Thursday, October 27, 2011

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Bitcoin Can't Be Free from the Powers That Be, Because It Rides on Rails That They Control

Bitcoin virtual currency

Bitcoin, the innovative virtual currency, may be a good idea for many reasons, but as it's currently conceived, it cannot really be free from corporate and state control. That's my strong belief after recently talking to Bill Maurer, Professor of Anthropology and Law at UC Irvine, whose specialty is money. (He wrote a very fun paper on Bitcoin and other non-traditional currencies for the July issue of The European Economic Sociology Electronic Newsletter -- click here for PDF link.)

"[I]t's not that they could easily pull the plug on the whole thing," he tells me, "just that they could easily stop the cash-in, cash-out side of Bitcoin, and effectively stop the flow of value into the system." Basically, as Professor Maurer explains, Bitcoin depends on infrastructures that corporations and states already control -- including a little-known protocol that handles financial transactions across the Internet:

"In order to get money into the system, as I understand it you have three options: mail a check (government supported and financed infrastructure), send a wire (government supported and financed infrastructure), or use Dwolla or another third-party payment provider. Dwolla 'rides the rails' of the ACH, the Automated Clearing House, a public-private entity made up of two main networks, with significant support from infrastructure created and maintained by the Federal Reserve. PayPal uses the ACH rails, too. The ACH is the service you use for things like direct deposit and direct bill pay. It's supervised by an industry consortium which sets the rules for it, called NACHA, with representatives from banks and credit unions. But the Fed plays a huge role in supporting, monitoring, and preventing fraud on the ACH."

Even beyond that, however, states and corporations control Bitcoin's underlying substrate. "[That's n]ot to mention Bitcoin's reliance on other existing infrastructures with varying degrees of government support," as Maurer puts it, "the electrical grid; the Internet itself!" As I understand it, for example, "Bitcoin mining" requires excessive CPU consumption, and consequently, lots of electricity. So if Bitcoin was suddenly outlawed, mining operations would likely be easy to tamp down, simply by pinpointing spikes on the power grid.

None of this is to necessarily say Bitcoin is a bad idea, just that it's not as free and independent as it's generally touted to be. To survive and even thrive, it would probably have to play nice with state and corporate authorities, just like Facebook Credits, Linden Dollars, and every other successful virtual currency has learned to do. If it doesn't, and it gained traction anyway, Bitcoin owners would inevitably get a strong lesson in who really controls what, and how. After all, Wikileaks once boasted it could operate on the Internet totally independent from the powers that be, and... we just saw what happened there.

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Zauber Paracelsus

"So if Bitcoin was suddenly outlawed, mining operations would likely be easy to tamp down, simply by pinpointing spikes on the power grid."

Any such power spikes would actually be relatively minor and indistinguishable from someone using a lot of electricity, such as running heavy power tools.

Alexandre

The government built the streets that the coke dealers are selling at. Does that mean there are no drugs?

Squeebee Wakawaka

"Any such power spikes would actually be relatively minor and indistinguishable from someone using a lot of electricity, such as running heavy power tools."

Except that at this point anyone looking to make any real money is using a heavy-duty mining setup, and those draw enough power that there's already stories of Bitcoin miners being mistaken for grow-ops.

Hamlet Au

Yeah, good point. I was thinking of the Bitcoin miner in the New Yorker profile: not only is he consuming massive CPU power in the middle of nowhere, he's consuming massive power just to keep those CPUs cool. I imagine small scale miners could stay off the radar, which is why I wrote "tamp", as opposed to "prevent".

Domchi Underwood

In essence, looking for bitcoin miners is the same as looking for weed farmers. You just look for heat and high electricity usage... it would be dead simple, you don't even need to retrain the police. The only difference is that they take out ATI cards instead of plants. :)

Edmund in Tokyo

These objections aren’t really about using bitcoins - they’re about trading out of your legacy currency. Obviously selling dollars online requires participation in the government-controlled dollar economy. That’s the whole point of Bitcoin. (Doh.)

That said, if governments decided to ban it, that would obviously seriously restrict its uptake in the legal economy. (Not that there’s much at restrict at the moment in any case...)

The optimistic scenario for Bitcoin is that it becomes well enough used in normal online commerce and charity giving that the government can’t ban it, even though it restricts its ability to shut down the last really non-free bit of the internet.

CBeast

Trading currency for bitcoin? There's an app for that.

Mark

I think it would be difficult for one government to close it down. There would need to be a concerted effort by all governments in the world to ban trading it. If a few small tax havens didn't agree then all the servers, all the banking and all the exchanges would simply move to them. The government would then need to ban all international money transactions and all third party companies involved in moving money.
Very few of the major exchanges are actually based in the US - Mt.gox is based in japan and uses a HK bank account, tradehill is based in Chile
Bittorrent still exists even after the concerted efforts of the music and movie industries to stop it. They may be able to close one site, but another just opens up immediately.
There are almost certainly going to me more innovations in the future that will make it more and more difficult for any government to control.

yang

"The government built the streets that the coke dealers are selling at. Does that mean there are no drugs?"

Indeed, it is also infinitely easier to hide a mining operation than it is to hide a grow op. Not to mention how easy it is to exchange cash for bitcoin compared to exchanging cash for drugs, which is easy enough already.
Bitcoin provides a template of a decentralized currency and as long as the demand for it can be sustained the powers that be are powerless.

Hamlet Au

"how easy it is to exchange cash for bitcoin compared to exchanging cash for drugs"

I'm not sure I follow that, cash for drugs is generally done in person, whereas cash for bitcoin is done on the Internet via payment rails that government and corporate bodies control.

BitcoinDirectory

Nowdays bitcoin is gaining more widespread attention and media coverage with every week. There are already many businesses accepting bitcoin as a payment. Check: www.bitcoin.travel . Bitcoin directory of hotels, restaurants, nightclubs, stores and other businesses in tourism industry, accepting Bitcoins around the world. As soon as mor businesses will pay more attention to it, bitcoin is safe. Government will also see an investment potential into this system anyway.

Hamlet Au

According to that website, only 6 hotels in the entire world accept Bitcoin as currency. And just 3 restaurants.

Dave

Have you heard of bitcoin-otc which is an irc based bitcoin market where people trade p2p ?

Bitcoin is bootstrapping itself using the tools of the existing system against itself. Don't mistake that for reliance. The bitcoin protocol doesn't need ach.

example

"not only is he consuming massive CPU power in the middle of nowhere, he's consuming massive power just to keep those CPUs cool."

Actually, unlike most materials resistance in silicon goes up when it gets hot. This means that that keeping CPUs cool can actually save more power then it costs to cool them. A few degrees can mean hundreds of watts in a seriously loaded mining rig.

SarahAndrea Royce

> Obviously selling dollars online requires participation in the government-controlled dollar economy.

Actually the Dollar economy isn't goverment controlled, but by the private institution FED and by banks who create dollars by granting loans.

Emperor Norton

Alexandre @ "The government built the streets that the coke dealers are selling at. Does that mean there are no drugs?"

I think the Professor's point is the government builds the prisons they toss coke dealers in. Sure, the government can't stop people from profiting off drug abuse, but they can certainly make life miserable for the people who do it.

Danielle

If your mining rig is in a data center, either a local corporate-owned one, or one of the big commercial ones, how exactly will the cops figure out it's there by excess energy use?

Carl

"just that they could easily stop the cash-in, cash-out side of Bitcoin, and effectively stop the flow of value into the system."

A simple way around that is just to sell something (other than dollars) for bitcoins.

qarl

Hamlet - did it occur to you that asking a professor of anthropology about the robustness of a cryptographically based distributed algorithm might not make much sense?

like, maybe, asking a librarian to build you a scalable web infrastructure - because, you know, the web is made of words and......

if only you knew someone who has been on the faculty of a computer science department at a university much more highly rated? wouldn't that have been someone to ask?

i guess not.

good thing you don't have an agenda here - it might skew your work.

ILikeBitcoin

Ummm, last i saw, wikileaks is still up an running. Just not on your conventional browser...... Bitcoin FTW

osmosis

Thats like saying that the only way to buy Euros, Yen, or Gold is by using your dollars, so therefor foreign currencies and precious metals are dependent on the dollar.

osmosis

Also, the state has a huge military force. So should we assume we are just slaves? Just because the state can do something does not mean we will not stand up for our liberty.

Rune K. Svendsen

There are an unlimited ways of getting bitcoins. Some are obviously easier than others, but you can always sell/buy bitcoins for cash. It just means they'll be more expensive. But the cost of money really isn't important, as long as it doesn't fluctuate too much.

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