ludwig von Mises Institute, part of the Austrian School of Economics, which was celebrated by Mr. Ulbricht on his Google+ page and by D.P.R. in Silk Road pep talks. . . .

. . . . What is unclear is how the feds knew where the servers were. Presumably, they were rented in some faraway corners of the globe — Iceland, Latvia and Romania are likely, according to experts who have studied the I.P. addresses. But the official vagueness has provoked speculation in academic circles and among security specialists. Was the National Security Agency involved? Did this process involve breaking laws, or violating constitutional rights?

That issue will be at the heart of Ross Ulbricht’s defense strategy, says Joshua L. Dratel, his lawyer, whose clients include a Guantánamo detainee.“It’s called the fruit-of-the-poisonous-tree doctrine,” Mr. Dratel explained. “If you think of the acquisitions of evidence as a chain, if you find one bad link, everything on the other side of that link is suppressible.” . . . .

. . . . A “services” section with 159 offerings included a tutorial on hacking automated teller machines. More than 800 listings offered “digital goods,” such as hacked Netflix accounts, and 169 listings in “forgeries,” including driver’s licenses and car insurance records.

Anyone with minimal computer literacy could access this superstore of criminal mischief. Users needed only to install software for Tor, a network that hides I.P. addresses and bundles communications in layers of encryption. . . .

11. In 764, we highlighted R. Cody Wilson, a bitcoin advocate who explicitly endorses the anti-democratic philosophy of Ludwig von Mises disciple Hans Hermann-Hoppe. (Hoppe, like Palantir CEO Alex Karp, has been heavily influenced by mentor Juergen Habermas.)

R. Cody Wilson is working on something called “Dark Wallet,” which will theoretically enable the circumventing of monitoring of bitcoin transactions. Ultimately, this will further the interests of intelligence services, terrorist milieux and malefactors of any kind.

In past programs, we have visited with the brilliant Lucy Komisar, who has done work on offshore. Dark Wallet, in particular, and bitcoin in general, is viewed by its proponents as a kind of “virtual offshoring.”

“Dark Wal­let Aims To Be The Anarchist’s Bit­coin App Of Choice” by Andy Green­berg; Forbes; 10/31/2013.

Bit­coin may be the world’s first decen­tral­ized, state­less dig­i­tal cur­rency. But in the eyes of at least one group of anar­chists, the Bit­coin com­mu­nity has been get­ting a lit­tle too cozy with the estab­lish­ment. And they want to bring the cryp­tocur­rency back to its anti-regulatory roots.

On Thurs­day a group of lib­er­tar­ian Bit­coin devel­op­ers call­ing them­selves Unsys­tem launched a crowd­fund­ing cam­paign to raise money to code a new Bit­coin “wal­let” they’re call­ing Dark Wal­let. Like any Bit­coin wal­let, Dark Wal­let will store a user’s Bit­coins and inter­act with the Bit­coin net­work, allow­ing the owner to spend and receive the cur­rency. But unlike other wal­lets, Dark Wal­let is designed specif­i­cally to pre­serve and even enhance the prop­er­ties of Bit­coin that make it a poten­tially anony­mous, tough-to-trace coin of the Inter­net underground.

“If Bit­coin rep­re­sents any­thing to us, it’s the abil­ity to for­bid the gov­ern­ment,” says Cody Wil­son, Dark Wallet’s project man­ager. (If Wilson’s name sounds famil­iar, he’s also the cre­ator of the world’s first fully 3D-printable gun, another project designed to show how tech­nol­ogy can under­mine gov­ern­ment reg­u­la­tion.)“Dark­Wal­let is your way of lock­ing out the State, flip­ping the chan­nel to one beyond observation.”

Bit­coin has already served as a pow­er­ful tool for the so-called “dark web”– the law­less, anonymity-enabled cor­ners of the Inter­net alluded to in some parts of Wilson’s video. Bitcoin’s most recent moment in the spot­light came with the shut­down of the Silk Road, the Bitcoin-based anony­mous online mar­ket­place for ille­gal drugs that gen­er­ated hun­dreds of mil­lions of dol­lars worth of sales in its 2.5 years online; The FBI seized another $28.5 mil­lion in stored bit­coins believed to belong to the site’s now-arrested alleged owner 29-year-old Ross Ulbricht just last week.

Bit­coin enabled the Silk Road by act­ing as a trust­wor­thy form of pay­ment that didn’t require any real names. Though all Bit­coin trans­ac­tions are pub­licly vis­i­ble within the Bit­coin net­work, they’re only linked to pseu­do­nyms, and users can anonymize the coins fur­ther by send­ing them through a Bit­coin laun­dry that mixes up users’ bit­coins with those of other users to make them harder to trace; Silk Road auto­mat­i­cally mixed the coins of all its users.

But Dark Wal­let would go fur­ther towards mak­ing Bit­coin a truly untrace­able form of dig­i­tal cash. The wal­let cre­ators plan to include a fea­ture called “trust­less mix­ing” accord­ing to Amir Taaki, one of Unsystem’s founders and a long­time Bit­coin devel­oper. Rather than hand a user’s bit­coins off to a typ­i­cal Bit­coin laun­dry ser­vice that must be trusted to send back another more anony­mous bit­coin, trust­less mix­ing bun­dles together a col­lec­tion of Bit­coin trans­ac­tions and simul­ta­ne­ously sends them to new Bit­coin addresses that are also con­trolled by the same users; Since no one watch­ing the trans­ac­tions can see whose coins went where, the tech­nique erases any ownership-identifying traces on the coins, while also avoid­ing the prob­lem of trust­ing a third-party ser­vice to suf­fi­ciently mix the coins and not to sim­ply steal them.

The soft­ware, which is intended to be a browser plug-in for Chrome and Fire­fox, would auto­mat­i­cally coor­di­nate the process with other users over the anonymity ser­vice Tor or sim­i­lar ser­vices to fur­ther hide users’ iden­ti­ties. The process could even be reduced to an anonymiz­ing “tog­gle switch” that would enable users to laun­der their coins on com­mand, says Taaki. “You buy the bit­coins in a nor­mal exchange, switch this on, and it slowly anonymizes them for you in the back­ground,” he says.

Dark Wal­let would also aim to solve another poten­tial pri­vacy prob­lem with Bit­coin that arises from wal­let soft­ware “announc­ing” trans­ac­tions to the Bit­coin net­work from a tell-tale IP address. By broad­cast­ing the mes­sages from a proxy address or over the Tor net­work, Taaki says that Dark Wal­let could pre­vent any­one from track­ing a user based on those trans­ac­tion announcements.

Wil­son and Taaki see Dark Wal­let in part as an answer to Bitcoin’s increas­ing adop­tion by users and devel­op­ers with more main­stream, government-friendly views. In the video above and in their writeup of Dark Wal­let on Unsystem’s web­site, they directly attack the Bit­coin Foun­da­tion, a non-profit group that has sought to engage with gov­ern­ments and use lob­by­ing tac­tics to com­pro­mise on poten­tial reg­u­la­tion of Bit­coin. “Many promi­nent Bit­coin devel­op­ers are actively in col­lu­sion with mem­bers of law enforce­ment and seek­ing approval from gov­ern­ment leg­is­la­tors,” reads one por­tion of the Dark Wal­let text. “We believe this is not in Bit­coin user’s self inter­est, and instead serves wealthy busi­ness inter­ests that make up the self-titled Bit­coin Foundation.” . . . . 

12. 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 is research­ing the devel­op­ment 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.

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

Stevens Le Blond, 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, 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. . . . .

13. We have dis­cussed the Max Planck insti­tute in past posts and pro­grams. (It was orig­i­nally called the Kaiser Wil­helm Insti­tute and was funded by the Rock­e­feller Foun­da­tion, in con­sid­er­able mea­sure.) A major epi­cen­ter of Nazi sci­ence, it was the aca­d­e­mic foun­da­tion for Josef Mengele’s ghastly Auschwitz exper­i­ments on twins.

In the 1950 Madrid cir­cu­lar let­ter crafted by the Nazi gov­ern­ment in exile, we find rein­forc­ing argu­ment that the Max Planck Insti­tute remained an epi­cen­ter for sci­en­tific and tech­no­log­i­cal devel­op­ment for the Under­ground Reich. The entire text of the Madrid cir­cu­lar is avail­able on pp. 209–232 of Ger­many Plots with the Krem­lin.

We note that Juergen Habermas, mentor to both Hans Hermann-Hoppe and Palantir CEO Alex Karp was head of the Max Planck Institute for 12 years. We seriously doubt that any “anti-fascist” would be allowed to head such an institution.

Ger­many Plots with the Krem­lin by T.H. Tetens; Henry Schu­man [HC]; 1953; p. 231.

. . . . Though we are pow­er­less at present, we have nonethe­less never per­mit­ted our­selves to be dis­armed spir­i­tu­ally and sci­en­tif­i­cally. Ger­man schol­ars are work­ing unremit­tingly in Ger­many as well as abroad on great sci­en­tific plans for the future. Favor­able cir­cum­stances enabled us to keep alive the great research orga­ni­za­tion of the Kaiser Wil­helm Insti­tute through a change of name. First-class sci­en­tists are work­ing in the fields of inter­plan­e­tary nav­i­ga­tion (“Raum­schiff fahrt”), chem­istry and on cos­mic rays. Our sci­en­tists, unham­pered in their work, have suf­fi­cient time and are plan­ning day and night for Germany’s future. It is the Ger­man spirit (“Geist”) that cre­ates mod­ern weapons and that will bring sur­pris­ing changes in the present rela­tion­ship of forces. . . .




15 comments for “FTR #770 Bit[coin]burg, Part 3: Fool’s Gold”

  1. side 1 & 2 are the same (side 2)

    Posted by TC | February 2, 2014, 5:27 am
  2. @TC,John, Tom–

    OK, the error is fixed. Both sides 1 and 2 of 770 are good to go.

    Thanks! (Haste Maketh Waste!)



    Posted by Dave Emory | February 2, 2014, 11:31 am
  3. There’s a ‘civil war’ of sorts taking place within the bitcoin community between the Wall Street-friendly folks that want to turn it into a regulated, fully-legal entity vs the crypto-anarchists and Libertarians that form the base of the bitcoin and want bitcoin to liberate humanity from the tyranny of central banking and fiat currency. Its the suits vs the kooks! So something worth watching once the smoke clears is what happens to the concentrated bitcoin holdings of all those big, early investors that hold a huge % of the total bitcoins that will ever exists, many of whom are presumably hardcore philosophical backers of the Libertarian economics. If the suits end up winning and bitcoin turns its back on destiny could that be the event that finally encourages some selloffs by the concentrated core of quasi-anonymous bitcoin barons:

    Business Insider
    The Emerging Bitcoin Civil War
    Rob Wile

    Jan. 29, 2014, 5:32 PM

    A civil war is emerging between Bitcoin’s earliest and most libertarian adopters, and a more commercial wing seeking to embrace regulation as a means of legitimizing Bitcoin businesses.

    The divide came into focus this week with two key events events. One was a hearing on Bitcoin regulation by the New York Department Of Financial Services. The other was the arrest of BitInstant CEO Charlie Shrem on money laundering charges.

    Until the moment of his arrest, Shrem, 24 had been something of a darling in the Bitcoin venture capital community — the Winklevoss brothers were one of BitInstant’s earliest investors, and Shrem was scheduled to co-headline a Bitcoin conference in Miami this past weekend.

    But on the first day of hearings about the future of Bitcoin regulation convened this week by the New York Department of Financial Services, a panel of VCs were quick to disavow Shrem as an example of a more immature wing of Bitcoin. The Winklevoss twins said they were gratified the Department was discussing ways to help legitimize Bitcoin commerce. Their Bitcoin ETF is awaiting regulatory approval from the SEC.

    The division is not just about sheer dollar size. Appearing at the Tuesday hearing, Fred Wilson — whose Union Square Ventures spearheaded a $5 million investment round in Bitcoin wallet firm Coinbase warned against anything but the lightest-touch regulations. He compared the dangers Bitcoin startups would face to what happened to early-stage music streaming platforms, which were inundated with lawsuits from record labels. Should Bitcoin startups be subject to similar legal scrutiny from financial regulators, he said, they would be snuffed out before they even had a chance to bloom.

    Wilson’s views were countered by no other than Fred Ehrsam, Coinbase’s co-founder. He told DFS regulators Wednesday, “Although I love Fred Wilson, there’s probably some minimal requirements and procedures that should be put in place if you’re facilitating that kind of exchange.”

    Perhaps it is not surprising that this ultra-libertarian faction was not represented at this week’s hearings.

    But it could be seen at the NYC Bitcoin Center on Broad Street in Manhattan — where a follow-up cocktail party was held Tuesday to discuss “fallout” from the first day’s hearing — and online, where this faction railed from afar against regulators.

    These individuals may seem extreme, but, until recently, they represented the core of Bitcoin evangelism.

    But their influence seems to be fading. Barry Silbert’s Bitcoin Investment Trust is now worth 10s of millions of dollars. In an email Wednesday, he said he agreed the crypto-anarchists who dominated the digital currencies earliest incarnations were getting left behind.

    “There are certainly a handful of folks that are hardcore libertarians (some anarchists) that believe that bitcoin should be completely unregulated, but I believe they are in the minority and, as a percentage of bitcoin believers, is shrinking very quickly. I respect their viewpoint, but unfortunately, don’t see how there vision is viable in today’s society.”

    On Wednesday, New York District Attorney Cyrus Vance Jr. said the greatest concern about digital currencies among law enforcement was anonymity. In a Bitcoin transaction, all transactions are essentially conducted between e-addresses that lack any kind of user identification.

    “The difficulty, when criminal activity is involved, is for investigators to identity how the money is moved where and for what purpose.,” he said.

    But tinkering with Bitcoin’s anonymity would seem to strike at the heart of another one of Bitcoin’s core elements — as seen in the following Tweet:

    But Jeremy Allaire, founder and CEO of Circle, a company that develops digital currency products, showed little concern that regulators could start scraping away at Bitcoin’s anonymity element. Asked Tuesday on the panel whether new regulations affecting Bitcoin’s anonymity would undermine the popularity of the currency, Allaire replied, “That depends on your definition of the essence of Bitcoin.”

    As Bitcoin continues to emerge, this fight over Bitcoin’s essence, and how much of a role government should play, will only get more intense.

    Don’t forget, in the cryptocurrency civil war, you don’t have to choose between the suits and the kooks. You can, and should, choose the underdog:

    Business Insider
    Dogecoin Just Solved A Problem That Bitcoin Is Going To Face
    Rob Wile

    Feb. 4, 2014, 4:58 PM

    The price of Dogecoin, the world’s third most traded cyrptocurrency, is down 9% this afternoon.

    And that’s a great thing.

    Because the update from Dogecoin’s creators causing the temporary price drop will ultimately ensure its longevity going forward.

    In a message on Github this weekend, Sydney-based co-creator Jackson Palmer announced the amount of Dogecoin would not be fixed, meaning it’s possible for an infinite amount of Dogecoin to be created. (This was first spotted by Ars Technica’s Cyrus Favriar). Every new “block” of Dogecoin that gets mined will yield 10,000 units of the currency.

    “This will help maintain mining and stabilize the number of coins in circulation (considering lost wallets and various other ways coins may be destroyed) at 100 billion,” Palmer wrote.

    This is close to how a normal fiat currency like the U.S. dollar works. Like the greenback, Dogecoin will now better be able to respond to increasing demand, as well as potential damages like those outlined by Palmer. It also gives incentives for miners to keep operating, thus helping keep the network more secure — as in Bitcoin, “mining” Dogecoin also serves to confirm the transactions taking place on the digital currency’s master exchange ledger.

    These all happen to be problems Bitcoin currently faces. Bitcoin has a early adoption and miner-arms-race regime. Those who got in earliest, or can mine the most, enjoy lopsided control over the Bitcoin market. We’ve discussed this elsewhere. The result is that they are crossing their fingers that Bitcoin adoption will become widespread, thus helping drive up value. It’s hard to tell what’s driving what, but the price has settled at $800 for a couple months now. That’s a lot to pay for a single Bitcoin for someone just entering the market.

    Secondly, Bitcoin is already approaching the point where mega-miners will have to begin charging fees to continue mining. As we discussed above, mining helps keep the network secure, so the cost of security is going to increase. By creating a steady rate of inflation, Dogecoin can keep security cheap.

    As GitHub user Chkwok writes, the new decision will allow Dogecoin to reach a much wider audience:

    The ones making the most noise in the pro-deflation camp aren’t the ones we want to serve, if we’re to become the Internet’s currency, we’ll have to reach the mainstream users which don’t care about hoarding massive amounts of Ð for profit, the max 5% loss of value per year caused by inflation in the worst case or broken promises on a Bitcointalk thread. They care about having a currency where micropayments are properly implemented (without the insane fees and minimums PayPal & friends want) and tipping is effortless.”

    Dogecoin wins the cryptocurrency battles one superior meme at a time so it’ll be extra interesting to see what dumping deflation in the hope of cutting down long-term transaction fees does do Dogecoin’s meme-magic. Either way, it’s a long war.

    Posted by Pterrafractyl | February 5, 2014, 2:39 pm
  4. As the MtGox debacle is demonstrating, dangerous mistakes can be rather costly. But as the article below points out, technical mistakes like the MtGox bug are relatively easy to fix. There are bigger bugs in bitcoin and they aren’t simply coding errors

    Financial Times
    February 10, 2014 5:40 pm
    A dangerous mistake lies at Bitcoin’s intellectual core

    By Mark Williams
    We need the flexible and timely policy that cryptocurrencies rule out, says Mark Williams

    This weekend Russia became the latest country to crack down on Bitcoin. China has already banned its citizens from buying the “cryptocurrency”, which functions like cash in that it can be transferred anonymously from one person to another without the involvement of a central clearing house. Western regulators are also watching nervously.

    Real though these concerns are, they miss the far more serious threat from the economic ideas behind Bitcoin. An individual or group using the pseudonym Satoshi Nakamoto first described the workings of the virtual currency in 2008. The following year they released the first version of the software that issues Bitcoins and keeps track of when they are spent. By then, many had come to doubt whether dollars, euros and other government-issued currencies would hold their worth – and whether orthodox monetary institutions were the best way to promote prosperity. Bitcoin has gained a following partly because it seems to show us how we can do without money issued by the state. Currency could be nationless.

    Keeping money stable and trustworthy has traditionally been a function of national governments. By controlling the money supply and targeting interest rates, the authorities try to promote job creation and economic growth, while preventing runaway inflation that would cause the system of market exchange to break down. Calibrating monetary policy to the needs of the economy is an enormous undertaking. Central banks such as the US Federal Reserve employ hundreds of people to analyse economic data, chart the best path for monetary policy and explain their decisions to the public.

    Bitcoin is designed to take these jobs away from central bankers and give it to a simple algorithm instead. Since an autonomous computer system cannot react to complex data such as the unemployment rate or the level of output, Bitcoin uses a fixed formula to control the currency supply. New tokens will be minted at a predetermined rate until a ceiling is reached some time around 2140, after which supply of the currency will stop growing.

    Nakamoto’s writings seem to indicate that the motivation, at least in part, was the libertarian ideal of putting money creation beyond the reach of meddling central bankers. But this is a mistake. It ignores the ebbs and flow of economic cycles – a reckless approach that is the equivalent of a doctor giving penicillin to every patient without first checking whether they are suffering from infection, depression or mania.

    Some newer competitors to Bitcoin try to correct this, allowing the supply of the currency to grow indefinitely in an attempt to generate low but positive inflation. Others incorporate penalties for hoarding, which are intended to ensure that the tokens circulate more freely. While these are a marked improvement over Bitcoin, they all share the same flaw. The state of the economy does not depend solely on the pace of money creation but also on patterns of human behaviour that are too complex to capture in a simple rule.

    That is why we need central bankers who can adjust monetary policy to promote prosperity when people behave in unexpected ways. True, the experts in charge of monetary policy in the years before 2008 failed to prevent the financial crisis. But their decisive action in its aftermath is widely credited with preventing a depression. Without a massive expansion in the money supply, many countries may now be dealing with serious deflation. Yet it is precisely this kind of flexible and timely policy reaction that cryptocurrencies aim to rule out.

    If you check out the comments to this article there’s fun little history lesson in the comment written by David D. Friedman, the crypto-anarcho-capitalist son of famous unperson Milton Friedman and father of Seasteader-in-chief Patri Friedman. The comment is a reminder that the organized far-right and associated thinktanks have been pining for private currencies for quite a while:

    David D. Friedman | February 10 7:09pm | Permalink
    There are at least two assumptions implicit in this article, both dubious. The first is that we know enough to use control over monetary policy to smooth out business cycles, the second that government money issuers have the correct incentives to run a better monetary policy than private issuers.

    As some evidence against the first, it’s worth noting that of the three big depressions in U.S. history, two occurred as the result of government involvement (the collapse of the Second Bank of the United States, government created, in the 1830’s, the perverse monetary policy of the Federal Reserve in the 1930’s), one from external causes (the long depression at the end of the 19th century due to the rising value of gold). Where is the evidence that government “stabilization” policy has actually stabilized? The most recent case is the current long recession, “managed” by both activist fiscal and monetary policy–with very bad results. One can always claim it would have been worse without that policy, but insofar as what happened is evidence, it’s evidence against. Where is the evidence for?

    One characteristic of a good money is that its value is reasonably stable and predictable. So far as I know, all historical hyperinflations have occurred with government money, which casts some doubt on the author’s claim that preventing runaway inflations is the job of governments—it is governments that cause runaway inflations. That isn’t terribly surprising if you think about the incentives—a monopoly issuer can, for a while, fund expenditure without taxation via the printing press. A private issuer in a competitive market, on the other hand, has good reason to maintain the value of his money if he wants anyone to use it. And privately issued money is not some new idea—it existed in Scotland for 150 years, and has existed elsewhere.

    For a more detailed discussion of the argument in favor of private competing currencies over state monopoly currencies, see an old piece of mine, written long before Bitcoin:


    The cato piece about competing private currencies that David Friedman linked to was written in 1982. And sure enough, it’s only 32 years later and we’re almost living in cryptocurrency nirvana! Let’s hope his other paleo-libertarian futurist predictions are just as accurate.

    Posted by Pterrafractyl | February 11, 2014, 11:43 am
  5. And the hits keep coming! Bitcoin is now suffering a massive denial-of-service attack, but with a twist: Someone’s botnet is applying the same “transaction malleability” technique that brought down MtGox, but instead of just hitting MtGox this bot network is malforming all sorts of bitcoin transactions simultaneously! As a consequence, we’re learning that it wasn’t just MtGox that needed to update their software:

    Bitcoin Exchanges Under ‘Massive and Concerted Attack’
    Emily Spaven (@emilyspaven) | Published on February 11, 2014 at 17:50 GMT | Bitstamp, Exchanges, News

    A “massive and concerted attack” has been launched by a bot system on numerous bitcoin exchanges, Andreas Antonopoulos has revealed.

    This has lead to popular exchange Bitstamp putting a temporary halt on all bitcoin withdrawals, and BTC-e announcing possible delays on transaction crediting.

    Antonopoulos, who is the chief security officer of Blockchain.info, said a DDoS attack is taking Bitcoin’s transaction malleability problem and applying it to many transactions in the network, simultaneously.

    “So as transactions are being created, malformed/parallel transactions are also being created so as to create a fog of confusion over the entire network, which then affects almost every single implementation out there,” he added.

    Antonopoulos went on to say that Blockchain.info’s implementation is not affected, but some exchanges have been affected – their internal accounting systems are gradually going out of sync with the network.

    He emphasised that this isn’t affecting withdrawals, because most exchanges are not processing them automatically.

    Mt. Gox is the exchange that has suffered the most over the past few days, due to a number of factors, said Antonopoulos. One problem is that it was using a custom client (not the core Bitcoin software), on top of that there is the DDoS attack, plus it was using an automated system to approve withdrawals.

    “This is not happening to other exchanges because they’re not stupid enough to issue withdrawals without checking them out first,” he explained.

    Antonopoulos said we will see a few exchanges suspend withdrawals temporarily while they re-work their accounting systems to ensure they are not confused by the attack.

    “It’s important to note no funds have been lost. Withdrawals have been halted to prevent funds from being lost or to prevent the balances from going out of sync,” he stressed.

    Industry action

    An industry-wide coordinated response has been put into action, with exchanges and core developers collaborating actively to attack the problem from multiple angles.

    Various other groups within the ecosystem, including the big mining pools, are working to stop the issue from propagating across the network.

    Bitcoin developer Jeff Garzik said the core bitcoin block chain consensus mechanism and payment system are continuing to work as before, and are not directly impacted by transaction malleability.

    He added: “Web wallets and other services that build services on top of bitcoin are reporting problems similar to MtGox, and are taking safety measures to ensure no fund loss, during this network disruption.

    “Yesterday’s statement must be revised: we will likely issue an update fixing two edge cases exposed by this attack.”

    Bitstamp has issued a statement explaining that it has temporarily halted BTC withdrawals. It begins:

    Bitstamp’s exchange software is extremely cautious concerning Bitcoin transactions. Currently it has suspended processing Bitcoin withdrawals due to inconsistent results reported by our bitcoind wallet, caused by a denial-of-service attack using transaction malleability to temporarily disrupt balance checking. As such, Bitcoin withdrawal processing will be suspended temporarily until a software fix is issued.

    The statement goes on to reveal that no funds have been lost, nor are any at risk.

    Don’t panic

    Antonopoulos was keen to stress that, although this is a serious attack, it doesn’t spell the end of bitcoin. He believes the DDoS attack will be “thwarted” and exchanges will be running as usual by Friday.

    “I expect things will go back to normal and the honey badger of money can continue showing its resilience,” he said.

    “The death of bitcoin has been prematurely announced so many times already that the obvious conclusion is that bitcoin is far more resilient than its critics would like to think. I am confident that in a few days, those who predicted the death of bitcoin will once again be proven wrong,” Antonopoulos concluded.

    So it doesn’t look like this latest attack is going to result in the actual loss of bitcoins like what took place on MtGox (because MtGox had an automated system that got tricked). But it does look like a number of bitcoin exchanges are going to be rendered unusable until they get this fixed, including major exchanges like Bitstamp. And who knows how many other kinds of bitcoin-related software will have to be updated too.

    The exchange operators are probably correct, however, that a fix shouldn’t be too hard to implement over time and that this doesn’t spell the doom of bitcoin. It’s just been a really really bad couple of weeks. But this latest denial of service attack sure is ominous coming just a day after the MtGox reminded the world that this vulnerability exists because it’s a reminder that bitcoin’s vulnerabilities aren’t limited to the the theoretical vulnerabilities inherent in its distributed architecture (like the 51% attack or selfish-miners attack). There’s also the vulnerabilities that might randomly arise simply through improper implementation of software that’s running on top of the bitcoin software.

    MtGox’s problems, and now Bitstamp’s problems, arose primarily due to flaws in their software and protocols. And the same could be true for any other exchange in the future or any other bitcoin app. You can defend against theoretical vulnerabilities but trying to identify and correct random bugs in future version of bitcoin-related software or just plain old human error isn’t really possible. This is why the irreversibility of bitcoin transactions could become a growing problem.

    So today’s attack is likely just another temporary annoyance for the bitcoin industry, but just imagine, in the future, if multiple popular bitcoin exchanges get hit by something causing bogus transactions but on a much larger scale. There’s no clear way to reverse an event like that so could something like that kill bitcoin? Pretty please?

    Posted by Pterrafractyl | February 11, 2014, 7:58 pm
  6. http://venturebeat.com/2014/02/12/new-jersey-slaps-mit-bitcoin-hackers-with-subpoena-and-theyre-fighting-back/view-all/

    New Jersey slaps MIT Bitcoin hackers with subpoena — and they’re fighting back
    February 12, 2014 10:02 AM
    Eric Blattberg

    The MIT students behind Bitcoin mining program Tidbit won the “most innovative” award at a recent hackathon.

    But they will soon face a ruling from another kind of judge: one employed by the state of New Jersey.

    In early December, a few weeks after the hackathon, the New Jersey division of consumer affairs issued a subpoena to 19-year-old Tidbit developer Jeremy Rubin. The subpoena demanded he turn over everything related to Tidbit: all versions of the source code, all Bitcoin wallets associated with Tidbit, all agreements and communications with third parties, the name and IP addresses of everyone who mined Bitcoins using Tidbit, and so on. It explicitly asked for “all documents and correspondence concerning all breaches of security and / or unauthorized access to computers” by Tidbit.

    (Disclosure: I’ve known Rubin for several years through mutual connections, though we’ve never maintained regular contact.)

    The student hackers bill Tidbit as an alternative to display advertising: With Tidbit, websites could let their visitors help them mine Bitcoins instead of serving up ads. While there are other remote mining solutions, Tidbit is the first project that seeks to replace advertising revenue with Bitcoin mining.

    New Jersey hasn’t accused Rubin or Tidbit of a crime, but the language in the subpoena reads much like the state’s computer fraud act, which carries some stiff penalties.

    Last year, New Jersey alleged that E-Sports Entertainment (ESEA), a competitive gaming company based in New York, embedded malicious code in its anti-cheating software. The software reportedly enabled ESEA to monitor 14,000 subscribers’ computers and also hijacked their computing power to mine Bitcoins worth around $3,750. Following New Jersey’s investigation, the company agreed to a $1 million settlement to avoid a prolonged legal battle.

    Several of the formal written requests posed to Rubin suggest the state believes Tidbit may similarly violate consumers’ rights.
    A proof of concept

    As for the information New Jersey is demanding from the team, it isn’t going to get the bulk of it, because most of it doesn’t exist.

    A bit about Bitcoin

    Bitcoin is a digital “cryptocurrency” that exists outside central financial institutions. Every Bitcoin transaction is automatically transcribed on the “block chain,” a shared public ledger supported by a worldwide network of Bitcoin miners. In exchange for their computational power, miners sometimes earn blocks of Bitcoin, although those chances grow slimmer as the network of Bitcoin miners grows.

    Tidbit remains a proof of concept: No one has ever used the program to mine Bitcoins or any other virtual currency.

    Although 98 percent of Tidbit’s infrastructure is in place, it isn’t ready for production use, according to the developers. They intentionally left out the final interaction (with Bitcoin pooling service P2Pool) while they worked on a set of terms and conditions. That’s why they were so surprised when New Jersey came knocking.

    “We were served right before finals,” Rubin told VentureBeat. “I think what was hardest is that I, and perhaps most MIT students, just want to build, make, and tinker towards a better future.”

    Faced with a daunting legal challenge, a stressed Rubin sought help from the Electronic Frontier Foundation (EFF). The technology law nonprofit readily agreed to assist Rubin and his peers.

    “These are college kids, and they’ve got this thing hanging over their heads,” Hanni Fakhoury, an EFF staff attorney representing Tidbit, told VentureBeat in an interview. “During the middle of their finals, they had to take time off to deal with the subpoena.”

    After negotiating a few extensions, Rubin’s lawyers filed an official complaint in late January. To quash the “unconstitutional” subpoena, Tidbit is taking New Jersey to court.
    Bitcoin mining through the browser
    Tidbit instructions

    Tidbit instructions

    Rubin and three classmates initially developed Tidbit in 48 hours for Node Knockout 2013, a Node.js programming competition held November 11 to 13. With a snippet of embedded code, Tidbit could enable websites to tap into visitors’ computers and borrow CPU cycles to mine Bitcoin. In exchange, the sites would remove display advertising for those who opt-in.

    “We’re hoping that Tidbit can completely replace ad revenue,” wrote Tidbit developer Oliver Song on the Node Knockout site late last year.

    Tidbit uses the Stratum protocol, which would enable websites to get paid based on total work contributed to the mining pool rather than total Bitcoins mined. But in its current form, Tidbit still isn’t very economical: If people ran Tidbit for a full day, they might each generate around a cent in revenue for a website, but their personal electricity costs would be much higher.

    To improve Tidbit’s performance, Song said the team wanted to integrate WebGL and run computations on the graphics processing unit (GPU). He also proposed support for cryptocurrencies that are easier to mine, like Litecoin. An early December email sent to the Tidbit mailing list (and obtained by VentureBeat) confirmed Litecoin support as a key goal for the beta release, which the team had planned for early February.

    New Jersey complicated those plans.

    Tidbit vs. New Jersey
    Rubin v. New Jersey

    With help from the EFF, Tidbit has moved to quash the subpoena in New Jersey state court. Tidbit’s representatives argue the state has no personal jurisdiction over Rubin because he’s not a New Jersey resident, and Tidbit has no direct involvement in New Jersey — the source code isn’t stored there, and it’s not targeting New Jersey consumers in any way. New Jersey has no right to regulate out-of-state Internet activity, said EFF staff attorney Hanni Fakhoury.

    “This is one of those rare circumstances where the common sense explanation also matches the legal argument,” he told us.

    Not surprisingly, New Jersey disagrees.

    “The state feels confident that its issuance of a subpoena in this matter will be found to be entirely legitimate, for reasons that will be detailed in its forthcoming opposition to Tidbit’s motion to quash,” Neal Buccino, a spokesperson for the New Jersey division of consumer affairs, told VentureBeat. He declined to comment further, citing the ongoing nature of the investigation.

    If the court upholds the subpoena, Rubin’s lawyers have requested he receive protection under the fifth amendment, which states the no one should be compelled to be a witness against himself in a criminal case.

    “He should be given immunity from criminal prosecution because the state is basically asking him to incriminate himself,” said Fakhoury.

    The court is expected to set a hearing for late February where the judge will make a determination. In the meantime, Rubin and his peers are trying to focus on their studies.

    “Dealing with this subpoena has put an undue amount of stress on me and my colleagues,” Rubin told us. “To have our progress be hindered by such a subpoena definitely hurt our team morale.”

    Rubin declined to comment on whether they intend to move forward with Tidbit. Fakhoury seems to think they’re interested in forming a startup, however.

    “I would imagine that they’d want to make this something more formalized,” he said. “After all, they won an award at the hackathon for a reason. But everything is going to basically be on hold until the subpoena is dealt with.”

    Fakhoury feels confident that Tidbit has “presented the best argument,” but noted that it’s impossible to predict a judge’s determination. “Any lawyer who will give you his chances is a bad lawyer,” he said.
    Phishing for evidence

    Even if the subpoena is dismissed, the Tidbit case represents a worrying disparity between the tech community and government regulators. With its investigation, New Jersey is trying to protect its populace, but Tidbit never even launched a functional product.

    The court should — and likely will — declare this subpoena unconstitutional and unenforceable, as Rubin’s lawyers have requested. But that won’t erase the time and resources it cost Rubin and his classmates, who should have been working toward that beta release, not battling a state regulator.

    The subpoena and accompanying interrogatories issued to Rubin demonstrate that the people working for New Jersey’s division of consumer affairs have made little effort to understand what Tidbit’s software actually does. With their broad demands, they’ve placed the burden of the investigation on some college students — and they’ve done so before the students’ software is even fully functional.

    Let’s hope the New Jersey court is smarter than the consumer affairs division.

    Posted by Vanfield | February 13, 2014, 9:42 am
  7. Awwwwwwww…Silk Road 2.0 just got hit with the same “transaction malleability” attack that took down MtGox and Bitstamp, losing all the coins in escrow. Or at least that’s what’s being claimed. Others aren’t so sure. Either way, Silk Road 2.0 just got looted

    Drug site Silk Road wiped out by Bitcoin glitch
    By Jose Pagliery @Jose_Pagliery February 14, 2014: 11:16 AM ET

    NEW YORK (CNNMoney)
    The revived online black market Silk Road says hackers took advantage of an ongoing Bitcoin glitch to steal $2.7 million from its customers.

    The underground website’s anonymous administrator told users Thursday evening that attackers had made off with all of the funds it held in escrow. Silk Road serves as a middleman between buyers and sellers, temporarily holding on to funds in its own accounts during a deal. Buyers put their money into Silk Road’s accounts, and sellers withdraw it.

    At the time of the attack, here were about 4,440 bitcoins in Silk Road’s escrow account, according to computer security researcher Nicholas Weaver.

    The news has shaken confidence in Bitcoin. Prices dropped sharply overnight, though they’ve since bounced back to about $660.

    Silk Road can only be accessed on the deep Web using Tor, a special program that hides your physical location. The FBI shut down Silk Road and arrested its alleged founder in October, but shortly thereafter, tech-savvy outlaws started Silk Road 2.0 in its place.

    It is primarily used to buy and sell drugs. Bitcoins are the only kind of currency accepted on the site, because they are traded electronically and are difficult to trace to individuals. But Bitcoin accounts also lack protections that most bank accounts have, including government-backed insurance.

    That means the bitcoins stolen from the Silk Road users are gone forever.

    The new site’s administrator, a faceless persona known only as Defcon, posted a nerve-racking message Thursday night that began with, “I am sweating as I write this.”

    He said hackers took advantage of the same flaw in Bitcoin that knocked major exchanges Bitstamp and Mt.Gox offline over the past two weeks. That glitch allowed Silk Road hackers to repeatedly withdraw bitcoins from the site’s accounts until they were empty.

    In detailing the alleged hack, Defcon listed the online identities of the three supposed attackers and shared records of the transactions. And in an example of the kind of dark, dangerous world of illegal drug trade, Defcon called on the public to “stop at nothing to bring this person to your own definition of justice.”

    “I failed you as a leader and am completely devastated by today’s discoveries,” Defcon wrote, adding that the website should have followed the approach of other major Bitcoin exchanges and halted withdrawals due to the Bitcoin system flaw. Silk Road has since temporarily shut down.

    Many have accused the site’s administrators of faking the hack and stealing the money themselves. But in a world where drugs are outright illegal — and there’s little to no regulation of Bitcoin transactions — it’s difficult to prove anything.

    It’s just his kind of bad news that smears Bitcoin’s credibility and keeps the currency from going mainstream.

    Posted by Pterrafractyl | February 14, 2014, 9:11 am
  8. Bitcoin: so bad even the real world looks good in comparison:

    The Washington Post
    Forget the 1 percent. In the Bitcoin world, half the wealth belongs to the 0.1 percent.

    By Brian Fung
    March 3 at 11:28 am

    The fall of Mt. Gox has a lot of people saying Bitcoin is dead. Yes, the Tokyo-based exchange may be gone, but the virtual currency has much more than a single exchange (which wasn’t even the largest at the time that it collapsed). There’s still a great deal of room for Bitcoin to grow, particularly in the West: Mt. Gox’s collapse hasn’t done much to temper curiosity among regulators and entrepreneurs.

    Of course, the drawback to consolidation is that those benefits will be concentrated in the hands of a relative few. That dynamic is already playing out among individual holders of Bitcoin, with a growing gulf between the Bitcoin-rich and the Bitcoin-poor. According to Risto Pietilä, a Finnnish entrepreneur, the overwhelming share of Bitcoin wealth is held in just a few dozen wallets. Half of all bitcoins belong to around 927 “individuals.” If those figures are right, then half of the world’s 12 million or so bitcoins is held by a tenth of a percent of all accounts. That’s a stunning statement of inequality, since in the real world 46 percent of the world’s wealth belongs to 1 percent of the global population. The Bitcoin world, then, is even less equal than the real world.

    One of the fun things about the collapse of MtGox is that we don’t really know if the bitcoin world became more or less unequal because we don’t how many different parties were exploiting the “transaction malleability” bug. Was it just one person or a free for all? The 850,000 stolen bitcoins dwarf the 144,000 bitcoins the FBI seized from Silk Road and are a pretty substantial chunk of the ~12 million bitcoins in circulation so far. Might we have a new bitcoin prince of thieves somewhere out there?

    Posted by Pterrafractyl | March 4, 2014, 8:36 am
  9. Wheels within kleptomaniacal wheels:

    PC World
    Bitcoin-stealing malware hidden in Mt. Gox data dump, researcher says
    Lucian Constantin

    Mar 17, 2014 7:30 AM

    An archive containing transaction records from Mt. Gox that was released on the Internet last week by the hackers who compromised the blog of Mt. Gox CEO Mark Karpeles also contains bitcoin-stealing malware for Windows and Mac.

    Security researchers from antivirus firm Kaspersky Lab analyzed the 620MB file called MtGox2014Leak.zip and concluded that in addition to various Mt. Gox-related documents and data, it contains malicious binary files.

    The files masquerade as Windows and Mac versions of a custom, back-office application for accessing the transaction database of Mt. Gox, a large bitcoin exchange that filed for bankruptcy in Japan in late February after claiming it had lost about 850,000 bitcoins to cyber thieves.

    However, they are actually malware programs designed to search and steal Bitcoin wallet files from computers, Kaspersky security researcher Sergey Lozhkin said Friday in a blog post.

    Both the Windows and Mac binaries are written in LiveCode, a programming language for developing cross-platform applications.

    When executed, they display a graphical interface for what appears to be a Mt. Gox database access tool. However, in the background they launch a process—TibanneSocket.exe on Windows—that searches for bitcoin.conf and wallet.dat files on the user’s computer, according to Lozhkin. “The latter is a critical data file for a Bitcoin crypto-currency user: if it is kept unencrypted and is stolen, cybercriminals will gain access to all bitcoins the user has in his possession for that specific account.”

    The malware, which Kaspersky has named Trojan.Win32.CoinStealer.i (the Windows version) and Trojan.OSX.Coinstealer.a (the Mac version), uploads the stolen Bitcoin wallet files to a remote server that used to be located in Bulgaria, but is now offline.

    “It seems that the whole leak was invented to infect computers with Bitcoin-stealer malware that takes advantage of people’s keen interest in the Mt. Gox topic,” Lozhkin said.

    “Malware creators often using social engineering tricks and hot discussion topics to spread malware, and this is great example of an attack on a focused target audience,” he said.

    Posted by Pterrafractyl | March 17, 2014, 12:02 pm
  10. Here’s one more reason why Wall Street should be pretty excited about getting into the bitcoin business: shared values:

    Pando Daily
    Leaderless: Bitcoin Foundation plagued by allegations of self-dealing and embezzlement

    By Michael Carn

    What’s the role of an industry trade group and how much authority should companies place in the hands of these unofficial leaders?

    That’s the question much of the bitcoin community is asking at the moment as the Bitcoin Foundation, the industry’s unofficial custodian and mouthpiece, faces allegations of self-dealing and embezzlement.

    According to the Foundation’s own website, it exists to “standardize, protect, and promote the use of Bitcoin cryptographic money for the benefit of users worldwide.” Several hundred bitcoin companies are members of the Foundation and have donated heavily to fund its operations. The organization is led by a board of prominent crypto-currency entrepreneurs, investors, journalists, and academics, chiefly its Chairman, CoinLab founder Peter Vessenes who has been the subject of the most skepticism and scrutiny.

    The spotlight was first shone on the Foundation’s leadership by controversial bitcoin blogger Ryan Selkis, aka the Two-Bit Idiot. On March 2nd, following the unraveling of Mt. Gox, Selkis wrote that Vessenes and Executive Director Jon Matonis would be stepping down prior to the conclusion of their current terms, “[seemingly recognizing] the need for the Foundation to clean house in order to revitalize its image in the coming months.” Days later, when forced to retract that prediction, Selkis began an aggressive, and occasionally manic campaign calling for their immediate ouster due to a failure of leadership.

    At his most livid, Selkis called the current board “illegitimate” and demanded senior leaders across the bitcoin ecosystem stage a coup or kill the Foundation altogether – a position from which he later backed down, but not before writing:

    Peter Vessenes and Jon Matonis are not scapegoats. They are not innocent bystanders. And they are not ethically entitled to remain in their board seats through later this year.

    Selkis then promised to reveal “damning facts” if his demands were not met, including the those relating to: the Foundation ignoring warning signs of Mt. Gox’s failure as early as April 2013; Foundation directors exploiting their positions to withdraw funds from a failing Gox while the general public was losing their shirts; and conflicts of interest between director’s roles within the foundation and their personal bitcoin businesses.

    After a several days of self-described backlash from the bitcoin community, Selkis issued a concession and never published those damning facts – despite maintaining that his accusations were “100% truthful.”

    Selkis’ lightning-rod status cannot be denied and has made it easy for many to write off his claims as those of a man seeking attention – he’s acknowledged on multiple occasions plans to write a book about bitcoin’s recent scandals – and also hoping to enrich his own bitcoin insurance startup through spreading fear. But it bears noting that for all his bluster, Selkis has also been the source of a number of accurate and impactful breaking news stories, not the least of which was publishing Mt. Gox’s Crisis Strategy documents ahead of its eventual bankruptcy.

    Now, however, it’s not just Selkis who’s beating the drum for changes atop the Bitcoin Foundation. Blockchain.info CSO Andreas Antonopoulos, who’s is held as close to a deity as anyone within the bitcoin community – a list on Reddit once ranked him below Satoshi Nakamoto but above Mother Teresa and Jesus – has also called for leadership change. Speaking on the Lets Talk Bitcoin podcast yesterday, Antonopoulos called the Foundation “rotten from the top” and said that he wouldn’t be surprised to see it implode due to embezzlement:

    They certainly have received many funds. Where are those funds, who controls those funds, when were they last audited, are they actually solvent, or have all of those funds disappeared into a big black hole? Just remember who was in the leadership until recently, who is in leadership today, and what their track record with ethics has been.

    And, I would suggest that I would be not surprised at all if the foundation implodes in a giant embezzlement problem sometime down the line or funds get stolen – within quotes or not within quotes – something like that. It’s bound to happen because these things happen not because of technical failures, they don’t happen because of bad actors, they happen because of failures of leadership. And the foundation is the very definition of a failure of leadership.

    Those are incredibly strong words and not the kind of accusations to be taken lightly. It bears noting that Antonopoulos didn’t suggest any direct knowledge of embezzlement or criminal wrongdoing, nor did he provide any evidence to that effect. He simply said that he views it as inevitable due to the character and competence of the Foundation’s leadership – leadership that until recently included Mark Karpeles, the CEO who led Mt. Gox into bankruptcy, and Charlie Shrem, the bitcoin entrepreneur recently charged with money laundering, among other offenses. Antonopoulos’ statements are complicated by the fact that he is a volunteer member of a Bitcoin Foundation working group, a fact that he acknowledges within the podcast.

    So where does this leave the Bitcoin Foundation, it’s current leadership, and the entirety of the bitcoin community as it fights for credibility and legitimacy among regulators, investors, merchants, and everyday consumers?

    Posted by Pterrafractyl | March 28, 2014, 8:15 am
  11. Here we go again:

    Pando Daily
    Crypto-”armageddon:” Researchers claim mining concentration threatens to destroy bitcoin

    By Michael Carney
    On June 16, 2014

    Here we go again. For the umteenth time in recent memory, the sanctity of the bitcoin network is facing an existential threat from a large and overly secretive organization. It’s not an exchange or wallet service this time around that has the attention of crypto-currency watchers, but rather a large mining pool, specifically GHash.io, the self-described world’s “#1 Crypto & Bitcoin Mining Pool.”

    So why is the bitcoin world up in arms over GHash? On several occasions last week, one lasting a full 12 hours, the group, which is owned by cloud-mining service CEX.io, controlled more than 50 percent of the global computational power directed at mining bitcoin.

    With such control, GHash (or any group that finds itself in a similar position) could manipulate the integrity of the bitcoin network by potentially double-spending coins, blocking or reversing transactions by competing miners, extorting increased transaction processing fees from the network, or waging a distributed denial of service (DDoS) attack against the entire bitcoin network – collectively, a so-called “51 percent attack.” In other words, it’s a major threat to bitcoin’s foundational distributed, and therefore trustless, nature.

    Cornell researchers Ittay Eyal and Emin Gün Sirer were the first to recognize the 51 percent event, calling it “armageddon” in a Friday blog post, and describing GHash as a “de facto monopoly.” The pair, who have long been thought leaders on the concepts of 51 percent attacks and “selfish mining,” write:

    GHash is in a position to exercise complete control over which transactions appear on the blockchain and which miners reap mining rewards. They could keep 100% of the mining profits to themselves if they so chose. Bitcoin is currently an expensive distributed database under the control of a single entity, albeit one that requires constantly burning energy to maintain — worst of all worlds.

    It’s a historical first for any entity to cross the 50 percent threshold, although GHash has been close before, approaching 45 percent in January of this year. At the time, GHash issued a press release, publicly committing to never reaching the feared 51 percent threshold (really, anything greater than 50 percent). So much for that promise.

    To be clear, GHash doesn’t own 50 percent of the global mining power, it simply “controls” it. This distinction is important, but does not necessarily eliminate the threat the group poses. GHash has in the past claimed to own only half the hardware providing the hashing power that it controls, with the rest contributed by third-party miners that allocate mining power to its pool. Nonetheless, the bitcoin network has reason to be fearful of this concentration of power.

    Making matters worse, no one knows who is behind GHash or CEX. The owners of the Netherlands-based company (which lists a London mailing address) are notoriously secretive, meaning that the bitcoin community – which at this point represents several billion dollars in wealth and untold future value – are left trusting a shadowy entity not to behave badly with its newfound power.

    To be clear, GHash has not abused its power yet. But if history’s taught us anything it’s that power corrupts. Making matters worse, the company was previously accused of using its enormous size advantage to bully a gambling site via double-spending attacks.

    Eyal and Sirer write:

    No one knows the ultimate aims of GHash. The people who join the GHash pool do so because GHash has zero fees — these people are essentially optimizing for short term profits over the long term well-being of the currency. All of these are precisely the points we cautioned about. So this is when we get to say “We told you so.”

    The pair go on to advocate a “hard fork” in the codebase underlying bitcoin, with the goal of accomplishing three core fixes: disincentivizing mining pools, combatting selfish mining, and making mining activity more transparent. They conclude, sarcastically:

    Or we can carry on as if nothing of importance happened. GHash will be on their best behavior for the next few weeks, and Bitcoin will limp along. What will bring the actual demise of Bitcoin is the subject of a future blog post, but this is by no means the end. People can still use Bitcoin to buy drugs, trinkets from Overstock.com, and maybe even grilled cheese from a food truck. There is an afterworld. And for everything else, there is dirty fiat and Mastercard.

    As Eyal and Sirer point out, the potential of 51 percent attacks has been known for some time. As a whole, the bitcoin community leaders have been quick to write off the risks of such a scenario, offering two common justifications. First, we’re told that the investment required to create a mining pool would disincentivize a pool’s participants from ever conducting such an attack. But, as the Cornel report explains:

    …[this] assumes a static world. Instead, the mining rigs have a fairly short useful lifetime. If a miner knows that they will be overtaken by the next generation of hardware about to be unleashed by a competing mining pool, it will have a definite time horizon for extracting every last bit of value, and that plan may not have room in it for a voyage to the moon.

    Secondly, naysayers are quick to argue that the mining community and bitcoin’s core developers will easily recognize such an attack and will therefore prevent the bad actors from harming the broader bitcoin network. At best, this seems like an idealistic view of likely events. Even if such an attack were recognized and ultimately interrupted, the trust-eroding effects – both within the community, but more so within mainstream consumers and media – would be staggering. Assuming that no harm will come of even a brief 51 percent attack couldn’t be further from the truth.

    A GHash spokesperson told CryptoCoinNews:

    …we would never do anything to harm the Bitcoin economy; we believe in it. We have invested all our effort, time and money into the development of the Bitcoin economy. We agree that mining should be decentralized, but you cannot blame GHash.IO for being the #1 mining pool.

    Bitcoin was created specifically to avoid the need to trust any centralized authority, be it a federal government, the Federal Reserve, the World Bank, or otherwise. The fact that the crypto-currency community is now confronting this scenario is a legitimate threat to the entire experiment.

    The broader market seems to agree with this concern, pushing the price of bitcoin down more than 16 percent in a few days, from a near-term high of $655 on Tuesday, June 10 to a low of $553 on Sunday the 15th – currently, the Coindesk Price Index sits at $589. This drop follows a recent upswing in price following a prolonged bear market that coincided with the collapse of Mt. Gox. As of this moment, GHash controls roughly 35 percent of global hashing power while the next largest known group, Discus Fish, controls 16 percent.

    GHash doesn’t need to conduct a 51 percent attack for their hashing power concentration to be a major issue. The simple fact that the bitcoin network must look over its shoulder to wonder if (or when) such an attack will arrive is enough to destabilize the system.

    Posted by Pterrafractyl | June 16, 2014, 11:26 am
  12. “A staunch person who believes in the gold standard says bitcoin is valueless and ultimately a Ponzi scheme, and people who didn’t dig gold but really got bitcoin would say that this is ridiculous, it’s just a dumb metal…We don’t need to fight. We can coalesce.” That quote from the article below inadvertently captures the essence of the situation

    Gold Bugs Meet Bitcoin Believers to Supplant the Dollar
    By Isaac Arnsdorf Jul 27, 2014 11:00 PM CT

    Call it bitgold.

    It’s what you get when you combine bitcoin, one of the world’s newest would-be currencies, and gold, one of the oldest. Add mistrust of centralized authority, a dash of rebelliousness and a dollop of profit motive and you might have the Independence Coin, the first gold-backed crypto-money, unveiled this month at FreedomFest, a libertarian convention in — where else? — Las Vegas.

    A staunch person who believes in the gold standard says bitcoin is valueless and ultimately a Ponzi scheme, and people who didn’t dig gold but really got bitcoin would say that this is ridiculous, it’s just a dumb metal,” Anthem Hayek Blanchard, chief executive officer of Anthem Vault Inc., the company behind the Independence Coin, said in an interview. “We don’t need to fight. We can coalesce.

    Posted by Pterrafractyl | July 28, 2014, 2:18 pm
  13. Interesting times for Bitcoin: The cryptocurrency plunged to $275 over the weekend before bouncing back over $300. And at one point a seller put in a sale order to 26,000 bitcoins, dropping the price from $317 to $300 in two seconds:

    Bitcoin Price Finds Hard Floor Following 26,000 BTC Sell Order

    Daniel Mark Harrison (@HarrisonDanielM) | Published on October 6, 2014 at 13:18 BST

    After buyers snapped up $7.8m worth of bitcoins that were selling for $300 each on exchange Bitstamp on Monday, bitcoin’s price appears to have found a hard floor in what has been a largely unpredictable trading period recently.

    On Sunday, bitcoin’s price dropped through the 18-month average purchase price of $337.60, signalling uncertainty to many traders in the market. Then, in the early hours of the Asian morning on Monday, a sell order of 26,000 BTC at $300 that was placed on exchange Bitstamp brought a temporary halt to the volatile price and narrowed bid-ask spreads between the four exchanges in CoinDesk’s Bitcoin Price Index (BPI).

    By the time of the European morning however, buyers had snapped up the entire order and the BPI jumped up into the low-to-mid-$320s.

    “When the sell order for 26,000 BTC came onto Bitstamp, the price dropped from $317 to $300 in two seconds. I’ve just bought back in now that block has been lifted,” said Adam O’Brien, CEO of BTC Solutions, a Canada-based provider of ATM exchanges and leveraged trading services for bitcoin.

    Investor tactics

    O’Brien said that Monday’s unprecedented BTC offer on Bitstamp was most likely a single investor looking to artificially move the price lower and buy back bitcoin later at a reduced price, probably in the early $200’s.

    Instead, buyers swarmed the offer. For market participants, the recent volatility has presented a welcome opportunity to make big sums of money trading bitcoin in large volumes, mostly through the practice of arbitrage trading or by taking fees for providing trading enhancements such as BTC Solutions’ leveraged product offering.

    With this offering, and for a cost of 0.3% per day, buyers and sellers can obtain immediate execution on trades for as much as eight times their nominal investment. In the one-week period, as prices have fluctuated from a high of $384 to a low of $290.83 on the BPI while exchange volumes have cooled off, traders have positioned themselves in over-the-counter (OTC) markets among various regional counterparties with different supply and demand preferences. This enables them to capture the impacts of the see-sawing drop in bitcoin’s market capitalisation.

    Leveraged-buyers to the rescue? That’s how BTC Solutions CEO Adam O’Brien saw it (he might be biased) Still, it is somewhat notable that we had a single seller tank the market, but only temporarily while buyers swarmed. Does that mean Bitcoin may have found its price floor? Perhaps. And it’s possible that the big seller was also buying on the dip too as O’Brien suggested. Although, if you make inferences based on the “26,000 bitcoin” size of the sale, that big seller may not be in the market for more bitcoins:

    The FBI’s Plan For The Millions Worth Of Bitcoins Seized From Silk Road
    10/04/2013 @ 3:16PM

    When the FBI arrested alleged Silk Road boss Ross William Ulbricht and took his site down, they seized the site’s assets which were primarily the currency of choice on the anonymous online drug bazaar: Bitcoins. A whole lot of Bitcoins.

    In the criminal complaint against Ulbricht, the FBI said that the Silk Road had total sales of over 9.5 million Bitcoins, collecting a revenue of 600,000 of the digital coin. (Given the current price — $140/Bitcoin — that’s $1.2 billion in sales and $80 million in commissions.)

    The FBI initially seized over 26,000 Bitcoins. I asked the FBI spokesperson what the plan is for those cryptocoins. “We will download the Bitcoin and store them,” she said. “We will hold them until the judicial process is over.”

    Then what?

    “This is kind of new to us,” she said. “We will probably just liquidate them.”

    In other words, the government is hoping the price of Bitcoin stays high for the Bit-fire sale to come once Ulbricht’s trial is over. Good news for them: the price dropped about 11% when the Silk Road sack first happened but has since recovered. After all, as the criminal complaint notes, “Bitcoins are not illegal in and of themselves and have known legitimate uses.”

    The spokesperson says the approximately 26,000 Bitcoins seized are just the ones that were held in Silk Road accounts. In other words, it’s Silk Road users’ Bitcoin. The FBI has not been able to get to Ulbricht’s personal Bitcoin yet. “That’s like another $80 million worth,” she said, explaining that it was held separately and is encrypted. If that is indeed what he’s holding, that’s close to 600,000 Bitcoin all together or about 5% of all Bitcoin currently in existence. (Update 10-25: The FBI says it’s seized 144,000 Bitcoins, or about $28 million, that it believes belong to Ross Ulbricht.)

    Was the the FBI the secret seller of those 26,000 bitcoins it seized last year? Well, they auctioned off 30,000 bitcoins seized by Silk Road back in June (with Bitcoin enthusiast Tim Draper buying all of them) but there was a lot more where that came from given the FBI’s 144,000 haul. So who knows, maybe it was FBI or some other random seller that chose 26,000 just for fun (or maybe to psyche out the market). Either way, the ongoing concentration of bitcoin wealth combined with the emergence of bitcoin buying on margin means it should be very interesting to see where Bitcoin goes from here.

    Posted by Pterrafractyl | October 6, 2014, 11:09 am
  14. This isn’t exactly the best news for Bitcoin populists: KnCMiner, one of the largest manufacturers of specialized bitcoin mining machines, is pulling out of the hardware sales business due, in part, to a drop off in buyers. Instead, KnCMiner is going into full-time mining for itself. As the company co-founder says below, “We’re seeing a complete change in the industry…It’s accelerated out of the garage and the homes, to the small businesses, to the large data centers, and now you’ve got to have a mega data center for it to be profitable”:

    Bitcoin Miner Ditches Clients to Chase $2 Billion Coding Prize
    By Niclas Rolander Oct 21, 2014 5:00 PM CT

    A Swedish company that estimates its equipment is behind about 25 percent of the bitcoins being generated has had enough of servicing unhappy clients.

    KnCMiner has stopped selling hardware and is instead expanding its own data center where thousands of its machines mine bitcoin and similar software by solving complex mathematical algorithms.

    After bitcoin’s price collapsed from a high of more than $1,000 to lows of around $300 earlier this month, .customers once eager to mine the digital currency have started to ask for their money back, according to KnC co-founder Sam Cole. Yet the pullback by individuals who had hoped to grow rich in their garages belies the potential for companies that have built up the scale to stick the course, he said.

    “When we don’t have these customers buy our hardware it becomes a different business model. It becomes much easier, much more open, much more honest,” Cole said in a phone interview. “There’s still going to be $2 billion, at today’s price, mined in the next few years. That’s a lot of cash that’s up for grabs and we’re going to do our best to take a decent chunk of it.”

    After raising $14 million in venture capital, KnC is looking at more locations in Iceland and Sweden as it aims to control as much as 20 percent of the bitcoin mining market, compared with the 5 percent it mines itself today.
    Seeking Capital

    KnC is now trying to secure a second cash injection, targeting $50 million to build more data centers and develop new mining equipment.

    Cole says the biggest miners will end up profiting most as scale becomes increasingly important. KnC generates bitcoin at a cost Cole says is “significantly below $400” per unit. The company does its mining in a helicopter hangar in Boden, a Swedish town near the Arctic circle, where it’s in the process of tripling capacity.

    One bitcoin currently trades at about $388, representing a 47 percent decline year-to-date. There are 21 million possible bitcoin units that can be mined, with about 13.4 million already in circulation, according to blockchain.info.

    Since its inception in 2008, bitcoin has been linked to a series of corruption scandals spanning money laundering to payment to view child pornography sites. Yet proponents of the software are attracted by an absence of banking fees and the prospect of a decentralized alternative to fiat currencies. And despite regulatory challenges and other glitches, bitcoin has managed to attract sufficient venture capital to continue growing.

    KnC says its shift in focus reflects an industry-wide trend.

    “We’re seeing a complete change in the industry,” Cole said. “It’s accelerated out of the garage and the homes, to the small businesses, to the large data centers, and now you’ve got to have a mega data center for it to be profitable.”

    Posted by Pterrafractyl | October 21, 2014, 6:37 pm
  15. Remember e-Gold, the early attempt at creating a digital gold and silver backed currency? Well it’s back and this time it’s state-backed! Well, not precisely. But it looks like Texas Governor Greg Abbott just signed into law an attempt to create a privately operated Texas-backed gold depository intended to rival the Federal Reserve Bank of New York’s vault. The idea is that depositors will be able to write checks against their accounts to other gold accounts which could, in theory, allow these accounts to act as a metal-backed currency to challenge the dollar. At least that’s what the bill’s backers are hoping for:

    TPM Cafe: Opinion

    With Eye on Fiscal Armageddon, Texas Set to ‘Repatriate’ Its Gold To New Texas Fort Knox

    By Brian Murphy
    Published June 16, 2015, 9:18 AM EDT

    Texas wants its gold back.

    On Friday, Gov. Greg Abbott signed legislation that will create a state-run gold depository in the Lone Star State – one that will attempt to rival those operated by the U.S. government inside Fort Knox and the Federal Reserve Bank of New York’s vault in lower Manhattan. “The Texas Bullion Depository,” Abbott said in a statement, “will become the first state-level facility of its kind in the nation, increasing the security and stability of our gold reserves and keeping taxpayer funds from leaving Texas to pay for fees to store gold in facilities outside our state.” Soon, Abbott’s office said, the state “will repatriate $1 billion of gold bullion from the Federal Reserve in New York to Texas.” In other words, when it comes preparing for the currency collapse and financial armeggedon, Abbott’s office really seems to think Texas is a whole ‘nother country.

    And the new depository will not just be a well-guarded warehouse for that bullion. The law Abbott signed calls for the creation of an electronic payments system that will allow gold, silver, platinum, palladium, and rhodium depositors to write checks against their accounts, making the depository into a bank – one that will create a metal-backed money supply intended to challenge the paper currency issued by the Federal Reserve – or “Yankee dollars” as one of the law’s top supporters calls them. And in case the Fed or Obama wants to confiscate Texas’s gold, nice try Fed and Obama! In keeping with this suspicion of the Fed and Washington, the new law also explicitly declares that no “governmental or quasi-governmental authority other than an authority of [Texas]” will be allowed to confiscate or freeze an account inside the depository. Gold that’s entrusted to Texas will stay in Texas.

    The depository law is the brainchild of a second-term state representative in the Texas legislature named Giovanni Capriglione, a 42-year-old Republican from Southlake, just northwest of Dallas-Fort Worth International Airport. A private equity manager with an MBA, Capriglione was elected in 2012 after beating an seven-term incumbent with the backing of Tea Party activists. He told the Star-Telegram that when he first announced his interest in establishing a depository in Texas in 2013, he “got so many emails and phone calls from people literally all over the world who said they want to store their gold … in a Texas depository. People have this image of Texas as big and powerful … so for a lot of people, this is exactly where they would want to go with their gold.” On his official Facebook page, Capriglione said he has “ just been overwhelmed with all of the contacts and write-ups and interviews” he’s gotten.

    Fed critics herald Capriglione’s bill as a long-awaited and much-needed assault on the government’s printing press. Ryan McMaken at the libertarian Mises Institute (named after Austrian economist Ludwig Von Mises) wrote that “while the Texas depository is a government-owned enterprise, it nevertheless is an improvement since it is a case of decentralization (and arguably nullification)” that will present “alternatives to the Federally-controlled monetary and banking systems.” In what Capriglione – the depository bill’s sponsor – called “an easy to read summary of the specifics” of the law, a Tea Party site described the depository as a “game changer.” The author of the piece, a metals dealer named Franklin Sanders, wrote that “since at least 1991 I have firmly believed that whenever an electronic payments system could be established using silver & gold, it could supplant fiat currencies worldwide within two years at most, less time given a crisis. Now Texas steps forward to make it stick. And if Texas has the nerve to carry though, it will make Texas a center of world finance to rival New York and London better than Switzerland, because it contains 27,695,284 Texans and all but two of ‘em are armed & serious.” (Sanders favors the term “Yankee dollars” to describe paper currency.)

    Other gold enthusiasts go further in blowing the secessionist dog whistle. “If the Fed gets too carried away with its digital money printing, then Texas will already have some kind of system to work off of in terms of not using the dollar. I’m not saying it will come to this, but it is symbolic in retaining some liberty, similar to gun ownership in this country. It is not something that will likely be used against a tyrannical government because the symbolism itself keeps tyranny in check,” writes Geoffrey Pike at Wealth Daily. The Tenth Amendment Center, meanwhile, predicted that “while [the bullion depository] won’t nullify the Fed’s monetary monopoly on its own, it represents an important step forward in that direction.”

    The depository, then, will insulate Texans from a just-around-the-corner economic and geopolitical catastrophe brought on by paper money and cauterize the seemingly-still-fresh trauma of Franklin Roosevelt’s 1933 executive order making gold coin hoarding illegal during the Great Depression.

    But to the trained ear, there’s an even more aggressively anti-Fed term being invoked in praise of the Texas depository: “repatriation.” Ordinarily it’s a word used to describe the movement of assets or currency from one nation to another. Yet on the website of SchiffGold, the gold brokerage owned by onetime U.S. Senate candidate Peter Schiff – whose claim to fame is to have predicted the 2007 housing crash (it happened!) followed by a death spiral of hyperinflation (still waiting!) – Texas is described “join[ing] the ranks of major global economies that want to bring their gold home from New York.” “Germany, Austria, the Netherlands, and other European nations have already begun to repatriate gold from the New York Fed or have proposed to begin doing so,” said a post on the firm’s website that ran on the same day as another predicting the coming of a “cashless society.”

    According to this narrative, then, Texas isn’t just setting up its own depository, payments system, and a safe haven for gold that can’t be confiscated by the federal government. Instead, it is signaling a loss of confidence in the United States by pulling its gold out of the largest gold vault in the world eighty feet below the Federal Reserve Bank of New York’s Florentine-inspired headquarters in lower Manhattan. There, a special police force guards some 530,000 gold bars protected behind a 140-ton airtight steel and concrete framed door sealed with a 90-ton steel cylinder and time locks. Nobody enters the vault alone, ever; three people are present, even if it’s just to change a light bulb. Most of the gold in the vault belongs to other nations; the Fed stores and guards it as a courtesy to allies. Thus, the idea that Texas is somehow taking on an unwise risk by lodging $1 billion in bullion in the vault – so much so that it regards the New York bank as a foreign entity from whom gold ought to be justly “repatriated” – is to reject the practical and geopolitical realities of gold ownership in the 21st century. Even in fiction it is hard to recall a more secure site that has at its disposal more robust resources to guard and defend itself.

    This is why, if you were suspicious about Gov. Abbott’s claim that “the [depository] law will repatriate $1 billion of gold bullion from the Federal Reserve in New York to Texas,” you were on to something.

    Indeed, Texas has no gold bars in the Federal Reserve’s New York vault. And what the state has is not worth a billion dollars. Instead some 4,200 gold bars bought in 2011 by the University of Texas’s endowment fund (the second largest in the country after Harvard’s) are stored in the basement vault of HSBC’s headquarters at 450 5th Avenue in New York City, just south of the New York Public Library. For the last four years, the endowment has paid an estimated $1 million per year to store their gold there. (If it had been at the New York Fed the cost would have totaled about $15,400 over that period). And the new depository law does not require the university’s endowment fund to relocate the gold to Texas.

    In case you’re wondering why the university’s endowment fund ever bought real physical gold to begin with (not just paper assets), that’s a story almost as odd as the state’s new effort to bring its gold back to Texas to ward off financial Armageddon in the country’s other 49 states. That story seems to begin and end with a hedge fund manager named Kyle Bass. Bass, a former Legg Mason and Bear Stearns managing director and outspoken Fed critic, was named to the endowment fund’s board of directors (listed – and pictured – here… ahem) and immediately began pressing his apparently suggestive colleagues to shift their gold options investments into a stake of physical gold.

    Bass isn’t just a casual metals speculator. When he believed nickel was undervalued he bought 20 million nickel coins to prove his point (they’re stored on a pallet in a Brinks vault). A brave new world mix of country club and prepper compound, in a Michael Lewis profile, Bass revealed that he’d prepared for a collapse of the government and economy by accumulating – in his words – “guns and gold.”

    Gold investors – and physical gold investors in particular – can be tempted to think of gold as a different kind of holding: a one-way investment whose sale can never be justified. Peter Schiff predicted in October 2012 that gold would soon climb from $1700 to $5000 per ounce. He keeps adjusting that timeline. Therefore, if you bought gold because it was a hedge against hyperinflation that did not happen, don’t sell the gold – just keep believing that inflation is coming in the next quarter, or next year, or that the government is secretly cooking the inflation figures. If gold prices slump, blame central banks for colluding to keep prices low.. If the value of gold falls in dollars, quote a rise in another country’s currency that lets you tell a good gold story.

    Fed a steady diet of fear, paranoia, and survivalism, the consumer market for physical gold is left particularly susceptible to magical thinking. So in addition to those 4200 University of Texas bars yearning to return home from Texas, that thinking is part of what helped the Texas bullion depository bill win passage in the Texas legislature. Texas state Rep. Giovanni Capriglione first introduced his depository bill as a freshman legislator in 2013. Despite support from then-Gov. Rick Perry, Capriglione’s bill died without a vote when a fiscal analysis showed that the state would be on the hook for $14 million in the first two years due to the costs of setting up a state-run depository guarded and administered by people on the public payroll.

    In a telephone interview with TPM, Capriglione said during the “interim period” between legislative sessions before his second term began, he set about re-designing the depository bill to outsource many of those more expensive functions to the private sector. Although the depository is performing the same functions in the new law as it had in the older version of Capriglione’s bill, shifting the execution to private contractors yielded a so-called “fiscal note” in the legislature that calculated an “indeterminate fiscal impact to the state.” Because it’s outsourced rather than run by state employees, it is no longer counted as a concrete expense in the state budget.

    Moreover, by privatizing the depository’s operations, Capriglione said he was able to begin recruiting “stakeholders” who “are interested in being a part of the system we’re creating.” Rather than build a Fort Knox-type facility in Texas, Capriglione said “there are commercial vaults not being used or not at full capacity, and I’ve heard from groups willing to start their own depository and IT security companies with underground storage facilities for data centers who can make space available” for gold and other precious metals.

    Most importantly, Capriglione found that by offering gold brokers and dealers the chance to become “depository agents” who can accept deposits on the state’s behalf or set up accounts with their own precious metal holdings that can then be sold off and subdivided to would-be depositors, he found a broad network of supporters for the state depository. “These agents will be licensed and bonded,” he said, “they’re middlemen who can, say, deposit $1 million of their own gold into an account and, acting as depository agents, make other accounts by virtually moving the gold.” In other words, by privatizing his would-be Texas Fort Knox and opening the system up to middlemen themselves looking to service the prepper-fueled market in physical gold, Capriglione gained a new legion of well-heeled supporters for his bill. With a newfound squadron of beneficiaries at hand, Capriglione saw his bill approved by both houses of the legislature and signed into law by Gov. Abbott.

    Yet some details have yet to be worked out. “We’re not going to allow entities outside of [Texas] to seize assets,” he said. “In 1933, the Feds seized certain assets,” he said, referring to Roosevelt’s notorious executive order (memories of which are lucratively misstated by some metals dealers). He acknowledges that because the depository law bars the federal government from seizing or freezing gold accounts, it will be necessary for Texas to “do the right thing” in “civil asset forfeiture cases.” “We don’t want illicit goods to be repatriated or criminals or drug lords” to see Texas as a safe harbor, he added. “The [state] comptroller will have to come to a conclusion with the Attorney General” on setting policy.

    As of yet, Capriglione doesn’t know where the bullion depository might be located. But he dismissed a suggestion that a building known as a the “Texas Bullion Depository” will attract criminal masterminds. “You don’t need as much security because gold is incredibly heavy and hard to liquidate,” he said. “There aren’t many heists of gold bullion…nobody’s going to be able to steal 80,000 pounds of gold.”

    Rushed for time, Capriglione cut short his interview before he could be asked if he had ever seen the films “Heist,” “Goldfinger,” “Ocean’s Eleven,” or “Die Hard 3.”

    Oh boy this is going to be interesting. So private “depository agents” (gold dealers) can accept gold on the state’s behalf, set up accounts, and virtually move gold deposits around the system (in effect, creating e-gold). But they won’t have to actually move their gold to a super-guarded giant gold vault somewhere in Texas. No, these same private entities will be allowed to set up their own depositories and store the gold there:

    Moreover, by privatizing the depository’s operations, Capriglione said he was able to begin recruiting “stakeholders” who “are interested in being a part of the system we’re creating.” Rather than build a Fort Knox-type facility in Texas, Capriglione said “there are commercial vaults not being used or not at full capacity, and I’ve heard from groups willing to start their own depository and IT security companies with underground storage facilities for data centers who can make space available” for gold and other precious metals.

    Most importantly, Capriglione found that by offering gold brokers and dealers the chance to become “depository agents” who can accept deposits on the state’s behalf or set up accounts with their own precious metal holdings that can then be sold off and subdivided to would-be depositors, he found a broad network of supporters for the state depository. “These agents will be licensed and bonded,” he said, “they’re middlemen who can, say, deposit $1 million of their own gold into an account and, acting as depository agents, make other accounts by virtually moving the gold.” In other words, by privatizing his would-be Texas Fort Knox and opening the system up to middlemen themselves looking to service the prepper-fueled market in physical gold, Capriglione gained a new legion of well-heeled supporters for his bill. With a newfound squadron of beneficiaries at hand, Capriglione saw his bill approved by both houses of the legislature and signed into law by Gov. Abbott.

    And, again, these deposits are all state-backed, but they’ll be held in private depositories scattered all over Texas. Depositories that will presumably be full of gold from all over the world if this scheme takes off. The people of Texas had better hope the contents of the private depositories are fully insured. The full faith and credit of the golden state of Texas just might depend on it.

    Also, if you’re looking for a place to park your cash, gold is an obvious option, but have you considered investing in high-performance power tool manufacturers? Maybe you should.

    Posted by Pterrafractyl | June 17, 2015, 6:33 pm

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