The Senate just held hearings on Bitcoin yesterday, and what do you know, it turns out that the US Government has a secret crush on everyone's favorite anti-establishment, stick-it-to-the-man, we're-so-cool-we-reject-your-dirty-fiat-money cryptocurrency. Partly in response to this newfound love, Bitcoin prices hit an all time high at $900, up from $12 a year ago, and $240 just two weeks ago.
I, too, would like to join the nearest Bitcoin-hits-900 party right about now, and in fact, do plan to go out with a bunch of CS geeks this evening, some of whom undoubtedly made real cash yesterday. But before we do exactly what is expected of us and fulfill the role The Man has cut out for our demographic (and if you're saying "hey, wait a minute, I'm nobody's demographic, I'm a free person with his/her independent opinion on Bitcoin, with some libertarian leanings and a penchant for TED talks", well, I don't need to finish the sentence), let's look a little bit into why The Man has such an unrequited love affair with our beloved cryptocurrency.
For if we don't sort this out, we run the risk of reading about it a decade from now, when another Snowden elopes to Russia and reveals that the powers that be ran a series of clandestine projects, probably code-named "Operation Libertarian Neckbeard" for the one on Bitcoin, and "Operation I-Know-What-You-Did-Every-Summer" on Tor. Oh wait, Snowden the First already revealed the project on Tor, though the name NSA picked for it was a lot more prosaic.
The Man loves Bitcoin because it's a digital accounting system that must necessarily keep track of all transactions. Unlike currency we're used to, there aren't any coin/greenback counterparts exchanging virtual hands, ever, anywhere in Bitcoin. Instead, there is an accounting book that keeps track of all transactions between people going back to the beginning of Bitcoin time. I have previously described how Bitcoin works and fails to work (and there's always this video), so I won't belabor the point, except to say that an angel dies every time some press article refers to Bitcoin as "untraceable". It is anything but. The whole currency is about traceability; in fact, transactions are individually traced independently by every node in the system to ensure that nobody is spending more than they earned.
What the press really means to say is that Bitcoin users can create new addresses at will, thereby allowing someone to create a bank-account-equivalent without having to show ID. This makes it possible for a user to be anonymous, as long as she prescribes to a set of practices that would protect her identity, even though her transactions are fully traceable.
The Feds love this system, because once you know the accounts belonging to Escobar-Jr, you can trace exactly from which other accounts he received his cash flows. Sure, pinning these accounts back to real people is not trivial because of the potential anonymity, but here is where the Feds have some special techniques. For one, they know that in real life, most people will go through exchanges that require some form of ID. The more commercialized and consolidated the Bitcoin space is, the easier it is for them to get at this data first-hand. And if some users avoid the exchanges and roll their own, the Feds know that real people have difficulty keeping up with all the requisite anonymity practices. Even the Dread Pirate Roberts who ran the Silk Road drug marketplace was easily traced back, and while the cover story says that he was caught because he used the same nickname on different forums, he could also have been caught by deanonymizing his address when he transferred Bitcoins. For Bitcoin users reveal their IP addresses when they submit transactions, and all our ISPs have our real names on file, and we know from Snowden that the ISPs are fully compromised.
We should not get too exuberant about the positive Senate testimony. It should give us pause that the people at the hearing yesterday were the same people who, only 20 years ago, were trying to ban the export of t-shirts with crypto algorithms on them. It's difficult to believe that they suddenly saw the promise of crypto-currencies. The same way your parents didn't suddenly, or ever, go from being total buzzkills to being totally cool with sleepovers and teenage sex, the Feds cannot suddenly turn all cool and progressive. They are just as short-sighted as they always were, except this time, they think they can take advantage of Bitcoin's traceability for their own purposes in the short term.
So, the Feds' newfound love for cryptography and cryptocurrencies should not be surprising.
But nor should it cause alarm.
Bitcoin still has lots of exciting uses, and the Feds' love affair with Bitcoin will pave the path for other cryptocurrencies, including modified/improved versions of Bitcoin. These currencies may well end up offering stronger guarantees than the current Bitcoin system. For instance, ZeroCoin offers improved anonymity, even though I cannot tell how one makes change in ZeroCoin despite having read their paper carefully. But I remain convinced that this is a minor, solvable problem, and I am sure there will be other, yet-to-be-invented currencies with even better features in the future. Little does The Man realize that once we all commit to a new way of doing business, it'll be difficult to unwind his policies when systems he cannot manipulate or navigate come along.
So, I'll join my prescribed demographic in celebration tonight, partly to genuinely celebrate and partly so as not to alert the Feds that we're onto them being onto us, and we're one step ahead.