The crypto-anarchic digital currency Bitcoin is based on a flawless technology that human nature couldn’t help but ruin. Does it prove regulation is the only way? By Elmo Keep.
How Bitcoin didn’t count on human frailty
It was like a gold rush. Fortunes were made early, when bitcoins were plentiful, more easily “mined” and cheaper to procure. Just as many were lost, as bitcoins were the preferred method of payment on “dark web” illicit markets. One such site, Silk Road, has been shuttered by the FBI, which has indicted its owner on narcotics trafficking conspiracy, continuing criminal enterprise, computer hacking conspiracy and money laundering conspiracy charges. One early bitcoin miner I spoke to recalled a small fortune lost this way, which would have been worth about $US500,000 at the time of publication. “I can’t think about it,” they wrote. “So sad.” With the access I’ve been given I dig around inside their long-dormant account and see dutifully ticking over a live stream of all the new bitcoins being mined in the world. In just a handful of years, Bitcoin has transformed from a little-known, hardcore internet geek purview to an $US8 billion global project, according to its head developer, Australian Gavin Andresen.
But who created Bitcoin, the world’s most popular peer-to-peer crypto-currency? The identity of its scrupulously secretive pseudonymous inventor, known as Satoshi Nakamoto, has been one of the most keenly pursued mysteries in technology these past five years.
On March 6, Newsweek claimed to have uncovered the founder’s true identity: a 64-year-old Japanese-American named Dorian Prentice Satoshi Nakamoto. The profile claimed his background included long stints in classified military contracting and a degree in physics, as well as a distinct dislike of banks and government regulation and a penchant for model trains. Nothing had been heard online from the pseudonymous Satoshi since 2011. He/she/they is said to have an unsold personal block of bitcoins worth more than $US400 million. But on the afternoon of the Newsweek article, Satoshi posted to his long-dormant forum account: “I am not Dorian Nakamoto.”
For his part, Dorian Nakamoto issued a further denial through his lawyers this week. He had fallen on hard times. He couldn’t afford the internet and had had it disconnected. His background was in engineering, but more recently he had worked as a labourer and substitute teacher. The reports had distressed his siblings and his 93-year-old mother. “I am writing this statement to clear my name,” the letter said. “I did not create, invent or otherwise work on Bitcoin. I unconditionally deny the Newsweek report.”
Bitcoin’s supporters say who created it doesn’t matter – it stands on the strength of its idea. And the idea was born of radical libertarian principles, as a rejection of the traditional capital and wealth models that dominate the globe. It was, in effect, conceived as an activist currency.
A currency must have a perceived value, of course, and that rests in its scarcity: money doesn’t grow on trees. Bitcoin’s genius was to create a digital artefact that could be “mined”, just like that traditional wealth driver gold. It is buried cryptographically, within a brilliant mathematical algorithm, which must be solved, or “mined”, to produce the data that is the bitcoin itself.
The cap on this otherwise endless (and fatally inflationary) digital resource is that the mining process is fantastically complex and requires computing power of the highest order, well out of reach of even the most cashed-up, tech-savvy consumer. Giant networks of mainframe computers are now needed, and seldom put to such purpose. And because transactions in the algorithm are made available in a public ledger, Bitcoin has also solved the problem of double spending. All transactions form part of the “blockchain”, which anyone can view and so verify.
More important, the algorithm is revised and exponentially increased in complexity the more it is employed, outpacing advances in consumer computing power. The capability to mine bitcoins becomes increasingly difficult, so available currency is kept to a valuable level, potentially providing a much greater long-term stability than traditional currencies. Also, only 21 million bitcoins will ever be able to be created, by 2140. Therefore it cannot be gamed to inflate or deflate its value at the will of federal reserves. This would be a pretty stunning change to the reality of financial markets as they currently exist.
Its architecture also has other potential applications. If similarly verifiable protocols could be adopted for the purposes of voting, its implications for democracy may be even more far reaching – the end of rigged elections and counting errors. Bitcoin’s cryptography has replaced trust in third parties to act honourably, with trust in mathematical proofs.
Bitcoin’s V for Vendetta-masked proponents rightfully point to this technology as revolutionary and incorruptible. But people aren’t, and once big bucks became involved, human nature kicked in. As with the goldfields, when the boom in mining and trading bitcoins grew, it quickly drew the attention of a cavalcade of protagonists, some of whom were ill intentioned. Bitcoin’s lack of oversight and traditional regulation makes its attendant markets especially vulnerable to scams of all kinds – with no consumer protections. It’s the same Wild West of the territories without sheriffs.
Bitcoin has turned into a kind of corral in which many of the dominant forces of the modern internet commingle: anarchists, hackers, cryptographers, code geeks, libertarians, Silicon Valley billionaires, keen observers, lay investors, and not least, government agencies and regulatory bodies. The latter are especially worrisome to Bitcoin’s hardcore libertarian underpinnings and those who uphold them – the currency was set up explicitly to do away with the need for third-party interventions of any kind, ever.
Online Bitcoin exchanges, the closest thing the currency has to banks, are the most popular way for traders to buy and sell, and they have been the constant targets of enormous thefts facilitated by hackers – hundreds of millions of dollars worth of coins have been stolen through these attacks. Recently, Mt Gox, Bitcoin’s largest trading exchange, filed for bankruptcy protection after losing 750,000 coins. All of these are gone, forever, with no way to return them to their owners.
As these exchanges aren’t banks, and are so far uninsured, even the most hardcore sovereign citizen might think at this point that there are regulators, taxes and protections for a reason. Regulation that would ensure the protections of users would go against Bitcoin’s anarchist roots, but to be a legitimate force, it must inevitably come closer and closer to resembling a traditional currency through rules and protections.
The cryptographer’s motto – “In numbers we trust” – does nothing to account for the ever-present possibility that living, breathing people will make mistakes, or act maliciously. The trust the Bitcoin ecosystem is built on to self-correct under group scrutiny can seem wilfully naive; as naive as believing markets are guided by the “invisible hands” of rational forces and not by the actions of self-interested individuals. This is borne out by Bitcoin’s seesawing price history. Since coming online in 2009, Bitcoin’s value has been as low as $US2 per coin and up to $US1200. It now sits at $US610.
The emergence of Bitcoin, and several other crypto-currencies that sprang up in its wake, can’t be disentangled from its historical moment. Since the 2008 global financial crisis, with consumer faith in banking institutions in the gutter and the contempt for the financial class spilling onto the streets in the Occupy Movement, Bitcoin, with its promise to do away with fees and third-party agents, was primed to find an audience among the disenchanted. Into this mix also came the rise in a broader awareness of the surveillance state, with big data tracking user movements across the internet and siphoning that information off to private corporations and government agencies. As Bitcoin also held the promise of pseudo-anonymity, the confluence of these forces proved fertile ground for it flourish.
Standing in the way of Bitcoin’s legitimacy as a global currency now is the freewheeling circus that surrounds it. Nonetheless, it is legal in Australia, though not in Russia, China or Vietnam, and it is going to be taxed should you cash it out for fiat currencies. Inquiries to the Australian Taxation Office were answered thus: “The ATO is working to provide further advice to taxpayers about the tax treatment of Bitcoin before the end of the financial year.” Inquiries to the Treasury as to what Bitcoin actually is – an asset or an income stream – were directed back to the ATO. Whatever Bitcoin is, legally speaking, its time as an off-the-grid geek secret is well in the past.
This article was first published in the print edition of The Saturday Paper on March 22, 2014 as "Money changes everything".
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