Month: July 2013

In the past year or so, it has come to be a known fact in Bitcoin technical circles that Bitcoin, in its current form, is partially quantum-safe. The claim is that “used” Bitcoin addresses – that is, addresses which have both received and sent bitcoins, have their corresponding public key exposed on the blockchain, allowing quantum-enabled adversaries to break Bitcoin’s elliptic curve cryptography, whereas “unused” Bitcoin addresses, which may have received bitcoins but have never been spent from, do not have their public keys exposed, allowing them to benefit from the much stronger cryptographic guarantees of SHA256 and RIPEMD-160. As long as the first transaction spending from any Bitcoin address empties out all of the funds stored in that address to new addresses as change, the theory goes, Bitcoin should remain just as secure as before. In fact, since most wallets already try not to reuse addresses to increase privacy, for most users only minor software changes would be needed to satisfy the more stringent security condition, so adapting to quantum computing would be a breeze. This argument has been made by many people in the Bitcoin community, notably including myself. In reality, however, the argument has a fatal flaw.

Hashes and Curves

First, the technical background. In a Bitcoin user’s wallet, each of that user’s own Bitcoin addresses is represented by three distinct numbers: a private key, a public key and the address itself. The public key is derived from the private key by elliptic curve multiplication, and, given only classical computers like those that exist today, recovering the private key from a public key is essentially impossible. The address is derived from the public key by a series of three steps: applying the SHA256 hash function to the public key, applying the RIPEMD-160 hash function to that and finally adding a value called a checksum for error correction purposes (so that if you accidentally mistype a single character when sending to a Bitcoin address your money does not disappear into a black hole). The point of hash functions is that, just like elliptic curve multiplication, they are computationally infeasible to reverse; given an address, there is no way, aside from the brute force approach of trying all possible public keys, to find the public key that the address is derived from.

Quantum computers have two major tools that make them superior to classical computers in breaking cryptography: Shor’s algorithm and Grover’s algorithm. Shor’s algorithm is mainly useful for factoring numbers – for example, given the number 1728499, figuring out that the number is composed of the factors 1129 * 1531. With seven-digit numbers, the problem can even be solved on paper with enough patience, but if the numbers are hundreds of digits long quantum computers are required. In fact, the difficulty of factoring very long numbers is the basis of RSA, the oldest public key encryption algorithm and one still in use today. Grover’s algorithm is far more generic – given a list of numbers and a mathematical property, it can figure out which one of those numbers satisfies the property. A modified version of Shor’s algorithm can crack elliptic curve cryptography as well, and Grover’s algorithm attacks basically anything, including SHA256 and RIPEMD-160.

However, the two algorithms differ drastically in just how efficient they are. Shor’s algorithm reduces the runtime of cracking elliptic curve cryptography from O(2^k/2) to O(k³) – that is to say, since Bitcoin private keys are 256 bits long, the number of computational steps needed to crack them goes down from 340 trillion trillion trillion to a few hundred million at most. Grover’s algorithm, on the other hand, does not offer anything close to so drastic a speedup. Rather, it simply provides a modest reduction from O(2^k) to O(2^k/2). In the case of RIPEMD-160, the weaker of the two hashes used to create a Bitcoin address, this means that the number of steps needed to recover a public key from an address goes down from 1.4 trillion trillion trillion trillion to … 1.2 trillion trillion. Somewhat easier, but still thankfully impractical. As described above, “used” Bitcoin addresses from have an exposed public key, so it is the easy challenge of cracking elliptic curve cryptography with Shor’s algorithm that is the bottleneck. “Unused” Bitcoin addresses, on the other hand, expose only the address itself, so it is the RIPEMD-160 Grover problem that poses the weakened, but still insurmountable, challenge.

So What’s the Problem?

Here is where the above logic goes wrong. Everything about quantum computers in the above two paragraphs is, given public knowledge, is essentially correct, and if a Bitcoin address is truly unused, then indeed, even given quantum computers, any bitcoins lying inside are fine. However, the challenge is, how do you actually spend the funds? In order to release the bitcoins sent to that address, it is necessary to create a Bitcoin transaction, and that transaction must include a signature and a public key to verify that it was the owner of the private key that signed it. However, here lies the problem. By making that transaction, you have just released all of the information that anyone with a quantum computer needs to fully impersonate you, right on the spot. Without quantum computing, this is impossible, as Bitcoin’s elliptic curve signatures only have enough information to recover the public key, not the private key. With quantum computing, elliptic curve signatures are as flimsy as a digital sheet of paper.

If you send a transaction spending all 100 BTC in address 13ign, with 10 BTC going to 1v1tal to pay for goods and 90 BTC change going back to your new address at 1mcqmmnx, the first node that you send the transaction to can replace the change address with whatever they want, recover the private key from your public key, and forge your signature. The only way to get around the problem is essentially to send the transaction directly to a mining pool, like BTCGuild or Slush, and hope that the mining pool will be honest and place the transaction directly into the blockchain. Even then, however, you are vulnerable to a Finney attack – a dishonest miner can forge your signature, create a valid block containing his forged transaction continuing the blockchain from one before the most recent block (the one containing your transaction), and, since the lengths of the old and new blockchains would then be equal, the attacker would have a 50% chance of his block taking precedence. Thus, safe transactions are essentially impossible.

Lamport Signatures: A Solution

Basically, the purpose of hash functions is to provide us with the mathematical equivalent of a lock. Publishing the hash of a value is similar to putting out a lock in public, and releasing the original value is like opening the lock. However, once the lock is open, it cannot be closed again. The problem is, however, that locks by themselves cannot make a secure digital signature scheme. What elliptic curve cryptography provides, and SHA256 and RIPEMD-160 do not, is a way of proving that you have the secret value behind a mathematical lock, and attaching this proof to a specific message, without revealing the original value or even making the proof valid for any other message than the one you attached. In Bitcoin, the message in question is a transaction. When your Bitcoin client sends a transaction to the network, what it is really doing is sending a mathematical proof of the following fact: this transaction, which states that I am sending this amount of money to this address, was constructed by someone in possession of the private key behind the Bitcoin address I’m sending from. This is the basis for the transactional side of Bitcoin’s security.

However, there is a construction that enables us to solve this problem without RSA, elliptic curves or any other traditional public-key cryptographic system: Lamport signatures. A Lamport signature is a one-time signature that gets around the lockbox problem in the following way: there are multiple locks, and it is the content of the message (or rather, the hash of the message) that determines which locks need to be opened. If someone tries to forge your message, it is almost certain (read: the sun will run out of hydrogen before the other scenario happens) that the Lamport signature scheme will require them to open at least one lock that you did not open already – which they, lacking the unreleased secret values, will not be able to do.

Under this scheme, a Bitcoin address will still be the SHA256+RIPEMD-160 hash of the public key; the only difference is that the public key will consist of 320 hashes rather than an elliptic curve point. A transaction will include the public key and the signature, just like today, and, once again just like today, verifiers will check that the public key matches the address and the signature matches the message and the public key. The signatures are unforgeable; even with Grover’s algorithm, it will take 2⁸⁰ steps for an adversary to construct a fraudulent transaction that requires them to reveal the exact same 160 secret numbers that you already revealed, or an adversary can take 2⁸⁰ * 80 steps to simply crack all the hashes. Both numbers are in the trillions of trillions of computations.

The only change in behavior that will be needed is for people to start using addresses only once; after two uses, the security of the Lamport scheme drops to 2⁴⁰, a value which might still be safe against quantum computers at first, but only barely, and after three uses it’s as weak as elliptic curve cryptography. Theoretically, however, even this can be partially overcome; the Merkle signature scheme builds off of Lamport’s idea to create signatures which can be used tens or hundreds, or potentially even thousands, of times before the private key needs to be retired. The only limit to the maximum number of transactions per address is basically a question of limiting blockchain bloat.

Given what is currently public knowledge, quantum computers are still far away; the most powerful quantum computer to date managed to use Shor’s algorithm to factor the number 21. However, sudden advances are always possible, and we always need to have a plan of what we can do if Edward Snowden decides to leak out that the NSA has fully functional quantum computers hiding in a secret data center. We probably cannot handle such a sudden event, but we certainly can handle cases where we get even a month of advance warning. The solution is this: as soon as a quantum pre-emergency is declared, everyone should move their wealth into a 1-of-2 multisignature transaction between an unused, old-style, Bitcoin address, and an address generated with the new Lamport scheme. Then, developers should quickly create the Lamport patch for as many Bitcoin clients as possible and push for everyone to upgrade. If the whole process is done within weeks, then by the time quantum computers become a threat the bulk of people’s bitcoins will be in new-style Lamport addresses and will be safe. For those who still have their wealth in old-style addresses by then (unused old-style addresses that is; by that point coins in used old-style addresses could trivially be stolen), a few established organizations will agree to serve as trusted nodes, using the Merkle signature scheme to add an additional signature to transactions sending from old-style addresses to new-style addresses. To prevent network fraud and Finney attacks, the new Bitcoin rules would require all transactions from old to new after a certain point to be signed by these authorities. The authority system will introduce centralization, but it will only be a temporary emergency measure, and after a few years the system can be retired entirely. From there, we lick our wounds, pick up our losses and move on to enjoy some of the more wonderful things that quantum computing has to offer.

At “Inside Bitcoins the future of virtual currency” Bitcoin Conference in New York held on July 30th, Adam B. Levine, senior fellow with the Bitcoin Education Project and Editor in Chief and Co-host of Let’s Talk Bitcoin! announced his ambitious project code-named “Watershed” (watershed.launchrock.com) in a well received speech, “Win-Win-Win-Win-Win: Rethinking Content Monetization with Bitcoin” with the collaboration of Farzad Hashemi.

The speech laid out the foundation for a versatile audience supported content exchange system.  More specifically, Levine told Bitcoin Magazine that Watershed will be “An open source, free platform for sustainable community ecosystems powered by cryptocurrency.” Recently we have witnessed content providers (which I would prefer to call content exchangers) big and small leverage the ”crypto-monetization” of web communities through tipping tools that eliminate so called “transaction friction” such as  Reddit’s Bitcointip, Terk.co’s WordPress Bitcoin Tips Plugin,  Scotty.cc’s Coin Widget and even “intersertial ad” URL shorteners such as CoinUrl.  Watershed take these concepts to the next level. Levine described the old “broken” media model where the audience/media consumer does not have a direct connection to the author:

Advertisers pay the Platform (i.e. the Website Operator), The Platform pays the Content Creator, The Content Creator creates content for the Audience,  The Audience supports the Advertiser. Watershed closes this content exchange gap with an Audience Supported Content system.  

Hat Tip to Early Thinkers: A Brief Pre-History of Bitcoin Tipping

February 16th, 2010: Elnora Crater on the Bitcoin Forum BitcoinTalk.org pondered a “URI-scheme for bitcoin”  whereby “The bitcoin addresses could be improved by implementing an URI-scheme like e.g. torrent magnet links….This would allow one to implement ‘donate buttons’ on homepages, ‘pay buttons’ on webshops…”

November 12th, 2010: The controversial Bruce Wagner wrote that “Bitcoin Needs a ‘Tip Jar’ Widget system like Flattr.”

April 04, 2011: Jed’s “Idea for the killer bitcoin app” laid the groundwork for a broad, all-inclusive Bitcoin Tip Jar with a “Twitter tipping system”, “Web based tipping”, “SMS tipping” and a “Forum tipping plugin.”

September 23, 2011: Manu Sporny explained “Why Tipping has failed” on his blog “The Beautiful, Tormented Machine” that “Standardizing Payment Links for the Web is not enough – we must also focus on listing and transacting assets that provide value to people.”  And further “…the problem is a deeper social issue of paying for unrefined content…”  Sporny was also a speaker at today’s conference  as the CEO of Digital Bazaar and is the founder of PaySwarm, “the world’s first open, Universal Payment Standard for the Web.”

2013 Bitcoin’s Tipping Point

On April 5th, 2013 Scott “Scotty.cc” Sherman announced the release of Coin Widget on the Bitcoin Forum: “coinwidget.com donation widget – now open source (w/litecoin support).” Coin Widget is a customizable and elegantly simple to use Bitcoin and Litecoin donation widget. It can display the total amount or the total number of tips and provides a QR code for additional donations. Shortly thereafter, on May 18th 2013, Adam B. Levine gave his seminal speech “Youtube is Broken!: Rethinking Content Monetization with Bitcoin” at the San Jose “Bitcoin 2013: The Future of Payments” Bitcoin Conference. Adam’s speech and Scotty.cc’s widget compelled David Perry of Coding in My Sleep to announce on the forum that he was “Looking for WordPress plugin (or someone to write one) to bring some of these ideas to fruition.”     Terk.co, taking the bull by its horns announced on May 24th, 2013 that “I hate WordPress development as its architecture is so wrong, but I loved the idea so much that I actually learnt writing WordPress plugins overnight….This is a result of my all-night work and this is a working plugin that does what {David} described.”  Terk.co’s WordPress Bitcoin Tips Plugin was born.

Enter Watershed

Working on these themes and with a grand vision, Levine announced Watershed. “My focus is not so much on commerce as it is on creating sustainable community,” said Levine. Watershed separates the platform from the content that resides on it, transforming the way we create, consume and exchange content.  In this new paradigm the audience pays for content, the sponsors pay for the platform.

Influenced by Dr. Conrad Barski’s Cointagion, which utilizes a “Real-time Generation of Bitcoin Addresses for a Web Commerce Site” Levine revealed “OAPUPU” or One Address per Use per User scheme.  OAPUPU pre-populates a new payment address for each potential user/consumer and tracks and credits payments, tips, donations, subscriptions all without requiring the user to navigate away from the page they are visiting.  Moreover, advertisers can embed actionable payment mechanisms such as QR codes to enable frictionless e-commerce and e-giving.

From a user privacy vantage point this system appears to one-up legacy services such as PayPal. Like PayPal, individual merchants do not store consumers’ credit card details; However, unlike PayPal there is no money transmitter service (i.e. PayPal) requiring you to park your financial details either. This is a direct widget to Bitcoin Wallet (to Block Chain) to merchant and content provider exchange. In a metrical rhythm Levine described how he envisions community supported content where information consumers tip authors for content on topics they are passionate about. This virtuous cycle of tipping,

leads to

content creators wanting to service those needs

results in

increased search rankings

leading to

more audience

meaning

there are more people willing to tip

leads to

more/better content creators creating content

leads to

better search results

resulting in

more audience

 

Watershed will bridge the creator/audience divide by enabling a new level of intimacy:

“Content creators already have a direct connection to their audience, the problem is until Cryptocurrencies there was never an easy and borderless connection from the audience back to that creator.  The audience compensates very indirectly by buying from site advertisers, which funds the site and which might trickle down to the creator, but there are two basically unrelated and unnecessary parties involved…By separating the platform from the content that lives on it, you dramatically simplify things.“

 

Quality is: Win, Win, Win Win, Win:

Results Based Pay for Creators – Win

Better Content for Audience – Win

Better Growth for Platform – Win

More Eyeballs for Advertisers – Win

Better Content – Win

Brave New Widget World

This is not your one size fits all Starbucks barista tipping jar. Tip splitting will divide tips into multiple addresses.  For example a percentage of the tip can go to charity. Affiliate syndication will enable creators to embed referral commissions into content, incentivizing syndication and social media distribution.

eCommerce Evolution

Watershed will be built with “WindowShop” Live Auction functionality. Announced was WindowShop which will take the Cointagion concept and reinvent display advertising. Advertising will directly engage the consumer rather than a tiered multi-click process. Three clicks becomes hyper-click. This will be the driving force behind a new type of impulse shopping. As a real world comparison, I was reminded of Tesco Homeplus Subway Virtual Store and PeaPod Virtual Shelf.   I was excited to learn about trustless and riskless live auction integration into Watershed. Live auctions will use blockchain escrow. On-chain escrow will enable refunds (i.e. release of escrow) without fees.  The stroke of genius is that since the money is not held by the merchant or platform, but rather by the blockchain itself, this reduces if not eliminates fiduciary risk and likely the regulatory compliance requirements (e.g. money transmitter licenses) for facilitating escrow transactions.  However, this requires a new way of thinking about auctions in general. Bidders would have their funds tied up in escrow until the conclusion of the auction. A paradigm shift in the way online auction can be conducted by completely removing dead beat and hoax bidders out of the equation. Gone are the days when sellers would state “serious bidders only” …and what good did that do?.       

Moving Forward

Levine’s speech at San Jose inspired other to act. With the announcement in New York, Levine anticipates spearheading Watershed and he told Bitcoin Magazine he anticipates running its operations as a not for profit. Watershed is an ambitious and broad proposal that is not yet funded. Collaborators are actively being sought to engage project Watershed. Potential developers should contact Levine with proposals. Levine boldly stated, “Rich, cryptocurrency advertising turns every community platform into a mini-kickstarter – Pick the community or niche that should be your primary audience and conduct that campaign right there in an advertising slot.”  

Can Watershed be the Kickstarter for the “other 6.5 Billion people?” Watershed with its multifaceted approach needs to gain enough momentum to vault ahead of maturing companies such as Flattr and newcomers such as Pikapay & BitCredits.io. Flattr describes itself as the “easiest way to support creators…give microdonations when you ‘Like,’ ‘Favorite’ & ‘Star’ ..support creators directly on services you use.” Flattr, more than three years strong recently added Bitcoin Support. PikaPay with a more narrow focus is now Microfunding Over Twitter.  BitCredits.io, a similar project was recently announced on Bitcoinstarter.

I’ve had the privilege of working with Adam as a writer for Let’s Talk Bitcoin! He has a creative drive and is passionate for his work. If anyone can bring together a project of this magnitude I know it will be him.

Bitcoin Magazine is proud to announce the launch of BitGive Foundation, the first Bitcoin charity!  BitGive is a non-profit foundation (IRS 501c3 status is pending) accepting donations from the greater Bitcoin community and offering charitable gifts to environmental and public health causes worldwide.

As Bitcoin continues to grow in prominence and utility, BitGive Foundation provides the opportunity for you to give to those in need in the most expedient and efficient way: through the Bitcoin currency!  The BitGive Foundation will provide charitable donations on behalf of the growing Bitcoin community.  BitGive is a non-profit foundation that is accepting donations from the Bitcoin community and providing charitable gifts to environmental and public health causes worldwide on behalf of the Bitcoin community.

Connie Gallippi, Executive Director of the new organization, says, “The long-term potential of the foundation is tremendous. The expected increase in value of Bitcoin will make donations grow over time, giving the foundation more financial stability and increasing funds to provide to charitable causes.”  With the anticipated growth in Bitcoin value, usage, and business opportunities, BitGive also anticipates an ever-growing community to provide donations, including investors and businesses with increasing profit margins related to Bitcoin and business investment gains.

Bitcoin Magazine had an opportunity to interview BitGive Foundation’s Executive Director, Connie Gallippi at the New York City Inside Bitcoins Conference.

Bitcoin Magazine : When did you first hear about Bitcoin?

Connie Gallippi: I heard about Bitcoin years ago when my brother, Tony Gallippi, first got involved.  I thought it was fascinating and I could really see potential for Bitcoin to make significant change.

BM: What was it about Bitcoin that you found interesting?

CG: That’s a tough one… EVERYTHING about it is fascinating.  Bitcoin can literally change the world!

BM: When did you first get the idea for the BitGive Foundation and what inspired you to create the BitGive Foundation?

CG: The idea came when I attended the Bitcoin Conference in San Jose this past May.  Being in that space with tons of energy, brilliant people, and interested investors, I saw tremendous potential for Bitcoin to lead to significant financial gains across the board.  My background is in nonprofits so I naturally wanted to find a way to capture some of the potential of Bitcoin for charitable causes.

BM: Where do you see BitGive going in a year?   

CG: I would love to see us get enough donations in the door that we can be giving gifts in a way that can actually create significant change.

BM: What makes your Foundation stand out in comparison to other businesses utilizing Bitcoin?  

CG: BitGive is a nonprofit foundation for charitable giving and is completely different than other for profit startups and other companies in the Bitcoin space.

BM: If I an individual is looking to contribute BTC to your foundation, how can they do so?

CG: We have a donation button on our website and it automatically goes right to our account.  Check out bitgivefoundation.org.

BitGive’s Board of Directors includes Stephen Pair co-founder and CTO of BitPay, Inc.; Patrick Murck, legal counsel at the Bitcoin Foundation; and Madeline Finch, who has a background in the non-profit foundation community.  BitGive has also received support from Tony Gallippi, co-founder and CEO of BitPay, Inc. and the legal expertise of Lorri Dunsmore, Jacob Farber, and Jane Frissell at Perkins Coie, LLP.

For further info, please contact BitGive’s Executive Director, Connie Gallippi, at 1-916-625-6BIT or [email protected].

For the past three months, the Bitcoin economy has undoubtedly been in a correction phase. The number of major new adoption announcements has dissipated, companies like BitPay and Coinbase have quietly ceased to provide weekly updates on their processing volume and number of new customers, and media attention has significantly died down since the sudden burst of both positive and negative attention in April. The Bitcoin price has slipped through one floor after another, dashing hopes that it would exceed $500 by the end of the summer. Google Trends volume has slowly declined, usage statistics have faltered and legal troubles have led to bitcoins becoming harder to buy as quickly as exchanges keep trying to make it easier; in fact, the most rapidly growing way of buying bitcoins today is on the streets. Now, however, three months after the greatest carnage immediately following Bitcoin’s massive rise to $266, it is time to take another look at where Bitcoin is going, and consider what the next steps are for the Bitcoin economy as a whole to take.

First, the price. The events of early June brought a considerable amount of pessimism to the Bitcoin community as a powerful upward trendline starting from even before the largest part of the price bubble was broken. Within days, Bitcoin dropped to $100, and even that level was pierced at the beginning of July as there was simply not enough demand to maintain the price point. What happened in the past month, however, is surprising. Not only did the price make an unexpectedly strong comeback from its low at $65, but it also managed to maintain it, resulting in a sustained upward correction that has now erased essentially 100% of the month’s losses. The price today is essentially the same as the price at the beginning of Porcfest in mid-June. In fact, the rise has sustained itself so well that, just in the last few days, the downward trendline that has dominated Bitcoin price movements since the crash from $130 in June has quietly been broken. This creates some evidence that, perhaps, the price is positioning itself to treat $100 as a long-term point of stability – similar to $5 in early 2012.

A Reddit user has provided another interesting chart comparing the Bitcoin price in 2011 and 2013; there, the conclusion is similar: Bitcoin’s decline this year was closely following the same pattern as its decline after the bubble in 2011 all the way up until July 10, but since then Bitcoin this year has made an unexpected and decisive comeback.

Here we see four different statistics from blockchain.info: the number of unique addresses used, the number of transactions per day, the number of transactions excluding popular addresses (in practice, this means certain mining pools and gambling sites) and the estimated USD transaction volume. All four of these show signs of stopping their decline of even recovering, although for the number of transactions per day it is still too early to tell if the last two weeks are merely a statistical blip. All in all, the evidence looks very positive.

Here is the one chart that provides some reason for further pessimism – the Google Trends volume. Searches for Bitcoin are continuing to decrease, and the four days with the lowest search volume since the bubble have all been in the last four weeks. However, history shows that Google Trends volume needs to be viewed carefully as an indicator of interest. One theory is that the Google Trends volume represents the derivative of the level of interest in Bitcoin more so than interest in Bitcoin itself. That is to say, most Bitcoin users who are already deeply involved in Bitcoin do not go around Google-searching it; rather, they simply head straight to their own projects or community hotspots like reddit.com/r/bitcoin, Bitcointalk or news sites like our own. People looking up Bitcoin on Google are thus by and large only potential new users. Hence, a 50% decline in the Google Trends volume does not mean that the Bitcoin community has become half as large; it simply means that it is growing half as quickly. Google Trends volume has consistently lagged behind other indicators in the past; for example, the indicator hit its post-2011-bubble low one month after the lowest point in the price, somewhat corroborating this hypothesis.

So what does all this mean for the future of Bitcoin? In general, it is further evidence for the Bitcoin economy’s high level of resilience. Even as the shadow of the April 2013 crash still looms over us, the underlying Bitcoin economy is continuing to grow, and it is our job as a community to continue to support it. The next great Bitcoin bubble, if it comes, will likely not come for a while; it may well be that the next year or so will be a time for the new class of Bitcoin entrepreneurs to further integrate itself into the community and develop its products and services, and only after a long time will we see an overt wave of public attention once again. In the near term, some kind of bubble similar to that in January 2011 may potentially happen, although history is unlikely to repeat itself so neatly. For now, keep using Bitcoin, keep developing great projects and services, and enjoy the ride.

According to the latest news from Reuters, the government of Cyprus, the Bank of Cyprus and international lenders have come to an agreement that will recapitalize the bank and allow it to remain solvent: all depositors at the bank will have 47.5% of all funds above the deposit insurance threshold of $100,000 seized to pay for the bank’s bad debts. Originally, 37.5% of all funds above the threshold were deducted and an additional 22.5% temporarily frozen in case of additional emergencies; now, if this agreement goes as planned an extra 10% coming from the frozen funds will go towards bank recapitalization and the remaining 12.5% will be unfrozen for its owners’ free use. The “additional emergency” in this case might be the fact that the BoC realized that it would not be able to get off lightly by holding on to its real estate for a few years until it could sell it at higher prices after a hypothetical market recovery; rather, the bank needs money now, even if it means selling off land at rock-bottom prices to get it.

Since the original depositor bail-in plan was announced in March, the idea has been very warmly received by governments around the world. The governments of Japan, Canada, the European Union, Switzerland, Australia and New Zealand have all endorsed or taken preliminary steps toward potentially implementing similar plans if necessary in their own countries. The economic logic behind the proposal is this: rather than banks imposing their fiscal irresponsibility onto the public at large through taxpayer-funded bailouts, depositor bail-ins would keep each bank’s problems confined to its own customers. Bank clients gain the ability to avoid facing any losses by deliberately choosing banks for their responsibility and solvency, and politicians concerned about inflicting severe shocks on the financial system through banks outright collapsing gain the ability to allow banks to only collapse partially, the financial equivalent of a prescribed burn.

Thus, depositors with funds in their bank exceeding the deposit insurance threshold (usually between $100,000 and $500,000) now have an increased incentive to turn to alternative ways of storing and protecting their wealth. The more popular alternatives include credit unions, “ethical banking” providers like Triodos Bank in Europe, peer-to-peer lending sites like Prosper and precious metals. Now, we are seeing a new category of asset emerge: cryptocurrencies. Bitcoin is by far the oldest and largest, but Ripple credits, litecoins and primecoins have already come up as significant alternatives.

Cryptocurrencies as a form of wealth protection is a highly controversial topic, the main reason being that, especially over the last six months, Bitcoin has been far more volatile than the fiat currencies that its proponents often rail against. Depending on the specific time that they bought in and cashed out, some Bitcoin users have lost even more of what they invested than the 47.5% haircut taken by Cyprus depositors – and Bitcoin has no depositor insurance threshold. However, as a small part of a toolbox Bitcoin is certainly a very valuable tool. The best analogy here comes from the world of electricity. If you have a circuit with current passing through a number of resistors in parallel, what happens if you add another resistor, one with extremely high resistance, into the mix? The answer is, only a small amount of current will pass through the new resistor and, all in all, despite the extremely high resistance that the new resistor brings the total resistance of the system will go down. Similarly, adding a highly volatile asset to your portfolio can still reduce your portfolio’s volatility as long as you only add a small amount of it – especially given how disconnected cryptocurrencies are from the economy of the outside world. Arguably, Bitcoin even hedges against the world economy – if more banks start to collapse, capital controls will increase, people will further lose faith in traditional institutions as a way of protecting themselves, and Bitcoin may become considerably more popular. The fact that Bitcoin’s price started to rise super-exponentially from $50 just two days after the news of the Cyprus bail-in first broke in March may be a coincidence, but is may also have been the primary trigger that set the largest part of the Bitcoin bubble off.

What will the bank account of the twenty-first century look like? Simply put, we don’t know. All we can tell for now is that we are seeing a large outgrowth of new alternatives, and any of them could become the dominant form of long-term wealth storage in the years to come. Treat your money carefully; don’t invest more into any single source than you can afford to lose.

Even among those of us who are experienced Bitcoin users today, chances are that when we first heard of Bitcoin we did not embrace the currency wholeheartedly all at once. When people ask the average Bitcoin afficionado how it was that they first joined the Bitcoin community, a common story is that of a tech-savvy netizen who hears about Bitcoin at some point, discounts it because the system has some obvious fatal flaws that should send it crashing down within months, and sees it again weeks or months later after a bubble of media attention – and only then do they listen. Indeed, Bitcoin is a technology so different from anything we have seen before that it is hard to imagine anyone being fully comfortable with it at first. The purpose of this article will be to help Bitcoin advocates identify what some of these misconceptions are, and how Bitcoin advocates can help potential new users more quickly make the jump.

Pitfall 1: Bitcoin is Backed by Nothing

This is the most common argument against Bitcoin. The idea is this: most objects that we are used to dealing with in the physical world are things that we want because they provide some specific use value to us in and of themselves. We want apples because they are healthy and taste good, we want chairs because they are comfortable and we want computers because they help us efficiently browse pictures of cats on the internet. Even things that we get not for our own use, but to trade or sell to others, derive their value from the fact that somewhere, near or far down the chain, someone has a use for it. Bitcoin, on the other hand, is not like that. Bitcoins are nothing more than numbers in a computer network, and by themselves they have no value whatsoever. Oil is valuable because you can sell it to a company which will produce gasoline and sell it to a gas station which will sell it to a driver who will use it to get where they want faster; a bitcoin is valuable because you can sell it to someone who will sell it to someone who will sell it to someone who will sell it – the chain is unending. There is no originating place where the value is supposed to start, and the whole thing rests on an unstable social equilibrium that is liable to collapse at any time.

Bad Response: Bitcoin is Backed by the Economy

A common response to this is: bitcoins are valuable because other people accept them as payment. The argument usually follows up by citing the subjective theory of value, which essentially states that something can only be valuable if people want it, and if people want it then ipso facto it must be valuable. The response is a clever one, but the problem is that it does absolutely nothing to address the problem of infinite circular descent that makes people so worried in the first place; rather, it simply sidesteps it with a trick of linguistic sleight-of-hand. Those making this response also tend to make the claim that, according to the subjective theory of value, intrinsic value does not exist, so the questioner’s desire to see intrinsic value in things is baseless. This is also wrong, but for a slightly different reason: it conflates two different definitions of “intrinsic value”.

The first definition of intrinsic value, the one that the subjective theory of value effectively refutes, is the claim that commodities have some kind of mystical “value” embedded in them as a chemical-metaphysical property sort of like melting point and density, and we value certain things because they score highly on this property. However, there is also a second definition of intrinsic value, and one that is perfectly grounded in reality: the value that something has for the purposes of final use, and not for trade. Apples, chairs and computers are all firmly grounded in intrinsic value, and company stocks satisfy this criterion to a large extent (as owning a stock brings you dividends and eventually a payout when the company goes bankrupt). Bitcoins, however, do not, and this is a problem – while computers going down by 99% in price is a strong buying opportunity, bitcoins going down by 99% in price also makes each unit 99% less useful in trade, and there is fundamentally no floor stopping a further collapse.

Good Response 1: Go Into the Details

There are two good ways to fundamentally resolve the paradox behind the seemingly circular argument tha justifies Bitcoin’s value. The first strategy is to explain in detail how a currency maintains its value. The argument is this: suppose that each bitcoin is worth $100, and Bob voluntarily accepts a bitcoin from Alice in exchange for a toaster. Why does he do this? Because he knows that tomorrow she will be able to give that bitcoin to Charlie in exchange for a chair. How does she know that? Because she saw Charlie accepting them yesterday, and the day before, and the day before that, and realizes that the chance that tomorrow will be the day Charlie stops taking them is quite small. Why does Charlie accept the bitcoin the next day? Because he knows that Dave will accept it the day after that in exchange foor groceries – for exactly the same reason. And so on to Eve, Fred, George and all the way down to Zachary, who will then give Alice a bitcoin in exchange for a bicycle for the same reason as everybody else.

At first, this seems like a circular argument: Alice accepts bitcoins because Bob accepts bitcoins, and so on, because Zachary accepts bitcoins because Alice accepts bitcoins. However, this misses the key insight that the argument makes: the fundamental role of time. It is not that everyone accepts bitcoins because everyone accepts bitcoins today; rather, everyone accepts bitcoins because everyone accepted bitcoins yesterday. Thus, as long as bitcoins manage to be valuable once, they can remain valuable potentially forever on simply through this self-reinforcing chain. Altogether, this argument provides a compelling reason why bitcoins are valuable, and so resolves the conflict.

Good Response 2: So Is Any Other Currency

The other, simpler, approach to defending Bitcoin from this accusation is to not bother defending it at all; instead, you show that other currencies are just as bad as Bitcoin is. For dollars, this is easy; they too are intrinsically valueless. Some argue that dollars have intrinsic value because the government will always accept only dollars for tax payment; however, this argument has a fatal flaw: the government forcing the use of dollars for tax payment does not constitute any kind of hard floor on their value. To see why, suppose the price of dollars went down by 99% (ie. 100x price inflation across the economy). What would happen to your income taxes? Well, your income measured in dollars would go up by a factor of 100, so you would owe a hundred times more dollars in taxes as well. That is to say, if each dollar becomes a hundred times less useful in buying goods and services, it will also become a hundred times less useful in paying off your tax liability. Government is in fact not a master of its own currency’s price; in fact, it is a slave to it just like everybody else in society.

Gold is harder, as it does have some intrinsic value in electronics and jewellery, but the argument here is that its intrinsic value is so small as to be insignificant; as recently as 2001, gold was worth less than $300 per ounce. If gold’s intrinsic value has any power whatsoever, the rise up to $1900 in the decade that followed would imply that industry and jewellers suddenly found six times more valuable uses for it, and now that gold is down to $1300 the electronics and jewellery companies would all be buying it up on the cheap for its intrinsic use value. However, this is not the case; in fact, some argue that without the additional value heaped on by its function as a store of value gold would be worth as little as $100 today.

Pitfall 2: Bitcoin is An Aristocracy of Geeks

This argument is often made by those who are interested in alternative currency as a means of securing greater geofinancial equality. The claim is that Bitcoin is really no better than the fiat currency that came before it because, while fiat currency gives great power to governments and banks with at least some elected officials regulating them, Bitcoin simply takes that power and hands it to unaccountable computer programmers living in their mothers’ basements instead. A parallel argument is that Bitcoin can potentially oppress the common people through an aristocracy of the super-intelligent, as ordinary people stand no chance of understanding how the complex algorithms behind Bitcoin work. When viewed from a programmer’s point of view, this argument seems silly, but from the perspective of someone who is only just beginning to hear the language of “SHA256”, elliptic curve cryptography and proof of work, one can see how some people could be worried.

Medium Response: Actually Explain How It Works

Many people think that Bitcoin is complex, but in reality compared to some of the other cryptogaphic protocols of the past few years Bitcoin is downright trivial by comparison. Here’s a full explanation of why Bitcoin is secure in two paragraphs:

The Bitcoin network maintains a database of all transactions that have taken place, and from these transactions it is possible to calculate how much money someone has. To prevent people from making transactions spending from other people’s accounts, public key cryptography is used. Public key cryptography lets you create a “key pair”, consisting of a public key and a private key, that lets you create “digital signatures” with your private key that anyone with the public key can verify, ensuring that the message was sent by the owner of the private key and was not tampered with. Bitcoin holders use their private keys to sign transactions spending money from their wallet, and publish their public keys so that the network can verify that these transactions are legitimate.

Order of transactions is also important: if Alice sends 10 BTC to Bob and then tries to send those same 10 BTC to Charlie, you want the network to reject the second transaction; otherwise, Alice can buy a product for 10 BTC from Bob, then buy a product with those same 10 BTC from Charlie and let the network throw out the transaction to Bob, effectively defrauding Bob of 10 BTC. To solve this, Bitcoin uses a construction called a “blockchain”, where some users (called “miners”) run a computer program to pool together transactions into packages called “blocks”. A valid block is hard to produce – so hard, in fact, that on average the entire network only makes one every ten minutes, and difficulty is calibrated so that it stays that way. Each block also includes a pointer to the last block, creating the “blockchain”; if there are two competing blockchains the longest is taken to be correct. It is impossible to change the content of any block without making the block invalid; the reason is that the mathematical properties that make a block valid are so convoluted that changing even one bit in the block would require redoing nearly all of the work in creating the block to make it valid again. Redoing all of the work would also make the block considerably different, so the pointer in the next block pointing back to that block would need to be changed, so the next block would also need to be redone, and so on. Thus, if Alice wants to double spend her 10 BTC, she would need to create a new block from before she sent her 10 BTC to Bob, and then catch up with the rest of the network from there faster than the network adds new blocks itself – a task almost impossible for any single individual.

This is certainly quite complicated to take in all at once, and Satoshi’s whitepaper explains the concepts in more detail, but surprisingly enough the explanation has very little mathematical content; understanding the properties of public key cryptography is all it takes. Most other truly novel cryptographic algorithms developed today, on the other hand, require the equivalent of a university degree just to understand the algorithm’s steps. With Bitcoin, you do need to trust academic mathematicians that the underlying cryptosystems (elliptic curve cryptography for public and private keys and SHA256 to provide the highly “convoluted” block validation properties) are secure, but this has been independently researched by hundreds of university departments around the world, and all agree that the underlying technologies are secure. At this step, the security of SHA256 and ECC itself, the “here’s how it works” argument does break down slightly, which is why the next response I will present is somewhat better (although you should certainly never shy away from an opportunity to educate people about Bitcoin’s inner workings or the mathemagical wonders of cryptography).

Good Response 1: Mathematicians Are Not A Cartel

If one makes the comparison between the coercive power of governments and social status of banks and the mathematical and computer science expertise of any possible “masters” of the Bitcoin system, the comparison breaks down at one particular place: math and comp-sci geeks are not on the same team, or indeed necessarily on any kind of team at all. Whereas the governments of the world meet up at specialized forums, the banks have industry conferences and exclusive events targeted toward the super-wealthy, and both heavily interact with each other through central banks and regulatory systems, mathematicians are pretty close to the opposite of an organized class. The wizards of numbers and Greek letters are distributed across various universities in the world, and the masters of the digital universe can be found anywhere from open-source development groups to corporations to your local teenage whiz kid. Saying that these groups are threatening to seize control of society is as absurd as claiming that blacksmiths and sword makers were on the verge of taking control of armies during the Middle Ages.

Furthermore, the clique of mathematicians and computer programmers is an open one; while joining the political and banking system requires a high degree of existing wealth, luck and social connections, anyone can start learning math and CS simply by taking some of hundreds of free open online courses. From there, Youtube videos, digital and paper textbooks and libraries can provide further support, and if you or your parents have anything close to a middle-class income (and are outside of the United States) universities are also there to help. Good luck finding a “how to become an elite banker” lecture series on Coursera.

Good Response 2: Fiat Currency is Technically Complicated Too

The other strategy is, once again, not to defend Bitcoin but to attack fiat currency. Among many people, there is this false conception that fiat currency is easy, because you just pass dollars around and enter numbers to make credit card payments, but Bitcoin is hard, because it involves computer programming and cryptography and SHA256. The fallacy here is obvious: there are in fact two levels of understanding, and arguably Bitcoin holds up well in both. The lower level of understanding is to simply understand the currency enough to be able to use it. Bitcoin is simple: you click “send” to send and copy and paste your Bitcoin address to receive. Credit cards are arguably more complicated; you need to fill in large amounts of personal information, understand how “chargebacks” work, pay off your balance every month and pay interest if you do not, and, for some reason, offline credit card transactions require you to sign a piece of paper (or a computer screen) with a pen. Cash requires you to do arithmetic with various denominations to calculate change.

On the higher level, while Bitcoin does have its mining pools and blockchain forks and client software patches, fiat currency has a large amount of complexity on its own. In Bitcoin, having 100 bitcoins means that you have 100 bitcoins. But what does it actually mean when you have $100 in your bank account? The technical answer is, there is a liability of $100 owed by the bank to you, backed by government deposit insurance up to a maximum of something like $250,000 if the bank goes bankrupt, and the bank itself partially backs its deposits by a combination of a very small quantity of cash and a specialized, bank-only form of money called “central bank reserves”. However, most of your money the bank lends out, and then the loaners probably spend that money, leading to the merchant depositing that money at a different bank, so the same underlying cash ends up being responsible for many different bank deposits at the same time, and it gets even more complicated from there – and, to be fully fair to the Bitcoin explanation given above, that’s not even getting into how the credit card system, bank ATMs and SWIFT are cryptographically secured (answer: quite a lot of the time, instead of actual cryptography security is achieved through machine-learning algorithms based on linear algebra and differential calculus). All things taken together, Bitcoin and fiat currency seem to be roughly equivalent in complexity on this front.

Pitfall 3: Bitcoins Are Finite And Will Run Out

The problem here is this: there will only ever be a limited number of bitcoins in existence – specifically, 21 million, and eventually, the argument goes, over time people will lose their bitcoins until none are left, making the system worthless. There are serious concerns with a limited currency supply, and the accompanying price deflation, as a model for an economy, and this article will not address those; instead, I will focus on the first concern.

One correct response is this: if half of all bitcoins are lost, then due to supply and demand the rest of the bitcoins will become twice as valuable. Thus, everyone will on average have and transact half as many bitcoins, and so after roughly the same amount of time, the number of bitcoins still in circulation will be down to a quarter of the original total. After three halvings, it will be an eighth, then a sixteenth and so on. However, and this is key, this progression will never reach zero. The Bitcoin protocol can always be changed to add more decimal places, and that is likely what will happen in that circumstance. Another response is to state that it is highly unlikely that we will see anything close to that much loss; if loss becomes a serious problem, we will see security systems develop to help guard against that. Ultimately, if nothing else, we can start another currency with unlimited linear growth to solve the problem; this will actually lead to a roughly constant final money supply assuming a fixed loss rate (eg. at 1 million coins per year and a 1% per year loss rate, the cap will be 100 million coins). Altogether, there are simply too many ways to get around this problem for it to be worth bothering about.

Pitfall 4: Bitcoin Is a Ponzi Scheme

Many people when first introduced to Bitcoin immediately come to this conclusion. The argument is this: Bitcoins are sold as an investment that will go up in value, but in order for them to keep rising there must constantly be more and more people participating – and once Bitcoin runs out of new people to bring in the whole system will collapse.

The most common rebuttal made is in fact the correct response, although it has some elements of an archetypal “bad response” in it. The argument is that Bitcoin is not a Ponzi scheme, as Ponzi schemes have a centralized authority, individual users are rewarded specifically for bringing in people under them, and the schemes themselves rely on misinformation and fraud – Ponzis do not advertise as Ponzis. Bitcoin, on the other hand, is decentralized, open source and individual Bitcoin holders only benefit very slightly from every new person that they recruit. The “bad response” side comes out when the argument focuses on the pedantic differences between Bitcoin and Ponzi schemes; to this, critics reply that centralization does not really matter and the sheer complexity of the Bitcoin scheme is a substitute for deception. As explained above, the latter claim is quite false, but even still this only reduces Bitcoin from “Ponzi scheme” to “pump-and-dump” on the level of dishonesty.

The “good response” side of the argument comes out when the response points out that, unlike both Ponzi schemes and pump-and-dumps, Bitcoin has legitimately revolutionary properties, and most Bitcoin users are into it for much more than just the money. Bitcoin allows users to transfer money instantly around the world essentially for free, semi-anonymously and without restrictions; that alone is a very compelling promise even without the decentralization aspects. It is more accurate to say that Bitcoin is a startup, and its twenty one million units are sort of like shares – although not quite, as they also have the hugely important function of being a form of money that can be transferred instantly around the world essentially for free, semi-anonymously and without restrictions. Simply being part of the Bitcoin community is another way to “buy in”; even if you own zero bitcoins yourself, if the Bitcoin economy does well, existing Bitcoin businesses will do well and you will derive a benefit in some form indirectly. If the startup pitch is compelling to you, come on in; if not, then okay, we’ll keep doing our best to make our decentralized little startup great without you.

In an oft overlooked statement German Federal Financial Supervisory Authority (BaFin) in December 2011 commented on Bitcoins. Although this statement directly concerns only Bitcoin businesses domiciled in Germany, one should be aware that BaFin is one of the most influential regulatory bodies in the EU. BaFin‘s statement could therefore be a blueprint for regulation in other European countries or EU regulation. Even if a particular Bitcoin business is not domiciled in Germany, it may be advisable for them to understand the BaFin statement and heed its possible consequences.

The statement was contained in a guidance to the German Payment Services Supervision Act, one of the codes which transfers the EU Payment Services Directive (PSD) into German law. Bitcoin is analyzed with regard to its possible quality as e-money. Regarding this question BaFin comes to the same conclusion as the ECB in its analysis of virtual currencies of October 2012, namely that bitcoins do not constitute e-money. BaFin henceforth refers to bitcoins as “units of value” (not “units of account” as posted on some forums; “unit of account” is a technical term in finance law while “unit of value” does not carry any specific legal meaning).

While the ECB goes on to say plainly that, by not being e-money, bitcoins “clearly fall outside the scope of the Payment Services Directive”, BaFin’s wording is much more subtle and cautionary. It states that the “creation” of bitcoins and their “use as medium of payment” do not need a permit (license). However, regulation applicable to banks and financial services could be applicable to Bitcoin transactions under two conditions: (1) the bitcoins themselves become an “object of trade” and (2) the “structure of the transaction” justifies doing so. If these two criteria are met, bitcoins become “units of account” and therefore “by implication” financial instruments.

I think, based on the very careful wording of the statement, that BaFin is well aware that it is all but impossible to fully gauge the meaning of these two conditions. An “object of trade” is not a technical term in finance law but comprises everything that is being traded, be it pork bellies, real estate or climate derivatives. I personally would assume that, for example, exchanging fiat currencies into Bitcoin and vice versa may make bitcoins an “object of trade”. As for the “structure of the transaction” one must probably look for the similarities between Bitcoin-based transactions and traditional banking and financial services transactions. Therefore it can only be assessed on a case-by-case basis whether a specific Bitcoin business model may come within the scope of banking or financial services regulation.

The ECB‘s analysis of October 2012 that the PSD is not applicable does not „over-rule“ this earlier statement of BaFin of December 2011 that laws based on the PSD or other laws pertaining to banks or financial services may be applicable. As long as there is no comprehensive EU regulation every country in the EU is free to regulate Bitcoin the way it deems fit. Even if the EU would begin to formulate Bitcoin-specific regulation it would probably take years before such regulation is enacted.

I‘m afraid that this analysis of BaFin‘s statement cannot be conclusive and may therefore be slightly frustrating for Bitcoin businesses applying various business models and looking for clear guidance. For the time being though, regulatory matters in the Bitcoin space will remain in a state of flux. However, as one VC investor noted at this year‘s London Bitcoin Conference, this obscure regulatory environment also presents opportunities for those keen and nimble enough to cope with it.

PS: Maybe bitcoin.de‘s collaboration with Fidor Bank in Germany will shed some more light on BaFin‘s thinking.

Image credit: http://spelunk.in/2013/07/14/los-angeles-bitcoin-meetup-2-writeup/

See also: Bitcoin Self-Defense, Part 1: Wallet Protection

The in-person Bitcoin economy is an exciting place to be. Ever since “Satoshi Square”, an in-person Bitcoin exchange event in New York City, had its first meeting in May, the popularity of trading bitcoins for cash, and for goods, in person has been growing exponentially. In the two months that followed, Satoshi Square spinoffs have been held in Los Angeles, Boston, Toronto and even, albeit without the “Satoshi Square” brand, Berlin. Bitcoin meetups in Argentina are seeing hundreds of people attending, excited about the currency’s potential ability to help them protect themselves against inflation and tight capital controls. Wired ran an article entitled “Why the Only Real Way to Buy Bitcoins is on the Streets“, and a journalist from Market Watch entitled his piece “I walked into a bar and watched as people swapped thousands of dollars for bitcoins”. These developments are highly positive; not only does in-person Bitcoin exchange help increase Bitcoin users’ privacy in the face of regulations forcing nearly every exchange to demand personally identifying information from its users, but such events also help build community, establishing the Bitcoin ecosystem as a tightly linked parallel economy – in fact, a full-scale parallel society, where an increasing number of people are finding their hobbies, jobs, friends and products all at the same time.

However, at the same time it is of the utmost importance to realize that in-person Bitcoin trade is not without its risks. As a Bitcoin user, there is a high probability that you come from an upper middle class, low-crime, background and spend sixteen hours a day in front of a computer. This type of lifestyle is certainly not in any way wrong or immoral; I myself am a product of such an upbringing. However, it does mean that you have so far been living a very sheltered life, and even the most basic of warning signs that experienced “street kids” take for granted will be simply lost on you. The risk of dealing with strangers is much lower than what media reports make us believe, but that does not mean that it will never happen; in fact, if you publicly establish yourself as a Bitcoin user carrying thousands of dollars worth of value in your digital wallet, the chance that something will happen to you may go up drastically. So far, we can be thankful that there have been only a few minor incidents of in-person Bitcoin crime taking place. When a major one does take place, however, that may seriously shake the public’s confidence in the growing Bitcoin community – so by delaying that day through exercising caution and vigilance, it is not just you that stands to benefit.

Risk 1: “I never paid for that!”

The following scam sounds too brazen and too simple for it could not possibly happen in practice, but two months ago it did. The story is this: a Bitcoin user was buying headphones from another in person in a restaurant. The seller gives his Bitcoin address, the buyer types it in, the seller confirms that it’s correct, and the buyer hits send. Then, however, “He casually stands up, has the headphones, and walks away. I stand up pretty quick, and shout after to him, accusing him of theft. He says a quick comment around the lines of ‘If you can’t pay the price don’t waste my time, I said $80’ and walks out. I contemplate chasing after him, calling the police, or fuck maybe getting some public attention, then I realized I didn’t have a leg to stand on. Cameras would show a guy sitting down at a table, showing me headphones, me inspecting them, then playing on a computer for a bit, with him walking off.”

It is a common assumption that people make that being in public automatically makes less one more safe. In reality, however, this is far from always the case. The most notorious counterexample of all is the story of Kitty Genovese; as Wikipedia describes it:

Arriving home at about 3:15 am she parked in the Long Island Rail Road parking lot about 100 feet (30 m) from her apartment’s door, located in an alley way at the rear of the building. As she walked towards the building she was approached by Winston Moseley. Frightened, Genovese began to run across the parking lot and towards the front of her building located on Austin Street trying to make it up to the corner towards the major thoroughfare of Lefferts Boulevard. Moseley ran after her, quickly overtook her and stabbed her twice in the back. Genovese screamed, “Oh my God, he stabbed me! Help me!” Her cry was heard by several neighbors but, on a cold night with the windows closed, only a few of them recognized the sound as a cry for help. When Robert Mozer, one of the neighbors, shouted at the attacker, “Let that girl alone!”, Moseley ran away and Genovese slowly made her way toward the rear entrance of her apartment building. She was seriously injured, but now out of view of any witnesses …
[A few hours later] Moseley proceeded to further attack her, stabbing her several more times. Knife wounds in her hands suggested that she attempted to defend herself from him. While Genovese lay dying, Moseley raped her. He stole about $49 from her and left her in the hallway. The attacks spanned approximately half an hour. A few minutes after the final attack a witness, Karl Ross, called the police. Police arrived within minutes of Ross’ call. Genovese was taken away by ambulance at 4:15 am and died en route to the hospital. Later investigation by police and prosecutors revealed that approximately a dozen (but almost certainly not the 38 cited in the Times article) individuals nearby had heard or observed portions of the attack, though none saw or were aware of the entire incident. Only one witness, Joseph Fink, was aware she was stabbed in the first attack, and only Karl Ross was aware of it in the second attack. Many were entirely unaware that an assault or homicide was in progress; some thought that what they saw or heard was a lovers’ quarrel or a drunken brawl or a group of friends leaving the bar.

A common reaction is to attribute the witnesses’ inaction to some form of human callousness and depravity; in reality, however, it was not a willingness to act, but the lack of knowledge that there was something to be acted on, that takes greater responsibility for the tragedy. The headphone thief was banking on precisely this sociopsychological result. From the buyer’s point of view, and the point of view of outsiders having the full information of the incident after the fact, the seller was obviously guilty of fraud, and the buyer subconsciously expected the rest of the restaurant patrons to share the perspective. In reality, however, as the buyer realized seconds too late the other patrons had no way of knowing who was actually in the right.

Mitigation

A perfect solution here is in fact something that the Bitcoin community is doing already: Satoshi Square meetups. Rather than meeting up to make trades in anonymous restaurants, what safer place is there to make a Bitcoin sale than in the middle of dozens of experienced Bitcoin users doing the exact same thing? Satoshi Square events could become not just the hub of Bitcoin for fiat exchanges, but also a recurring, ephemeral flea market for people selling used goods. In most cases, finding a buyer for some esoteric product is difficult among a few dozen traders, so the buyer and seller would need to make an agreement online beforehand, but as a place to meet Satoshi Square is the perfect candidate. If you are going to meet on your own, be sure to plan ahead, and know exactly what you are going to do if the counterparty turns out to be less honest than you had thought. Make sure the product is in your hands, or at least on the table, before you make the payment.

Risk 2: Outright Mugging

Fortunately, a true Bitcoin mugging has not happened yet. The closest thing we have is a story of questionable veracity from a German Bitcoin trader who claimed to have bought 60 BTC in person for $4500, and was then beaten and robbed by the seller of his cash, laptop, smartphone and watch. The attacker was unable to recover the bitcoins, but the victim also lost them because the fifteen-character Blockchain.info password was stored only on his laptop. In general, regardless of whether it is true this story is not particularly instructive, except as a reminder to keep many backups; aside from the incidental loss, it was little more than a conventional mugging. The more interesting question is, how would an attacker rob a victim of their bitcoins?

The main challenge in a hypothetical Bitcoin mugging is not the coercion; if the attacker knows how many bitcoins you have, it is easy for them to keep whacking you with a five-dollar wrench until you cough up the wallet password. Rather, the challenge is figuring out how much you have in the first place. In theory, Bitcoin has the potential to provide a very high level of privacy to its users and thwart many attempts at de-anonymization. In practice, however, if you do not take precautions breaking privacy can be quite easy. The attack is this: first, the attacker sells the victim some trivial item (eg. $10 USD) for bitcoins, and lets the victim make the payment. Then, the attacker takes advantage of a key insight: if a transaction has inputs coming from multiple addresses, those addresses are all probably owned by the same person. Starting from the address the victim used to send the payment and iteratively applying this process, the attacker computes a set of addresses called a “closure”, that are quite likely all owned by the victim. Tools exist to do this automatically. This provides a lower bound on the victim’s Bitcoin wealth, and is used to weed out low-net-Bitcoin-worth individuals. When the attacker finds a high-net-Bitcoin-worth victim, they can then follow them into a dark alley and demand their private keys. Sometimes the attack is much simpler: simply look over potential victims’ shoulders and see if anyone has more than $5000 worth of BTC. Even worse, the coercion step may not even be necessary – simply shoulder surf) to get the password (including the computer’s screen lock password), physically whack the victim one or two times to get the computer, and input the data yourself.

Mitigation

The best defense against such attacks in general is to keep multiple wallets: one spending wallet and one savings wallet. The spending wallet should be optimized for convenience, whereas the savings wallet should store the bulk of one’s funds and be used only occasionally. Consider sending your bitcoins from the savings wallet to the spending wallet through a proxy to keep the savings wallet anonymous; for example, deposit from the savings wallet to an exchange or gambling site, and then withdraw those same funds to your spending wallet. The process usually does not link the two in the blockchain. Even if you do not take this extra step, however, this wallet separation will still help massively – you can keep the keys to your savings wallet printed on paper at home, and even if you do not you can still claim that you do, and potential muggers would not have any way of getting anything out of you beyond what’s left of your spending wallet.

Sometimes you might need to get your savings wallet out at Satoshi Square; many people want to trade thousands of dollars worth of bitcoins, and you can earn a healthy commission by making these trades both ways at a one or two percent fee. This is okay; as long as you are in Satoshi Square the presence of dozens of other Bitcoin users around you protects you. Once you leave, however, you are vulnerable to being followed as a high-value target; the best safety tip here is simply to send all remaining bitcoins to another wallet which you can only access from home (or pretend that you can only access from home) once the event ends. If your defense is based on pretending, it is best to set it up so that potential muggers get at least some small amount like 0.095 BTC; this presents a much more convincing case that that is really all you have. Anything that looks like blatant resistance is an easy way to get yourself hurt.

Conclusion

Most of you will never have to deal with any of these issues. Crime is fortunately an increasingly rare occurrence in the developed world, and many people go through their entire lives without ever seeing anyone in person that is genuinely interested in harming them physically or financially for personal gain. However, eventually some kind of incident will happen, and if it does it is much better to be prepared. All safety is fundamentally about risk mitigation; no measure is guaranteed to protect you, and outright avoiding offline trade out of fear of being defrauded will not help anyone. However, there are certain basic measures of protection that we can take: stick together when possible, don’t carry thousands of dollars in an insecure wallet, don’t publicly advertise that you are carrying thousands of dollars even in a secure wallet if you can open it, and everything will very probably be fine. All in all, it is better to be vigilant earlier rather than later.

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If the level of participation shown by meetup attendance is a reliable indicator, Bitcoin interest appears to be rising in Argentina. The country’s 25% annual inflation rate gives its residents a stronger incentive to consider Bitcoin as a safe haven than the residents of almost every other nation, and many observers have noted how Bitcoin is natural fit for the circumstances surrounding the inflation-plagued Argentine population.

There is one obstacle to overcome, however, before Bitcoin can enter Argentina or other nations with similar financial situations. Part of the reason that Bitcoin is so badly needed in Argentina is because of the strict capital controls which make it very expensive and difficult for average residents to move currency internationally. This presents a problem for Bitcoin adoption because presently most of the bitcoins in the world available for purchase are being offered in exchange for dollars or euros.

This barrier will be overcome as Bitcoin use begins to enter the next phase of the bootstrapping process, where its growth is driven by commerce rather than by currency speculation. In countries where the international movement of legacy currencies is restricted and expensive but tangible good are still allowed to cross the border in an outbound direction, it is this trade in tangible goods which presents the best avenue for Bitcoins to enter that nation’s economy.

Continuing with Argentina as an example, the most obvious entry point for Bitcoins is the beef exports. This product is in high demand around the world and represents a significant portion of their total export market. Here is an example of how a group of Bitcoin-aware entrepreneurs in Argentina might be able to connect the foreign demand for Argentine beef with the domestic demand for Bitcoins:

The first step would be to form a ARS (Argentine Peso) denominated investment fund. It would not need to be large to begin with, perhaps only enough to buy a few tons of beef at wholesale. The fund would buy beef from local farmers and sell it internationally to importers willing to pay with bitcoins, for a discount below the prevailing market price. The fund would then sell the received bitcoins to Argentinians, either via OTC trades or on a domestic exchange, and use the ARS they receive in order to fund the next shipment.

At first glance this does not appear to be a profitable activity, but with some reasonable and conservative assumptions it could end up to be quite lucrative for everyone involved. The following assumptions will apply for the rest of this article: the price of bitcoin in non-ARS currencies will remain stable, neither increasing nor decreasing by any significant amount, the devaluation of the ARS will continue at a constant 25% annual rate, and sufficient domestic demand for bitcoins exists and will grow at least the same rate as the fund’s activities.

With these assumptions in place, we can assume that a bitcoin purchased today in Argentina will be worth 25% more in ARS terms one year from now, and 6.25% more three months from now. If Argentine bitcoin purchasers are willing to pay a 3.75% commission (a conservative assumption based on conditions on the ground), then it’s reasonable to assume that a bitcoin received today could be sold for 10% more in three months. Once the fund managers can reasonably expect the bitcoins they receive as payment can be sold for a 10% profit in three months it makes sense for them to sell beef internationally at a discount, perhaps 3%, in order to convince importers to pay with bitcoins. Note that since the government of Argentina currently imposes a ill-advised export tax of 15% on beef, a reduction in the sale price of 3% actually results in a 3.45% discount to the importer.

If the fund can realize a net 7% profit by accepting bitcoins at a 3% discount and selling them three months later for 10% more, they could cycle through their working capital four times in a year, resulting 31% nominal profits and an 6% annual inflation-adjusted return. The only requirement is domestic demand for bitcoins grows sufficiently to absorb the bitcoins being sold by the fund.

Of course, if any of the assumptions turned out to understate the demand for bitcoins in Argentina, or the growth in the exchange rate of Bitcoin internationally, the actual profitability of this fund could be substantially greater.

Now we’ve seen one possible way that bitcoin can enter the economies of the countries that need it most even if currency controls make it impossible to move legacy currencies out of those countries. Since there is no credible indication that currency controls are going start loosening any time soon, this form of arbitrage will eventually become the primary way in which Bitcoins can be traded internationally and will bring the world one step closer to the eventual obsolescence of legacy currencies.

Bitcoin Magazine would like to thank you for first visiting our news site, for taking a look at our print magazines and for many, ordering a subscription to Bitcoin Magazine. Since we first released our first print magazine issue, the Bitcoin currency has grown to a significant level of prominence.  Bitcoin Magazine has now released 12 issues.  That means that for several of you, it is time to renew your subscription.

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Erik Voorhees is one of the foremost Bitcoin entrepreneurs and has helped build some critical parts of the Bitcoin business ecosystem, as well as being a loud advocate for a free, decentralised and voluntary currency. When the history of Bitcoin is written, he will be remembered as one of the brave few explorers ready to set out into the unknown and risk life and fortune to create a new world.

Bitcoin Magazine: You discovered Bitcoin in May 2011… how? where?

Erik Voorhees: It was fairly innocuous, but had profound consequences! I was cruising Facebook and saw a friend’s post that mentioned some weird currency that had appreciated by a gazillion percent since the prior October. I clicked the link, read about this thing called Bitcoin, and dismissed it outright as preposterous. Fake internet money didn’t appeal to me. Then I read more, and more, and I found an elegant answer to each skeptical question that popped into my mind. After a couple hours, I was utterly hooked, and realized it would change the world and I better figure out what the hell it’s all about.

That day was one of the most important days of my life. It was like discovering some great truth, like seeing the future. I quit everything I was doing and jumped down the rabbit hole.

BM: What is the most important feature of Bitcoin in your opinion?

EV: This is a very good question. The most important feature is the fact that Bitcoin is decentralized, that it does not have any person or group of people who control it. It is from this feature that all the societal ramifications can occur, because a monetary system without a company or group of people behind it cannot be shut off. There is no office to raid, no server farm to close. Bitcoin is thus politically neutral. It excludes nobody, it has no geographical restrictions, it doesn’t make judgments on its usage. It has no terms of service. Bitcoin is a pure technological tool which will necessarily revolutionize society and finally separate money and state. The decentralized nature is what enables all this magic.

BM: Many people have problems trusting a decentralised system founded by an anonymous programmer… can you explain the significance of Bitcoin being an open source project?

EV:  Yeah that’s easy… open source means you don’t need to trust anyone. Just go read the code. Thus the creator of Bitcoin is irrelevant, there is no need to care what his intentions were or what kind of person he was. There is no need to fear some secret scam is occurring.

You mention that some people have problems trusting a decentralized system, but why? Because there is nobody in charge? Because there is no person who dictates the rules? This is precisely why you CAN trust it. It’s often quoted that a nation should be based on laws and not on men, because men can be corrupted, are fallible, and are often unpredictable. Bitcoin is this principle applied to money: it is a money of laws – mathematical laws – and not of men. This is why it has earned, rightly, the trust of some many enthusiasts.

BM: Miners, gamblers, hackers and smugglers… is Bitcoin the Wild West online? Will it become boring once it goes mainstream?

EV: Bitcoin is absolutely the Wild West of finance, and thank goodness. It represents a whole legion of adventurers and entrepreneurs, of risk takers, inventors, and problem solvers.  It is the frontier. Huge amounts of wealth will be created and destroyed as this new landscape is mapped out. I believe the effects of this adventure will be profound, for while the “Wild West” was a uniquely American phenomenon, Bitcoin is a global one.

Will a mainstream Bitcoin be boring? Perhaps by definition it will be, just as electricity is boring to us today, while at the turn of the last century it was hugely exciting. And of course, just as electricity, which is now boring, enabled the creation of unlimited new, exciting projects (including Bitcoin!), so too will Bitcoin enable a world of new innovation for many years to come.

BM: What first gave you the idea to create SatoshiDice? How would you describe your experience running the site this past year?

EV:  I didn’t create SatoshiDice, but I am involved with it. To be honest, my experience has not been as pleasant as it should have been, for being an American citizen is a huge liability, and I worry constantly that the US Government will harm me in some way.

The past year has shown me that America is not the land of free markets and free people that it was advertised to be in Government schools when I was growing up. America’s government has grown into an abhorrent apparatus that steals, harms, and imprisons people who have harmed nobody. At best, it seizes half the wealth you earn or makes you dependent on the wealth it has seized from others, and at worst, it ruins or ends your life.

The amount I’ve spent on lawyers just trying to navigate the absurd legal system is enough to feed hundreds of families in a third world country on a continual basis.

In short, my experience as an entrepreneur in “the land of the free and home of the brave,” both regarding SatoshiDice and in my other projects, has taught me that America is a lie. It has become a pathetic fiefdom, and I wish Americans would wake the hell up and see what’s happening.

BM: Some people criticise SatoshiDice for “spamming” the network… what would you say to them? If Bitcoin is to scale, shouldn’t it be able to take this traffic and more?

EV: Yes there is a number of people who hate me and hate SatoshiDice because it has caused so many transactions on the network. They call it spam because they believe their transactions are more legitimate than mine, and thus mine are spam. Apparently it’s okay to send “some” Bitcoin transactions, but if you send “too many” then that’s a no-no. “Too many” has never been defined, of course.

Further, SatoshiDice pays the standard Bitcoin fee for every single transaction, and in this way has paid more to support the mining network than everyone else, combined. Critics retort that there are other externalities caused by SatoshiDice. Well that is true, and Bitcoin better fix that problem, and it will. I’ve offered non-trivial sums of money to people to work on and figure out good solutions, but this stuff takes time.

In the end, haters gonna hate.

BM: You hold Bitcoins, but also gold and silver. Is it fair to call Bitcoin a gold standard for the Internet?

EV: I do love gold and silver as money, because I know why they make excellent money (tl;dr it’s because of their specific properties). Bitcoin’s specific properties similarly make it an amazing money. And while Bitcoin is certainly new and hasn’t withstood the test of time (like gold), some of its properties are far superior to metals in terms of monetary usage. Primarily, one cannot send gold instantly anywhere, period. This makes it very poor for modern commerce. While it’s true that a digital gold-backed currency could exist, the fact is that introduces severe counter-party risk on the part of the backer. E-gold is the perfect example of this, because as soon as the government gets angry about how e-gold is used, it shuts it off and arrests the owners (land of the free).

So while precious metals make excellent money, they do have some problems. Bitcoin has problems also, of course. Neither are perfect, but in general gold and Bitcoin highly complement each others’ weaknesses. Anyone who believes in free and open markets and individual rights should have a very warm disposition toward both precious metals and Bitcoin.

BM: Can Bitcoin be divorced from its political implications? Can it be “just a payment system”?

EV: Interesting question. I think while the Bitcoin system, as a technology, is “apolitical,” its ramifications cannot be divorced from politics or society at large. And while a socialist might rightly hail Bitcoin as an equalizing force (it is), the truth is that it equals out peoples’ rights, not the result of their behavior. In other words, Bitcoin is highly individualistic, and robs power away from collectives and puts it in the hand of each person who cares to hold it.

Beyond this, if Bitcoin succeeds it will inevitably cede power from governments, because much of a government’s power comes from its ability to print and control the currency that its subjects use. I think it would be hard to argue that Bitcoin would pull society away from individual liberty, and as such it is very much a libertarian technology. Socialists have every right to use it of course, but they may find that by doing so they enable everyone else to use their own money in the way that they personally see fit. This is the antithesis of collectivism, and will hugely undermine the coercive power of the State.

BM: When will we see the first major government attacks on Bitcoin? How much damage can they really do?

EV: I think governments see Bitcoin as a problem in terms of money laundering, drugs, tax evasion, etc. For this, they will try to regulate it more closely. They will not try to downright attack Bitcoin for these offenses. What they will attack it for is when they realize that those offenses are just a distraction… for the real power of Bitcoin is that it will increasingly compete with government fiat currency. Bitcoin will pull in more and more business and incrementally the actors using it will discover less and less need for dollars or euros or yen. This happens gradually. At some point, however, the government will realize that this made-up magic internet money is wresting power away from their anointed currencies and they will then come down hard. When will this happen? I have no idea, but I imagine it will be too late, because it probably already is.

It’s also important to remember that not all governments will act in tandem. It’s possible that one regime will assault Bitcoin while others will be agnostic and others may even encourage it. Those regimes that clamp down hardest will simply squeeze an increasing amount of commerce over to those regimes that are friendly. Profits seek the path of least resistance and digital, frictionless currency is that path. Governments which attempt to abort this process will hamstring their competitiveness, and I fully expect some of them to be this foolish.

BM: How many Bitcoin users are there right now in your estimation? When do you think that we will reach 10 million users, and what will it take to get us there?

EV: My guess here is pretty anectodal and unscientific, but I’d say there are a few million people who have used Bitcoin in some way. Then maybe 500k-1m who use it occasionally, and maybe a couple hundred thousand who use it frequently. Ten million “occasional” users will likely be reached within two years and that’s probably about one order of magnitude higher than today.

What will it take to get us there? More of the same. More businesses, easier tools, better security, and a sprinkling of time and luck.

BM: What is the most urgent infrastructure that the Bitcoin ecosystem needs right now?

EV: Bitcoin needs better ways to buy and sell Bitcoins quickly. In the US, BitInstant and CoinBase do a reasonable job, but it needs to be better and more specifically faster. And while the US is in the “reasonable” category, elsewhere in the world needs much better ways to buy and sell quickly. The ability to move in and out of Bitcoin in a frictionless manner is what allows the magic to happen – it’s what lends utility to the payment system aspect, and the payment system is what gives the currency its value.

Bitcoin Magazine had an opportunity to interview Mentor Palokaj, founder of BlueVPN. Mentor is currently a university student in the Netherlands, but has taken to internet privacy and the Bitcoin currency. BlueVPN provides individuals with an ability to utilize currently blocked websites, have protection against hackers, and in essence use the VPN servicing to be anonymous online. BlueVPN is now one of several VPN services accepting the Bitcoin currency for payment. Bitcoin Magazine had the opportunity to interview Mentor Pelokaj and learn more about how he got involved with the Bitcoin currency and what makes BlueVPN stand out.

Bitcoin Magazine: When did you first hear about Bitcoin?

Mentor Palokaj: Somewhere between one and two years ago I was reading an article on the future of bitcoin. Having no idea what it was I dismissed it after reading halfway. For a while nothing happened, since I was not actively on the lookout. Then half a year or so ago a programming friend of mine enthusiastically showed me the bitcoin he just bought (or rather the wallet on his phone). That sparked a round of research. Two days and many websites later bitcoin seemed like the future of currency. I tried to get my hands on ASIC devices for mining, but they were all either conceptual or to be shipped way later. Right now I have 20 avalon chips coming my way to play around with.

BM: What was it about Bitcoin that you found interesting?

MP: The decentralized and inherent scarce nature. In plain English it is more like gold than money. There is no bank or government creating more as they need, it is a resource. The only difference is that bitcoin has no application (so far) outside of value storage. Gold can be put in jewelry; bitcoin is harder to apply elsewhere. One concept that created security for me is that every coin is the sum of a lot of effort. It is not just a string of numbers, it holds in it the effort, research and risk the network and miners took.

BM: When did you first get the idea for BlueVPN and what inspired you to create the site?

MP: Three years ago I visited China to be trained in Kung Fu. The experience was amazing and our team ended up on stage with Jackie Chan. One of the annoyances though was not being able to get onto Facebook and other services. After some Googling it turned out that a VPN can create a secure connection (I use the analogy ‘false identity’) allowing you to browse the web as if you are in a different country. The problem was that all free ones were slow, incompatible with most devices and just generally terrible. Again for a while nothing happened, but as I rolled more and more into the web space setting up a service like this became relatively easy. Looking at the current VPN market there is no provider truly trying to exist for its customers. The idea of BlueVPN is to help out people who, like me a few years ago, need something that just works.  As a group of my friends is spending some months abroad, they needed some way to connect to the web securely and without blockages. That sparked the creation of BlueVPN.

BM: Were there any pre-existing businesses that inspired you to create BlueVPN?

MP: As mentioned there are plenty of businesses like BlueVPN, and they inspired it purely by showing what NOT to do. Ever since starting the service there have been emails coming in purely with a “thank you” in them. That shows exactly what BlueVPN aims to be.

BM: Where do you see BlueVPN  going in a year?  

MP: Right now BlueVPN is as good as the other providers out there. Within a year I want it to be bigger and better in so many ways. One of them is to create 1-click setup packages for every device. I dream of the day when each customer has their own private server the VPN runs off of.

BM: What makes BlueVPN stand out in comparison to other businesses utilizing Bitcoin?  

MP: A core idea behind the service is privacy. Most companies out there use bitcoin as just another payment gateway. It is a totally legitimate use of course, but BlueVPN is even more compatible with the nature of bitcoin. Of course bitcoin is not anonymous, but is is far more secure than, for example, credit cards. This is especially true in regions where the government is spying on its people.

BM: What are your suggestions for individuals hoping to start a business like yours?  

MP: Just do it. You have far more to lose by doing nothing than you ever will by taking action. As a shoutout I hereby offer my help to anyone wanting to start an online or even offline business.

BM: Where do you see the Bitcoin currency going in a year?  

MP: Over the past week I’ve had a lot of conversations on this particular topic. When looking at the bitcoin valuation graph is appears to follow the technology development cycle (see image). This would predict a fall, after which the productive use of bitcoin would become mainstream. Combined with Moore’s law though the later phases of the cycle might be accelerated. In plain English something would appear to crash bitcoin (government interference, scandal of sorts, etc. etc.) after which it would gradually make it to mainstream.  The downside of this theory is that it only works in retrospect and doesn’t predict the future. Personally I believe the currency will develop into a useful addition to the global economy.

Update: Mentor has since sold BlueVPN and is working on Hoasted webhosting, a company geared towards web designers.

Victims of the largest scam in Bitcoin’s brief history can find solace today as the Securities and Exchange Commission alleged fraud charges against Trendon T. Shavers of McKinney, TX for operating BTCST (Bitcoin Savings and Trust), a Ponzi scheme advertised as a financial security involving over 700,000 BTC of investors’ money.

Using the moniker pirateat40 and boasting the associative image of a peg-legged, eye-patched buccaneer in his personal profile, Shavers marketed his pyramid scheme over a nine-month period to over 100,000 Bitcoin users registered on a popular online forum while promising compounded returns at a rate of up to 7% per week.  While most investors assumed that their funds were being used for arbitrage trading and other legitimate business as Shavers was claiming they were, it is purported that Shavers cycled the money, passing bitcoins from new to old investors to give the illusion of legitimate returns.  The SEC also alleges that Shavers successfully withdrew over $147,000 to a variety of privately-owned accounts to help pay for his personal and gambling expenses. The SEC is pursuing a court order to seize Shavers’ assets and claim additional relief.

While it is uncertain when, or if, investors will ever recoup their losses, the charges against Shavers may give U.S-based Bitcoin users something to smile about.  While Bitcoin transactions have been frequently mischaracterized by various media sources as anonymous and potentially dangerous in consequence, the SEC’s charges and concrete knowledge of Shavers’ activities indicate the ability to analyze and track the movement of ‘tainted’ bitcoins through Bitcoin’s global ledger, the Blockchain.  This indication is important as it provides evidence for a counterargument to speculation that Bitcoin both enables and catalyzes criminal activity including money laundering and the sale of illegal goods and services due to an assumed impossibility of nabbing the crooks.

How strong this evidence is has yet to be seen.  While Bitcoin transactions are capable of being traced, the identities of the sender and receiver can only be linked to a specific transaction if there is public knowledge of account ownership outside of the Blockchain.  Unless a person goes to significant lengths to mask his identity, there will always be at least one other person (i.e. the person[s] with whom he exchanges) that knows he controls a given bitcoin address.

Shavers never kept his identity a secret.  Information ranging from current and former places of residency to his personal Facebook profile was exposed by the same online community he advertised to as concerns over the legitimacy of his operation spread.  In July 2012, Shavers even extended an invitation to investors for a Las Vegas meetup, claiming that it was an opportunity to “look at a pirate, eye to eye if you dare.”  Soon after, a photo of Shavers sitting around a dinner table with nearly a dozen other attendees surfaced on the Internet, his appearance consistent with other photos of himself found on a variety of social media websites.

In short, Shavers made it too easy to be caught.  But for investors hoping to see even a fraction of their losses returned, the charges against Shavers may do little to ease their concerns.  While having knowledge of bitcoin accounts specifically managed by Shavers throughout his operation can allow investigators to follow his trail of fraudulent activity, it is a much more difficult task to tally and prove the sum of bitcoins lost by each investor.  Analyzing the Blockchain can be extremely time consuming, and though it is unknown how thorough the SEC has been during its investigation, it is extremely unlikely that the agency operates with enough resources to trace each bitcoin linked to the crime back to its original owner.  And for Bitcoin users in other parts of the world where there has been a lack of legal clarification and/or regulation, the likelihood of recovering stolen or extorted bitcoins is slim without a committed investigative agency assigned to the task.

Nonetheless, while investigators may not be able to prove the identities of all BTCST investors or the exact sum of funds lost by each, more than enough information should be available to prove Shavers’ involvement in shady business practices.  The SEC’s charges constitute proof to dispel any myths about Bitcoin’s anonymity.  Bitcoin isn’t anonymous, it’s pseudonymous, and Bitcoin users can now point to a real world example to highlight this important distinction.

 

Precious metals purveyor Amagi Metals announced on Friday that as of mid-August, their current bank account with San Francisco headquartered Bank of the West would be closed. In the latest case of banking aversion to bitcoin, Amagi Metals stated that the basis for the account closure is the fact that Amagi Metals accepts bitcoin as a payment method, which Bank of the West views as a risk.

In their statement, Amagi Metals noted that after having had an account with BotW since 2011, they began receiving inquiries about their business last month, with the bank indicating that Amagi was a money transmitter. While the bank’s account closure notice does not apparently claim that the precious metals seller is in the business of money transmission, it indicates a line of thinking that fundamentally questions the legitimacy of any business that handles bitcoin. The news that that a bank has shut down a customer’s account based on the particulars of what payment method that business accepts has instigated a backlash against Bank of the West by the bitcoin community. This has inspired some bitcoin users to launch a hastily designed free-for-all blacklist of banks based on reports of hostility towards bitcoin related account holders.

While it is the prerogative of a bank to choose not to do business any entity based on a risk assessment, a decision to cut off a customer based on the fact that they accept a specific method of payment is unusual. When banks do arbitrarily close accounts, they often leave their disenfranchised customers with little recourse. This is poignantly evident in the case of Huntington Bank, which prompted a lawsuit from the Arab-American Civil Rights League after it allegedly shut down the accounts of hundreds of businesses and individuals with roots in the Middle East. In contrast with the Amagi Metals case, many of Huntington Banks customers were not informed of any reason behind the closures, only that they were now without a bank.

As an eCommerce business, Amagi provides its customers with a variety of payment methods. On the list are bank wires, personal checks, money orders, cashiers checks, PayPal, credit cards, and bitcoin. The last option was added in December of 2012, and three months later, the business announced on their blog that they had received the US Dollar equivalent of nearly $50,000 of sales denominated in bitcoin. While it remains to be seen exactly what it is about servicing a bitcoin-friendly business that keeps the decision-makers at Bank of the West awake at night, it is clear that this is not the first nor the last of this type of action.

In contrast with cases such as BitFloor in the United States, CaVirtex in Canada, among others around the world, Amagi Metals is not a bitcoin exchange. And in what is perhaps little consolation, its bank gave it notice before a final shutdown. In their announcement, Amagi turned to its customers to find a bitcoin (and precious metals) friendly bank. While some limited options were proffered, the challenge of finding a bank that is both knowledgeable and accepting of bitcoin is likely to remain a crucial challenge for businesses looking for their niche in the bitcoin economy.

Bitcoin Magazine’s readers are encouraged to share their thoughts in the comments section.

 

As a greater number of brick and mortar businesses are embracing the Bitcoin currency, so have larger companies and most recently Synergetic Press. Synergetic Press officially began accepting the Bitcoin currency through BitPay Inc, the lead Bitcoin payment processor, and made an official announcement and promotional rate. Known as an independent publisher with offices in London, England and Santa Fe, New Mexico, Synergetic Press facilitates the spread of a wide array of texts ranging from scientific works to biographies, to personal recollections, to an eclectic mix of texts. Embracing Bitcoin is in keeping with its mission, “to better understand the world and our place within it,” as Bitcoin is a digital, decentralized, peer-to-peer international currency.

On Friday, July 19, Synergetic Press posted the following press release on their site:

Now Accepting Bitcoin

July 19, 2013

For our readers who are familiar with Bitcoin digital currency, we’re pleased to announce that Synergetic Press is (as far as we know) the first publisher to accept Bitcoin as payment (in addition to Visa, MC, PayPal, etc.)

Bitcoin is the world’s first fully decentralized, peer-to-peer (p2p) virtual currency. It allows users to make anonymous and untraceable cash transactions anywhere in the world without any sort of real-world intermediary. So unlike PayPal and other online se0rvices, it can’t be squeezed in the same way by governments or other control agents.
 (philosophers-stone.co.uk

To purchase our books with Bitcoin, just select the “Pay Using Bitcoin” option during checkout. Orders for 5 or more books quality for fast FREE shipping, anywhere in the world.

With over 27 authors and a wide array of texts, Synergetic Press “challenges readers to want more for themselves and their planet and to rise to their fullest potential as mindful individuals.”  The fundamental principles of the Bitcoin currency closely align with the goals of Synergetic Press. Bitcoin, as a decentralized, digital currency provides individuals with a greater level of control over finances and additionally promotes a global interconnected community with one scan of a QR code. As the Bitcoin currency continues to grow in prominence, a greater number of merchants and customers are now connected through to date, the most expedient method of payment. As Synergetic Press thrives on the commitment of, “expanding human knowledge,” Bitcoin does just that. While continually developing in utility and expediency, the Bitcoin currency offers endless learning opportunities for developers and individuals who are just seeking a deeper understanding of the inner workings of a digital currency.

Just as Synergetic Press has successfully worked with a variety of authors to present a wide array of intuitive literary works, the Bitcoin currency is fueled by creative minds seeking to promote an expedient, global, and decentralized system of peer-to-peer interactions. Of course, it is always exciting to learn of new businesses embracing the Bitcoin currency, but especially when those businesses exemplify key principles of the Bitcoin currency and community. We are confident that Synergetic Press will serve as the first of many publishing companies to accept payment in the Bitcoin currency.

Every few months the Bitcoin media sees it fit to repeat a similar meme: somewhere, in some distant third world land, are some millions of citizens oppressed by rapid inflation or outright theft from a corrupt government, and Bitcoin, being a superior unit of value whose value goes up, not down, can, or in the more optimistic cases already is, swooping in and saving the day. In March, Cyprus was supposed to have a fully-fledged Bitcoin ATM allowing Cypriots to trade their euros for the internet’s new global currency. In June, it was Argentina, where the government is instituting strict capital controls and the value of the peso has shrunk by over 30% in the past six months. And, most recently of all, we had Iran – a country whose citizens were supposed to have all already flocked to Bitcoin in 2012. The problem is this: the story that Bitcoin can protect the assets of the downtrodden is nice to tell when the bitcoin is going up in value, and indeed in March those Cypriots who had bought even a small quantity of BTC in the preceding year saw enough profits in the aftermath of the “bail-in” to make up for double or triple what was taken from their bank accounts. Now, however, for the past two months Bitcoin has been on a largely downward trend, and especially in the aftermath of the sudden 80% crash in April claims that Bitcoin alone can somehow protect these people from the evils of the Argentinian regime or the wrath of the European Central Bank seem silly, if not outright dishonest.

However, detractors of such claims are equally wrong in their pronouncements. Bitcoin certainly can help people anywhere around the world, from Iran to Argentina and even China and Africa, protect their hard-earned wealth, and earn more wealth to lift themselves and their families out of poverty, and its potential effect in this regard may be almost as significant as that of the internet itself. However, third world residents will not be saving by purchasing units of BTC. Bitcoin’s main advantage in constraining third-world regimes is not in the “hard-money” nature of the currency with its 21-million unit limit – if nothing else, governments can circumvent this simply by hiring mathematicians to create new, and technically superior, cryptocurrencies with more currency units or even infinite supply schedules; rather, Bitcoin’s advantage is, like the internet itself, in its unstoppable internationality.

Consider the deliberately generic story of Jose, an Argentinian interested in saving up funds so that his daughter can go to university in Europe or the United States. Jose might have an annual income of $10,000 USD (equal to the country’s GDP per capita), expenses of $6,000 USD, and so have $4,000 per year to save. What options do you, as Jose, have to save the money? First of all, you can keep it as cash, and see half your money disappear roughly every eight months. Another option might be the stock market, but that has been highly unstable over the past four years, and the Argentinian government may well simply decide that it wants a piece of Jose’s money. Investing in foreign stock markets instead is essentially impossible due to capital controls. Finally, there is the option of buying US dollars on the black market – but, as the term “black market” so obviously implies, that is highly inconvenient and risky, and the physical US dollars themselves are vulnerable to theft.

Enter Bitcoin. Suppose Jose wants to take the third option, and secretly move his wealth into US dollars. With Bitcoin, Jose can purchase bitcoins, perhaps through some kind of Satoshi Square meetup or with a private dealer, and immediately create an account on a Bitcoin exchange like Bitstamp. BitStamp so far has seen no signs of trouble with the law, so Jose’s dollars with them may well be safer than they are under his mattress. If Jose distrusts the US Federal Reserve and the ECB as well, he can open a Ripple account and store his money with BitStamp as Swiss francs. Also, Jose’s investment options increase, allowing him to reduce the volatility risk from stock markets by diversifying. By going on BitFunder, he can now invest in Bitcoin mining companies, a Bitcoin T-shift site and even personal loans to a few reputable community members at 0.05% daily interest (denominated in Bitcoin; the resulting volatility can be countered by shorting on Bitfinex). If TorBroker‘s operators manage to find a jurisdiction in which their service is safely legal and they reveal their identities to gain public trust, Jose would also have access to a way to invest in the US stock markets as well. For the average person in first world countries, most of these investments have too much counterparty risk (a technical term for the risk that the people accepting the investment will decline to pay back or disappear) to be worth it; for Jose in Argentina, they are a somewhat more attractive proposition.

Also, Jose has another option with BTC that Argentinian capital controls may prevent him from doing any other way: sell his services to clients around the world. If Jose is selling physical products, this may be difficult, but if he is a writer, artist, musician or programmer, he has access to a worldwide clientele whose ability to pay for his services is not constrained by his own oppressive government beating down on them as well. Even if Jose only speaks Spanish, the South American world is much larger than Argentina; and if he speaks English, then he may be able to start earning a much higher salary, and if he finds a long-distance job he eventually even have a path to immigration to more developed countries as an “intra-company transferree”.

Certainly, the bitcoin as a unit of value is useful as part of a diversified “black swan” portfolio, as its value may increase massively if a major part of the mainstream economy unexpectedly (or, to some, very much expectedly) goes down. However, for those simply seeking to keep what they have, the bitcoin itself is currently a very poor option – even more so than many fiat currencies. Fortuantely, the bitcoin also has another value: as a gateway to other fiat currencies, bypassing any capital control regime that does not involve shutting down the internet outright. In Iran, the story is similar; inflation is a very serious problem, and international diversification is the cure, but Bitcoin’s value is, similarly, in its ability to be used to evade capital controls and invest in more stable assets and currencies abroad. In China, and Africa, the main problem is different: very many people have no access to a formal banking system, so the advantage that Bitcoin provides is not just evading the restrictions of local governments, but also simply giving people access to any way of owning stable assets or investing at all. Many people in such countries only have access to a feature phone, not a computer or smartphone, but if Bitcoin gets any popularity in these regions for these purposes feature phone interfaces for Ripple and BitFunder will quickly be created as well. As long as there is even one country in the world where people are reasonably free, Bitcoin businesses can based themselves there, and everyone in the world can be, at least financially, free – just what “the internet of money” is supposed to do.

This note summarises the dangers inherent in the Linux distribution packaging model for Bitcoin, and forms a request from upstream maintainers to not distribute Bitcoin node software as part of distribution package repositories without understanding the special requirements of Bitcoin.

Distributors typically unbundle internal libraries and apply other patches for a variety of generally good reasons, including ensuring that security-critical fixes can be applied once, rather than multiple times for many different packages. In most cases, the common distribution packaging policy has many advantages.

However, Bitcoin nodes are an unusual category of software: they implement a complex group consensus in which every client verifies the behaviour of every other exactly. Even an exceptionally subtle change – including apparently harmless bugfixes – can cause a failure to reach consensus. A consensus failure of one client is a security risk to the user of that client. A significant number of nodes failing to reach consensus – as happened in March 2013 due to a change in database libraries¹ – is a critical problem that threatens the functionality and security of the system for all users.

For this reason, it is vital that as much of the network as possible uses unmodified implementations that have been carefully audited and tested, including dependencies. For instance, if the included copy of LevelDB in bitcoind is replaced by a system-wide shared library, any change to that shared library requires auditing and testing, a requirement generally not met by standard distributor packaging practices.

Because distributed global consensus is a new area of computer science research, the undersigned request that distributors refrain from packaging Bitcoin node software (including bitcoind and Bitcoin-Qt) and direct users to the upstream-provided binaries instead until they understand the unique testing procedures and other requirements to achieve consensus. Beyond being globally consistent, upstream binaries are produced using a reproducible build system², ensuring that they can be audited for backdoors.

Signed,

• Gavin Andresen
  
• Jeff Garzik
• Gregory Maxwell
• Luke Dashjr
• Peter Todd
• Mark Friedenbach

1. https://en.bitcoin.it/wiki/BIP_0050
2. http://gitian.org/

Roughly two months ago, the Bitcoin community was first shown a trailer for “The Rise and Rise of Bitcoin“, a documentary following the travels of 35-year-old computer programmer Daniel Mross as he explores the merchants, entrepreneurs and others in the Bitcoin community all across the world. In June, a couple in Utah announced a project to live only on Bitcoin for ninety days and make a movie about their adventures, and have already raised $70,000 for their efforts. Now, a group led by producer Andrew Wong and filmmaker Marco Vitale has announced that the Bitcoin community will be seeing not one or two, but three Bitcoin documentaries in the twelve months ahead. The film’s title: “Bitcoin: The Movie.”

The movie is now in the early stages of production, and the project is actively seeking funding on Kickstarter; so far, the project has received $10,000 of its $100,000 goal. Wong’s Kickstarter page descrives his own intent behind creating the film as follows:

I have been an avid computer gamer since I was a kid. Growing up with video games, I know a thing or two about digital currency. Even though I went to business school, the reality is that I never connected all the dots between virtual money and the real world impact it could potentially make. Well, that gap was bridged when Bitcoin caught my attention a year ago. The recent major events in Cyprus and China have further opened my eyes and changed my perception about cryptocurrency. Fast forward to today, we are here and now. You’re reading this. And you know my crew and I want to make a movie about Bitcoin.

The documentary’s stated intent is to explore the “socioeconomic impact of Bitcoin around the world”, and the Kickstarter page lists five sub-headings: look into consumer and merchant behaviors around Bitcoin around the world, educate the public about Bitcoin, study Bitcoin’s socioeconomic impact especially in emerging markets, understand why Bitcoin users are getting involved in Bitcoin, and help build Bitcoin’s infrastructure. From viewing the trailer, the fourth goal, that of understanding why Bitcoin users are finding the currency so attractive, is perhaps the most important. The trailer tells the stories of three Bitcoin users around New York City:

• Patrick Che, the operator of XCubicle, a “hybrid tech shop” specializing in walk-in and mail-in electronics repairs
• Dan Lee, the owner of Oxford Kitchen, a restaurant and organic grocery store
• Lena Sklyut, the owner of the Old Fulton Creperie

The three business owners all have different reasons for supporting Bitcoin. Patrick Che is excited about Bitcoin’s potential to rein in political systems. “It prevents governments from printing a lot of money, and preventing governments from abusing their power with a currency through which they can control the entire population,” Che says. Lee, on the other hand, is a pragmatic merchant. “It’s actually cheaper than processing credit cards, there really aren’t any chargebacks on the merchant side, and you get funded pretty much the same day, usually within the same hour. So when oyu look at it that way, those are actually pretty good benefits for a merchant,” he replies. And Sklyut places herself in the middle. “I’ve heard about Bitcoin from a friend of mine who is really into technology, and they told me that Bitcoin was the currency of the future,” she tells the viewers, “so I figured I want to be one of the people accepting that and supporting the future.”

New York City is only the start of the film’s objective. Ultimately, Wong would like to take his crew to travel to Bitcoin sites all around the world; the problem is, the crew needs money to do so. If the Kickstarter campaign reaches $100,000, the crew would be able to travel to four countries. At $150,000, the amount goes up to seven countries, and at $200,000 a total of ten countries would become possible. The film itself is expected to come out by July 2014, and will be submitted to the Sundance Film Festival.

Films like this documentary, and the Rise and Rise of Bitcoin scheduled to come out at the end of this year, are representative of a side of Bitcoin that has been rapidly growing since the beginning of 2013: the human side. While in 2010 Bitcoin was simply a project to write software for, and 2012 a currency to develop businesses and financial services around, in 2013 we are now beginning to see widespread interest in the Bitcoin community. The observation holds outside the world of film too; the couple’s 90-day Bitcoin challenge is as much for themselves as it is to produce a show for the world, and in May Forbes reporter Kashmir Hill herself undertook the “Bitcoin diet” for a week. Now, she has become one of the more prolific reporters about Bitcoin in the mainstream media community. One of the more attractive, and practical, potential uses of Bitcoin has always been as a sort of worldwide traveler’s check; once the Bitcoin community sufficiently grows, Bitcoin users would be able to make their way around the world, and simply exchange their bitcoins for local currency as needed, and make friends everywhere they stop at the same time. Now, it seems like Bitcoin is not simply facilitating trips; rather, for many Bitcoin is a trip’s primary purpose. Twelve months from now, this may well be the way that Bitcoin takes its next major step into the mainstream.

The Bitcoin Foundation took a decisive turn in its strategy for defending Bitcoin three weeks ago when the organization wrote its reply to a cease and desist order from California’s Department of Financial Institutions. Rather than meekly asking the government how the nonprofit advocacy group was acting as a money transmitter, the organization delivered a seven-page reply in which it laid out an argument that not only was the organization itself not doing selling bitcoins in any way, but in fact even if the organization was selling bitcoins the act does not constitute money transmission under present California law. After making this argument, the Foundation went so far as to specifically “request that your office issue an opinion that, for the reasons explained above, the sale of a bitcoin is not regulated under the California Money Transmitter Act.” Now, Foundation legal counsel Patrick Murck has made his second move.

Two months ago, Liberty Reserve, an alternative payment processor known for its very weak know-your-customer policies, was shut down and its owners arrested by the United States government. In a press conference following the shutdown, FinCEN attorney Prret Bharara focused heavily on “anonymity” as a major reason behind Liberty Reserve’s shutdown, and weeks later a FinCEN Notice of Finding criticized the entire category of irreversible digital payment systems. “The fact that transactions are irrevocable, meaning that they cannot be reversed or refunded in the event of fraud, makes it a highly desirable system for criminal use and a highly problematic one for any legitimate payment functions. Revocability protects users and merchants from fraud and is a common feature of legitimate payment systems,” the report claimed. Many have taken these words as a sign that, since the currency has a considerably degree of anonymity and is almost completely irreversible, Bitcoin is next. FinCEN director Jennifer Shasky Calvery came out to reassure Bitcoin users and investors, saying that legitimate businesses that follow the relevant laws “have nothing to fear from Treasury”, but even still many in the digital payments space seek a stronger reassurance.

It is under this background that Murck has sent another request for clarification, this time to US federal regulator FinCEN itself. The subject of the letter is a notice of proposed rulemaking announcing a set of steps that FinCEN intends to take in order to shut down Liberty Reserve transactions around the world. The actions are targeted around Liberty Reserve itself; the first action listed is that “Section 1010.660(b)(1) of the proposed rule imposing the special measure would prohibit covered financial institutions from establishing, maintaining, administering, or managing in the United States any correspondent account for or on behalf of a foreign bank if such correspondent account is being used to process transactions involving Liberty Reserve, including any of its branches, offices or subsidiaries.” However, especially in the context of the Notice of Finding, the Bitcoin Foundattion is concerned that “although the special measures contemplated by the Proposed Rule are explicitly targeted at Liberty Reserve, many of the statements in the Proposed Rule and Finding could be misread to apply more broadly to transactions involving virtual currencies generally.”

The core arguments that the letter makes are the following:

• Maintaining consistent definitions is important. Quoting the letter: “For example, the Finding describes Liberty Reserve as a “web-based money transfer system, or ‘virtual currency.'” In doing so, FinCEN infuses virtualcurrency with a new definition – namely, a web-based money transfer system. This definition of virtual currency is inconsistent with the definition FinCEN issued in its March 18, 2013Guidance … By equating virtual currency with “web-based money transfer system” in the Finding and the Proposed Rule, FinCEN risks muddying the analysis required byits own Guidance.” The letter instead recommends that FinCEN use its own language from its own March 18 guidance, perhaps calling Liberty Reserve the administrator of a centralized virtual currency system.
• Anonymity is not necessarily criminal. Once again from the letter: “The Finding and Proposed Rule broadly state that ‘Liberty Reserve’s system is structured so as to facilitate money laundering and other criminal activity,’ and cite, among other things, theanonymity of the system as evidence of that illicit structure. The Bitcoin Foundation is concerned about the broad use of the term ‘anonymous’ and about FinCEN’s generalcharacterization that all ‘anonymity’ is designed to facilitate money laundering and other criminal activity.” Here, the foundation is taking a brave turn, not taking the usual strategy of defending Bitcoin by claiming that it is not anonymous, but rather arguing that even anonymity itself is not necessarily criminal. This is a highly beneficial strategy for Bitcoin advocacy going forward; if Bitcoin becomes more anonymous in practice through developments like Zerocoin or decentralized mixers, the defense that “Bitcoin isn’t that bad” may not cut it anymore. Questioning what is bad in the first place, on the other hand, stands a solid chance no matter what the changes in technology.
• Neither is irreversibility. Contrary to what the Notice of Finding implied, irreversibility is a valuable feature for a payment system to have and, as Jon Matonis argues, it is in fact necessary for a number of applications. Matonis (not quoted in the letter) writes: “As an industry that suffered a high degree of customer disputes, online gambling is instructive because when certain customers lost in the casino and ‘changed their mind,’ it became necessary for these merchants to accept only payment methods with finality.”

The letter concludes: “The Bitcoin Foundation supports a strong and vibrant financial system in the United States and isnot objecting to the imposition of special measures in this particular case. At the same time, the Bitcoin Foundation urges FinCEN to be precise when it describes the growing virtual currency industry, and when issuing findings and making rules affecting the industry, to avoid any inadvertent implication that all virtual currency related businesses (including compliant ones) are somehow more predisposed to facilitate money laundering than other money services businesses.” All in all, this is an example of the solid Bitcoin advocacy that the foundation was created for. Rather than simply acting as a sitting duck waiting for it and its member businesses to be sued, the foundation is actively, and at the same time respectfully, seeking to engage in dialogue with federal regulators and actually turn digital currency regulation in a more favorable direction. It is only recently that Jon Matonis was named the new executive director of the Bitcoin Foundation; perhaps under his influence we will see more steps like this in the months to come.

On Thursday, July 11, Ultra Light Startups hosted a successful NYC Bitcoin Pitch Event.  Nine entrepreneurs provided two minute pitches on their Bitcoin start-up businesses.  Graham Lawlor and Tatiana Bakaeva of Ultralight hosted the event.

The evening was structured with nine 2 minute pitches from different Bitcoin related start ups.  At the conclusion of the evening the audience selected three winners for in-kind prizes.  Four panelists, including Andrew Chang (Founding Partner, Liberty City Ventures), John Frankel (Partner, ff Venture Capital), Nikhil Kalghatigi (Principal, SoftBank Capital), and Matthew Witheiler (Principal, Flybridge Capital Partners) from venture capital firms provided guidance to each start up following their presentations.  Bitcoin related start-up presenters included, Divya Thakur (Developer, BTX Trader), Shawn Sloves (Co-Founder, Atlas ATS), Ayoub Naciri (Co-Founder, artaBit), Andre De Castro (Ecoincashier), Jesse Heaslip (Co-Founder, Bex.io), Aric Fedido (Founder and CTO, OpenWallet), Kingsley Edwards (LeetCoin), Shamoon Siddiqui (CEO, Crypto Street), Megan Burton (Founder and CEO, CoinX).  At the conclusion of the evening, Megan Burton of CoinX was selected as the winner and runners up included Aric Fedida of Open Wallet and Shawn Sloves of Atlas ATS.

First prize went to Megan Burton who used her two minutes to discuss her new company CoinX, a digital currency exchange.  CoinX serves as a virtual currency platform for the buying and selling of Bitcoin, Namecoin, Devcoin, Litecoin, Ixcoin, PPCoin, Terracoin, and additional digital currencies.  CoinX specifically provides services to buy and sell digital currencies, accept payment in digital currencies and create a free Bitcoin wallet.

The overarching purpose of this first Ultra Light Bitcoin Startup event was to provide necessary tools and advice to early stage Bitcoin startups.  With time allotted to sell their company, each start-up representative not only practiced their sales pitch but also then received guidance from the panel on how to refine their investor pitch.  The four venture capitalists on the panel then provided insight on how investors evaluate startups.  With the Bitcoin currency growing in prominence, Ultra Light Startups made a wise decision to carve out an evening to feature Bitcoin startups.

Ultra Light Startups events take place the second Thursday of each month in New York and Boston.  Events on average have an audience of around 150 to 250 attendees.  Ultralight Startups ventured into the world of Bitcoin on July 11 and were pleased with the results as well as the opportunities that will follow from this step.

Where authoritarian government control and restrictions on individual liberties appear to be the strongest, the Bitcoin community is still growing and in some cases thriving.  Just this week Coin Ava launched as the first Iranian Website open for Iranians to buy and sell Bitcoins.  While Iranian leadership is known for tight regulations on citizens in particular for those seeking to utilize the internet and community with the rest of the world, Iranians have found a way around onerous authoritarian restrictions through the Bitcoin currency.

Last year, Bloomberg Businessweek pushed out an article, “Dollar-Less Iranians Discover Virtual Currency” to conclude, “For now, Iranians are using bitcoins to maintain a fragile connection to the outside world.”  Iranian citizens are able to use the Bitcoin currency as a gateway to purchase products around the world and through the Bitcoin currency are not confined to a devalued Rial.  As the Iranian regime continues to move forward with an illicit nuclear program despite international sanctions and pleas from leaders around the world to cease uranium enrichment, Iranian citizens are put in a tough situation.  In the end of the day, Iranian President, Mahmoud Ahmadinejad, and Iranian Supreme Leader, Ali Khamenei, while claiming to act in the best interest of Iranians are actually compromising the financial health and well being of all Iranian citizens.  Bitcoin provides a ray of hope for many Iranians in light of Iranian Authoritarian Leadership’s  blatant disregard of international standards.

As a former Foreign Policy staff member for a Member of the US Congress, I understand the hesitancy some might have to applauding the growth of Bitcoin in Iran.  Whereas it is evident that the current regime in Iran has violated international law through disregarding International Atomic Energy Agency (IAEA) standards and frequently utilizing hate-filled rhetoric, it is also true that there is a sizable group of Iranian citizens who oppose the totalitarian actions of their government and are working to reform their country.  The Iranian Bitcoin question is a touchy subject for most, but can be worked through if viewed through lenses centered on the purpose of the Bitcoin currency.
Whereas Bitcoin is a digital, decentralized currency, it serves as a source of empowerment for individuals around the world to take the initiative to control personal finances and become financially independent from a centralized source of control.  In some nations, the desire to be independent from a central bank is not as strong as not all nations have authoritarian leadership and high inflation rates.  Yet for some nations Bitcoin provides a source of financial security and promise outside of any centralized currency to citizens.  Coin Ava’s launch this week has prompted dialogue once again over the many purposes of the Bitcoin currency and the intrinsic value this digital, decentralized currency holds of citizens living under the auspices of an authoritarian government.  From the perspective of a former Capitol Hill staffer who ardently opposses Iranian nuclear development, hate speech, and human rights violations, I see the growth of the Bitcoin currency in Iran as a direct affront and slap in the face of the Iranian authoritarian government.  Where there is a will, there is a way, and Iranian citizens have worked to combat Iranian leadership’s poor decision making with the Bitcoin currency.

On July 9th, Jon Matonis accepted the position of Executive Director of the Bitcoin Foundation. Jon Matonis is a tech contributor to Forbes Magazine, editor of The Monetary Future, and also serves on our editorial board at Bitcoin Magazine. Previously Jon was the CEO of Hushmail and Chief Forex Trader at VISA.

How the Bitcoin Foundation will move forward on regulatory and legal issues is of crucial importance to the Bitcoin community. Jon announced a Legal Defense Fund and that it will be structured similarly to that of the Electronic Frontier Foundation.  

The Foundation intends to file amicus curiae Briefs in decisive bitcoin-related legal cases and offer pro bono legal defense. Amicus curiae (Latin: “friend of the court”) briefs are filed with the court by someone who is not a party to the court case. Take a look at EFF’s Legal Cases to see a sample what the Foundation’s amicus brief might look like.   He envisions “building a legal defense dream team…I’m talking about keeping people out of jail and pressing our case in the grey areas.”

The Foundation is only nine months old and the core list of issues are still being ironed out.  However, the first “two phases” of the fund have been established.  Phase I will focus around the Bitcoin exchanges while Phase II will focus on businesses that accept Bitcoin who are feeling indirect pressure to abandon adoption.

The Foundation was recently in the spotlight responding to cease and desist letter from the State of California  Department of Financial Institutions for being a “money transmitter” – an act that is as humorous as requiring chef to first become a certified farmer.  While this cease and desist was directed towards the Foundation, The Legal Defense Fund anticipates engaging the Bitcoin community at large.

In a podcast interview, Adam B. Levine, co-host and Editor in Chief of Let’s Talk Bitcoin!  asked Jon Matonis for specific examples where the Foundation would be proactive in exploiting the Legal Defense Fund.  Contemplated were two recent high profile situations interjecting themselves in Bitcoin legal grey areas (there are no known court actions in this regards): The BitBills Cold Storage Patent and the DEA Bitcoin Seizure.

The Foundation will not be involving itself in asset seizure cases such as the DEA bitcoin seizure.  The BitBills situation is “still under discussion” whether or not it fits within the scope of the Fund; Gavin Andresen, the Chief Scientist and Core Developer of the Bitcoin Foundation is regarded by most as the  progenitor of the cold storage paper wallet technology.

The “defensive intellectual property registration” of the fund might extend to defensively trademarking rights to names and logos.  It would be “broad and sweeping but not an aggressive portfolio.”

There may be good reasons for doing this. In 2011, a New York criminal law attorney attempted to trademark the term “Bitcoin”, and similar incidents in other countries led to Mt. Gox applying for the trademark Bitcoin themselves in a number of jurisdictions as a service to the Bitcoin community to prevent others from doing the same.  Max Keiser also caused a bit of a stir earlier this year when he pondered in The Huffington Post if “A Patent Lawsuit Could Take Down the Bitcoin Exchanges Like MtGox?“  Max Keiser is the former CEO of the Hollywood Stock Exchange (HSX) and inventor of the “Virtual Specialist Technology” now generally known as the “prediction market” business model. The company along with its patents were eventually sold.  The plan was to have a real hollywood futures contract exchange based on box office receipts.  It was initially approved by the CFTC, but was soon banned by the Dodd-Frank Wall Street Reform and Consumer Protection Act through Hollywood lobbying efforts.  Mr. Keiser speculates that the HSX patents could land the Bitcoin exchanges in a legal quagmire.  Shortly thereafter after we learned that the CFTC commissioner Bart Chilton announced on CNBC news state that he is interested in regulating Bitcoin.  He reasoned that if it is “commodity that is used as a derivative” than the CFTC can regulate it. Showmanship?   Maybe.  Regardless, this is the type of legal/regulatory/lobbying environment the Bitcoin Foundation will find itself head to head with.

Jon stated that the Foundation would look at Mt. Gox’s account being seized by Federal authorities at Dwolla regardless of whether Mt. Gox was on the Board or not.  LTB called compliance  a moving target and it was generally agreed that  the “rules get changed on you without you having  enough time to react.”

“rules get changed on you without you having  enough time to react.”

“Doug Jackson of e-gold knows you can have the rules changed on you at any time” cautioned Matonis.  The e-gold case is a good analogy when looking at the regulatory environment.  Wikipedia explains how “e-gold presaged Bitcoin as an alternative internet transaction system that operated completely outside of and independent of the legacy banking system.”    Bitcoin Magazine’s Vitalik Buterin’s recent interview (“Bitcoin at Porcfest Part 3”) with  James M. Ray of Omnipay (and  former exchanger for e-gold) shared James’ experience with the regulatory environment at the time. “Doug Jackson of E-gold tried very very hard, I witnessed it, I was there, to cooperate with the government, he testified in front of Congress and all the various agencies, but he finally got raided anyway.  If they could have raided Bitcoin they already would have, and the meme I’m trying to spread, I would love to see someone like Jeffrey Tucker say it, is that Bitcoin is karma for E-gold…”

Returning to Mt. Gox and the Bitcoin exchanges, Matonis noted the regulator concern of tax evasion vs. war on money laundering and terrorism.  Without putting words in his mouth I think Jon was alluding to is that regulators might be using the potential threat of terrorism as leverage to go after Bitcoin exchanges for tax evasion.

In any case, of all the Bitcoin related stories swirling around the news these days it is curious that the Department of Homeland Security would choose to highlight on July 2nd in its daily news clippings a story by SoftPedia that  the CNN Political Ticker blog was hacked: “July 1, Softpedia – (International) CNN’s Political Ticker hacked, fake Bitcoin operator story published. CNN’s Political Ticker blog was hacked and used to post a fake story about the shutdown of Bitcoin operator Btc-e.com after a user’s third party  publishing platform credentials were compromised.”

Other cases that come to mind are Bitfloor and Bitspend.  Bitspend has stated on its homepage since June 19th that “Bitspend is Unavailable: The TL;DR is that Bitspend has had its accounts frozen by our banks. We cannot operate without access to our funds.” and further provided updates on Reddit.  BitFloor Posted on April 13th that “I am sorry to announce that due to circumstances outside of our control BitFloor must cease all trading operations indefinitely. Unfortunately, our US bank account is scheduled to be closed and we can no longer provide the same level of USD deposits and withdrawals as we have in the past. As such, I have made the decision to halt operations and return all funds.”

“Bitfloor was Bullied” said Matonis.

In the next 30 days, the Foundation is scheduled to submit comments to FinCEN’s guidance and request for industry feedback on rulemaking.  They will have to submit their comments in the next few days on the NPRM or Notice of Proposed Rulemaking for “Imposition of Special Measure against Liberty Reserve S.A. as a Financial Institution of Primary Money Laundering Concern (May 28, 2013).”  Additional information on the Liberty Reserve can be found in the June 6th Federal register.

On regulation, Matonis noted that “The U.S. is taking the lead on being one of the most aggressive jurisdictions towards Bitcoin regulation.”  Further, “The U.S. regulatory crackdown on Bitcoin does not harm Bitcoin or the targeted companies, it harms U.S. citizens.”  Just like U.S. citizens can’t do online gambling or online poker, the rest of the world doesn’t care.”

“The U.S. regulatory crackdown on Bitcoin does not harm Bitcoin or the targeted companies, it harms U.S. citizens.”

One need only look at SatoshiDice.  “SatoshiDice is the most popular Bitcoin betting game in the universe.”  However, attempting to access SatoshiDice from the United States will flag you with the following message: “Beginning tomorrow, Thursday May 16, SatoshiDice.com will close to US players and all US-based IP’s will be blocked from the website…”  SatoshiDice posted the decision to vacate the U.S. market on Reddit on May 15th: “This decision was made on the basis of extensive legal counsel. The best way to limit legal risk for SatoshiDice, and thereby protect its stakeholders, is to block US players.”

 Consensus and Education Needed

The groundwork for governmental education will come before advocacy.  “The role of education is paramount and its so far behind the world of Washington when it comes to Bitcoin and virtual currencies in general” said Matonis.  The Foundation has not proactively engaging anyone in a long term relationship for representation in Washington in regards to government affairs.

Moreover, the membership of foundation might not want advocacy for different regulations.  The lobbying effort is an ongoing conversation within the membership and is quite active in the member forum and the main Bitcoin Forum.

Right now the Legal Board on the Bitcoin Forum has more than 6,600 post with about 350 topics.  See you there?

 

Coinbase is a company which offers a product which sounds too good to be true – the ability for US customers to buy bitcoins from their bank accounts via an ACH transfer with a locked-in exchange rate of 1% above spot at the time the purchase is initiated. And now they’ve just announced their most exciting feature yet: instant purchases. Granted, it takes 30 days to become fully verified to get access to the maximum transaction limit, and instant purchases, but that’s a small price to pay because once you’re fully verified it’s smooth sailing after that, right?

 

Unfortunately even after completing all verification steps it’s not always smooth sailing. Ever since Coinbase opened up to ACH purchases, some users reported cancelled purchases, especially in cases when the exchange rate jumped between when the sale was initiated and when it was completed.

 

The typical scenario that these users describe is that the bank transfer clears according to their online banking, but approximately at the time when they promised in the initial purchase message that the bitcoins would be released, what happens instead is that the transaction gets cancelled. The cancellation emails look like this:

I should note at this point that in almost every reported case, the individuals who contact support do eventually have the problem resolved to their satisfaction, and it’s likely that customers who have their orders cancelled after a drop in the exchange rate are probably less likely to complain about it.

 

This kind of problem was a lot more understandable back in February and March when they were just rolling out ACH buying to the public. Unfortunately, it’s still going on, and it’s still almost impossible to get help in a timely fashion when it does. The email itself is incredibly frustrating, because it give the user no indication of what they’ve done wrong or what they can do to fix the problem other than try again “in a few weeks”. Coinbase has no phone support available, and email support requests can take a few business days to receive a response.

 

As can be seen in several bitcointalk.org and Reddit forum threads started by frustrated customers, a lack of an explanation as to why their anti-fraud system has so many false positives leads some to question whether or not Coinbase cancels trades following large exchange rate fluctuation because  it becomes more profitable to sell the bitcoins back on the exchange instead of delivering them to their users. This is the kind of speculation that is corrosive to a company’s public image, and can scare off new customers. If Coinbase had more robust and responsive support options so that users who encounter these problems can get assistance in a timely fashion, it would go a long way towards countering accusations of exchange rate shenanigans.

 

At the same time, their pricing structure doesn’t leave a lot of room for support staff or for losses caused  by fraudulent purchases. With only a 1% commission on each sale, their entire operation must be largely automated and they have little margin available to hire a large support team. They also don’t want to give away information about their algorithm that would allow malicious users to bypass their fraud detection system.

 

There is one change they might consider which would alleviate the speculation though. Instead of immediately reversing a sale which trips the fraud filter, hold on to the bitcoins and give the customer a reasonable window in which to contact support and clear things up. This would at least allow the original purchase price to be honored and would refute accusations that the cancellations are related to changes in the exchange rate, while still prevent releasing bitcoins on a potentially fraudulent sale.

 

Coinbase is offering a service in the US market that is unmatched by any other company – the ability to buy bitcoins directly from a bank account at extraordinarily low prices. The only downside is that their low prices are necessarily bundled with limited support options. If they can find a way to strike a better balance between those two competing objectives it would remove a blemish from an otherwise excellent product.

Alternate cryptocurrencies are all the rage now. Over the past two years, we have seen the emergence of Namecoin, Litecoin, Freicoin, Terracoin, Devcoin, PPCoin, Worldcoin, and over thirty other coins all vying for a chance to become the next great cryptocurrency. Most recently of all, Primecoin entered the scene, offering a cryptocurrency whose mining algorithm based on locating prime number chains has attracted over seventy thousand pageviews on the Bitcointalk forums alone. With so many currencies to choose from, it can be hard to keep track of each one. Even Bitcoin data is highly disparate, with some sites offering accurate up-to-the minute market data, other sites focusing on mining statistics and still others more focused on transaction counts. Fortunately, there are a large number of sites that can help. Over the past six months, we have seen the emergence of dozens of different aggregator sites, all sharing the same goal: to keep track of the large and rapidly growing number of cryptocurrencies that are now available, and help users make sense of it all. Some of these sites offer market statistics or network data, others are mining-focused, and still others exist to help arbitrage traders. Of all the websites that have popped up to serve these new niches, here is a collection of some of the best.

• The Alternate Cryptocurrencies Subforum – this section of the Bitcointalk forums (which were formerly the official Bitcoin forums) is by far the largest gathering spot for alternate cryptocurrency discussion. Nearly every new currency makes its first announcement on this subforum, and many continue to use it as their main location for posting updates. One can also find giveaways, alternate cryptocurrency-accepting websites, and if any new data aggregator appears after this article is written chances are it will find its way on there.
• List of Altcoin Faucets – one particularly useful post on the alternate cryptocurrency subforum, providing a list of all of the sites you can go to to get your first few units of almost every alternate cryptocurrency available.
• Coinchoose – Coinchoose provides basic data on 30 cryptocurrencies, particularly targeted toward miners. The site shows the mining algorithm (sha256 or scrypt), difficulty, reward, price (in BTC) and network hashpower of each currency, and also provides another particularly useful statistic for miners: the profitability of mining every currency relative to Bitcoin. Hence the name of the site – if you have a miner and want to decide which coin you should choose to work on, Coinchoose is the place to go. The site also offers its data in a computer-friendly JSON format at coinchoose.com/api.php.
• CryptCoin Monitor – an Android application to help alternate cryptocurrency miners keep track of all of their mining pool accounts.
• CrypTrader – this web application allows users to link their accounts to MtGox, BTC-E, Bter and Vircurex, and then instantly buy and sell on any of the exchanges from a single page. The basic idea behind CrypTrader has been tried before, in the form of Eun-Joo Hansch Seoung’s BTC Trader application, but Cryptrader is superior in a number of ways. First of all, unlike BTC Trader it is a web interface, making it much easier to use and requiring less trust on the user’s part than a desktop application. It is even possible, and recommended, to provide CrypTrader with API keys to your accounts without withdrawal privileges, so even if CrypTrader (or someone who hacks CrypTrader) proves to be malicious they can only move your money from one currency to another; they have no way of simply taking it for themselves. Second, CrypTrader goes beyond just Bitcoin, supporting all of the thirteen cryptocurrencies supported at the four exchanges. Altogether, if you are an arbitrage trader looking for a convenient way of looking at the price discrepancies between the various cryptocurrency markets, CrypTrader is the place to go.
• Cryptsy – Cryptsy is one particular cryptocoin market, offering over thirty alternate cryptocurrencies tradable for BTC on its exchange. Coins-e is another site with a similar function.
• Quandl Bitcoin Markets – Quandl is now offering a page with a large number of Bitcoin-related statistics aggregated from blockchain.info and Bitcoincharts. Statistics include the number of Bitcoin transactions, the average block size, the blockchain size, and Bitcoin prices on twenty different currency/exchange pairs. All data is also offered in a computer-readable JSON format, and for every statistic Quandl also offers a highly advanced chart interface and the ability to download historical data in a number of different formats. The only thing that the site is missing (as of the time of this writing) is mining statistics such as those from bitcoinwatch.com; once it includes that, this may well become the only Bitcoin statistics site worth visiting.
• Cryptocoincharts – this site offers charts and the orderbook for over seventy cryptocurrencies, and for many currencies the site shows data for multiple exchanges and, in several cases, even data for exchanges converting directly between that currency and the USD or Euro. Altogether, the site contains 150 charts, making it one of the most detailed alternate cryptocurrency data aggregators out there.
• Ripple Charts – Ripple Charts provides dozens of charts for currency markets over the Ripple network, and is the best place to get price data for Ripple’s own internal currency unit, the XRP.
• Cryptocoin Explorer – the altcoin equivalent to Bitcoin’s Block Explorer, the site provides information on addresses, transactions and blocks for over 15 cryptocurrencies. The site also provides its data in a machine-readable format via an API, which also gives the site another practical application: one can use the site to query for the balance of a particular address, allowing merchants to start accepting any of these currencies without having to worry about running their own local node (although they will need to generate a few thousand addresses; creating a deterministic wallet that can generate addresses for any cryptocurrency is still an open problem).

For the cryptocurrency enthusiast, these sites are all valuable tools in a rapidly growing cryptocurrency toolbox. Multicurrency online wallets are perhaps the one application that still can be worked on; so far, every cryptocurrency has retained Bitcoin’s cryptographic relationship between private keys, public keys and addresses exactly (except possibly changing a “magic byte” to make addresses start with a different letter), so one should easily be able to make a deterministic wallet that works over all currently existing alternate cryptocurrencies at the same time. Complete alternate currency merchant tools are the next step; currently, Kojn offers Litecoin and Bitcoin support at the same time, but accepting a dozen cryptocurrencies is the next step. From there, well, let a thousand cryptocurrencies bloom.

Note: there has been some confusion regarding Danske Bank’s involvement with this service. Danske Bitcoin is a service independently run by BIPS, and there are no formal agreements between BIPS and Danske Bank to facilitate the offering of this service

BIPS, a Bitcoin payment processor based in Canada and Denmark, has just announced a new service: Danske Bitcoin, allowing users with Danske Bank’s MobilePay service to instantly buy bitcoins from their phone. MobilePay an iPhone and Android application that allows anyone with a Danish bank account and credit card (and is over 15 years of age) to send money to other users instantly. MobilePay is currently making an introductory offer of no fees until January 1, 2014, at which point, DanskeBank’s Mobilepay page reports, DanskeBank may add a fee that “will be a competitive price that reflects the costs of running the solution”. Users need not be specifically in Denmark to buy bitcoins; as long as one’s Danish bank account and credit card is active, the service works from all over the world, and the money will be immediately credited to one’s BIPS account. As of July 14, the service is not released yet, but should come online soon.

The process to buy bitcoins with Danske Bitcoin is as follows:

1. Install DanskeBank’s MobilePay app to your phone from the iPhone App Store or Google Play.
2. Insert your bank account and credit card info on the BIPS website, as well as the number of the phone that you have installed MobilePay on
3. Go into the application, go to “Send” and send any amount to BIPS’s phone number (36965694)
4. You should receive the equivalent in BTC credited to your BIPS account very soon

BIPS has not seen nearly as much attention in the Bitcoin merchant processing space as its major competitors BitPay and Coinbase, but it has been seeing considerable growth particularly in Denmark, where the service’s co-funder Kris Henriksen is located. The service is used by a number of businesses in Denmark, notably the popular online dating site single.dk, and also recently announced its latest customer: Flattr. Flattr is a service based in Sweden founded by Peter Sunde (best known for his work in The Pirate Bay) and Linus Olsson that allows users to easily donate small amounts to content creators on the internet. Users set an amount that they want to donate every month, and then while browsing they can click a button to tip individual creators. The monthly donation is evenly split among everyone tipped at the end of the month.

Payment processing with BIPS is free if merchants wish to cash out directly in bitcoin, but charges a 2.5% fee in the form of a lower exchange rate for converting the bitcoins to a cash deposit in one’s bank account. Merchants can opt to pass the fee on to customers (default), or absorb the fee themselves. BIPS also offers a number of additional features for a small fee, including MtGox integration and secure cold storage. BIPS can also be used to buy and sell bitcoins, and with this integration of DanskeBank’s services using BIPS to buy bitcoins just got considerably easier for Danish users. Denmark remains one of the countries where Bitcoin is less widespread, with Google Trends showing a score of 49% compared to an average of 50%-70% across Europe, but thanks to the efforts of BIPS (and, to a lesser extent, Lasse Birk Olesen’s Bitcoin Nordic) the community is growing. Hopefully we will continue seeing more interest from Denmark in the months to come.

An Interview with Marco A. Santori, Senior N&M Associate

On July 1, Nesenoff & Miltenberg LLP took the step to provide the option for payment in Bitcoin.  The Bitcoin currency is not a new concept to this Manhattan based full-service commercial law firm as Nesenoff & Miltenberg LLP, otherwise known as “N&M”, provides legal services for Bitcoin related businesses. N&M finally made the significant step of providing clients an opportunity to pay for services with Bitcoin through BitPay Inc, the lead Bitcoin payment processing company.

Marco A. Santori, Senior N&M Associate, stated: “Manhattan law firm Nesenoff & Miltenberg, LLP, is committed to providing legal counsel to businesses in the growing virtual currency space. As one of the few firms with hands on experience counseling Bitcoin clients in this evolving area, the firm will be accepting payment in Bitcoin, providing those qualified clients with the flexibility and confidence to meet their business needs.”

Bitcoin Magazine had an opportunity to speak with Marco and find out more about his involvement in the Bitcoin community.  Over two years ago Marco formed a currency trading fund for a few entrepreneurs. On the side, the clients used to joke and state regarding the currency trading fund, “what they are really doing is trading Bitcoins.” Well, soon Marco found that his ratio of non-Bitcoin related businesses to Bitcoin related businesses was diminishing. Today almost all of his time is spent counseling Bitcoin related businesses. Marco represents clients in NYC and from clients all over the world: BTC Global, companies in Canada, a company in TX, companies in NYC. What used to be a comical afterthought is now a reality for Marco.

Marco has now assumed the role of a “Bitcoin lawyer”. How did he get to a position to assume such a role? Marco took the time on his own volition to learn more about the Bitcoin currency and research on Bitcoin forums and also personally get involved in Bitcoin through serving as Chairman of the Bitcoin Foundation’s Regulator Affairs Committee. After having digital currency clients continue to ask if they could pay in Bitcoin, N&M finally chose to accept Bitcoin as a payment for legal services. BitPay Inc made accepting the Bitcoin currency possible for N&M.

Bitcoin Magazine had the opportunity to interview Marco to learn more of how this process unfolded:

Bitcoin Magazine : When did you first hear about and get involved in the Bitcoin currency?

Marco A. Santori: Nesenoff & Miltenberg, LLP has an established practice counseling clients in the finance and high-technology industries. In early 2011, the firm formed a foreign currency trading fund for a group of very savvy clients. The fund traded mostly Euros and US Dollars, but even back then, they would discuss how the real money would be made in trading Bitcoins. It turns out they were right.

BM: How did you first get involved in the Bitcoin currency? What makes your legal services stand out in comparison to other lawyers assisting individuals in the Bitcoin community?

MS: I have always been a technology enthusiast. I think it has mapped well onto my practice counseling businesses in the tech sector. I don’t actually remember when I purchased my first Bitcoin, but I’ve since fallen pretty deeply into the crypto-currency rabbit hole. I’m fairly certain I’ve read every bit of press coverage on digital currency published since then. I attend regular Bitcoin NYC Meetup groups dedicated specifically to Bitcoin entrepreneurship. I’ve engaged in in-depth statutory analysis, regulatory projections, and simple speculation on web forums. The firm’s clients get the benefit of that knowledge without having to pay someone to reinvent the wheel. I think that clients appreciate it when they don’t have to spend their first chunk of billable time explaining to their lawyer what the block chain is, and why an M-of-N transaction might be the solution to their regulatory concerns. That’s the kind of information the lawyer ought to be providing to the client, not the other way around.

BM: When did you first get the idea to work with clients involved in Bitcoin?

MS: As it goes with most things in the practice of law, I didn’t choose Bitcoin; Bitcoin chose me.  Companies first began reaching out to me with their digital currency issues in response to my work with businesses in the tech sector. As that progressed, I was named Chairman of the Bitcoin Foundation’s Regulatory Affairs Committee. Word of mouth is a powerful thing, and I think clients prefer to use attorneys with an intimate knowledge of their industry.

BM: How did you make the decision to accept payment from clients in Bitcoin?

MS: The firm strives to serve its clients. That means flexibility with time – picking up the phone at midnight – and flexibility with money – accepting alternative currencies. It should come as no surprise that clients whose business is dealing in digital currency might prefer to pay their legal fees in digital currency. Paying in Bitcoin presents qualified clients with the flexibility and confidence to meet their cash flow and tax planning goals.

BM: Were there any preexisting law firms and/or businesses that inspired you to get involved in the Bitcoin currency?

MS: The inspiration to get involved with Bitcoin came, as many things in this industry come, from our clients. Bitcoin adoption is the fundamental driving force of their business models. Combine this with the fact that many clients in the space already possess substantial Bitcoin holdings, and it just makes good business sense for them to pay in Bitcoin.

BM: Where do you see your Law Firm’s involvement with Bitcoin going in a year?

MS: Digital currency law is the copyright law of the 2010s. As most lawyers recall, the revolution in computer applications and mp3 encoding resulted in an unprecedented explosion in the volume and quality of copyright law in the late 1990s and 2000s. Likewise, I anticipate substantial growth in the volume and quality of digital currency law in the coming years.  Nesenoff & Miltenberg is committed to positioning itself as the law firm of choice for guidance in the digital currency space.

BM: What are your suggestions for individuals hoping to get involved with Bitcoin?

MS: As to early-stage businesses:  Talk to a lawyer early on, and then run the numbers. Then run them again. Then run them again, and only then sink money and time into developing your product. That is the correct order of operation for the digital currency business. I spend hours a day speaking to entrepreneurs who have already developed a spectacularly functional and well-polished product, only to realize the cost of IP licensing and regulatory compliance means reworking key features of their business model. As to individuals: support Bitcoin businesses!

BM: If I am an individual involved in the Bitcoin community and need legal assistance, how can I get in touch with your law firm?

MS: You can visit our website at www.nmllplaw.com, and you can email me at [email protected] for more information.

Bitcoin Magazine applauds N&M’s work in the Bitcoin community and additionally this next step to accept payment for legal services with the Bitcoin currency. N&M partners have blazed the trail for legal professionals and businesses to follow and learn more about the Bitcoin currency and other alternative currencies on the rise and path to prominence.

One of the more interesting applications of peer-to-peer finance is the concept of a prediction market – a market where people can speculate not on stocks and commodities, but rather real-life events. A prediction market might issue an asset that pays out $10 if Hillary Clinton wins the 2016 US presidential election, and $0 otherwise, and people would be free to either buy or sell the asset (short selling, or selling shares that you do not own to have a negative exposure, is just as easy as selling). The asset would then find a natural market price, say $2. If you think Hillary Clinton has more than a 20% chance of winning the election, it is in your interest to buy, and if you think he has less than a 20% chance then you can short sell. The idea is that, through the mechanism of the market, the opinions and information of millions of people around the world would be brought together to determine a sort of public estimate of the probability that something would happen. What is even more interesting is that even secret information would be brought into the calculation; if, for example, you secretly know that Hillary Clinton already has established plans to retire by then, you can short sell a large number of shares without telling anyone why, and your short sales will make the market price go down.

Unfortunately, as far as actual working prediction markets go, right now there are few options. The world leader in the industry, InTrade, shut down in March this year due to what appear to be internal “financial irregularities”, and so far no other has stepped up to take its place. This, of course, presents a prime opportunity for Bitcoin, and one that a number of sites, most notably betsofbitco.in and bitbet.us, have already attempted to seize. Today, though, a new contender is opening its doors: Predictious. The difference: unlike the previous contenders, Predictious works like an actual prediction market.

Betsofbitco.in and Bitbet attempt to serve the save function as Predictious, but in a very important way they are actually quite different. Rather than having users buy and sell shares, both sites use a betting system known as “parimutuel betting”. Users bet on events by placing their money into the “yes” pool or the “no” pool for each event. Whichever side is ultimately correct will have the value of both pools redistributed them in proportion to how much they personally invested, with an additional weighting factor to encourage earlier bets. The problems with this approach are several. First, there is no way to “cash out” of one’s bet in the middle. Second, the time weighting is impossible to balance perfectly; too little time-weighting, and users can “snipe” near-certain outcomes one minute before the deadline of a given event and make a substantial profit, and too much time-weighting means that it becomes impossible to tell what the market thinks is the probability of an event happening from the size of the pools. In Predictious, you bet for or against events by buying or short selling shares, and the price of a share always accurately reflects the market’s opinion of the probability of a given event. Finally, parimutuel betting is simply unintiutive compared to the relatively simple concept of buying and selling shares in a market, which Bitcoin users are already used to in the form of Bitcoin exchanges.

Inside the Market

Predictious was created by Flavien Charlon, a developer with a prior background in mobile applications and Facebook applications, and is his first Bitcoin-related project. The parent company, Pixode, is based in Ireland, and the project is currently largely a solo effort – “although I am getting some help from a friend,” Charlon points out. The site’s interface is intuitive and easy to use. Users can look through the various predictions that the site offers listed by category (currently, the major categories are politics, sports, economics, entertainment, science and tech and business), and see the buy and sell prices listed beside each prediction. Each share pays out 10 mBTC if the underlying prediction proves true and 0 mBTC otherwise, so seeing a prediction with a price of 7 mBTC suggests that the market believes that the prediction has a 70% chance of coming true.

There are two places to click on each prediction in the above view; on the left, one can click to view a more detailed contract, and on the right one can click in the “Buy” or “Sell” area to get to the trading screen. On the trading screen, the user sees a form that looks much like buying or selling bitcoins on an exchange; they set a quantity and a price they wish to buy or sell at, and click “Buy” or “Sell” to confirm the trade. If a matching offer exists (eg. you sell at 4.50 mBTC and someone is already buying at 4.80 mBTC), your offer gets matched up against the matching offer most favorable to you, and you either gain a share, lose a share, gain a negative “short share” or lose a short share depending on the kind of offer you made and your existing exposure. Short shares are what you get when you attempt to sell shares of a prediction without having any shares to sell; essentially, they are the inverse of an ordinary share. For example, short-selling a share for 3.00 mBTC will withdraw 7.00 mBTC from your account, and return 10.00 mBTC if the prediction proves to be false and 0 mBTC is it turns out to be correct. If a matching order does not exist, your order gets put in the order book, and hopefully soon enough someone else will take your offer. Predictious itself intends to earn its money by taking a fee, currently set at 0.2 mBTC per share on every transaction.

The Dreaded “R-word”

One question that is, and arguably should be, asked of nearly every new Bitcoin business in 2013 that goes beyond simply accepting the currency for payment or using it to pay employees is that of regulation. Financial services are a highly regulated industry, and the closure of InTrade should be viewed as a warning sign, particularly since Predictious is based in Ireland just like InTrade was. However, Intrade’s home page provies us with the following information:

We have now concluded the initial stages of our investigations about the financial status of the Company, and it appears that the Company is in a cash “shortfall” position of approximately US $700,000 when comparing all cash on hand in Company and Member bank accounts with Member account balances on the Exchange system.
…
We are now very confident about the reasons which caused the current circumstance of the Company; however, for legal reasons we are not yet at liberty to document them to you. I can confirm that the Company, if it is able, intends to vigorously pursue two substantial monetary claims against two distinct parties for an aggregate amount greater than $3,500,000.

Thus, the true cause of the shutdown is very likely some kind of internal fraud, and not legal issues with InTrade itself. However, InTrade did have one run-in with the law. In November, InTrade was forced to close its doors to US customers following a complaint from the Commodity Futures Trading Commission, one of the federal financial regulators of the US government. The Commodity Futures Trading Commission’s press release begins:

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today filed a civil complaint in federal district court in Washington, DC, charging Intrade The Prediction Market Limited (Intrade) and Trade Exchange Network Limited (TEN), Irish companies based in Dublin, Ireland, with offering commodity option contracts to U.S. customers for trading, as well as soliciting, accepting, and confirming the execution of orders from U.S. customers, all in violation of the CFTC’s ban on off-exchange options trading. The CFTC’s complaint also charges Intrade and TEN with making false statements concerning their options trading website in documents filed with the CFTC, and charges TEN with violating a 2005 CFTC cease and desist order (see CFTC Press Release 5124-05, October 4, 2005).

Fortunately, Predictious is somewhat less vulnerable than InTrade to this kind of regulatory attack. In theory, both companies could simply sit in Ireland and remain unaffected by the law of a foreign country. In practice, however, the US very often gets its way. The major avenue of attack is through banking relationships; had InTrade not complied, the US may well have forced local banks to block, or even seize, transfers to Intrade, putting large hurdles before US residents wishing to use the site. This strategy is used already in the Foreign Account Tax Compliance Act, which has one clause requiring US-based banks to withhold 30% of all transfers sent to international institutions that do not comply with the act’s core requirements. Predictious, on the other hand, does not need any banking relationships with anyone. However, this does not mean that Predictious will want to violate US law; if nothing else, the US has the power to produce an arrest warrant within their own country, effectively banishing Charlon from one third of the developed world. But, although Predictious eventually may not be able to avoid blocking the US, that is not where its advantage lies; rather, Predictious has no way of actually enforcing a country-based restriction. IP address-based blocks are possible, and often used in practice, but virtual private network (VPN) services like PrivateInternetAccess (which also accepts bitcoins) can easily be used to pretend to be from another country. SecurityKiss’s VPN is even free for basic usage.

As for Ireland’s own laws, Charlon writes, “regulations around gambling in Ireland only apply to services dealing with currencies like Euros or Dollars, which we don’t, so this may not even be coming into question before a few years.” The idea of using Bitcoin as a currency not legally recognized as money in order to bypass regulations is not a new one; this was in fact the main legal premise of the gambling site SatoshiDice. However, in March 2013 FinCEN released a guidance stating that Bitcoin was indeed a form of virtual currency, and soon after that SatoshiDice decided that it was in their legal interests to start blocking IP addresses from the US (although circumventing that particular block is even more trivial; the SatoshiDice betting addresses have been copied to the Bitcointalk forums). In Ireland, nothing like this has happened – in fact, the country’s government has not yet said a thing about the currency. Just like in the US, the situation may change, although arguably a pro-Bitcoin decision is more likely there. Hopefully, Predictious will remain untouched.

Conclusion

Prediction markets are an application for Bitcoin that really should have had multiple stable providers since 2011; beyond the standard difficulties relating to security, they are not technically hard to implement, and fill a valuable niche in the Bitcoin ecosystem. Predictious, with the effort put behind it, stands a solid chance of finally succeeding where its predecessors have failed, especially as it will be helped along by the higher volume of the Bitcoin community in 2013. The one thing that is still lacking is a good set of predictions; currently, the predictions essentially all have to do with the 2016 US presidential election, celebrities, top grossing movies or the Bitcoin price; a wider array of predictions relating to science and technology or economics would likely be well received by the Bitcoin crowd. However, this is easily fixable; the site has a form where users can submit questions, and a manual review process will look through the inputs and include those that meet the site’s quality standards. In the near future, the site will likely add graphs to track the price of particular shares over time, and adding new predictions will also be a top priority. Given the lack of any true competitors in the Bitcoin economy, and the lack of a solid established player since the loss of InTrade, Predictious has a unique opportunity to not just carve out a niche in the Bitcoin space, but also to bring a considerable amount of attention to Bitcoin itself. With enough community support, and luck, it may do just that.

Primecoin has come far in the last few days. Less than a day after founder Sunny King released the genesis block and I first covered the currency, Primecoin has become one of the few alternative cryptocurrencies to be featured on Business Insider, its thread on Bitcointalk has reached 77 pages and has attracted the interest of thousands of people around the world. Now, after two days in the wild, Primecoin is already bringing us real-world value.

Buying primecoins has already become easy; Coins-e, a cryptocoin exchange featuring over 30 currencies, added Primecoin support yesterday. Users need only create an account, deposit bitcoins, and within one hour they will be able to exchange them for primecoins at a current rate of 1 for 0.005 BTC. And if you want to spend them, there’s a business that accepts those too: Satoshi Roulette. SatoshiRoulette is a Bitcoin gambling site that popped up a few months after the industry was first popularized by Erik Voorhees’ SatoshiDice, featuring a roulette game that you can play simply by going to the site, clicking on the guess you want to make (either a number, like 15 or 23, or special options like “FIRST 12”, “EVEN” or “3rd line”) and sending money to the Bitcoin address. As far as infrastructure is concerned, there is now a Primecoin block explorer, which can theoretically be used by web developers to easily set up a Primecoin-accepting store.

However, that is not even the most interesting aspect of Primecoin’s development. Rather, what deserves the most mention of all is that Primecoin miners have already broken world records for finding Cunningham chains. The specific record is for Cunningham chains of length 9; the longest three chains before this week had origins 111, 109 and 94 digits respectively, and had been discovered in 2004 and 2009. The two new records generated this week are 131 and 158 digits respectively. The numbers:

15746436948707162347681191092622506406480521554672382866529
11336545168633619161630382098525129584202068464052357630633
6183730859560



65004063504559525007738276505391185322137155270201199057971
07651195404566504896517372220950102661115676898877913886840
8914387452650147975793533060274322762630


Note that these numbers are obviously not prime; the convention of Cunningham and bi-twin chains (or at least the convention adopted by Sunny King) is that the “origin” of a chain is defined as either one less or one more than the first prime in the chain. This is done for convenience. If one wanted to retrieve some particular prime in the chain from the first prime, one would need to repeatedly multiply by two and subtract one at each step; using this convention, the formula is simply p_n = w*2ⁿ-1, where n is the index of the prime and w is the origin. For Cunningham chains of the first kind, the formula would be p_n = w*2ⁿ+1. Thus, the first prime in the smaller record-breaking chain is:

15746436948707162347681191092622506406480521554672382866529
11336545168633619161630382098525129584202068464052357630633
6183730859561


The second prime is:

31492873897414324695362382185245012812961043109344765733058
22673090337267238323260764197050259168404136928104715261267
2367461719121


And so on.

A list of records is being maintained by Dirk Augustin; the miners of blocks 2044 and 5355 have the option of proving who they are (eg. by sending a pre-specified quantity of primecoins from that address) in order to get their names on the list. Length-9 Cunningham chains of the first kind will be much harder to break records for; the current record is already 185 digits long. Cunningham chains of length 10, however, will be easy; the current records are 99 and 109 digits long, respectively. Ultimately however, the Primecoin communities should set their sights on a much more audacious goal: the first advance in mathematics made for the sake of Primecoin mining. In a few years, or perhaps even sooner, we may well get there.

Last year in December, Bitcoin Central, the leading Bitcoin exchange in France, shocked the Bitcoin world with an announcement which at the time was the first of its kind: a formal partnership with Aqoba, a licensed payment services provider – a classification which Bitcoin Central’s David François described as “exactly what a bank does, minus the issuing of credit”. Thanks to Aqoba, Bitcoin Central users would have the fiat portion of their funds stored in an actual, federally insured, bank account, which they could send money to via traditional mechanisms like wire transfer. Unfortunately, the agreement never came to fruition. Weeks and then months passed without any further progress in the implementation, and by April Bitcoin Central was forced to shut down for unrelated reasons involving security. The exchange now plans to start again with another payment processor when they come back online.

Now, the leading Bitcoin exchange in Germany has just announced that it is doing a very similar thing. Bitcoin.de, a Bitcoin exchange that has been bringing together Bitcoin buyers and sellers since August 2011, has announced a partnership with Fidor Bank through which the exchange will integrate with the bank directly. Understanding exactly what this integration is first requires a knowledge of how Bitcoin.de works. Bitcoin.de is not a typical exchange; rather, it is a hybrid between a typical exchange and localbitcoins.com. The exchange maintains an order book, charts, an internal Bitcoin wallet and many of the other trappings of a typical exchange, but trades happen between buyers and sellers directly. As the original post (German) explains:

On our portal users can easily sell bitcoins to other users or buy from them. To do that users must register at bitcoin.de and, insofar as they want to be sellers, transfer a quantity of bitcoins to their bitcoin.de account. Once a buyer is found for their bitcoins, the payment information is automatically sent to the buyer. The payment takes place directly between buyer and seller. As soon as the payment has arrived at the seller, the bitcoins are transferred for a small fee from the seller’s account to the buyer’s.

Buyers and sellers have some latitude in choosing their payment option, and, as it turns out, Fidor Bank is a popular option. The problem was, however, that the process of making a full transaction, from the buyer receiving the seller’s banking info to making the payment and finally the seller confirming that they received it, would take as long as 1-3 days to complete. Now, Bitcoin.de chief Oliver Flaskämpfer writes, “through the cooperation with Fidor Bank over the next few weeks our customers will gain the possibility of trading bitcoins almost in real time on a free FidorPay checking account.” Anyone with a legal residency in the European Union, Iceland, Liechtenstein, Norway and Switzerland will be able to get one of these accounts, and they would then be able to either use that same account as their bank account or send money to it by bank transfer much like one would deposit to BitStamp. Compared to BitStamp accounts, however, bitcoin.de will have one huge advantage. “While customers of foreign Bitcoin exchanges must transfer their money abroad into non-insolvency-protected company accounts,” Flaskämpfer continues, Bitcoin.de customers’ money will be stored in their own bank accounts with EU deposit insurance of 100,000 EUR per customer per account.”

This is significant in multiple ways. First of all, it essentially elevates bitcoin.de to the status of a fully-fledged Bitcoin exchange. Anyone in the EU wishing to exchange bitcoins can wire money to their FidorPay checking account, and then use that balance to buy and sell bitcoins at will on bitcoin.de – just like a BitStamp account (or MtGox account or BTC-E account). Second, this is an EU-wide, and possibly worldwide, first as a formal cooperation agreement with a bank, and not a lesser classification like a “payment services provider”. Finally, this agreement appears to be considerably more likely to actually come to fruition. According to heise.de, “the cooperation should start once the banking regulator BaFIN gives its approval”. Technically, approval is not even necessary, but after recent regulatory clashes in the US Flaskämpfer prefers to give BaFIN the opportunity to look through the agreement first just in case.

Altogether, this is a strong step in boosting what has already become a powerful German Bitcoin community, and hopefully the agreement will go through as planned. “In the future,” heise.de reports, “Bitcoin.de also wants to offer their own Bitpay-style payment service, which should allow merchants to receive business transactions with Bitcoin. For that a BaFIN license is necessary, It would take until 2014 to satisfy all the requirements, Flaskämpfer said. An exchange with an automatic trading system would then be the next step.”

The Bitcoin community and user base continues to expand and businesses old and new are embracing this new digital, decentralized cryptocurrency to simplify the payment process and meet consumer needs.  The quantity and variety of businesses accepting payment in Bitcoin continues to expand.  From real estate sites to now watch factories, Bitcoin has been embraced to simplify payment and incentivize merchants to sell products and in turn deal with fewer transaction fees.

Just this week, Russia’s historical watch factory Raketa, began accepting Bitcoins.  Raketa was founded in 1721 by Peter the Great and is the oldest factory in Russia.  For almost 300 years, Raketa, formerly known as Petrodvorets Watch Factory, has produced and sold wristwatches to individuals in Russian and those around the world.  Petrodvorets Watch Factory was renamed Raketa in 1961 to honor the World’s first cosmonaut Yuri Gagarin.  Yuri was the first human to travel to outer space.

This is a significant step in the right direction for the Bitcoin community.  Over the years Raketa’s watches have been produced for the members of the Red Army, Soviet Navy, North Pole expeditions and civilians.  Not only is Raketa respected by Russian leadership, but also popular with the public having an array of watch designs from practical to fashionable.  Raketa even has the last remaining watchmaking school and operates this training program in conjunction with the Saint Petersberg Technical Institute.  Raketa is just not another watch brand or shop, but has deep roots within Russia and a global reach.  We can expect Raketa’s step to embrace the Bitcoin currency as a catalyst for other businesses in Russian and around the world to transact in Bitcoin.

Raketa produces all mechanical movements in-house, setting this watch factory apart.  Raketa is now unique in an even more significant way in that it currently stands as the only watch factory to date accepting Bitcoins for payment.  Factory Director, Jacques von Polier stated, “It is very easy to accept Bitcoins…you just put a logo on your site saying- we accept bitcoins- and that’s it.  It is as simple as saying we accept cash!”  Manufacturers and merchants can heed Von Polier’s example of taking an easy step and in the long run a very beneficial step of accepting Bitcoins.
Bitcoin Magazine encourages businesses to follow suite and accept this alternative payment method which not only alleviates merchant woes, but also makes payment much more convenient for customers.  Check out Raketa’s watch selection and feel free to look into making a purchase in Bitcoin today. 

Over the past few months, Bitcoin has taken the Chinese community by storm. In early April, Iwannabuy, an online discount store selling air purifiers, humidifiers and anti-pollution masks to people living in China started accepting Bitcoin for its products. On April 23, the One Foundation, China’s largest private charitable foundation, followed suit, accepting Bitcoin donations for a disaster relief effort after a recent earthquake, receiving $30,000 worth of BTC in a single day. On the same day, for the first time another country registered more downloads of the Bitcoin-Qt client than the United States. The country in question: China. At the beginning of May, millions of Chinese were introduced to Bitcoin for the first time with a half-hour special on the state TV network. Altogether, the effect was massive. Two months later, TechInAsia reports that “the bitcoin industry is also all over Taobao [China’s equivalent of Ebay], where you can buy everything from computer chips to custom mining rigs to bitcoins themselves.”

However, there still remains a huge sword of Damocles hanging over the fledgling Chinese Bitcoin community. The problem: same as in so many other countries in the world, government regulation. China already went through the digital currency experiment once with Q Coin. Q coin is a form of electronic money issued by Tencent QQ, one of the largest internet companies in China. Tencent QQ offers services including online social games, music, blogging and chat, and Q Coin was introduced as a sort of gift card for QQ’s paid virtual addons. Originally, the coins were even transferable between users, creating a booming secondary market. However, eventually the Chinese government cracked down, among other restrictions banning companies from issuing digital currencies that can be traded between users. Bitcoin bypasses this particular regulation, as it has no “issuers”, but it is quite possible that the Chinese government will crack down on local Bitcoin exchanges at the very least.

The main argument against this is the state TV broadcast in May. The broadcast, transcribed and translated here, featured a broad overview of Bitcoin, describing Bitcoin mining, Bitcoin business and speculation and the technical properties of the Bitcoin currency itself. The tone was surprisingly positive, at no point even mentioning the possibility of criminal use and only briefly discussing government regulation. The channel the broadcast was on was China Central Television, the “predominant state television broadcaster in mainland China”. If the state TV is so approving of Bitcoin, the argument goes, why would the government change course and turn against it?

There are two possible explanations. First, governments are far from monolithic entities, and the sheer size of the Chinese Communist Party makes that even more true in this case. Some lower-level officials in the TV network may well be strongly in favor of Bitcoin, having been fans of QQ coin back in its day themselves, and at the same time it may be quite possible that everyone at the top is already thinking of how best to destroy it. Second, however, the Chinese government is known for being fickle. The best example of this is the Hundred Flowers Campaign, an initiative launched by Mao Zedong in 1956 which permitted Chinese residents to engage in a wide range of criticism against the party. However, the criticism went much further than Mao, believing that the people were almost fully in favor of his version of Communism by then, had expected, and in 1957 the government suddenly changed course. An “anti-rightist campaign” started, sentencing hundreds of thousands of people deemed to be excessively critical of the government to labor camps or even death. In the late 1970s, the Chinese government established a “Democracy Wall” in an attempt to experiment with freedom of speech one again and, well, we all know how that turned out. On the other hand, China’s efforts at business liberalization through special economic zones have all largely remained. The question is, do some people in the Chinese Communist Party see Bitcoin as a chance to make another experiment by granting a measure of economic freedom to the masses, and, if so, will they change their minds?

It’s hard to tell. The Chinese government is not known for being open, and we can only guess at what their motivations are. On the one hand, the government has an established track record of cracking down on freedom if it even slightly infringes on state security, and Bitcoin could be seen as a competitor to the central bank. On the other hand, one of the unique benefits of Bitcoin is that it is an ownerless protocol, not intrinsically tied to any foreign entity. Now, if China wants to integrate into the global financial system, doing so may well involve major US and European banks, Paypal and Mastercard moving in and domintaing the local market. Bitcoin, on the other hand, offers a solution that the Chinese, just like anyone else in the world, can call their own. Finally, the question is, just how effective will regulation actually be? Chinese internet users are already willing to navigate through a complex web of proxies and Tor in order to browse foreign sites on the internet, so even if all Bitcoin infrastructure in China is outlawed they may well start heading over to the Bitcoin job boards to earn some BTC to cash out at some online games, or even just save it until the day they can make their way over to Canada, the US or Europe. Hopefully, though, China will be one of the places where Bitcoin does not need to hide in the shadows in order to bloom.

Bitcoin Magazine would like to congratulate Jon Matonis on his new role of Executive Director of the Bitcoin Foundation.  Jon Matonis has served as an advocate for the Bitcoin currency and a source of insight for cryptocurrencies and general matters of finance and politics.  Prior to assuming his position as Executive Director, Jon Matonis served on the Board of Directors for the Bitcoin Foundation.  He currently is a regular contributor to Forbes and is the editor of The Monetary Future economics blog and has not only a passion for but understanding of the ins and outs of the Bitcoin currency.

Jon serves as a member of the Bitcoin Magazine Editorial Board and has contributed articles to the print magazine and website.  Prior to getting heavily involved in the Bitcoin currency, Jon served as the CEO of Hushmail and Chief FX Dealer at Visa.  Prior to accepting his new appointment of Executive Director of the Bitcoin Foundation, Jon was a board member holding the officer role of board secretary.

So why the shift from Frm. Executive Director, Peter Vessenes, to Jon Matonis?  The specifics are not yet out in the open, but members of the board carefully made this decision in the best interest of the Bitcoin Foundation and Bitcoin community.  Why was Jon a prime candidate for the job?  Jon has a wide ranging appeal among the BTC community and proven business leadership experience as a former CEO and Chief FX Dealer.  Today, Peter Vessenes released the following welcoming Jon and stepping down from his current role to get further involved in his CoinLab project.

Peter Vessenes    Jul 08 2013
I want to share some good news; we’re expanding.

As of today, Jon Matonis has accepted my offer to join us as Executive Director of the Bitcoin Foundation. He starts immediately, although he’ll take a few months to ramp up to full time.

This is a coup for the Foundation. I believe Jon’s work experience and passion for Bitcoin will combine into something awesome here. I’m excited!

Since we can’t have two Executive Directors, this means I’ll be giving up my ED title. Practically, this will have zero impact on my day-to-day with the Foundation; since we’ve launched, I’ve spent about one day a week in my senior leadership role at the Foundation, spending the other four on CoinLab’s paying work. I will continue to put in that time, but now I will be able to rely on Jon managing and growing the organization; this will allow me to do more of what I think I should be doing — strategizing, building relationships, fundraising and speaking.

I’ve thoroughly enjoyed working with Jon so far; he’s smart, often contrarian, and cares very much about our mission. I imagine we won’t always agree, but the last year has made for a productive beginning to a partnership, and I have a feeling the entire Bitcoin community will benefit from this hire. Welcome, Jon!

Finally, I would like to draw your attention to the upcoming elections for our two additional board seats; there is still time to join and get the right to nominate someone for either an Industry seat or an Individual seat. We will be making announcements about the upcoming elections this week. We have seen some very strong candidates come forward for these seats, but what can I say? I’d like to see more, and I hope you’ll join us. I’m looking forward to welcoming more people to share the fun work of spreading out across the Globe.

Bitcoin Magazine would like to thank Peter for his service and wish Jon all the best on his new role!  The Bitcoin Foundation also announced that they will be holding board elections soon for 1 individual and 1 industry seat.

Read the exclusive interview with Primecoin’s creator Sunny King in the issue 13 of Bitcoin Magazine.

One of the disadvantages of Bitcoin that its proponents often gloss over is the fact that its mining algorithm has little real-world value. The underlying issue is this: in order to add a new block to the Bitcoin blockchain, a Bitcoin miner must include a “proof of work”, a number which has a property that is hard to find numbers that satisfy, but is efficient to verify. Essentially, a proof of work is a way of proving to the world that the miner spent a certain amount of computational effort generating the block, and is in fact a vital component of Bitcoin’s security – without proof of work, an attacker could easily pretend to be a million Bitcoin nodes at the same time, and in that way seriously compromise Bitcoin’s transaction ordering mechanisms. The canonical attack, the so-called “double spending” fraud, involves sending a payment to a merchant, later sending the same coins back to yourself and then creating a false consensus that the second transaction happened first, thereby depriving the merchant of their money. Proof of work solves the problem by making “pretending to be a million Bitcoin nodes” prohibitively expensive. However, what makes people uncomfortable is that in Bitcoin’s case the work (SHA256 computations) has no underlying value; rather, Bitcoin’s proof of work is literally nothing more than burning electricity for its own sake.

It has always been thought that we could do better. Many newbies to Bitcoin immediately suggest that the mining algorithm should have involved SETI@home or folding@home, so that the computations would also help bring humanity closer to curing protein misfolding diseases or finding aliens. The problem is, however, that Bitcoin mining requires one key property that SHA256 does have but SETI@home and folding@home do not: it is efficiently verifiable. Right now, all participants in the SETI and folding networks are volunteers, meaning that they (probably) have no intentions other than the desire to actually help the project’s underlying goal. If these networks become tied to Bitcoin mining, however, participants will be motivated by profit, so there would be an overwhelming incentive for miners not to bother with the actual computations and instead provide fake data that has no value to the networks’ underlying goals but is indistinguishable from a genuine computational output.

Primecoin is the first proof-of-work based cryptocurrency that has come up with any kind of workable solution. The central premise of Primecoin is that, instead of useless SHA256 hashes, the proof of work protocol would require miners to find long chains of prime numbers. There are three specific types of chains that are of interest: Cunningham chains of the first kind, Cunningham chains of the second kind, and “bi-twin” chains. The rule behind a Cunningham chain of the first kind is that each prime in the chain must be one less than twice the previous. The first Cunningham chain of length 5, for example, consists of the following six primes:

1531, 3061, 6121, 12241, 24481

 

In Cunningham chains of the second kind, each prime must be one more than twice the previous. Here, the first length-5 chain appears much sooner:

2, 5, 11, 23, 47

 

Finally, bi-twin chains are chains of pairs of twin primes, or primes that are 2 units apart from each other, with the average of each pair being twice the average of the previous pair. Each bi-twin chain must obviously have even length; the first chain six primes long is:

211049, 211051, 422099, 422101, 844199, 844201

 

Note that a bi-twin chain is essentially a Cunningham chain of the first kind and a Cunningham chain of the second kind rolled into one; the first numbers of each pair follow the recurrence that each one is one more than twice the previous (211049 * 2 + 1 = 422099, etc), and the second numbers of each pair are similarly one less than twice the previous.

What is the practical utility of finding primes? Well, if the effort that we put into the topic today for its own sake is any indication, there is definitely at least something to it. The Electronic Frontier Foundation is offering $550,000 worth of prizes to the first groups to discover a prime number more than 1 million, 10 million, 100 million and 1 billion digits long. The first two awards have already been claimed. The Great Internet Mersenne Prime Search has been looking for large prime numbers since 1996, and mathematicians in universities around the world are involved. The University of Tennessee at Martin provides a list of reasons why looking for primes is useful; aside from “for the glory!”, searching for primes leads to useful byproducts in other areas of number theory, provides an incentive for computational hardware development and leads to insights in the underlying workings of prime numbers themselves; the prime number theorem, for example, a theorem stating with high precision how often prime numbers are likely to occur at a given size, was first conjectured by looking at the distribution of actual prime numbers. Here, the hope is that if Primecoin takes off people will start looking for much more efficient ways of finding Cunningham and bi-twin chains, potentially leading to mathematical breakthroughs in how these chains work.

Further Refinements

In order to be a viable cryptocurrency, Primecoin needs a way to finely tune the difficulty of the proof of work; otherwise, new developments in technology or increased popularity may lead to new blocks being created too quickly for the blockchain to be stable or so slowly that transactions take hours to confirm. By themselves, prime chains do not provide enough granularity; a chain eight primes long may be a hundred times harder to find than a chain seven primes long. One option is to reward length, but that would make verification more difficult. The solution that Primecoin settled for is one based on the Fermat test. The Fermat test is a quick way of telling if a number is (very probably) a prime: raise any number (typically 2) to the power of a prime, subtract out the prime as many times as possible and see if you get the original number back. For example:

2¹⁷ – 17 * 7710 = 2
2²³ – 23 * 364722 = 2

But:

2²¹ – 21 * 99864 = 8

An alternative, and slightly better, formulation is to raise the number to the power of the prime minus one and see if you get one; this being true clearly implies the number passing the other test, and the other direction holds most of the time (one exception is that 3⁵⁶⁰ = 375 but 3⁵⁶¹ = 3 (561 is not prime), but these become extremely rare as primes get bigger). Primecoin uses the p-1 test in combination with the Euler-Lagrange-Lifchitz test, which uses similar principles, to establish primality. So, the question is, how can one use this test to create granularity? That is, how can one distinguish between a chain 7.2 primes long and a chain 7.5 primes long? The answer is simple: look at the resulting value of the Fermat test of the first value in the chain not to be a prime; the lower it is, the larger the “fractional length”. For example, our chain of 2, 5, 11, 23, 47 has the next value 95, 2⁹⁴ modulo 95 (modulo being the mathematical term for the process of repeated subtraction used above) is 54, so the chain would have a length of 5 + (95 – 54) / 95 ~= 5.43. However, the chain 1531…24481 has the next value 48961 with a relatively low Fermat remainder of 1024, so the length would be 5 + (48961 – 1024) / 48961 ~= 5.97. In order for a prime chain to count as a valid proof of work, it must have a fractional length at least equal to the difficulty; as of the time of this writing, this parameter is floating around 7.1.

Since we do not want proofs of work to be reusable, Primecoin also adds another restriction. For the purposes of Primecoin, the “origin” of a bi-twin chain is defined as the average of the first pair, and for single Cunningham chains the origin is what the average of the first pair would be if the Cunningham chain’s twin also existed; for example, the origins of the two single Cunningham chains given above are 1530 and 3, respectively. The restriction is that the origin of a prime chain must be divisible by the hash of the block that the proof of work is for. Hash functions have the property that the only way to look for a value that has a particular hash is the computationally infeasible strategy of simply trying new values until you get a result that works; thus, the only way to generate valid proofs of work is to look for prime chains targeted to one block of which you already know the hash, and these chains would only ever be useful for that specific block.

Primecoin also adds a number of other innovations on the side:

• Smooth difficulty adjustment – unlike Bitcoin, which adjusts its difficulty to exactly match the target rate of 1 block per 10 minutes every 2016 blocks (roughly two weeks), Primecoin adjusts its difficulty slightly every block, nudging it toward the target rate in an exponential decay pattern. For example, if network hash power (or rather, prime generation power) suddenly doubles, the next block would be 0.02% harder than the previous, increasing the amount of work required per block to 186.5% of the original after one week and 198.2% after two weeks, assuming no further mining power increases take place.
• Very fast confirmations – unlike Bitcoin, where transactions take an average of ten minutes to confirm (eight minutes in practice since the difficulty must constantly catch up to increasing mining power), Primecoin blocks come at a rate of one per minute. This allows secure transactions to be made much more quickly; six confirmations may take fifty minutes in Bitcoin, but they take only six minutes in Primecoin. The underlying mathematics behind why six confirmations is a fairly safe threshold is independent of block confirmation time, so the Primecoin transaction at six confitmations is no less secure (it can be argued that attackers can make double-spending attempts ten times more frequently, but going up to just seven or eight confirmations more than makes up for this).
• Self-adjusting block reward – Bitcoin is known for its controlled currency supply algorithm, which guarantees that only 21 million bitcoins will ever be generated, as well as specifying the rate at which these bitcoins will come out. Primecoin follows a different path. The number of primecoins (XPM) released per block is always equal to 999 divided by the square of the difficulty, a formula which should converge to some maximum if the difficulty increases linearly. Given that Moore’s Law states that computing power increases exponentially, and the effort it takes to find a prime chain is exponential in its length, that is quite likely to hold true.

There are some places where Primecoin missed some serious opportunities for improvement. First of all, the self-adjusting block reward was intended to be a “more natural simulation of gold’s scarcity”. However, in practice it does the exact opposite. The desirable property that gold has is that its supply at least somewhat increases with its value; if the gold price shoots past $5,000, mining opportunities will become profitable that were not profitable before, increasing the rate at which new gold is mined and eventually making the supply go up, partially counteracting the price shock. Here, if the price goes up by a factor of ten, the difficulty will shoot up significantly as well as more miners move in, leading to… a reduction in the Primecoin generation rate. Thus, instead of adding the negative feedback mechanism inherent in gold, Primecoin instead creates a positive feedback mechanism that exacerbates the problem of volatility. Also, Primecoin could have set up its exponential adjustment algorithm to have a much longer period – reaching 86.5% adjustment after two months, for example, instead of a week. This is one innovation that would also at least somewhat stabilize the value of the currency by generating more coins when interest goes up, but unfortunately so far no currency has tried this; Primecoin, despite all of its other improvements, missed the chance to be the first.

All in all, Primecoin presents itself as an extremely interesting experiment; for the first time, we have a currency whose mining algorithm has a secondary value, and at the same time Primecoin, unlike so many other coins before it, actually makes serious attempts to improve on Bitcoin in unrelated aspects. Not taking into account Bitcoin’s massive headstart, Primecoin may well be the first alternative coin to actually be better than Bitcoin, giving the currency the potential for a bright future ahead.

Read the exclusive interview with Primecoin’s creator Sunny King in the issue 13 of Bitcoin Magazine.

For the Bitcoin community, June has been a month of mixed blessings. The price tumbled frm $128.8 to $97.5 (and currently stands around $70), major Bitcoin network statistics like the number of transactions per block and the number of unique Bitcoin addresses used took a nosedive, and the Bitcoin Foundation received a cease and desist letter from the state of California’s Department of Financial Institutions. On the other hand, Google Trends volume, a statistic which estimates the global level of interest in Bitcoin, at least temporarily stopped its decline, and is now back at May 19-25 levels, or 20% of the peak. Media attention was mixed, with some articles arguing that Bitcoin “is losing its shine” and others saying that it is now “getting its groove back” following a few instances of good news.

As far as the price and popularity are concerned, it is my own thesis that we have now returned to a pattern that old-time Bitcoiners know all too well: the Gartner Hype Cycle. The Gartner Hype Cycle is a pattern that many technologies, ranging from machine learning to space exploration and virtual reality, consistently tend to face, and has five stages: (1) a “technology trigger”, (2) a “peak of inflated expectations”, (3) a “trough of disillusionment”, (4) a “slope of enlightenment” and finally (5) a “plateau of productivity”. Bitcoin users in 2011 and 2012 would frequently refer to this model, saying that the currency’s crash from $30 was simply the result of a hype bubble popping and a sign that the “real work” was only starting to come to fruition. In late 2012 to early 2013, many believed that the plateau of productivity was finally here. As it turns out, that was not the case – in fact, 2013 proved to be the start of a whole new hype cycle. However, this time is different. Although some anti-Bitcoin viewpoints have certainly come to the forefront, by and large today, unlike in 2011, the hopeless pessimism is simply not there. Investors have plunged into Bitcoin, and have committed themselves to working for the long haul. Hardened users have seen the Bitcoin price crash before, and are ready to live through a crash for a second time – that is, of course, if the crash is not already close to its bottom.

Taxes and Regulations

• The World Bank held a panel on “the legal and regulatory challenges” of digital currencies. The agenda was made up of four main parts: an overview of virtual currencies, implications for payment systems overseers, two panels on illicit activities and recent regulatory actions by the US Treasury.
• MtGox published an ad in the official magazine of the annual G8 summit, which took place in Ireland this year.
• The Dutch and Australian governments confirmed that Bitcoin earnings will be taxable. “Bitcoin is no more anonymous than physical cash and the ATO has experience in working with earlier forms of ­anonymous electronic money systems, and with physical cash, which are relevant for responding to new and emerging­systems,” the Australian Taxation Office senior assistant commissioner wrote.
• The German government took a different tack: if the time between when one buys bitcoins and sells them is longer than a year, any capital gains income from the investment is tax-free.
• The Government Accountability Office in the United States published a report detailing when digital currency systems are taxable and when they are not, and stated that the IRS was not interested in creating Bitcoin-specific rules.
• California’s Department of Financial Institutions sent a cease-and-desist letter to the Bitcoin Foundation telling them to stop engaging in money transmission activities. The Bitcoin Foundation has since replied, arguing that it was not selling bitcoins, and even if it was selling bitcoins does not constitute money transmission in California.
• MtGox appears to be well on its way to resolving its conflict with the Department of Homeland Security, having recently created a new Delaware corporation in the United States and applying for a FinCEN money services business license.

One Exchange Down, Three Pop Back Up

• LibertyBit, the second largest Canadian exchange, has shut down its operations and has refunded customers’ money, citing banking concerns and fraudulent transactions.
• Satoshi Square, a weekly in-person Bitcoin exchange event in New York, expanded is operations to Los Angeles.
• Bitcoin Exchange Berlin, another in-person Bitcoin exchange event in Berlin, had its first session on June 29.
• BTCGlobal, a company seeking to massively reduce the barriers to entry to creating a Bitcoin exchange in the US, announced itself to the public. BTCGlobal intends to develop a Bitcoin trading platform and obtain money transmitter licenses in all US states that require them, and then franchise out the licenses and technology to partners.

Business and Tech

• Draper University of Heroes, a four-month live-in program created by Tim Draper that seeks to teach college-age students how to become entrepreneurs, started accepting Bitcoin.
• Coinbase secured an investment of undisclosed size from IDG Ventures, a company located in China.
• Yumcoin, a platform that seeks to make it easier to sell digital goods for Bitcoin, opened its doors.
• Kenilworth Exploration, an Australian mining company, started issuing shares on BitFunder, one of the most popular Bitcoin-based trading platforms.
• PayPal announced the PayPal Galactic Initiative, a project seeking to develop a financial system suitable for interplanetary trade.
• Butterfly Labs, the first ASIC Bitcoin mining company to open up pre-orders for its products in June 2012, started shipping its 30 GH/s Little Single miners.
• SecondMarket, an alternative stock market for private companies and accredited investors, launched a Bitcoin Education Center, an online resource where Bitcoin enthusiasts and newbies alike can learn about all things Bitcoin.
• The mining pool BTCGuild started selling ASICMiner’s 336 MH/s Block Erupter USB devices, and sold out within forty minutes. Also, ASICMiner reduced prices on the devices from 1.99 BTC to 0.89 BTC.
• Mike Hearn and Matt Corrallo have added micropayment channels to BitcoinJ, allowing users to pay a microbitcoin at a time for services like internet connectivity without creating a new transaction for each incremenet in payment. Essentially, the protocol works by repeatedly replacing a transaction with a new transaction that gives slightly more money to the recipient.

Delightfully (and not-so-delightfully) Subversive

• Porcfest, the Free State Project’s annual camping event near Lancaster, New Hampshire, took place for the tenth time last month; over two thirds of the merchants accepted Bitcoin.
• Atlantis, a new startup competitor to the (in)famous online drug market Silk Road, released an advertising video of its own, telling the story of “Charlie” who moved to a new city and was not able to find any weed.
• TorBroker, an anonymous service allowing users to invest in real-world stocks, released an advertising video and made a number of upgrades to its service.
• Michael Mancil Brown, an individual best known for attempting to blackmail Mitt Romney for $1 million in BTC over his tax returns, was indicted on extortion and wire fraud charges.

WalletBit, a payment processor and online wallet that had acquired some attention especially in Canada and Denmark, has announced that it is shutting down on July 15. “Despite sales efforts,” the press release reads, “it is now unfortunately discovered, due to a number of factors, that it is not possible to transfer all or parts of WalletBit to a new operator. As a result of that combined with new commitments, it is not possible for us to continue offering services via WalletBit.”

The shutdown is hardly unexpected. WalletBit has been rapidly declining in popularity for the last few months since its only two employees, Adam Harding and Kris Henriksen, had developed a new platform to perform the same functions: BIPS.”I will hopefully convince merchants and ewallet user to switch to the more optimized BIPS platform,” Kris Henriksen had written, “but they are welcome to stay at WalletBit.” Since then, BIPS has been quite successful, processing over $400,000 of payments by the beginning of June. BIPS was responsible for getting single.dk, a popular Danish online dating site, to accept Bitcoin, as well as several brick-and-mortar locations including a theater in Denmark and CoWorkingSpace in Toronto. Given this success, Harding and Henriksen have decided to work on BIPS full force.

The two are careful to avoid telling users that they are expected to switch to BIPS; “I prefer people to make their own choices,” Henriksen writes; “so many times I have experienced companies changing structure and people being highly disappointed with the new.” The two main alternatives that WalletBit users have to choose from are BIPS and BitPay, which also allows bank account payouts in European countries. In the United States, another alternative is Coinbase, and those who wish to accept bitcoins directly without converting earnings to fiat currency can use Coinbase anywhere in the world. The payment processor ecosystem is expected to only continue to improve as time goes on.

The Bitcoin Foundation has published a reply to the cease and desist order that the organization received on May 30 from California’s Department of Financial Institutions. The cease and desist order was a vague one, telling the foundation to “cease and desist from the business of conducting money transmission in this state” without specifying what the foundation was actually doing that qualified as money transmission. There was little to go on; the Bitcoin Foundation is simply an advocacy organization that “standardizes, protects and promotes the use of Bitcoin cryptographic money for the benefit of users worldwide.” It may be possible that the state of California is thinking of a rule that “whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business” is also guilty of unlicensed money transmission, and they consider the Bitcoin Foundation to be somehow directing the activities of Coinlab, BitInstant and their other major business members, but there is no evidence that the state was actually following that path.

The reply that the Foundation wrote back was a strong one, attacking the claim that it was engaged in unlicensed money transmission in California in three ways. The first two parts of the argument are exactly what we would expect. Starting from where the main part of the rebuttal begins, the reply reads, “the California Money Transmission Act regulates only ‘the business of money transmission … in this state’ – namely, California. The Bitcoin Foundation does not have business operations in California that would subject it to the DFI’s jurisdiction. The Foundation is incorporated in Washington D.C., and operates out of offices in Seattle, Washington.” Since the foundation does not actually perform any potentially regulated activities in California, it cannot be regulated by California. Second, “the Bitcoin Foundation is not in the business of selling bitcoin to consumers and does not otherwise operate a bitcoin exchange” – its main Bitcoin-related activity is simply accepting donations in BTC, which would be very difficult to frame as an act of “money transmission”.

Even the first technicality alone would have arguably been strong enough to refute the DFI’s claims, but the foundation did not stop there. The third, and most interesting, part of the letter argues that, even if the Bitcoin Foundation did actively sell bitcoins to customers, that activity itself is not a form of money transmission. The reply begins by quoting the California definition of money transmission:

California defines money transmission as including any of the following:

1. “selling or issuing payment instruments;”
2. “selling or issuing stored value;” and
3. “receiving money for transmission.”

From there, the reply examines each of these three sections and describes how selling bitcoins actually does not fall under any of them. The summarized arguments are as follows:

In California, a payment instrument is “a check, draft, money order, traveler’s check or other instrument for the transmission or payment of money or monetary value, whether or not negotiable” … In July 2001, the California Department of Financial Institutions released a letter on the “sale of ATM-accessible cards clarifying that “an ‘instrument’ is a written, signed document that it is similar in nature to a check or a draft, even though not negotiable. We have,therefore, not viewed electronic media, such as stored value cards, as payment instruments” … Bitcoins are not written or signed notes or drafts, and therefore, are not payment instruments regulated by the California Money Transmitter Act. Even if bitcoins are classified as “instruments,” there exists no “issuer” of bitcoins under California law because no entity acts as the “maker or drawer” of bitcoins, and no entity is fundamentally liable for payment.

Stored value is “monetary value representing a claim against the issuer that is stored on an electronic or digital medium and evidenced by an electronic or digital record, and that is intended and accepted for use as a means of redemption for money or monetary value or payment for goods and services” … Bitcoin might be described as a “medium of exchange, whether or not redeemable in money,” and therefore be considered monetary value, but that monetary value is not fixed – it varies with the determinations of the market. Furthermore, bitcoin never represents a claim against an issuer, because there is no issuer of bitcoin. Bitcoin is therefore not stored value as that term is defined under California law.

California law defines money transmission as “receiving money or monetary value…for transmission.” The plain language of this provision indicates that money transmission occurs when money is received and transmitted or when monetary value is received and transmitted. In other words, the statute, on its face, requires parity of currency on either side of the transaction -money received and transmitted or monetary value received and transmitted. This conclusion is confirmed by the DFI’s December 6, 2011 opinion letter entitled “Foreign Currency Exchange Services – Not Subject to money Transmission Act.” In that opinion, the DFI determined that the receipt of dollars and the delivery of pesos for a fee did not constitute money transmission.

Simply put, this is huge. The foundation has taken the DFI’s claim that it is engaging in money transmission and transformed it into an opportunity to argue that selling bitcoins is an entirely unregulated activity in the state of California. The letter finishes off by actually requesting a reply from the DFI confirming the validity of their arguments. The other half of operating a true Bitcoin exchange, buying bitcoins (ie. selling USD and taking BTC as payment), was not addressed by the letter; a layman’s reading of the above definition of money transmission suggests that bank transfer withdrawals may be covered under stored value but selling cash in the mail (or cash from a two-way Bitcoin ATM) is free and clear. Even if only selling BTC is legal, however, buying bitcoins is the far more pressing side of the Bitcoin exchange equation; “selling” BTC is already relatively easy with platforms like Gyft and the various Bitcoin-accepting stores. If the foundation proves to be successful, California may well become one of the more Bitcoin-friendly states in the country – although hopefully others will follow suit.

The largest Bitcoin exchange, MtGox, has announced that they are resuming USD withdrawals around the world, putting an end to two weeks of hiatus. A long backlog of withdrawal requests had been accumulated over the period, so it will take over a month before processing times finally return to normal, but MtGox expects that the main disruptions are now over. “Mt. Gox has now formed relationships with several new banking partners both in Japan and around the world,” the press release reads, “and we are still in the process of finalizing even more. This means that we will have increased stability and ability to transmit withdrawals going forward.”

The price collapsed suddenly following the reopening of withdrawals, sinking to a bottom of $72 on MtGox itself and $70.06 on BitStamp; just how much of this drop was caused by people seizing the opportunity to sell BTC and withdraw USD on MtGox and how much was simply an existing downward slide reaching its conclusion is impossible to tell; the second conclusion has strong support, as the volume of the last two days was not particularly higher than before. The price has since recovered to about $80 at the time of this writing, and will continue to change as time progresses. The disparity between MtGox and BitStamp, which had reached as high as ten percent during the hiatus, appears to have now cleared.

MtGox itself has seen its market share according to Bitcoinity holding steady at 64% over the course of the past two weeks, and is continuing to oscillate day-by-day between 55% and 75%. If MtGox succeeds in forging new banking relationships and opening up convenient and effective deposit and withdrawal options, its market share may well recover somewhat from the drop. Alternatively, it may continue to drop as exchanges like Tradehill continue to pick up speed and a whole host of new ones come online over the next few months. The future of Bitcoin exchange is proving to be a surprisingly interesting one.

BTC London was a conference quite different from both Bitcoin 2013 and Porcfest. While Bitcoin 2013 was a conference generally intended for fans of Bitcoin in general, and Porcfest an event for libertarians, most of whom were just starting to use Bitcoin, BTC London was targeted to a very specific group of people: wealthy individuals who are already heavily involved in investment or finance, and are interested in Bitcoin businesses as their next investment. The fee for the conference was high, at 250 GBP ($400) for pre-registration and 500 GBP ($800) on-site, a massive figure compared to the $300 for the Bitcoin conference and $75 for Porcfest – even more so since the conference lasted only a single day. But the fee fulfilled its purpose; the only people attending were those with businesses to show, or tens of thousands of dollars to invest in them.

Aside from an energetic opening speech from Tuur Demeester and a few spirited remarks by Erik Voorhees, the ideological side of the Bitcoin community was almost entirely lacking; the overarching theme of the conference was an attempt to answer the single question of where the largest opportunities for growth in the Bitcoin space are and how to invest in them. To some, this is a sign of stale government-corporatism creeping its way back in as usual, and will lead to Bitcoin becoming little more than another PayPal; to others, it is an inevitable sign, and precondition, of genuine progress.

What was perhaps the most impressive aspect of the conference was the sheer number of start-ups that were present there. An entire two presentations were simply panel discussions with five start-up owners each talking about their businesses; wallets, exchanges and mining firms of various sorts (as well as Icelandic data centers to host them) all played their part. There was also a large media presence featuring both major Bitcoin-related news sources (including Bitcoin Magazine ourselves) and outside reporters from, among others, the Financial Times and TechCrunch.

Here are some of the more interesting businesses that were at the scene:

• BridgeWalker is a Bitcoin wallet which integrates a Bitcoin exchange behind the scenes, allowing users to make and receive Bitcoin payments while still keeping their balance constant in the fiat currency of their choice. To pay for the cost of the exchange trades, Bridgewalker charges a fee of 0.75% per transaction, which will go down as the service becomes more popular and volume increases.
• Hive is a Bitcoin Wallet that attempts to take the idea of being designed with ease of use in mind one step further. Rather than thinking of how a Bitcoin transaction works from a technical standpoint and trying to create the best possible interface to express the various details, Hive’s design started by creating the interface first and fitting Bitcoin in later. In the words of its founder, Wendell Davis, “I asked the graphic designer to make a payment application that would be easy to use and we would fit the Bitcoin in later. He barely knew what Bitcoin was, and this is what he came up with.” The result: an application which allows you to select people to pay to simply by clicking on their faces in a contacts screen, and for which one can build “Bitcoin apps” like BitcoinStore and SatoshiDice.
• Bex.io is a company based in Vancouver that seeks to do the same thing that BTCGlobal is: commoditize the BItcoin exchange. The company’s ultimate vision is that they would handle all of the aspects of Bitcoin exchange that are easy to replicate, of which the trading engine and security is the largest, and first, step, and leave it to exchanges to attract customers and interact with local banking and regulatory systems. The trading engines will be run on Bex’s servers in-house, and exchanges will be able to interface with it via an API. Bex will also include a system for clearing buy and sell orders between multiple exchanges using their platform (at least within the same currency), and will eventually include a colored coins-based system for keeping track of fiat balances. Bex’s service is expected to come online at some point this fall.
• MetalAir is a company seeking to create a decentralized Bitcoin exchange. The process of buying and selling will roughly work as follows: first the Bitcoin seller makes a transaction sending the bitcoins to a 2-of-3 multisignature address between himself, the buyer and an escrow agent. Then, the buyer sends the fiat directly to the seller by bank wire or whatever other mechanism. Finally, the buyer and the seller – or, if necessary, the buyer and the escrow agent, sign a transaction to transfer the bitcoins from the multisignature address to the buyer. MetalAir themselves will be an escrow agent, but theoretically anyone with a reputation could be. MetalAir will also support cryptocurrency-to-cryptocurrency exchange with a higher guarantee of security, as both sides of the exchange could be done via multisignature transactions.
• CoinX is an exchange created by Megan Burton with the intent of being enterprise-ready, security and compliance and all, right from the start. The exchange will offer a fee structure biased in favor of liquidity providers in order to encourage stability, two redundant servers to guarantee uptime, and is heavily focused on being compliant with money transmitter regulations in all of the states that have the relevant regulation. The exchange will open around the end of July.
• MiiCard is a platform that intends to replace expensive and privacy-eroding photo identity checks with a much simpler means of customer verification. Customers of exchanges would verify themselves by logging in with their MiiCard, and the MiiCard itself verifies users by checking that they have a verified bank account. The bank account itself presumably exists only if the bank verified the customer’s identity through photo ID. It turns out that under current US law this is legal; federal rule 103.121 (ii) b. allows “verification through non-documentary methods” that “may include contacting a customer, independently verifying the customer’s identity through the comparison of information obtained from a consumer reporting agency, public database or other source, checking references with other financial institutions, and obtaining a financial statement.” MiiCard ensures that the customer has a relationship with another financial institution and acts as this “other source”.
• Kipochi is a feature phone (or “dumb phone”) compatible Bitcoin wallet intended for customers around the world, allowing them to send and receive bitcoins with nothing but a mobile phone connection. The wallet will be heavily marketed to users in Africa and particularly Kenya; a major use case, founder Pelle Braendgaard believes, will be sending money out of the country. Although we often think of Kenya as simply being part of Africa, the poor continent to which remittances are sent, in reality it is one of the more developed countries in the region, and many people go to Kenya due to the better economic prospects there and then send money back to their families. Two weeks ago, Kipochi introduced a feature that allows users to exchange money in M-Pesa, a popular mobile banking system in Kenya, for bitcoins.

There were also a few major announcements at the conference. OpenCoin’s Stefan Thomas announced that the Ripple client now has a built-in feature that allows users to send money directly to a Bitcoin address. From the Bitcoin Foundation, Peter Vessenes made two announcements. First, he will soon be stepping down from his role in the foundation. Second, the foundation aims to expand internationally, and is looking for people who wish to set up local chapters of the foundation. The way the relationship would work is that the local chapter would help raise funds for its parent organization, and would gain access to the larger organization’s brand and support in exchange.

The next Bitcoin conference to take place is MediaBistro’s Inside Bitcoins conference in New York City on July 30; this will once again be a one-day event heavily focused on the investment community, although this time it will be the investment community in New York City rather than London (although Bitcoiners will, as usual, come from all over the world). The one large conference remaining this year will be unSYSTEM, taking place in Vienna this November. See you at the next few conferences!

What would an approved patent for a physical Bitcoin mean for the Bitcoin community? Douglas Feigelson, the founder of BitBills, filed a patent with the United States Patent and Trademark Office (USPTO) on December 23, 2011. Just last Saturday, June 27, 2013, the USPTO processed Feigelson’s application and entitled the application for a patent as, “Creating and Using Digital Currency.” There is much concern within the Bitcoin community that such a patent, if approved, could potentially restrict further hardware Bitcoin wallet development.  “Let’s Talk Bitcoin,” highlighted the connection between the patent and BitBills’s cold storage concept.  Additionally, we can question what the further implications of a patent description including the world, “Bitcoin” might mean.  Currently, the Bitcoin community is unique and thriving due to an openness to ingenuity, development of new products and the betterment of existing products and Bitcoin accessories.

What are BitBills?

On May 9, 2011, the first BitBill was launched. BitBills preceded Casascius coins as the first physical form of Bitcoins. As plastic cards, BitBills store Bitcoin and provide individuals with an opportunity to not only store Bitcoins but also trade Bitcoins.  Along with each BitBill, a new Bitcoin address is created to provide a user a place to store Bitcoins and also a QR code to receive and transfer Bitcoins.  As security is key for BitBills and other physical manifestations of the Bitcoin currency, Bitbills are secured through anti-counterfeiting and tamper-evidence.  As each BitBill contains a security hologram and an embedded private key, it is next to impossible to counterfeit a BitBill.

Protection of Ingenuity is Key

Are BitBills an asset to the Bitcoin community? YES! Yet, BitBills are not significant enough to merit a compromise of one of the founding principles surrounding the Bitcoin community: INGENUITY. As Feigelson took the step to request a patent for his BitBills, several in the Bitcoin community are concerned about what this might mean for future opportunities to readily update and improve hardware wallets. With a USPTO stamp of approval on Feigelson’s patent application, members of the Bitcoin community will be restricted in some capacities of improving Feigelson’s design and also building off of BitBills to develop an even more secure and efficient wallet.

Bitcoin has thrived in part due to the limited government involvement to date in the Bitcoin currency and hardware involving Bitcoin. Feigelson’s request for a patent is one of the first steps to bring the United States’s Federal Government into the Bitcoin space. There will most likely come a time when the US Federal Government will take larger steps to get involved and regulate the Bitcoin currency, but the Bitcoin community would not want such involvement to take place prematurely.

Always be Mindful of Unintended Consequences

Certainly, Feigelson’s development of BitBills has worked for the betterment of the Bitcoin community. However, prior to proactively involving the US Federal Government in the Bitcoin space, he should understand the several unintended consequences of such a step. Protecting one’s work definitely makes sense, but one should be mindful that such actions may deter development and growth of a currently flourishing Bitcoin community. What will come of Feigelson’s patent request?  Since this affects everyone in the community, make your voice heard.   Do you agree with Douglas Feigelson’s attempt to secure a patent for BitBills? [socialpoll id=”BitBill”]

Make your voice heard!  We do not know, but we can hope that the free market, limited government, ingenuity  and promoting spirit of the Bitcoin community will not be squelched.

[socialpoll id=”9581″]

Most attempts to make Bitcoin more palatable to governments tend to revolve around downplaying its privacy aspects. Arguments are made that figuring out who can be linked to which address through the blockchain will be quite easy once competent mathematicians start seriously working on the problem, or that Bitcoin’s privacy properties can effectively be reined in by requiring identification at the exchanges. No matter which particular path one takes, the point that anything more than a moderate degree of financial privacy is bad for everyone but criminals is conceded, and the debate immediately shifts to how easily Bitcoin in particular can be bent to look more like what government intelligence agencies want.

This article will attempt to take a completely different tack. Rather than debating the merits of Bitcoin in particular, and ignoring the potential of other technologies like centralized and decentralized mixers, Chaumian blinding and Zerocoin (many of which can potentially be layered on top of even existing mainstream platforms like Paypal), another alternative is, for the moment, assuming that hyper-efficient anonymous payment mechanisms are here to stay, but also exploring the positive consequences that we might see as a result.

Taxation is one major point of contention. It is often assumed that anonymous payment mechanisms will make life difficult for governments, because it will be impossible to collect taxes. In the case of income and sales taxes on purely digital goods, that is certainly true; if I were to sell a copy of my book pseudonymously online over Tor for 0.0238 bitcoins, anonymized with three different mixers before and after the sale, no one but myself and the buyer would be able to know that the transaction even took place. As for physical goods, although the effect of increased privacy in the digital world will at least partially be offset by increased surveillance in the physical world, once again with anonymous money it will be more difficult to collect taxes to some degree than it would without.

Nearly everyone, both those in favor of increased financial privacy and those against, agree with the above statements; the main disagreements have to do with, one the one hand, the extent of each of the particular effects, and, on the other hand, the desirability of taxation in the first place. However, there is one piece of the puzzle that, so far, the conversation is entirely missing. And that is: hyper-efficient, anonymous money (the two go hand in hand; systems like Zerocoin and decentralized mixers can be applied to any payment system with sufficiently low fees and cryptographically secure transactions) does not just weaken governments’ power to collect revenue; in fact, they open the door for innovative, radically new forms of government financing that would not be otherwise even possible.

Road Tolls

As every urban planner knows, road congestion is one of the largest problems that the modern city has to face. As soon as enough people move into a particular area that it starts to become a downtown, roads on the inside of the region, and often the highways leading in, slow to a crawl as hundreds of thousands of drivers all struggle to get to and from work at almost the exact same hours each day. Widening highways and roads works, but only up to a point; as soon as such a project is done, the roads once again become more tolerable, more people set up their homes and offices in the region as a result, and soon enough the problem is right back where it started. Public transport is a solution, but buses and subways are often slower and, according to some, less comfortable than cars, and so people often end up avoiding public transit even if it would be better for society as a whole if everyone did not.

The key reason for the discrepancy is simple: externalized costs. When you are driving a car, there are a large number of costs that you end up having to pay. Many of these costs are borne by you personally; you need to buy the car to start driving in the first place, pay an additional fee every month for insurance, and finally pay for every kilometer that you drive at the gas station. But there are also other costs that are not paid by you personally, but are rather imposed on all of society. The example most people immediately think of is environmental costs, and these certainly do exist, but in an urban environment they are arguably not even close to the greatest issue. The greatest issue, in fact, is much more mundane: by driving a car on a road, you are taking up space. High-traffic roads are slower, and less pleasant, than low-traffic roads, and the pattern is continuous; every single driver that adds themselves to the flow of traffic is making life worse for evertone else who is sharing the road with them.

Normally, when an activity is demonstrably “bad”, the solution is to simply ban it, but in this case that is obviously not a practical solution; some drivers on the road are using the road for a very good reason, and there is a natural equilibrium between having the maximum possible number of drivers on the road, and ensuring the best possible conditions for each one, that would deliver optimal results for society as a whole. However, under ordinary conditions we have a problem: the “free market” does not reach this balance. The reason is that roads are not a market at all; if your car had to compensate every other driver for the harm that it caused by taking up space on the road, just as you must compensate the grocer when you buy an apple, then it would closely approximate a traditional market, and, if the prices were right, produce the optimal result: a new car would only enter the road if the benefits to itself were greater than the cost to everyone else. Now, however, drivers enter the road if the net benefit to themselves is simply greater than zero – producing roads with far more congestion than necessary.

The first solution that one might come up with to this problem is gas taxes. Add a surcharge to every liter of gas that drivers buy, and if the charge is high enough road usage will considerably reduce as a result. The problem with this solution is, however, that not all kilometers are created equal. Driving at night imposes almost no costs on anyone else, as there is no one else around, while driving at peak time is highly problematic. Similarly, driving along a road relatively far from, and perpendicular to, the downtown is far less of an issue than driving in the middle of it. Gas taxes fail to grasp these nuances, and so, if they are effective at reducing congestion at peak hours, may accidentally massively overshoot the target at night. Another solution is downtown parking levies, which are more efficient, but even still such solutions cannot rapidly adapt to changing circumstances, unexpected traffic jams or fine changes to driving patterns. For example, a hypothetical altruist driver wishing to avoid causing pain to everyone else coming to work around 8:00-9:00 and leaving around 17:00 to 18:00 by coming at 6:00-7:00 and leaving at 15:00-16:00, but they would still end up paying most of the downtown levy. Such levies also do nothing to stop the problem of people driving through high-traffic areas (people would still avoid them to some degree due to their own desire to avoid traffic, but, as described above, this level of avoidance is far below optimal), and fail completely when areas where more traffic is acceptable and where more traffic is not acceptable are right beside each other (eg. a high-traffic city street passing through a residential area).

The one solution that stands out above all others is road tolls. Passing through some stretch of Main Street might cost 8 cents per 100 meters at 8:00-9:00 on weekdays, but only 4.5 cents per 100 meters at 9:00-10:00. At night, there might be no toll at all, or perhaps the city may wish to still charge a toll to compensate for the noise pollution against nearby residents trying to sleep. If traffic on some road is higher than expected, no matter what the reason, cameras can catch that and double the toll immediately. Google Maps could integrate with the tolling system in order to find an optimal path that tries to save money as well as time, guiding users toward those roads that are socially optimal, and in the future self-driving cars could work with the system completely automatically.

If such a system is indeed as poweful as I have described, the question is: why hasn’t every city done it already? There are three problems. First is lack of infrastructure. Road tolls of this sort would require electronic payment handling devices at essentially every intersection, requiring hundreds of millions of dollars of initial investment that not all municipalities are capable of. Second is lack of standardization. If cities started to set up such systems independently, each one would be incompatible with the others, making life very difficult for anyone who does not simply stay in one place. Notably, the most famous municipality that does implement this kind of tolling, Singapore, is located sufficiently far away from other developed cities, and even further from other developed cities where most people speak English, that everyone who lives there essentially does simply stay (or at least keep their car) in one place. Third, and for some most important, is privacy. Under all of the systems that are currently available, an unavoidable secondary consequence of such effective universal road tolls is that everyone is being tracked everywhere they drive. Singapore’s relatively authoritarian government can afford to ignore most privacy concerns without raising an eyebrow, but implementing a Singaporean system in cities with a more democratically minded populace may not go over so easily.

Bitcoin (or hyper-efficient anonymous money in general, which Bitcoin may or may not actually be) solves the second problem, the third and perhaps even part of the first. Bitcoin is standardized around the world, so once an open-source Bitcoin-based toll solution is developed every city that wants to can simply plug it in. As for privacy, Bitcoin can be used to send transactions without linking them to any particular car; wallets can be specifically designed to avoid transaction linking. And as for infrastructure, Bitcoin is driving innovation with tools like Mycelium’s Bitcoin Card, which should make all relevant infrastructure much cheaper. Additionally, because Bitcoin payments only really need an internet connection in order to work, municipalities can take advantage of the opportunity to set up Bitcoin road tolls and offer city-wide free wifi at the same time.

The revenue from such tolls could potentially be massive; collecting even two dollars from the average driver each day could easily pay for the public transit expansion that would absorb all of the residents that choose to no longer drive as a result of the tolls. And the drivers that do pay would enjoy cleaner, less congested roads; in fact, an economic argument can be made that the cost of paying the toll would simply replace, and not add to, the discomfort of driving in congested traffic – the only difference is, the cost would go towards schools and parks and libraries, and not engulfing your mind with blaring honks and frustration.

Electricity, Water, Garbage Disposal

Aside from roads, there are plenty of other services that local and provincial governments often charge for; electricity, water, gas and garbage disposal are perhaps the top four. All of these services, in fact, face the general problem as roads: they can be charged for, and in this case they always are, but the process can be done much more efficiently and in a more privacy-preserving way. Consider electricity, for example. One of the major challenges of electricity generation is that, while output from power plants is usually constant, electricity is needed in different quantities at different times, and it is very difficult to store electricity in order to smooth out these variations. If your local power plants can generate a total of 2000 MW of power, and average consumption is 1200 MW, that might sound like a safe margin, but in real life things are not nearly so simple. What if people consume 400 MW between midnight and 16:00, but 2800 MW for the other eight hours? What if there are two peaktimes, one smaller one in the morning and a larger one in the evening? What if there’s also a difference between weekdays and weekends? So far, the main workaround has been to simply build power plants to maximum capacity and often leave them unused.

The first solution to the problem is smart meters. Electricity distribution agencies (whether government departments, private companies or anything in between) could set different prices for electricity at different times – perhaps one might pay $0.04 per kWh at night, but $0.20 per kWh at peak time, and electricity meters that are aware of the prices could calculate the cost. In some places in the United States, the agencies occasionally announce “critical price events” – blocks of time where, due to particularly high usage (eg. due to unexpected heat), the price of electricity would be ten times higher than usual. Residents living through these events are forced to cut down drastically on all non-essential usage during those hours to save money, creating an efficient, and arguably more palatable, alternative to brownouts and blackouts. The problem with smart meters, however, is privacy. The more precise the pricing system, and the more accurate smart meters get, the more the electricity distribution agency knows about your electricity consumption. This is no small matter; marijuana growers and Bitcoin miners have already been discovered simply by watchin electricity usage now that systems for gathering and analyzing data have become so well-developed, and as finer-grained surveillance capabilities emerge it will not just be a small set of “unusual” lifestyles that can be found out. Whoever sells you your electricity could tell when you are cooking dinner, when you are making tea (possibly even what brand of teapot), and when you are fast asleep, down to the precise minute.

Cryptography offers a solution. What if, instead of recording how much electricity you spend and when, you could simply provide a zero-knowledge proof that all of the electricity you received you paid for, without revealing any other knowledge to the agency? With the advent of technologies like Zerocoin, cryptographers have proven themselves to be a resourceful lot; devising a protocol ideally suited for this should not be a problem. As one example of how a cryptographic solution might work, consider the following protocol: every hour, your smart meter (which can be open-source) publishes a cryptographic “commitment” (eg. a SHA256 hash) to one of a few trillion trillion Bitcoin addresses controlled by the agency, and, depending on how much energy you consume, at the end of the hour the meter would anonymously send money to that address. To enforce the system, we add an auditing protocol: after the commitment phase, the agency picks a random 0.1% of homes and monitors the electricity usage of everyone in that group itself. This need not be especially difficult; one solution is to require homeowners to have two smart meters, of which one is open source and does most of the day-to-day reporting and payment, and the other is proprietary. The open source meter can be trusted not to reveal any information outside of the protocol because the source code is auditable, and the proprietary meter can be trusted because computer experts could wiretap the device and see that it only sends a few bytes to the agency during the occasional auditing phase.

Once the hour is over and the payments are supposed to be sent, the agency requires those users (or rather, their smart meters) to provide the addresses that they paid to. The agency checks to see if the correct payment was sent to that address within the past hour, and if the address matches the cryptographic commitment. The commitment scheme ensures that homeowners cannot trick the system by simply looking for a government address that has the right balance paid to it in the past hour and claiming that was the one they had sent money to themselves; instead, homeowners must decide on the address before the fact. This isn’t quite zero-knowledge, as you do lose your privacy during that 0.1% of hours that you get audited, and it requires another mathematical trick that wasn’t described here to allow the agency to actually control trillions and trillions of addresses, but it illustrates the principle.

Water and gas can be charged for in the same way; garbage disposal is a somewhat different problem, but even there Bitcoin can make serious headways in increasing efficiency by allowing garbage collectors to charge in fine increments by mass. The general principle remains the same; with cryptographic auditing techniques, it becomes possible to charge for anything at a much lower cost of data privacy than before. Businesses could benefit too; factories may wish to buy materials using this kind of cryptographic scheme so that they can meet their rapidly changing industrial needs without clueing competitors into what they are interested in. An interesting technology called private information retrieval allows users to pay for downloads from a database without revealing to anyone, including the database itself, what they were looking for. Privacy-preserving purchases have thousands of applications, and we’ve only begun to scratch the surface of what they could offer.

Sales Tax

Anonymous cash, combined with the commitment scheme protocol described in the previous section, could allow for a more efficient, and privacy-preserving, collection of sales tax as well. The way this would work is similar; stores would publish a commitment to a government address for every transaction, and occasionally auditors would, after a particular transaction, demand that the address corresponding to that transaction be revealed. Government gets all of the taxes, stores need to do zero reporting; essentially a win-win for both sides. Of course, the “shadow economy”, including anonymous commerce over the internet, would evade sales tax entirely, but this still shows how an increase in financial privacy can actually make tax collection more efficient.

What these examples show is that crypto-anarchism is not the only political platform that can find financial privacy useful; efficient anonymous money may well allow governments, especially on the municipal level, much more freedom to fine-tune taxes and other monetary incentive mechanisms to meet communities’ hour-by-hour needs. In those cities that are daring enough to try it out, this may well finally bring the futuristic technocratic utopias that we have all been waiting for. And, if are the sort of person that does not want governments to become any more powerful than they currently are, do not despair; the only municipalities that will actually be willing to implement any of these measures at first may well be private cities.

Just this evening, word got out that Cameron and Tyler Winklevoss, otherwise known as the Winklevoss Twins, filed a Form S-1 today with the Security and Exchange Commission.  What does this mean for the Bitcoin community and the buying and selling of Bitcoin as we know it?  If approved the SEC Filing will open Bitcoin up to Wall Street, 401ks, and tons of individuals around the world who had previously avoided the buying and selling of Bitcoin due to the lack of accessibility of this digital, decentralized, cryptocurrency.

Imagine how this filing might transform the Bitcoin community and even more so make Bitcoin a household name, not just for those on Wall Street but also individuals around the world who are interested in investing in a currency with great potential for growth.  After the US Department of Homeland Security freeze of Mt. Gox’s Dwolla account back in May, the ability for individuals to buy and sell Bitcoins in particular within the US has been more difficult.  For many businesses accepting Bitcoin and then needing to in turn exchange Bitcoin for USD or other currencies, the Mt. Gox/Dwolla debacle has held up ease of exchange and transaction and left the the price of Bitcoin at a lower point than previous peaks in April and May.

With this announcement from the Winklevoss Twins, there is great hope for an increase in the price of Bitcoin, not just in the short term, but in the long run with an increase in individuals buying and selling the currency and further more businesses choosing to accept Bitcoin.  Bitcoin continues to reel in venture capitalists and those with free market, entrepreneurial outlooks on the world.  Imagine this user base expanding outward to the various stock exchanges on Wall Street then in turn having a greater reach into the global community.   With the potential of 20 million dollars worth of shares available, individuals interested in taking part in this venture and purchasing stock in Winklevoss Bitcoin Trust will look forward to seeing a rise in the utility and price of Bitcoin should this SEC Filing be approved.

As Bitcoin continues to grow in prominence, a position on Wall Street will continue to propel this alternative blossoming cryptocurrency to another level of significance.  As many US and international citizens already purchase stocks online with relative ease, this SEC filing opens the door to allow Winklevoss Bitcoin Trust to sell stocks in the same manner and open the door to many more individuals investing and transacting in Bitcoin.  This is yet another step in the right direction and another huge opportunity for Bitcoin to flourish!  What’s next?  We can only hope that the ingenuity of the Bitcoin community will keep on driving this cryptocurrency to greater levels of utility and value.