On BitCoin

Like a lot of people, I started hearing a lot about BitCoin recently. I didn’t pay too much attention at first, but after I kept hearing about it mentioned, I started to get interested and decided to check into it.

I became intrigued. BitCoin is an ambitious project to rethink currency and provide a decentralized means of exchange.

Sadly (or perhaps luckily, if widespread establishment might have been disastrous), before it could get too much more established, a high profile digital theft of $500,000 in equivalent value seems to have resulted in the crash of the currency’s valuation.

I say sadly because I always like things that are new and experimental and attempt to re-think the status quo.

Digital currency transactions presently are dependent upon banks and other institutions which impose a lot of costs, and imposes control on the way money exchanges between two parties. This intermediary has to be trusted, and it would be nice if you didn’t have to trust an intermediary in order to conduct a transaction between two private parties. In the real world, this is not impossible; an transaction of cash money for a good or service is extremely commonplace. The physical realities of common transaction exchanges tend to enforce honesty and punish criminality, but there are always risks. Still, the risks, the mitigation methods, and the rewards are all tangible, easy for people to understand, and this enables people to engage with each other and conduct business.

After validation of identity, the two biggest problems with transactions conducted in virtual spaces are privacy and anonymnity. These are very old school values that are still easily realized through physical media such as cash or gold, or some barter commodity. Once quantities change hands and people part company, there’s nothing to trace what took place unless someone documents the transaction. Laws require this to be done, but informally people ignore this all the time, and for minor/informal transactions it’s almost unthinkable to do the sort of bookkeeping and reporting that is required for larger scale transactions and legitimate, long-term businesses to function.

Politically speaking, if what you do with your money can be observed, monitored, or traced by third parties, it threatens your ability to conduct business — particularly the free exercise of your political power, expressed through your financial means — freely. Thus, there’s a great deal of interest in any way to conduct transactions anonymously and privately.

Of course, these shields are highly desirable to the criminal elements of society, as well. Which makes BitCoin inherently controvercial. But as it often is said, one man’s terrorist is another man’s freedom fighter. Obviously, it’s a totalitarian’s wet dream to have a completely visible economy in which all holdings and transactions are visible, traceable, and verifiable. To that end, a technology like BitCoin that attempts to do without the sort of centralization that enables totalitarianism would appear to be a good thing. BitCoin is good where the government is corrupt or oppressive, and no worse than cash where crime is a problem.

Like any currency, and especially any new currency, it is highly dependent upon the faith of the people who use it that the currency has value.

As a purely digital currency, this is a particularly challenging proposition. The two biggest threats to users of a decentralized currency are counterfeiting and theft. BitCoin employs some sophisticated cryptography to address counterfeiting (if there is no centralized authority to determine whether a note is legitimate). Users are more or less on their own to prevent theft (centralized banks are insured and otherwise mitigate this risk for you as a part of the cost of the services they provide; the options for a private individual to safeguard their belongings exist but are of a decidedly different character)

The victim in the high profile loss incident that led to the collapse of confidence in BitCoin fell victim to theft. If what I heard about the case is accurate, the theft was not a sophisticated cyber-attack, but depended upon physical access to the file that held the rightful owner’s keys which proved in essence that they owned the particular BitCoins in question. The file essentially acts like a bearer bond, in that it is not tied in any way to an individual’s identity (as is required in order to preserve anonymnity).

In other words, the situation is no different from someone breaking into the person’s house and stealing $500,000 in cash from their mattress.

So, then, it would seem that BitCoin’s infrastructure might still be essentially sound from a security standpoint. It might not, too. But the physical theft of a bearer bond in no way invalidates the concept or value of bearer bonds.

Whether BitCoin’s infrastructure ultimately is or not secure depends on a lot of very sophisticated math and computer programming. Ultimately, conventional wisdom seems to be that any security can be defeated. Perfect, invulnerable security is a childish power-trip fantasy suitable for comic book fiction. In the real world, security can never be perfect, but does need to be “good enough”.

The question, then, is can a decentralized digital currency ever have “good enough” security? The general consensus in the wake of the collapse of BitCoin’s value seems to be “we doubt it.” And this is perhaps correct, given that a technology like BitCoin depends to a great degree on the trust and faith of its users, and is thus vulnerable to crisises of confidence as well as actual breaches of security.

In a world where there is no possibility of perfect security, but where “good enough” security is attainable for most clients, certain entities may nevertheless have too many enemies, or are simply too attractive a target not to attract the interest of so-called Advanced Persistent Threats which, given enough time, will eventually successfully breach. Perhaps the ultimate mitigation for this sort of thing is not technological, but rather legal or even military in nature.

So what could we do for BitCoin? The solution seems to me be to recognize the risk, and use BitCoin like one uses cash. Just as one would not keep $500,000 stuffed in their mattress, one should not hold such sums of BitCoin in such an insecure manner — the holding should be converted to a more securable currency. BitCoin potentially can still be useful when it is useful to do what it is valuable for: secure private, anonymous digital transactions.

The way to do it is this:

Hold your money in normal bank accounts and other traditional holdings, like you normally would. When you want to conduct a secure, private, anonymous transaction, convert some of your holdings into BitCoin. Then conduct the transaction as quickly as you are able. The recipient of the BitCoins should then convert them to a traditional holding that they are comfortable with.

The problem with this is that the conversions are traceable, and the proximity of the conversions can be used to determine who did business with who. But there are probably methods of dealing with that which can be employed — such as breaking up the conversions, spreading them across many different types of holdings, and over enough time that traceability becomes difficult or impossible at the point of conversion.

Updated: 2014-Aug-17 — 5:00 am

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