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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. [1] (The flash drive includes the anti-fascist books avail­able on this site.)

Listen: MP3

Side 1 [2]   Side 2 [3]

[4]Introduction: This program continues our exploration and analysis of the online cryptocurrency bitcoin. (We have previously explored this in FTR #’s 760 [5] and 764 [6]. In addition, we recommend a penetrating essay [7] 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, [8] who is credited with developing the cryptocurrency.

[9]If bitcoin were to achieve the acceptance hoped for by its advocates, the enormous carbon footprint [10] 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 [11] (consistent with our hypothesis that the creator is a group of individuals working for Lantiq); the increasing concentration [12] 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 [13] of bitcoin; the probability that higher transaction fees [14] will undermine the very premise of bitcoin; similarities between bitcoin and the gold standard [15]; 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 [16] that bitcoin could threaten the dollar; the European Central Bank’s view [17] that bitcoin is the expression of the Austrian School of Economics (favored by Ron Paul and Snowden); the arrest of a prominent bitcoin promoter [18] 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 [19] might be involved in the Silk Road case; Julian Assange’s fondness for bitcoin [20] 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 [21] (which would allegedly make it impossible to trace bitcoin operations); review of Max Planck Institute attempts [22] at making Internet communications immune to surveillance; the Max Planck Institute’s association with the Underground Reich [23].

1. In FTR #760 [5], we advanced the hypothesis that the actual originator of bitcoin may well be three employees of Lantiq, a spinoff of Siemens/Infineon AG [24] 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. [11]

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 [25] 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. [8]

. . . This honor is thought to belong to bitcoin’s shad­owy inven­tor Satoshi Nakamoto, who is esti­mated [26] 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 [27]” (which we spoke about in FTR #760 [5].):

If you go here [28] 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 [29]. 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 [30] 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. [12]

. . . . 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. [13]

A dooms­day sce­nario that has long been dis­missed by bitcoin’s biggest boost­ers is now a clear and present dan­ger [31]At 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 [32]. That’s what could hap­pen to bitcoin.

Update: Ghash.io has issued a press release [33] 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 [34] 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 [35]. Quartz’s Ritchie King weighs in: No, bit­coin isn’t about to be taken over by a mas­sive car­tel [36].

Pop­u­lar dis­cus­sion boards devoted to bit­coin are freak­ing out about this pos­si­bil­ity [32], 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 [37] a key sell­ing point [38]. 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” [36] isn’t the only threat posed [39] 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; [14]1/24/2014. [14]

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 [40]“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 sce­nario [41]and 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 [42], 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 [13]”).

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. [10]

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 [43] – of 8.25 mega­tonnes (8,250,000 tonnes) of CO2 per year, accord­ing to research by Bitcarbon.org [44]That’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. [15]

. . . . 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. [17]

The ECB (Euro­pean Cen­tral Bank) has pro­duced the first offi­cial cen­tral bank study of the decen­tral­ized cryp­to­graphic money known as bit­coin, Vir­tual Cur­rency Schemes [45]. 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 [46]. 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 [47].

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 [48] 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 [49]. 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 [50] 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 [16] on bit­coin:

“Ron Paul: Bitcoin Could Destroy the Dol­lar” by Jose Pagliery; CNN­Money; 12/4/2013. [16]

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. [20]

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.  [18]

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. [19]

. . . . 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 [6], we highlighted R. Cody Wilson, a bitcoin advocate who explicitly endorses the anti-democratic philosophy of Ludwig von Mises disciple Hans Hermann-Hoppe [51]. (Hoppe, like Palantir CEO Alex Karp, has been heavily influenced by mentor Juergen Habermas [52].)

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. [21]

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 [53] 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 [54], 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 [55], 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 [56] 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 [57], 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 [58] is research­ing the devel­op­ment [22] 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. [22]

. . . . This month’s reports, based on doc­u­ments leaked by Edward Snow­den, didn’t say whether the NSA was doing so. But a 2012 pre­sen­ta­tion [59] marked as based on mate­r­ial from 2007, released by the Guardian, and a 2006 NSA research report [60] on Tor, released by the Wash­ing­ton Postdid men­tion such techniques.

Stevens Le Blond [61], 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 [62], 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 [63] and pro­grams [52]. (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 [64], we find rein­forc­ing argu­ment that the Max Planck Insti­tute [6] 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 [23].

We note that Juergen Habermas, mentor to both Hans Hermann-Hoppe and Palantir CEO Alex Karp was head of the Max Planck Institute [65] 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. [23]

. . . . 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. . . .